Tag: Sports

Most Important Story of the Week – 14 Aug 20: What Comes Next As The Paramount Consent Decrees End?

The theme of the week is “antitrust”. It didn’t start out that way, as Friday night’s leadership change at AT&T would have been the story of the week most weeks. (Though, I consider it less of a big deal than most, and that’s why it’s at the bottom of this column.) So which M&A story wins the crown?

Most Important Story of the Week – Ending the Paramount Dissent Decrees

Ending the decades old Paramount Consent Decrees isn’t simple to explain. Because it was also the core trend in regulation over the last 30 years, it took me about 1,700 words. Which I’ll put up early next week. (Just too much news this week.)

In this column, I’ll just focus on the question on everyone’s mind is what comes next. To guess at that requires answering the key trend in government regulation: will antitrust enforcement become more lax or strict over the next few years? Let’s try both scenarios.

Continued Lax Antitrust Enforcement

Starting with the likelier outcome: nothing changes. If there are any economic headwinds in January–and there probably will be!–industry leaders will tell President Biden that breaking up companies will hurt growth. (It won’t; it will hurt industry profit and those are two different things.) That will scare him from enforcing current law and thus, things stay the same.

That leaves these key facts: 

– There are three big studios with lots of cash/success (Disney, Warner Bros, Universal)
– Three smaller studios with less cash (Sony, Paramount, Lionsgate)
– Lots of smaller distributors (A24, STX, Annapurna, etc)
– And the new digital titans with mountains of cash that make Smaug the dragon jealous (Netflix, Amazon, Apple, etc). 

– There are only really three major theater chains: Regal, Cinemark and AMC Theaters.

If the big players with lots of money can buy a studio chain–and honestly the prices are so low in the Covid-19 economy, for some it’s a drop in their debt bucket–I think they will. Sure, theaters are a dying industry (kidding), but being able to collect all the theatrical rentals and own the entire relationship will be too big of an opportunity for at least one of these entertainment/tech giants to pass up. 

Even if it isn’t a great business opportunity, when Comcast announces it is buying AMC Theaters, hypothetically, that will leave Warner Bros and Disney staring at only two remaining chains in the US. If Amazon or Apple sounds interested, then suddenly the land grab is on. If the remaining theaters get purchased by other studios, the remaining studios will be terrified their movies won’t get played. That’s their worry. Sure, Disney will probably be fine with its blockbusters, but would Paramount make that bet? Or Lionsgate?

Thus, tentatively, I think we see the theater chains get snapped up. When? That’s tougher to say, given that everyone’s cash flows are a mess right now. But once the race starts, it will end with all the theater chains under new ownership. I know I’m the outlier on this –the smart take is, “No Disney won’t buy a theater!”–but the logic feels inescapable: if there are three chains, and 10 potential buyers, they’re gonna get bought up.

In the meantime, you’ll see lots of block booking, licensing of films to theater chains and other practices previously held in check by the decrees. They were held in check because the big studios know they can extract rents from theaters with them. Since these practices benefit the bigger studios with blockbuster films, the independent distributors will definitely be hurt. Of course, the judge deciding the case said she didn’t see this happening, but judges tend to be shockingly bad predictors of future corporate behavior. 

(Judge Richard Leon who approved the AT&T deal and, I believe, the Sprint/T-Mobile mergers takes the cake in this. He consistently believes that companies won’t raise prices after a merger, and then they always do! Funny how that happens.)

Renewed Strict Enforcement

On the unlikely side of the coin, potentially a President Biden and Attorney General Warren come out swinging at consolidation. In that scenario, everyone will be scared to start an M&A process. Potentially, the theaters could be candidates to get broken up! (Arguably, this would be great for the industry. With dozens of smaller theater chains, they would be more innovative and focused on their strategy.)

Moreover, an AG Warren would look at harmful vertical integration practices across the spectrum of entertainment. Everything from how licensing deals harm talent to price collusion by the entertainment conglomerates to platforms extracting rents as monopolists to, and this is is crazy, how price gouging by big tech to seize market share. 

That said, I’m skeptical strict enforcement is coming. Guess what? Wall Street agrees. Which I’ll explain next week.

