Demand and Supply in media no longer makes sense to support traditional models, in general. In sports in particular, the entire landscape is being redrawn and business models and valuations being re-examined.
The world of sports coverage and sports betting are morphing into one. Last week in “We let straight men get away with it all the time” I wrote:
"Last century, industrialists were drawn to media for vanity and, well, as “insurance.” Owning the means of production and communications medium allowed them to control what was said of them, and what they could, in turn, say about their competition. Hearst vs Pulitzer, and so on. That side of the history of media is fascinating; I started to cover that in the Turn the Page series on ContextTV.
Those classified-profit-machines posing as local information brochures made the profit printing presses of today’s tech behemoths look take. Media owners would pour profits back into swanky newsrooms as… insurance. Eventually, the Web changed dynamics, Craigslist, Google, yada yada – the so-called ad monopolies of today – i.e. Facebook, Google (whom, ironically, are already seeing rising threats that will erode their profit base) don’t have similar concerns and thus, less interest to maintain those traditional newsrooms. That’s why the future of local news may be rooted and anchored in academia and campuses."
Indeed, the news business isn’t what it used to be, partly because the Web redrew the landscape, changed the economic formula and adjusted the power dynamics for good. The biggest change to affect sports is in fact the democratization of media, which ushered the explosion in user-generated content (UGC).
Every kid’s dream job was landing that sports writer gig. The web blew open the doors and anyone – literally – could be a sports writer. BleacherReport and SB Nation were pioneers, echoing Ghandi’s (had Ghandi been an M&A banker instead) “first they laugh at you and then they, they buy you and replace SI with you.”
Sports Betting Was Made For the Web
The web was built on the 3 C’s: Commerce, Content, Community, and underwritten originally via marketing, be it CPM, CPL, CPA style ads.
The CPM (cost per thousand impressions of ads) model faced an incredible amount of pressure with the proliferation of UGC, supply shot up and demand (while growing) didn’t keep pace.
Print media (including local print media) never stood a chance and began to lay off writers. Recognizing the vacuum, eventually, companies like TheAthletic came along and recruited laid off sports writers (partly for their strong followings on social media) but shunned a pure ad model, opting for subscriptions.
Much of the boom in sports media came as a result of cable, which stole market share away from network TV but actually increased the size of the pie. When ESPN and MTV launched in the 1980s, they weren’t exactly the barometer of ultra bespoke programming, but over time, they became synonymous with quality (WatchMojo replicated the playbook, launching early on YouTube as it replaced television).
As industries tend to do, the Web did to cable what cable did to network TV. As ESPN’s subscribers tumbled, so did its revenue base. Concurrently, print media’s larger, faster downward spiral led to a perfect storm that left demand for sports content high but distorted the traditional economic model.
Of Vice and Virtue
For all of America’s obsession with violence (the Second Amendment and guns, massive military budget), it’s never been comfortable with sex. It’s also been dysfunctional with betting. What happens in Vegas, stays in Vegas, after all.
Except that the genie is out of the bottle, via Wapo:
Since the Supreme Court overturned a federal law in 2018 that limited sports gambling mostly to Nevada, 19 state legislatures and the District have legalized sports gambling in some form, with another 27 moving toward legalization. The early returns have been encouraging. In October, for instance, the amount of money bet in New Jersey eclipsed $800 million, more than the $650 million in Nevada. In a rush to attract these new customers, gambling operators have turned to sports media companies, which are in their own race to cash in on the legal-betting boom. ESPN, NBC and CBS have formed lucrative advertising partnerships with big-name sportsbooks. Fox Sports launched its own gambling company, FoxBet.
Barstool’s owners sold a large stake to a betting company. Last month, Sinclair bought a stake in gaming company Bally’s and said it will rebrand its 21 regional sports networks using the Bally’s name. Sinclair CEO Chris Ripley said in a recent interview that gambling will transform a sports industry that is reeling from the pandemic, watching advertising and cable bundle fees shrink. “It’s a third revenue stream to maintain the growth of the industry,” Ripley said.
