THE TRUTH TO UNLOCKING VALUATION INCREASES IN SPORTS

“Look man, you can listen to Jimi but you can't hear him? There's a difference man. Just because you're listening to him doesn't mean you're hearing him. - White Men Can’t Jump – Sidney Deane speaking to Billy.

This fabulous quote left me dazed and confused when I first heard it, but it rings truer and truer every time I have the good fortune to catch the film.

To me it pertains very specifically to where the Sports industry stands in 2021 and came back to mind via a recent Unofficial Partner newsletter and podcast.  The spark to a very lively, and fun, twitter conversation with some leading minds in the sports industry. 

The central tenant of the argument is that Sports Teams are either massively undervalued or tech companies are grossly overvalued. This is made on the basis that TikTok has 680m users but is valued at over $180bn but Manchester United (MUFC) has over 1.1bn fans and followers yet is valued at $4.2B by Forbes and $2.6bn on the NYSE.

As Lucas Von Cranach (CEO of One Football) was alluding to in the conversation with Richard Gillis (Host, Unofficial Partner), the difference comes from how the market prices a business model. TikTok is a tech platform with direct access to consumers and first party data and a sports team relates to its followers indirectly and through third party data.

THE WRONG COMPARISON

Contrasting MUFC with TikTok though is unfair. A better comparison might be sports teams to media companies.

Indeed, attend any conference related to sports and you will hear how sports teams have pivoted to become content and media companies. When we compare how the two are valuedvalued, we find a familiar issue. As of today, a quick google gives you this:

§ Disney - $340bn (Despite fact the Parks haemorrhaged cash through the pandemic!)

§ Comcast - $248bn

§ Netflix - $245bn

§ CBS - $27bn

§ Fox - $21bn (much of its assets of course sold to Disney)

§ Discovery - $18bn

§ ITV - $6.8bn

The top sports teams are therefore getting close to the valuation of a regional sports business (ITV or Sinclair).

BUT, and this is critical to the thinking around valuation. Sports teams are not media companies. 

Teams increasingly, at all levels, create “Shoulder Programming” - content away from, and around Match day. At the top end it can go further. MUFC has a TV Channel – MUTV that it has invested in. MUTV has a growing distribution, and I am excited by their recent Direct to Consumer launch on a number of platforms. Yet their public accounts reveal that this business line, in a good year, is contributing ￡10m in revenues or less that 2% of total income. It’s a good start but doesn’t appear to have grown in 3 years according to their accounts (pg 65).

More than anything, sports teams create content and media to supplement their Sponsorship agreements with companies they view as real partners. Sponsorship will generally be no more than 30% of the total revenue of a sports team so this content creation is directly linked to a minority of their revenue profile. They view straight advertising buys on their media platforms as commodities. Think of how a typical media company will sell spots around their content to a number of competitors. ITV during the Grand National week no doubt sold spots to all the gaming companies in the UK that wanted one and could afford to pay. In my experience a sports rightsholder typically grants exclusivity for it based on the level of sponsorship a partner undertakes and therefore functionally cannot act in the same way as a broadcaster or media company. 

SPORTS TEAM VALUATIONS

Follow the money. Always follow the money. And as we can see here the reality is that sport teams, despite how they may want to position themselves, are sponsorship and licensing companies. 

MUFC’s financial reports highlight sports teams’ principal revenue:

Media Rights – sold at the league level such as the Premier League or NFL

Sponsorship

Retail/merchandise/licensing

Sport is therefore tied now to two sectors that are growing, are healthy but are not exactly thrilling for an investor. The Sponsorship Market has an expected CAGR of 6.7% and the licensing business is growing at 4.5%. This is nothing to be sniffed at and it’s great to see they continue to grow given they are the backbone of the sports industry. Tech Valuations quoted by Lucas are often linked to their total addressable market (TAM) and Growth rates – but sports teams are capped by the sector they play in and the metrics at play.

If you then look again at MUFC’s valuation it feels pretty accurate. I’m guesstimating by guessing that MUFC might have 25m users in their database. If true, the market is actually valuing their business at $20 per user. This is an impressive figure in my book and feels appropriate given the low customer churn rate of a sports business. Compared to ITV’s 2020 revenue of ￡2.7bn and an assumed potential audience of 40m that would be about ￡67.5 per user. Given their respective valuations those numbers make sense.

If you want to use the 1.1bn ‘followers’ that MUFC talk about then they are making less than $0.50 per user and again that tells me that the valuation is still about right.

The fact the valuations continue to go up is linked to being in a (slow) growth space and the intrinsic value proposition of sports. This is coupled then with the scarcity of assets. There are only so many teams in any league. With closed leagues this is exacerbated and creates an upward pressure on assert valuations particularly as more investors come in – simply supply demand economics at play. 

So, the disparity in valuation doesn’t come from the lack of potential in a sports team – given their reach - but the business model. Despite creating more content and positioning themselves as media companies when you dig below the surface the reality hits – and a sponsorship or licensing model will never get a valuation multiple equivalent of a media company or a tech company.

The cost model for a tech company also has an impact on the valuation that removes the comparable matrix. For a technology company to get the racy valuations we see they need to be designed as exponential organisations. In simple language, costs do not increase at anything like the same rate of revenues – direct costs do not grow proportionally to revenues. Many will lose money for a substantial period as they invest in infrastructure, people and improving the algorithm but the underlying principle is that as they mature the cost structure will stabilise as revenues and customers continue to skyrocket. This means that both public and private investors are more comfortable with a technology business accumulating heavy losses as it grows (and chases monopoly status) in the expectation that when the lever gets pulled a tech company can become very profitable. 

The difference between TikTok as a platform business and a comparable media business is that TikTok is not paying for its content. It can focus purely on bringing on users who will both create and consume. ITV? They are commissioning, licensing and creating content all the time. The underlying margins are therefore much much thinner. In turn therefore investors will not allow for long term losses because the underlying business model won’t generate the profits down the line.

In that sense you can see a comparison between Sports Teams and Media companies in terms of their cost base. The English Premier League Teams are averaging around 60% of income being spent on wages and in many other leagues its higher. The US sports work at around 50% but directly link revenue and wages – ensuring that as revenues go up so does cost. The implication being there isn’t much additional value in scale.

For valuations to soar as tech companies often do, one of two things need to happen:

1.      Product Innovation (you can see the value creation results with T20 Cricket and IPL, or use of tech to enhance the current product etc)

2.      Business Strategy Innovation

The latter is where I will focus in my follow up. Business Strategy Innovation should not be confused with the current focus of sport’s digital transformation – which is around optimising how we currently operate and which is a necessary step to take. The innovation we are discussing here is a re-examination of the business model we are in and what the data tells us about the model we might want to be in to unlock valuation growth. The goal of strategic innovation is to change the dynamics around revenue and costs.

Of course, before you can define where you are going it has been important to understand the reality of the business model we are in, and the metrics and data points that define it and only then can we identify potential alternatives.

If you are interested in discussing this more, or keen to go beyond that and think about how you can unlock this potential contact me at:

[email protected]

Twitter: @mbrought9

LinkedIn: https://www.dhirubhai.net/in/michaelcbroughton/