Sports as a Content Business Is Evolving
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Despite being a couple of weeks removed from the Super Bowl, one interesting statistic has stuck with me. More people tune in to watch the half time show versus actually watching the game. Rihanna had a captive audience of 118.7 million, whereas Nielsen reports that 113 million tuned in for the game.
But even more than that, there appears to be an evolution underway in how people consume sports content. And the impact on media brands could be significant.
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Now let’s jump in…
The days of regional sports networks (RSN) may be coming to an end. When everyone had a cable TV subscription, RSNs were a great business. Media companies could acquire the local rights to a specific sports team and then run a channel. Fox was a big acquirer of these.
However, what was once a great business model is now a struggling one. According to Axios:
Bally Sports owner Diamond Sports Group will skip its $140 million interest payment that was due Wednesday and has entered a 30-day grace period to try to resolve its debt.
If it can’t come up with a resolution, the company is likely headed toward a bankruptcy filing.
The company, which was formed after its parent company Sinclair acquired 21 RSNs from Disney in a debt-heavy $10 billion transaction, owns the local rights to 42 professional teams. Bally Sports launched a streaming service last year that included some of those teams.
Only a few days later, WSJ reported:
Warner Bros. Discovery Inc. WBD is informing the professional-sports teams whose games are carried on three of its regional sports networks that it wishes to cease operating the channels and exit the business, according to people familiar with the matter.
The three regional sports networks were inherited by Warner Bros. Discovery Inc. when it acquired control of the WarnerMedia assets from AT&T Inc. The channels—which are still branded as AT&T SportsNet—serve teams in Pittsburgh, Houston, Colorado and Utah—and carry baseball, basketball and hockey.
In a letter sent Friday from the unit’s president Patrick Crumb—a copy of which was reviewed by The Wall Street Journal—teams were warned that “the business will not have sufficient cash to pay the upcoming rights fees,” people familiar with the letter said. The teams were also told that Warner Bros. Discovery “will not fund our shortfalls,” they said.
Whether the leagues like it or not, these RSNs are bad business and we’re likely going to see a lot of them struggle and shutter.
But it’s not just the RSNs. ESPN is also going through its own evolution. According to a Sportico story in late 2022:
The 10-K filing revealed that ESPN has lost approximately 10 million subscribers over the last two years, bringing its overall reach to 74 million cable/satellite/telco-TV households. While that marks a loss of 12% of ESPN’s linear TV base, the network’s declines aren’t nearly as severe as the losses on the distribution side, as operators have seen 12.6 million pay-TV subs churn off over the same 24-month period.
ESPN has, in some respects, made up for the losses on the cable front with a stark uptick in direct-to-consumer subs, as the ESPN+ streaming service boasted 24.3 million subs as of last month. That’s good for a 42% improvement versus the year-ago tally (17.1 million subs) and a 136% jump compared to the October 2020 figure (10.3 million).
So, on one hand, ESPN continues to see its linear business shrink. But on the other, its streaming business is getting stronger. More people are going directly to ESPN+, which fits its strategy of going direct to consumer. There’s an ARPU issue, though. According to that same Sportico story:
ESPN+ now generates an average of $4.80 per sub per month, up 5% from $4.57 a year ago. That’s about half of what the flagship generates by way of the affiliate fees it charges cable operators.
And so, it might have the same subscribers, but Disney is making half as much money on those 24.3 million subs as it would have if it had those people coming through cable operators. We’re talking over $1 billion in revenue for Disney. That revenue goes straight to the bottom line, so of course Disney is hurting.
So, what’s going on here? Is this just a big chord cutting fiasco and that’s why we’re seeing sports content struggle?
I was talking with a media investor last week and one thing she said that stuck with me was that the younger generation didn’t care as much about watching sporting matches from start to finish. Instead, they were only interested in the highlights. If you think about, that makes sense. One of the most popular social media platforms is TikTok, which serves up bite-sized video.