M&A and Antitrust Updates

Wow, what started as a quiet week in M&A news got fairly busy. 

Sumner Redstone Passing Away Means More M&A around ViacomCBS

First, Sumner Redstone passing away is the end of an era, an era with old-fashioned media tycoons. He assembled his media empire by buying, buying, buying in an age that was just beginning to allow media consolidation. That’s sharp insight into the landscape. Of course, he also was described generously as a “brawler” and negatively as “thuggish”, so it’s not all a positive story for old-fashioned tycoons. He was also notoriously litigious, which again is less business acumen and more brute force.

What comes next for ViacomCBS? The scuttlebutt is something, but what we don’t know what. Both ViacomCBS finally being sold (Current market cap is around $16 billion.) is an option and so is ViacomCBS buying more (MGM? Discovery?) to then be sold to a bigger buyer. Or it holds the course as it tries to boost its stock price. 

Epic Games Sues Apple for Anti-Competitive Practices

In a week that doesn’t see the end of the Paramount Consent Decrees, this is the clear number one story of the week. So important that I’ll save it for next week in case we have a slow news week. The story is that Epic Games–maker of Fortnite–is upset at having to pay Apple’s 30% pass-through tax/fee/rent on in-app purchases. So they just stopped, Apple kicked them off the app store, and now they’ve gone to court. Google then followed suit. (That last part is good news, since it means this story is far from over.)

This will have ramifications for video games, technology and entertainment. Consider Disney+: Right now, they’d have to pay Apple $9 for every $30 rental of Mulan (unless they negotiated another split). If in-app purchases go away, Disney gets to keep that for themselves.

I won’t even bother to forecast how this ends, but we’ll be paying attention.

AT&T Wants $1.5 billion for CrunchyRoll

This is a bananas story–that’s a technical term–in The Information, the outlet that seems to get all the scoops. AT&T thinks CrunchyRoll is worth 10% of all of ViacomCBS? My how things have changed.

If I were Sony, I’d point out just how low the barriers to entry are to buy anime content. Every streamer has their M&A vertical from Netflix to Amazon to Hulu. It’s just not a point of differentiation, and definitely not a $1.5 billion point of differentiation.

Data of the Week – BBC Global Audience

I’m a sucker for global data numbers, so the number of the week is BBC reaching 486.2 million folks around the globe, an increase over last year’s record of 438 million. Of course, like any number defining reach is always tricky. This seems to include folks who simply visited any BBC website over the last year, which is valuable, but not quite the same as regularly watching BBC News.

Still, the 400 million reach number is a good stand in as well for global English language total attributable market. Meaning, if you were Netflix, you could point to that as the upside scenario.

Other Contenders for Most Important Story

No College Football

This is bad news for ESPN, Fox, Fox Sports, ABC, NBC and CBS. Less live sports means less lucrative revenue for the traditional businesses. That’s a pretty simple case. And in other weeks could have been the story of the week. (Though its impact is lessened by the chance the season moves to the spring and that other sports are going full bore.) Rick Porter has the good read this week. Anthony Crupi too.

NCAA Alston Case: Supreme Court Helps College Athletes

The Supreme Court refused to allow an injunction in the Alston Case, the ruling that says NCAA players can get paid to play. While this isn’t the final word, it makes it much more likely to actually go into effect. If, of course, there are sports to be played.

Sky World News shuttering

Comcast bought Sky from Fox during the Disney merger time, and one of their big initiatives was to launch a global news service. Well, those plans are on hold. 

Lots of News with No News – AT&T Friday Night Change in Leadership

Oh yeah, this happened.

Notably, this isn’t a “massacre”. Let’s save such extreme language for bigger changes. Instead, Jason Kilar is consolidating control at AT&T’s Warner-Media, with the narrative that this will allow him to focus on streaming, streaming, streaming. Let’s go best case/worst case.

Best Case: The strategy is more focused.

A good strategy is a focused one. Arguably, Kilar is eliminating his direct reports who don’t share that focus. So if you were wondering if AT&T would “burn the boats” for HBO-Max, Kilar has forced them to. A simpler org chart should help drive HBO Max growth.

Worst Case: He’s eviscerated his content side.

