The BT Sport, DAZN and Discovery Pantomime

A seasonal reminder of the power of football and television to befuddle otherwise sane executives

BT has been trying to sell BT Sport for many months, at least since April of this year. The Sunday Times (19 December) now reports that talks with potential bidders for BT Sport, claimed to be valued at ￡600m, are “dragging on”. No kidding.

DAZN has apparently been the frontrunner, but Discovery is now claimed to be in the frame, proposing a joint venture with BT. This all feels like a seasonal pantomime to provide a reminder, if one is ever needed, that there is no limit to the potential for the combination of football and TV to draw otherwise sane executives into making complete fools of themselves.

BT Sport was a reasonable idea but so poorly executed that it became a bad idea. BT has eventually conceded the point, blamed former executives and promised shareholders it will focus more diligently on things that matter, like funding its pension deficit and ensuring that BT secures a preeminent position in fibre.

BT backed off buying major new rights a while ago and is now looking to sell BT Sport as a going concern, rather than simply wind the business down and walk away, hoping to salvage some cash consolation from the ruins. Those with a sense of history can enjoy the irony that this is what ESPN did when they exited the UK stage nearly ten years ago, selling out to BT, which is why one of BT’s channels is called BT Sport ESPN. Perhaps if DAZN buys the business we will see the DAZN BT ESPN channel?

Challenges with selling BT Sport

BT has a problem, however, trying to pull off a meaningful sale. It was always doubtful that the BT Sport business was profitable, but if there was ever any story that BT Sport made sense, it relied on benefits to the BT broadband business through improved retention of broadband customers gifted a free sports offering. The problem is that if you sell such a business to anyone else, they do not inherit this benefit, so the thing being sold is probably structurally loss making. When the focus narrows to tangible and transferrable revenues and costs, there is not enough direct subscription revenue to cover the rights costs. No one should willingly step into the existing BT Sport rights deals because they are just too expensive. So the sale always looked tricky, and it has been no great surprise that talks are “dragging on”.

As always, there is much focus on the Premier League (PL) rights. If DAZN wants to become a serious UK player then the attraction of PL rights is clear and if they don’t buy BT Sport they would have to wait several more years for an opportunity to get involved. It is clear why BT was happy to roll over its previous PL deal earlier this year, eschewing the potential opportunity to bring the price down, but avoiding any risk of being displaced. With the rollover secure, buying BT Sport is DAZN’s only medium-term route to becoming associated with the PL brand in the UK.

In principle, the book cost of PL rights should not be a barrier to a sale because BT only ever won the PL packs that Sky could not own, so the price level should not reflect head-to-head competition with Sky. Sadly, however, the prices are too high, much higher than the market price today, because BT overpaid in 2012 (as part of a failed attempt to outbid Sky for five packs) and has notably failed to bring down the prices in subsequent auctions, despite an absence of obvious competition.

The other problem for BT is the Champions League rights which it has retained at a price that remains several times the level that prevailed before the war with Sky broke out. This does not look like an attractive deal for DAZN to inherit.

Awkward solutions

There is a potential solution to this problem that would help get a sale done, but BT would have to swallow its pride. If an ongoing rights deal is on the books at ￡100m, but ￡70m is a fair and sensible price given the potential direct revenues today, then BT could sell the business if it offers to remain liable for the ￡30m “excess cost” of the rights. But this is awkward. It is hard to negotiate, and it is probably not something BT wants to concede publicly and then have to keep explaining to shareholders for the next few years.

The Sunday Times reports that talks have stalled over DAZN wanting BT to cover the costs of BT Sport provided for free to BT broadband customers, many of whom will drop the channel when it becomes standalone. This is another way to square the same circle, to pretend something adds up when it does not. BT would pay DAZN for a large number of “subscribers”, even though many of these broadband customers would never pay full price for BT Sport.

If BT does ever announce they have sold BT Sport for anything greater than zero, the game will be to try to work out where in the accounts they have buried the evidence.

BT Sport could nonetheless work for the DAZN plan

All of this does not mean the sale won’t happen. Sometimes people do dumb things, and DAZN might indeed fall into the trap. Another possibility is that DAZN can see the trap perfectly clearly, will walk into it nonetheless, but hopes that it will be able to IPO in 2022 with a bulked-up story and can flip the business to someone else before the problems become apparent.

Indeed, this seems to be the general confidence trick that DAZN has been trying to carry off and buying BT Sport would represent a doubling down on the idea. Because DAZN also looks like a bad idea, or more accurately, a good idea that went bad. The early version of the DAZN story made sense, that OTT was a smart and efficient means of monetising sports rights that were not being picked up by the main sports broadcasters. It was an especially strong idea in the context of exploiting rights outside their main territory, but where there were pockets of enthusiastic fans.