Throughout the history of business, all incumbents will have a harder time embracing change than the challengers, who feed off it. As such, the ESPNs of the world do not really want to be known as “sports betting shops” (same way a Buzzfeed probably hesitated to venture into sex toys despite their demographic and expansion into revenue streams) but as consumer behavior and optics change, they risk being left behind – an added whammy on top of every other headwind.
It shouldn’t have come as a surprise that when NBC Universal CEO (& Covid warrior!) Jeff Schell pointed to soccer matches as driving some of Peacock’s early traction.
History Repeats Itself
Fifteen years ago when I launched WatchMojo, I told people that “yes content is king, but distribution is queen” and one without the other means you lose, blur into oblivion, or land in no man’s land. This is why today, you see audience/distribution companies access content (though not feel compelled to buy it) while content owners invest in technology/distribution to go DTC.
Given the tilting competitive landscape in sports, it’s natural that sports betting firms (the tech/distribution enabled of the betting revenue stream) will, like the video distribution platforms of yesteryear invest in content. Some will license, others will buy, a few will merge. Draft Kings, apparently, wanted to buy Bleacher Report from WarnerMedia, a unit of AT&T (related: watch AT&T and WarnerMedia as the odd couple). Why would Draft Kings do that?
“In an uncertain media landscape, gambling companies have lots of advertising dollars to spend. DraftKings spent more than $200 million on advertising just in the third quarter of 2020.”
Indeed: according to Yaniv Sherman, the head of business development at another gambling company, 888 Holdings:
“We’re all media companies. We’ve realized we need to be producing content.”
Reality is owning content isn’t for all, but when you consider the alternative, it may be a lesser of many evils. Indeed, Sherman said:
“888 spends some $200 million each year on marketing and that he would prefer to partner with a media company rather than build one. Gaming operators aren’t news desks. That reporter needs to report to someone. You need an editor.”
Full disclosure: I already emailed him to propose a partnership as we revisit our sports programming and ramp up our audio programming (i.e. podcasts and such).
“The places that have the money to hire the best writers right now are the folks that are serving the gambling audience,” Brian Musburger said. “So it’s interesting.”
Why? One word: YIELD.
The more an investor in technology, platform etc. can yield – aka generate, extract, capture – out of his user base, the more valuable they will become. Since content is an asset but marketing is an expense, it makes sense to use balance sheet cash to invest in content and IP than marketing. This is exactly what happened in other industries.
Stock Disclosure Time
This is why after sitting on the sidelines and watching Draft Kings and Fubo rise post-IPO, I finally bought shares in both (for more: read My Anti-Portfolio & investment philosophy, Introducing my Portfolio but note I am NOT licensed to give investment advice, and for all intents and purposes, I’m just essentially gambling. Ha!)
Admittedly, it’s not like I conducted weeks of due diligence, pouring over either company’s financial statements, it’s just a bet at a macro level and connecting the dots.
For example, a few years ago, I met Patrick Keane (former Google/Associated Content exec) while an operating partner at Stripes before he founded The Action Network, who went on to recruit Darren Rovell to venture into content. Of all of the opportunities he saw and considered, he picked sports betting. That’s at the infancy stage. At the more mature phase, Penn National Gambling – owner of brick and mortar casinos in 19 states – bought a controlling stake in Barstool, helping it reach a younger, gambling-savvy demographic.
Why Fubo and Draft Kings?
Granted the macro landscape is promising, but why bet on specific horses?
I’d heard of Fubo for a while but admittedly spent a bit more on it after Edgar Bronfman Jr. joined as Executive Chairman. More on him below.
Fubo, of note, is a bet on niche video-streaming platforms that have their sights set on replacing traditional cable and satellite television services, but have global reach given the web’s boundaryless nature. I also like that Fubo isn’t necessarily trying to replicate ESPN – which given my perch on YouTube realize may not even be possible due to there being no true barrier to entry online vs the days of cable. Fubo offers a myriad of bundles which aren’t necessarily cheap. My guess is over time, as cord cutting intensifies and cord nevers grow in numbers, Fubo becomes the kind of things sports fan turn to. Past performance does not guarantee future results, and I don’t like comparing any companies, but Fubo does remind me a bit of something like Roku, which starts off small and insignificant but then becomes a marketmaker. And, I won’t lie, while Edgar Bronfman Jr. may have been a bit of a punchline early on for mortgaging Seagram/Dupont’s vast riches to move into show business through the Vivendi/Seagram merger, but his instincts were right with betting on Universal Studios, it just came at a massive cost. He was also right in backing Warner Music Group, before selling it to billionaire Lev Blavatnik who ended up pulling off one of the greatest bets in media. For a very personal take on my love/hate relationship with the labels and WMG, read this.