Not completely, he had five creative types before, he’s down to three now. Did he pick the right ones? We don’t know. (I don’t have enough data to prove it.) But none of them are guaranteed hit-pickers like a Les Moonves at his peak. The further worry is that Kilar is NOT a content guy and “content is king”. When he was at Hulu, Kilar was was more focused on the algorithm than the content, right as Netflix went all in on the content. Vessel was Quibi before Quibi was Quibi, with the same lack of detail for content.

Meanwhile, my sympathies go out to the hundreds of folks losing their jobs at Warner Media in this consolidation. That’s never good to hear.

An Aggressively Moderate Take on Coronavirus and Sports

On Wednesday sports in America made their triumphant return! “The MLS Is Back” tournament declared that, well, the MLS is back.

This follows the June return for most of European soccer, starting with the Bundesliga and continuing to the English Premier League, the most popular global sports league.

Yet not all is sunshine and roses. The leagues are back…but the fans aren’t. And won’t be for the rest of the summer, if not longer.

So how should we think about Coronavirus and Sports? Well let’s bust out the EntStrategyGuy’s patented Covid-19 impact system to analyze it. We look at impacts on Supply, Demand and Employment (if relevant). We also try to separate what we know from what we don’t (and is usually guessed at).

(Curious for my “moderate” take on how Covid-19 will impact the rest of the entertainment industry? Here are my takes on…

The Entertainment Recession
Theaters
Pay/Linear TV
TV and Film Production

Supply

If you’d asked me in 2012 how sports teams made their money, I’d have told you extremely confidently that they made their money by signing huge TV sports rights deals. That’s what I kept reading in the news, after all. Then one day a famous NBA GM spoke at my school and disabused me of that notion in a way that’s stuck ever since. And understanding that explains the trouble for sports leagues over the next year or so.

Yes, the headline buzzy numbers about multi-year deals for TV rights are indeed true. Sports rights for TV have grown by about 4-5% per year for the last two decades. (Math here.) That’s tremendous growth! And hence why everything related to sports has also grown in value. (The price of teams, the salary of players, the size of sponsorship deals.)

But it isn’t the entire story. The second or first biggest chunk of revenue for nearly every sports team in America (and I believe globally) is ticket sales. That’s fans attending live games. It depends on market size, but not the way you think. Larger market teams like the Lakers, Dodgers, Golden State Warriors, Dallas Cowboys and Knicks have even more of their revenue as a percentage from local ticket sales than smaller market teams. This is because seats to sporting events are a constrained inventory for a popular product often in very economically wealthy areas. That’s a recipe for high prices.

This explains why the sports leagues, initially, were more willing to postpone the season than play games in front of empty arenas. Empty arenas meant permanently lost revenue and the NBA, NHL and MLB desperately wanted to avoid that happening. (This article says all live revenue is about 40% of the NBA’s total revenue.) They waited as long as they could, but now it’s clear sports in front of fans aren’t happening this year. 

And since it’s better to get some revenue than no revenue, the sports leagues–sans the NFL–have figured out how to bring competitions back without fans. (Good for them!) This means sports in America will be back on live TV soon enough. (Technically the PGA is already back in the US and as I said above the EPL and other European leagues are already back.) 

Still, this leaves the situation with ticket sales unresolved. The owners and commissioners desperately want that other huge chunk of revenue back.

Forecasting when fans can return to arenas or stadiums is fairly difficult. It’s worth comparing them to theaters because the different situations imply different economics. With theaters, I remain convinced that there are measures that can reduce transmission dramatically: have everyone wear masks, keep a checkerboard pattern in design, have a reduced congestion plan when leaving. (This is definitely a minority take not shared by public health officials, so take it for what it’s worth.) Moreover, with a new film, a theater can flex it onto many, many screens simultaneously, meaning you can support a checkerboard pattern while potentially achieving mostly the same volume of tickets sold.