But it seems this initial story was not enough and DAZN has been seduced by the idea of becoming the Netflix of sports, contending for the most premium of rights. But the fact that newspapers bandy about the “Netflix of sport” phrase does not necessarily make it a good business idea, and there might be a reason why even Netflix does not seem to want to be the Netflix of sport.

In the UK and many other markets, premium sports rights are typically won by pay broadcasters who then bundle sports with a range of other content and services (movies, entertainment, broadband, etc). I won’t go into the detail of the economics of bundling here, but the basic result is that bundling allows bidders to extract far more value from the rights at the centre of a bundle than someone planning to sell a standalone service. Sky retains the sports rights it wants because it can pay more than anyone else, and this in turn is because it has the most extensive array of bundling options. It is, of course, possible to win sports rights that Sky has decided it does not want and that can be the basis of a profitable business. But if you ever outbid Sky for something that Sky really wanted, then you have probably overpaid and you are very likely to lose money. This is the lesson learnt in turn by ntl, ONdigital, Setanta, ESPN and most recently BT.

Perhaps DAZN has not yet learnt this lesson from history. Perhaps they think that the magic of OTT somehow disables the basic economics of bundling. If so, they will be disappointed. There is very little magic in OTT, but this is especially so for sport which demands to be watched live, in which case streaming is not so different to traditional broadcast. This means that as soon as DAZN started to expand from its early roots into outbidding pay TV incumbents around Europe for premium football rights, the red warning lights started to flash. Of course, everything seems wonderful for a while, with glitzy announcements of auctions won and incumbents vanquished. But it is trivially easy, if you are backed by people with more money than sense, to overbid and win rights. ONdigital did this with the Football League. Setanta had such backers and many such moments, and we know how that ended.

It is possible that DAZN knows all of this but is hoping that they can get their IPO away next year before the problem is spotted. The game here is to assemble a portfolio of headline grabbing rights and then you have a few years to sell the business before it becomes obvious that the subscriber revenue will never cover the rights costs. A bit like a Ponzi scheme, or a game in which you just need to make you are not the one holding the baby when the music stops. The timing of a 2022 IPO could work, because rights tend to be bought a year or so before they go live, and then it is expected that subscribers will take time to build. So it is a few years before problems with the spreadsheet become clear.

Acquiring BT Sport could fit into this game: DAZN would bulk up, establish a significant presence in the UK, and link themselves to the glamour of the PL. This could put them on a path to an IPO at a higher price, all assuming they can find the next group of fools to buy the story before the cracks start to appear.

It's behind you!

Now there is a new angle and we are invited to believe that the competitive dynamics of the BT Sport sale have intensified by the arrival of Discovery as another ardent suitor. I have had many dealings with Discovery over the years and they are a formidable commercial outfit, but they too have shown signs of being susceptible to the sport delusion. Perhaps there is a logic in Discovery buying BT Sport, but that is a bigger discussion and would need an article to itself.

The more likely explanation, however, is that BT desperately needs a story to spook DAZN and hurry them along, get them worried that they might miss out if they don’t seal a deal now. To extend the pantomime metaphor, this looks like BT or its advisors leaking an “it’s behind you!” story.

Predictions too hard, so make do with advice

Given the time of year, I should try to close by making predictions for how this will play out in the new year. But it is almost impossible to make predictions when people are not acting rationally, as seems to happen so often when TV and football are in the mix. So I will stick to (unsolicited) advice.

My advice for BT? If you really want to put BT Sport behind you, you might need to swallow your pride and accept a deal that reflects commercial reality, even if that means you retain a tail of excess cost in one guise or another. If that is unpalatable, then you can always let the business run down and walk away from the major rights deals when they come round for renewal (but then you should not have rolled over your PL deal for another three years). By the way, a joint venture with Discovery, if that is a real discussion, does not really solve your problem: you would still be in the game, perhaps indefinitely, and Discovery will surely demand that the venture be paid real revenue for all those broadband customers gifted “free” sport, so you won’t be able to escape from those excess costs remaining with BT.

My advice for DAZN? You seem to be all-in on the idea of outbidding incumbents for premium football rights and launching an IPO before anyone can judge success. If you want to double down and secure a serious UK position before IPO, BT Sport is a plausible option. If the IPO fails, you could always try to square the circle yourself by renewing rights deals at reduced prices in the future. Or if you are building a business for the long term, you could ignore BT Sport and wait until the major rights deals come back to the market – I don’t think BT will be putting up much of a fight.

My advice for everyone else? Watch this space. There is a role for a second sports player in the UK market, a profitable and attractive niche, whether broadcast or OTT. But it needs to be executed well and you need to avoid going head-to-head with Sky. There is a chance that the opportunity to occupy this space will emerge soon as rights pop free and become available at more sensible prices. But then again, the history of the last 20 years suggests that the queue of people who are dazzled and deluded by the glamour of football and TV might not yet be exhausted.