This is, effectively, what Jamie Moraga at IntelliSolutions, told the San Diego Union-Tribune:
If anyone has the means to reverse the trend, it’s professional sports leagues. They have the motivation, the capital, and can hire the talent to target younger viewers. Fans are seeking highlights, quick snippets of information, or close game notifications through apps or paid subscriptions. By getting more creative and interactive and utilizing technology, social media, branding, and live experiences, professional leagues may be able to re-engage younger generations of fans.
The issue is bigger than that, though. Younger generations are just less interested in sports than their parents were. In 2021, Morning Consult conducted a survey that found:
…53 percent of Gen Z respondents, ages 13-23, identified as either avid or casual sports fans, a smaller share than the 63 percent of U.S. adults and 69 percent of millennials who considered themselves fans.
35% of parents with kids born from 2013-2017 said they lost interest in sports during the pandemic.
Again, this survey was when the pandemic was at its peak, so it might not be a long-term trend. That said, if this trend lasts, it might lead to negative spiral for the entire sports media food chain.
Leagues are able to pay players high salaries, in big part, because of the TV contracts. But if viewership is down, TV contracts are going to go down as well. The networks just won’t pay as much. We can already see that with Warner Bros. Discovery CEO saying, “we don’t have to have the NBA.” The company spends $1.2 billion per year. If that goes away, the leagues have fewer resources.
Sports is stuck in a weird place. The way it makes the most money is with people tuning in and watching the entire game. But consumption behavior shows people aren’t interested in that. Instead, they want things in smaller chunks. If the leagues can deliver on that, they’ll be able to retain their consumer’s interest. If they can’t? Well, we’ll see more of the demise of leagues like baseball.
Sports is big business. Even with something as powerful as the Super Bowl, it’s still content. And what people want evolves as well. If fans continue to lose interest in organized sports, it could be a slow death for these media companies.
The Information Goes Pro
Is it easier to get a new customer or get a current customer to spend more money with you? There are differing opinions on that, but The Information is going to try for the latter.
In a blog post last week, The Information’s Jessica Lessin announced the launch of the company’s Pro product. In a nutshell, the product costs $999 a year and provides much of the data that the newsroom uses itself. According to the piece:
Now, the quality over quantity problem has spread into a new domain: data. Numerous services—often specialized by vertical—are charging astronomical fees for access to data that does little to help those customers stand apart. And often, the data isn’t accurate. The rush for volume leads to shortcuts and errors. Verification is in short supply.
Our newsroom feels this problem acutely. When we rely on these sources, we have to correct them. And so, over the years, we’ve built out our own tools based on something in too short supply: careful reporting with trusted and vetted sources. Those resources are what we are starting to share with you today.
Turning a product you use internally into something you sell to your audience is smart business. For example, a proprietary database tracking which companies spend the most on cloud infrastructure is necessary for reporting purposes. It’s also important for investors and operators alike.
More than that, The Information caters to a very specific type of reader. For example, I would wager most venture capitalists read it. What’s the difference between $400 and $1,000? To them, very little. And so, can The Information upsell enough to make a meaningful difference? I’d bet yes. And that’s just VCs.
Creating tiers of products is a smart way to scale subscription revenue without needing to grow top line subscribers. If The Information has 100,000 paying subscribers at $400, that’s $40 million a year. If it can convince 1% of those people to spend $999 instead, that’s an additional $6 million in revenue.
That said, there is a right and wrong way to do it. If you look at the comments on the announcement, a small subset of the readers are irritated that some of the benefits of their old subscription have been removed.
For example, readers used to get org charts of major tech companies. Now? It’s part of the Pro product. As one reader said:
Org charts were a big selling point for justifying such a high subscription cost. They were front and center in the sales conversation flow when I decided to fork over hundreds for a news subscription. You can run your business however you like, modulo the law and FTC. But when people feel they’ve been sold something and then that thing is taken away, that feels bad.
Other members argued that they should have been grandfathered in until the end of their subscription. I tend to agree with this. If people were expecting to receive one thing when they subscribed, it’s important to honor that. However, I also understand why The Information made the switch the way they did. Since this is about converting a certain percentage of their current members, waiting for their subscriptions to expire to upsell would have taken time.
The question for the rest of us to ask is whether there is data we track to do our jobs that could be monetized. If that exists, it could become the type of product worth putting a subscription in front of.
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