The Evolving Landscape of the Global Sports Business Industry

It has been a while since I last shared my thoughts on the current affairs of the industry. I owe a big thank you to Jaime Domínguez Pérez de Ayala of World Football Summit for inviting me to an upcoming WFS Podcast episode. Preparing for this appearance prompted me to review my notes and observations from the past 12 months, both from firsthand experience in various professional processes and as a student of the sports and entertainment industry.

The insights and assessments I offer are framed by nearly 20 years of professional experience in diverse roles and organizations, as well as my work as a consultant. The rapid developments in our industry over the past year have been a central topic of discussion in forums and offices worldwide. What was once considered the future five to ten years ago has become the present today and will soon be the past.

Historically, our industry has struggled with a lack of professional expertise and smart capital investment. These issues often created a chicken-and-egg dilemma, which was only recently disrupted by the disastrous aftermath of the pandemic and the subsequent (sometimes reluctant) appeal for assistance from international capital markets. In times of distress, debt took precedence; now, private equity is taking center stage.

It's important to note that although private equity and venture capital are distinct, the sports industry—particularly decision-makers in Europe—often treats all sources of capital as if they were venture capital. This perspective overlooks the inherent differences between the two, hoping that the investor or lender would do so mostly based on passion and not on business principals. What comes after is a cost of operation (both financial and in governance & control terms) that many have difficulties to swallow. For the capital markets, the higher the risk and the weaker (sometimes, non existent) the growth strategy plans, the greater the potential for the investment to evaporate into thin air. A serious business without a detailed and realistic strategy is neither serious nor a business.

For a deeper understanding of these issues, I highly recommend Roger Mitchell 's new book, Sport's Perfect Storm: An Industry Now Totally Adrift. This book does an excellent job of leveling the financial and management playing field for everyone in the industry, regardless of their level of experience.

This reflection serves as the foundation for the following commentary and assessment, offering a comprehensive view of the industry's current state and the transformative changes it is undergoing. I also encourage you to listen teh conversation I had with Jaime, which is airing soon.

1) Sponsorship Dealmaking in the Post-Pandemic Era

The world of sports sponsorships is transforming rapidly, driven by the need for tangible business results. Traditionally, sponsorships were all about brand awareness and positioning. But in this post-pandemic era, there's a noticeable shift towards performance-based partnerships. Brands now demand measurable outcomes that directly impact their bottom line. This trend is evident globally, with major brands across Asia, Europe, and the Americas seeking partnerships that offer clear performance metrics.

The rise of performance-based sponsorships means that platforms and sports organizations must show how they can drive sales and boost customer engagement for their partners. This shift is particularly significant for major "blue-chip" brands, which are highly sought after for partnerships. These brands need evidence that sponsorship can deliver substantial business results, making performance metrics a crucial element in sponsorship negotiations. For instance, performance-based sponsorships involve setting specific objectives, such as social media engagement or increased brand awareness, with incentives tied to achieving these goals.

Consider the story of Germany's national football team, which recently partnered with Nike in a €1 billion deal. This agreement grants them unprecedented creative freedom in designing their kits and merchandise, showcasing how strategic partnerships can lead to innovative outcomes. Similarly, FC Barcelona launched its own in-house "own label" apparel line, under a corporate structure called Bar?a Licensing & Merchandising (BLM), aiming to capture a larger share of the global licensed sports merchandise market, which is projected to grow to more that $50 billion by 2032. These ambitious initiatives require substantial financial backing, which private equity firms can readily provide, empowering sports teams to innovate in design, production, and direct-to-consumer engagement.

2) A New Media Paradigm: the recent case of Netflix and NFL

Netflix's recently announced collaboration with the NFL marks a significant shift in the sports broadcasting landscape. Traditionally, the Christmas Day games in the United States have been dominated by the NBA. However, last year, the NFL entered this space, and now Netflix has secured the rights to broadcast these games. This move is particularly noteworthy because Netflix has historically refrained from live sports broadcasting.

Imagine the local impact: The NFL's strategy to expand its calendar and maximize revenue from its games is a major shift. Known for generating the highest revenue from TV rights and sponsorships, the NFL has the fewest games of any major sports league. Increasing the number of game days, even by one, is significant both in business terms, and in the impact of the players given the physical demands of the game and the potential for injuries. That schedule expansion is at the core of the ongoing labor conversations between the NFL and the NFL Players Association.

From a global perspective, Netflix's strategy to broadcast these games on an ad-supported tier aims to create a global advertising powerhouse similar to the Super Bowl. By leveraging its advanced content delivery platform, Netflix can offer highly targeted advertising, maximizing revenue from global advertisers, with an unprecedented granularity of said targeting. This move could set a precedent for other streaming services and sports leagues, potentially transforming the global sports broadcasting industry forever.

High-profile streaming deals, such as Netflix's $65 million (per year) agreement with the NFL and Apple TV's $2.5 billion (per ten years) deal with Major League Soccer (MLS), exemplify the growing importance of global streaming platforms in sports broadcasting. These deals highlight the potential for private equity to drive innovation and growth in the sports media landscape, while maximizing value-creation and return on investment.

