Distribution vs. Dollars
Isos Capital Management
An investment firm built by media, entertainment and sports operators for operators
Navigating Today’s Media Ecosystem
Note: Welcome to the first edition of the Isos Capital Newsletter. This newsletter will analyze the business strategy behind sports, media, and entertainment brands making headlines. More specifically, we strongly believe that sports properties are a premier asset class—this newsletter will show why. Expect it in your inbox about twice a month.
10 years ago, the doom and gloom of the media business was about the supposed demise of the bundle. Streamers were supposed to come in and destroy the industry. That…hasn’t happened. Instead, streaming has offered an additional, wonderful option for content providers to deploy their product too. Instead of destroying the media business, it has been a net positive. Now the question is what is the most valuable distribution channel for content and what content will drive subscribers.
All sports leagues are going to face the same challenges over the next few years—how best to monetize content across a changing media ecosystem. The value of live sports is undeniable. There is a reason everyone from Amazon to Apple are looking to add live sports to their bundles. Traditional broadcasters also have the margin to pay for content. Sports leagues now have the option to go explore new media partners.?
The streamer money is tempting. Amazon paid $1B a year for 11 years for the rights to TNF. There will be a delicate balance between O&O channels, cable partners, and streamers for leagues to navigate. To better understand the risks and rewards associated with that decision, TNF football on Amazon, while early, is a good case study.
Thursday Night Football on Amazon came hot out the gate but the viewership has been dwindling throughout this season. In the first 10 weeks, TNF is averaging 9.7M viewers, according to Nielsen. That’s below its promise of 12.5M that it gave to advertisers when the season started. To be fair to Amazon, they are arguing that their viewership numbers are usually one or two million higher than what Nielsen is giving them, but it is likely they were hoping for more.?
It isn’t all bad news though! The audience skews significantly younger for TNF versus historical cable programming. Through the first five games of this year, viewership was up 48% from the first five TNF games in 2021 among viewers in the 18-34 demographic, and up 25% in adults 18-49. Additionally, the Amazon team should take heart in the performance of the NFL over Thanksgiving. There were roughly 138M total audience viewers for the three games with the Cowboys-Giants game drawing 42M viewers. This screams opportunity for Amazon, and both the NFL and Amazon will use what is almost certain to be another massive holiday audience next year to promote the inaugural Black Friday game.
There are ~166M Amazon Prime members in the U.S. meaning that if Amazon is able to eke out $6.50 in additional revenue just from existing subscribers per year, the program pays for itself. This can come from in-game advertising and sponsorships, but more likely it would come from additional goods that will be sold because the viewer is now spending more time on Amazon properties. The company employs over 250 PhD level economists to help model out the impact TNF will have on their retail business. There is probably an algorithm that says for every touchdown thrown we sell 1,000 more tubes of toothpaste. (Sort of facetious, sort of not here).
The point being that as a sports league looks to partner with a big tech company, that negotiation needs to be undertaken with an understanding that the economics are entirely different for these companies versus traditional cable network buyers. This can be good—see getting a billion a year for Thursday Night Football—but it can also mean you are a less important part of what they do.
It is a delicate balancing act between accepting the correct amount of capital and promotional agreements from these players. Go too deep with a single streamer and you may relegate yourself to brand decay, ignore them and you’ll leave significant money on the table by decreasing competition.
For a property like the NFL, the deal still works out great, even if viewership is lower than preferred. They are able to experiment with the TNF games because they have broad linear distribution the rest of the week on CBS, FOX, NBC, and ESPN. For other organizations, these experiments are higher stakes.
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Take a rapidly-rising Major League Soccer. The MLS Cup championship game had 2.1 million viewers in the U.S. on FOX (1.487 million) and Univision (668k) in November. It was their best performance in 25 years. In total, MLS averaged 254K in 2021 across ABC, ESPN and FOX networks with that number bumping up to 343K on ABC / ESPN networks in 2022.
They recently signed a multi-faceted deal with Apple for streaming rights for 10 years at a price tag of $2.5B. Users can subscribe to the MLS season pass on the Apple TV app for $14.99 per month and Apple TV+ subscribers can sign up for $12.99 per month. It is a financial win for MLS but is still an experiment in deployment modalities. All MLS season ticket holders will get access to this first year. The service will be available in 100 countries with no blackouts. Very different from other leagues’ offerings.
Regardless, all of this activity is occurring because sports are so valuable relative to other content. There are very few media properties that people will sign up for a bundle just for one content type. Sports have proven, time and time again, that they can do it. For cable, for satellite, and now for streaming, exclusive sports broadcasting rights drive growth and retention for networks.
This is a journey we navigated ourselves. When we were managing the WWE’s content rights, we spent years debating the right balance of content distribution across the media ecosystem. Eventually, we ended up doing a detailed analysis to determine what new content to create and where to distribute it. We weighed our options by balancing against multiple goals:
We even drove it down to the level of which content would perform best in vertical versus horizontal formats on smartphones. While we increased right fees for the organization globally we also simultaneously built one of the largest social media followings for sports in the world (including one of the biggest YouTube channels in the world). And it included the launch of our own direct to consumer service. All together this resulted in a 5x increase to our enterprise value.?
As more streaming services proliferate and more sports come fully online, we expect to see more large cash offers come in. Tech giants can easily cross-sell products and track user behavior versus traditional cable services, so we would also expect to see higher ad performance on these streams as well. All of this put together means the value of sports properties are going to go up for a long, long time.
We hope you enjoyed the first edition of the Isos Capital Newsletter! As always, feel free to reach out to us with any questions, thoughts, or feedback.
Best,
The Isos Capital Team