DraftKings, meanwhile, is one of the competitors in the space with an instinctual pedigree in betting, has a first mover advantage, a recognizable brand name. It sought to merge (and then backtracked) with FanDuel in 2017. None of this means anything in the end: Excite/Altavista/Lycos were early but then saw Google come along and benefit from a perfect storm to win in search). But same way that Sirius and XM Radio were early, it’s hard to dislodge an early player in a nascent field. It’s also hard for the establishment to share the same velocity; ESPN shut down its stand-alone eSports unit, despite eSports being a high-growth space.
Both are up in my portfolio, but the market has done well overall, so take this with a grain of salt.
I poke fun at myself for always referencing the “Then vs Now” graphs…
but given my verbose writings, I think we all agree if an image can replace a thousand of my words, we all win!
In the same vein, there’s a “galaxies colliding” diagram in the Betting landscape… (a bit “brouillon” as they say but expanded below):
with more than two worlds that shows belligerents like:
- The Fubo’s of the world on one side, with RIGHTS TO SPORTS (primary content) and adding sports betting capabilities – as Fubo did when it finally moved into sports betting with the acquisition of Balto after hinting at it for weeks.
- The Draft Kings’ on the other, with BETTING capabilities that add sports content capabilities, as it contemplated with its inquiry to AT&T re WarnerMedia’s Bleacher Report.
- and a third profile which is companies who either produce (secondary content) and/or have technology but primarily bring AUDIENCES, i.e. or in Web parlance, USERS.
Naturally, since different belligerents have different pedigrees and some have head starts, some companies may already be dabbling in more than one worlds. I’d also highlight that it’s not unwise to bet on companies building the infrastructure of betting, such as Nuvei, another stock I picked up recently.
That Isn’t Cool. You Know What’s Cool?
Online, USERS could be readers, listeners, subscribers, viewers, etc. WatchMojo is proud to serve 150 million viewers who sure, in theory are more valuable to advertisers in a CPM galaxy. But that’s all in the “Universe of Advertising.”
The reality is that users who are bettors are inhabitants of the “Universe of Transactions” – a far away place which Covid has now dramatically accelerated the journey to. For more read
- Covid accelerated the shrinking of ESPN
- The impact of Covid on Advertising
- Covid’s bizarro reality has accelerated all industries
Sports (and news) have always been somewhat sheltered by market forces because of its live, tune-in nature (i.e. piracy). But while that shelters the programming from some of the risks affecting others (i.e. DTC/cord cutting, or shift of advertising from print/TV to the web), it just prolongs the inevitable.
The market forces are too strong, if Hollywood as we know is dead, it’s hard to think a model where the business of sports won’t be even more affected, especially because the value of BETTORS is orders of magnitude greater than other types of USERS, be it an ESPN viewer* or Bleacher Report reader. ESPN paradoxically earned fat fees via subscribers it reached from distributors but if you strip away their “end-user” from a revenue generating perspective, said viewer wasn’t necessarily more valuable than a viewer on another cable station or TV network.
Post IPO, I sat on the sidelines as both Fubo and Draft Kings blasted off, but eventually, it was clear that these stocks reflected a change in the kinds of companies that markets reward. Of course, guessing which companies is key. Given both companies’ gains, they remain risky, but signal a brave new world order.
Disclaimer: Nothing here should be misconstrued as investing advice. I am NOT licensed to give any advice. These writings are intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon. The majority of my holdings are in safer, value stocks and managed by professionals. My direct investments portfolio represent riskier investments that make sense for my time horizon.