March 19, 2024

SI Lives? A Lot of Unanswered Operational Questions Exist

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Minute Media takes a chance on SI

It would seem that the game of chicken between Authentic Brands and Arena Group has ended, with Authentic finding a new partner to license the publishing rights. According to The New York Times:

Minute Media’s license with Sports Illustrated will stretch for 10 years with an option to extend for up to 30 years total, into the magazine’s centenary. Both companies expect the deal, which also includes Sports Illustrated’s Swim brand, to last for the full 30-year term. The companies declined to disclose financial terms but said that Authentic Brands Group was taking a stake in Minute Media as part of the deal.

I wrote about this back in January, but let me give you a quick refresher. Sports Illustrated is unique because of its convoluted ownership and management. Authentic Brands acquired Sports Illustrated from Meredith in 2019 for $110 million. It then signed an agreement with Maven—now called The Arena Group—to license the brand and manage the business. It was a 10-year license for a minimum of $15 million a year.

But then The Arena Group reneged on one of its quarterly payments. Authentic threatened to take the license away, and The Arena Group effectively said, “I dare you.”

Well, bluff called. Minute Media will now have the license for ten years. What comes next will require a herculean transition. Unlike normal transactions where both parties are friendly, this deal has an ex-partner with zero incentive to help.

For example, who currently manages Sports Illustrated’s paid subscriber list? Is it Arena Group or Authentic? If it’s the former, how does that seamlessly transfer to Minute Media? Minute Media must immediately fulfill the subscription (something we’ll return to). And so, it needs to get access to the user data. Arena Group can’t horde it, but can they be a little slow to give it up?

While we’re on the topic of paid subscriptions, where is the printing done? What is the process for getting the magazine to the printer? Minute Media is a digital platform, so moving into print is an entirely new business for the company. Who on their team is going to manage this? Or are they going to hire people from Arena Group somehow?

Then there are the financial aspects. According to Arena Group’s Q3 financials, it had $63,757,000 in unearned revenue. This is a standard metric with subscription businesses because you are effectively being prepaid for a service. Consider an annual subscription to Sports Illustrated that costs $30. That means each monthly magazine is $2.50. The publisher only earns that revenue when they’ve delivered the magazine, even if they have already received the cash. In other words, it’s a liability on the P&L.

This is where the legal and accounting stuff can, perhaps, get a little murky. Arena Group has that liability; however, it cannot fulfill it because it has lost the Sports Illustrated license. On the other hand, it has received the cash for the subscriptions beforehand.

In a typical M&A process, Arena Group would provide money to Minute Media or deduct it from the purchase price as net working capital. But that implies this is a typical M&A deal; it’s not. On the other hand, Minute Media doesn’t want subscribers to be unhappy and, more importantly, doesn’t want them all to churn. And so, it has to continue fulfilling the magazine irrespective of not receiving any subscription revenue until renewal.

Let’s not forget that Arena Group must also pay Authentic Brands $45 million for breaking the agreement. This might be the incentive that incentivizes Arena Group to help out. Here’s how it could play out:

  • Authentic Brands agrees to waive the $45 million cancelation fee in exchange for expeditiously helping with the transfer of all the assets
  • Arena Group can remove the unearned revenue liability from its books and pass that to Minute Media
  • Minute Media assumes the costs of honoring the subscription business and fights to retain the subscribers for the renewal

But honestly, this is all speculation because none of us have seen the unredacted agreement (a heavily redacted one can be found here). And it’s a significant risk for Minute Media because the SI subscription business is dying.

According to the Alliance for Audited Media, Sports Illustrated had 1,231,390 paid and verified subscriptions in 2023. In the audit period ending June 30, 2022, it had 1,569,179, and in the period ending June 30, 2021, it had 1,622,670. So, Minute Media’s risk is that it assumes the cost of serving these subscribers, potentially hundreds of thousands of them churn anyway.

On the other hand, Minute Media had to know it was a risky move, and the team still embarked on it. So, maybe it knows something we don’t. Nevertheless, like I said above, it’s a herculean task with parties that are not all going to see eye-to-eye. Truthfully, how that plays out is anyone’s guess.

Warning on TikTok

A ton of ink has been spilled regarding the proposed forced divestiture of TikTok. In essence, the United States House of Representatives passed a bill that would have forced TikTok’s owner to sell it. If the Senate also passes this, the President signs it, and then it overcomes lawsuits, ByteDance would have to sell.

Naturally, ByteDance says it won’t sell and would rather shut the product down. Whether this is brinkmanship is anyone’s guess, but it should leave anyone building their media business on TikTok feeling immensely uncomfortable.

I won’t go into depth about where I stand on this, but I will say this… there is a cataclysmic risk of building on rented land. If you depend entirely on a single platform for your business’s health and prosperity, you risk losing your business.

In the case of TikTok, it’s an extreme example. But how many publishers have seen their traffic numbers crater due to algorithmic changes in Google or on social platforms? The only real solution is to build a strong brand where people seek you out. And, as best as you can, acquire email addresses with declarative first-party data (but even email still carries some platform risk).

Please don’t build a business on rented land…

Active Interest Media’s Brian Van Heuverswyn on AMO Podcast

This week, I spoke with Brian Van Heuverswyn, the COO of Active Interest Media, a portfolio of enthusiast brands. In this discussion, we dug into how Active Interest Media grew from its early private equity days to ownership by its founder, the most recent Taunton Press acquisition, its expansion into digital, and so much more.

You can listen to the podcast wherever you choose or on the AMO website. AMO Pro members also get the full transcript if they prefer to read over listening.

Give the episode a listen here.

AMO Pro Last Week

We had two great stories published last week for AMO Pro members.

If you never want to miss another piece on A Media Operator, become a premium member today.

And with that, I hope you have a great week. Hit reply if you have thoughts or join the AMO Slack, an exclusive benefit of AMO Pro members. See you soon!