This is not the case with sports. If you’re an NFL team, you only get 8 home games. NBA team gets 42. MLB gets 424 (it feels like). And so on. You can’t surge it into more stadiums or games. (The very thing that drives up prices in the absence of coronavirus hurts the sports leagues here.) Moreover, unlike theaters, stadiums are filled with choke points where people will crowd. (You’d have to have folks arrive 2 hours early or more to avoid crowding at ticket entrances.) Not to mention, a checkerboard seating pattern won’t make sense because you’d have to rearrange nearly every season ticket holder. Yikes.

This means that to have sports return with live fans, you are much closer to needing a full therapeutic cure or vaccine before sports can safely resume.

When will that happen? Well I don’t know. And it’s the biggest variable–and potential hit to the bottom line–for sports teams. However, if you assume we will one day cure or eradicate coronavirus, the supply problem will eliminate too. In the meantime, I expect players, owners, stadiums and all adjacent dependents to take a hit to their salaries and values.

As for the “Bubble” situation, I’m reasonably confident the leagues will find ways to play the games in largely safe ways for the players. It will evolve and folks will get sick, but the revenue draw is too high to avoid.

Demand

Here’s the good news: all signs point to sports fans clamoring for the return of their favorite sports. The Michael Jordan documentary did blockbuster ratings for ESPN. Same for the NFL draft. Even golf is breaking ratings records!

Everyone is trying new things during this quarantine. Some habits may change. But abandoning sports doesn’t look to be one of those things.

Of course, the flip-side to the above supply scenario is that maybe fans will abandon live sports for fear of the coronavirus. This is a risk, but feels low probability. First, sports will likely be constrained by having a therapeutic or vaccine before they return. Unlike theaters, which will test audience demand for their product, I don’t see live sports in arenas this year. 

Second, I don’t think coronavirus has turned us into a world of shut-ins. If anything, folks want to flee their homes more than ever. Admittedly, this is my opinion. It’s an unknown and I could be wrong. A pessimists could say it’s as likely fans flock back to stadiums as they abandon them in perpetuity. Where specifically it lands on that spectrum is up in the air.

As fro demand for live-sports on TV, again I expect it to be high. If folks are in perpetual shut downs with concerts, live-sports and many outdoor gatherings prohibited, live sports rights should be widely consumed. Not to mention, the slow down in TV and film production has meant fall will be light on new content. Sports can instantly step into that void.

Employment

I do see lingering pain the labor market related to stadiums staying closed. Entire ecosystems are built around attending live sporting events. Everyone associated with working that from ushers to security to restaurant staff will be hurting until sports return.

Even the players, as I mentioned above, will likely see a lot of pain. As long as salaries are a percentage of basketball related income, then the players will see cuts if fans can’t comeback in 2021. 

Overall, I’m less worried about the impact on the economy from sports compared to either TV/film production or movie theaters, both of which employ a lot more people.

Bonus: The Breaking of the Bundle?

The one variable that is neither “supply” nor “demand” is whether the absence of live sports will cause a further deterioration of the cable bundle (and maybe satellite bundle in Europe) that props up the current exorbitant sports rights fees. I’ve seen this thesis floated out there fairly commonly over the last few months. (If not directly, then via the rhetorical question headline.)

If prices to be paid are any indication, the answer is no. The prices for live sports rights haven’t decreased even during coronavirus–they’ve continued to go up actually–meaning sports will definitely be the anchor propping up cable and satellite providers in the near term. I’d recommend considering this mostly wild speculation. Folks have been predicting the end of TV since the beginning of this decade. And it’s still kicking.

However, the true test will be the upcoming earnings season. After all, the bundle won’t die because companies let it, but because customers finally opt out. That will be the true final test.

Most Important Story of the Week – 10 July 20: Sports Streaming Price Hikes

I hope everyone–and this probably just applies to the Americans–enjoyed the long weekend. The only thing missing really was America’s pastime of baseball. Or any sports really.

But all that has changed. Sports are back! Which is really the story of the week. But I’ll tackle that next week in the next installment of “Coronavirus and Entertainment”. In the meantime, let’s look at another sports-adjacent story.

Most Important Story of the Week – Sports Streaming Price Hikes

Everyone is raising prices, from Youtube TV to ESPN+ to Fubo TV

While all these services are sports based, it’s also important to note the differences between them. Youtube TV is a vMVPD, meaning they’re trying to replicate the cable bundle via streaming. ESPN+ is a streaming service that only offers sports. Fubo TV is a hybrid: it’s a vMVPD, but focused on sports.