3) Direct-to-Consumer Streaming: The Future of Sports Broadcasting

The broadcasting landscape is further evolving with the rise of direct-to-consumer (DTC) streaming services. Platforms like Peacock have already demonstrated the potential of this model by retaining customers through exclusive content like NFL playoff games. As traditional broadcasters face increasing competition from streaming platforms, sports clubs and leagues too are considering their own streaming solutions to directly reach their audiences.

This shift poses a dilemma for leagues and clubs, as whether to sacrifice short-term revenue from traditional broadcasting deals (now including streaming platforms in tender) in favor of investing in their own direct-to-consumer platforms. The key to success in this model is retention, which hinges on offering relevant and engaging content. For leagues with comprehensive content libraries, direct-to-consumer streaming can offer a viable model. However, for smaller clubs without extensive archives or global followings, the investment required for such platforms may be prohibitive.

Consumers are multidimensional, with diverse interests spanning various sports and entertainment genres. And that's where integration comes into play.

The NBA's development of a basketball super app in partnership with Microsoft exemplifies how a league can aggregate global content to create a compelling direct-to-consumer offering, harnessing a global storytelling anchor in a global sports discipline. I have zero doubts they are going to differing leagues or clubs, and try to aggregate basketball content from around the globe. And if they are successful, you can then have something that is akin to a plug-and-play basketball content pipeline that streamers will highly bid for: exciting content, already produced, global appeal, and local relevance. This approach could significantly enhance monetization opportunities through targeted advertising and sponsorships, and it doesn't get any better than that.

Specialized private equity is analyzing these type of potential opportunities, and are willing to become the fueling force for this transition by funding the necessary technological infrastructure and enabling sports entities to offer personalized content, exclusive access, and immersive fan experiences. Not for nothing, the biggest pool of private capital comes from the US. According to a PwC report, the number of US viewers who stream sports events at least once a month is projected to rise from 57 million in 2021 to over 90 million by 2025. This growth underscores the importance for private equity firms that, when coming in any sports property, one of the first topics on the docket is to analyze the current status of the property's DTC business, and looking at the strategy that aims to driving the adoption of said platforms.

4) Driving Digital Transformation

The digital transformation journey in sports presents challenges, including technological integration, fan adoption, and data privacy concerns. Capital markets are decisively pushing to provide the resources needed to overcome these hurdles, investing in robust technology infrastructure, continuous fan education, and stringent data protection measures, so the businesses they invest in are less dependent on their local markets. For example, by 2025 the virtual reality (VR) and augmented reality (AR) market in sports is projected to reach $11.2 billion, highlighting the potential to drive innovation in immersive fan experiences and advanced data analytics, that further globalizes sports.

Digital technology is unlocking unprecedented opportunities for growth in the sports industry, offering the potential to draw fans closer through innovative and customized experiences. To capitalize on this opportunity, however, digital will need to be embedded in every aspect of the business, transforming people, processes, and technology. Sports organizations will need to integrate digital talent and provide ongoing training to their employees, helping them view problem-solving through a digital lens. Digital is the bullseye of any up-to-date business strategy.

5) Unlocking Real Estate Potential

Few assets offer more comfort to the capital markets than valuable Real Estate. Investors' influence nowadays extends to the physical transformation of sports environments through mixed-use real estate projects around stadiums and arenas, particularly in Europe -where the stadia is very underwhelming in general. These developments create new revenue streams and enhance the overall value of sports franchises. For instance, the SoFi Stadium in Los Angeles, anchoring the Hollywood Park development, boasts also a 6,000-seat theater, luxury apartments, offices, and retail spaces. Private equity investments in underdeveloped real estate and media rights can drive long-term value creation, contributing to local economic growth and community development.

Professional sports teams are becoming real estate empires, building luxury apartments and shopping malls, with the suroundings of the venue turning into vast entertainment districts in which the sports team is just another leisure option, amongst many. For decades, major league teams depended on ticket sales, concessions, and TV deals to generate revenue. But team owners in recent years have turned to real estate development to bring in extra cash and drive up the asset values of their franchises. Billionaire owners have built dozens of new stadiums and arenas, often with hundreds of millions of dollars in taxpayer funding (the magic of the US, which is unthinkable in Europe!). State and local governments spent $33 billion in public funds to build stadiums in North America between 1970 and 2020, with the median public contribution covering 73% of costs.

Teams' push into real estate has significant implications that are shaping both sports leagues and urban areas. Teams are now real estate plays for billionaire owners and capital markets in general, with stadiums and arenas increasingly serving as anchors for mixed-use shopping and entertainment districts. Development rights around stadiums for team owners have become a key asset and due diligence component for any private investment process. This trend underscores the evolving role of stadiums in the sports business landscape, transitioning from single-purpose venues to multifaceted entertainment hubs.

Conclusion

In conclusion, the sports industry is witnessing profound changes in sponsorship strategies, media paradigms, and venue utilization. Performance-based sponsorships, direct-to-consumer streaming, and multifunctional stadiums are reshaping how sports organizations generate revenue and engage with their audiences. As these trends continue to evolve, they promise to create new opportunities and challenges for stakeholders across the sports ecosystem.

The surge in private equity investment will become the driving force behind the future transformation of the industry, ensuring sustained growth and significant returns on investment for all stakeholders involved. By harnessing key economic levers such as sports sponsorship, streaming and media, digital transformation, and real estate development, private equity firms are enabling sports entities to become value-generating powerhouses, navigating the complexities of the digital era and capitalizing on new opportunities for long-term success.