The least shocking price raise should be Youtube TV. Of all the services, it was the most clearly trying to offer a $65 product for $45. Despite the bells and whistles, the vMVPD model is essentially the traditional cable model: the vMVPDs pay each channel a given rate per subscriber who receives it. The only difference is that instead of a cable box it goes through a streaming TV, device or iPad. So if you see the rates for various channels–for example this chart in this article by Dan Rayburn–you see how expensive it is to own all those channels. (Especially ESPN.)

Add all them up, and you quickly see that the reason cable is so expensive is because cable channels are expensive. Hence, virtual cable is expensive because virtual channels are expensive. The core economics aren’t different.

How did Youtube TV last this long without a price increase? Because they were losing money on it! 

Frankly, that’s why any articles or tweets I saw praising Youtube TV always baffled me. Of course they were beating everyone on price! Google subsidized the losses! But they hadn’t actually created any value, they were simply capturing market share. (They had created some value with a good UX, but that value is easily superseded by selling at a loss.) 

Losses in cable can add up really quickly, and even Google couldn’t stomach the Youtube TV losses. If they were losing $15 per customer per month, at 2 million customers, that’s $360 million a year. Adding customers would just make the situation worse. You can’t make up these losses on volume. Hence the price increase.

The challenge is what happens next. Since there are no natural digital monopolies, I wouldn’t be shocked to see either the FASTs or new vMVPDs rise up to offer “skinny bundles” again. Clearly customers want lots and lots of channels–hence why MVPDs and vMVPDs exist–but don’t want to pay as much as the local monopolies charge. Since the barriers to entry are relatively low, a new skinny bundle can easily enter. The actual solution is to have the cable channels finally start lowering their affiliate fees, but that’s a tough pill for a business unit to swallow.

On to ESPN+. If you look at Disney’s earnings report, you know that Disney is losing money on streaming. How much they are losing on ESPN+ in particular is unknown. ESPN+ doesn’t really have a lot of in-demand live sports, so it’s not like they can increase prices too much before folks will unsubscribe. This could portend some additional sports deals, or just Disney shoring up the bottom line in a world without theme parks and movie theaters. Either way, I expect both to keep happening: Disney will try to get better rights for ESPN+ (think NBA or NFL) while raising prices..

Other Contenders for Most Important Story

WGA Puts Their Strike on Hold?

This happened over a week ago and I missed it, so shame on me. (Thanks to KCRW’s The Business podcast for shouting it out.) The caveat is nothing has been officially announced as of yet. So the deal could still fall apart. From reports, the deal is inline with the gains of the most recent DGA deal.

The headline is that the deal prevents a strike because the WGA can’t add a third tsunami to the twin waves of firing all their agents and coronavirus. Really, this is a victory for the pandemic. 

The other victor–as Kim Masters noted–is for the studios and streamers, and I tend to agree. The current deal hurts younger and lower level writers that are caught between exclusively writing on one show at a time, but also the reduced episode commitments of the streamers. Not changing that really hurts writers. But they didn’t have a choice.

Disney World on Track to Reopen this weekend

Theme parks are on track to reopen in Florida, with all eyes on Disney World. (As of this writing.) Depending on how cases, hospitalizations and deaths trend over the next few weeks, this will be a story to monitor. On the one hand, people could end up being too scared to go. On the other, theme parks may not end up being a huge source of transmission if they’re at reduced capacity with lots of effective countermeasures.

I remain bullish for theme parks. Unlike sports stadiums, they have more control over keeping folks outdoors and hence controlling transmission. The analogy is the return to restaurants and bars in June. As soon as lock down was lifted, folks returned to their old behaviors relatively rapidly, with just facemasks and spacing as the key differences. Of course, it wasn’t the same volume as previously, but enough to make the business models work.

If theme parks prove safe, I could see the same thing happening: folks come back as before. That said, America’s outbreaks are surging across the southern states whose temperatures have increased in recent weeks. It’s one thing to open a theme park when cases are plummeting; another when they’re surging. That will have to tamp down some demand.

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