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THE DELTA PERSPECTIVE Raghul Suthagar-Consultant Batuhan Er-SeniorConsultant José delValle-Iturriaga -PartnerandHeadoftheMedia,Sports&Entertainment practice Sam Evans-Partner ‘slam dunk’forOTTs Sports rights:Notyetthe

February 2019 THETHE DELTADELTA PERSPECTIVEPERSPECTIVE THE DELTA PERSPECTIVE

Sports rights: Not yet the ‘slam dunk’ for OTTs

Authors: Sam Evans - Partner José del Valle-Iturriaga - Partner and Head of the Media, Sports & Entertainment practice Batuhan Er - Senior Consultant Raghul Suthagar - Consultant

A shifting sports rights correction or a point of reflection as landscape leading internet platforms consider their premium content strategies. The value of sports rights has Overall, the global sports rights steadily increased across markets market is expected to continue with leagues such as NFL, growing annually at more than 4% and NBA growing 41%, 87% and for the coming years. 111% respectively between 2013 and 2018. For some properties, A significant driver of growth where there has historically been is expected to be the deeper consistent and rapid growth, penetration of new ‘non- like the English traditional’, i.e. non-pay TV players (EPL), most recent auctions have such as technology platforms and plateaued in rights value, which social media companies. These signifies a potential market players not only increase the

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Exhibit 1: Sports rights inflation and media rights market outlook

Sport rights inflation 2018 Media Rights Market Outlook ($ billion, % change) (Revenue forecast, $ billion) CAGR 2013 2018 4.3% 23 22 41% 21 20 CAGR 19 6.5 12.3% 18

16 15 4.6 12 12

111%

2.3 87% 108% 1.9 1.6 94% 20% 265% 1.1 1.0 0.9 0.9 0.8 0.6 0.8 0.5 0.2

NFL NBA La Liga MLB USOpen NASCAR MLS 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 ()

Source: SportsCal, press clippings, Delta Partners analysis

number of bidders, but they are also well positioned to linear TV drives advertising premiums during sports extract greater value from the content they purchase events, which in turn contributes to the growth of through their ability to utilize asymmetric business sports rights market. models where the content is used as a mechanism As rights values continue to increase, consumers to support sales of additional higher value services. are simultaneously evolving the ways in which they Furthermore, as TV viewership continues to shift from engage with content. For example, millennials linear to catch-up/non-linear and faces competition spend over five hours on mobile devices daily, from OTT players, live content remains as the key including significant social media usage and own attraction that generates a mass audience for linear on average eight connected devices. This segment TV. The increasing scarcity of mass viewership on

Exhibit 2: Football viewership during 2016-2017 season for top five leagues in Europe

Football viewership by age and medium during TV 12 2016-2017 season for top five leagues in Europe Online (%) screens2

61%

38% 28% 22% 27% 14% 3% 7%

6 19 20 34 35 49 50+ Notes: 1 Top divisions in England, France, Germany, Italy and Spain, 2 Online screens are defined as mobile, laptop, desktop and tablet Source: IRIS Intelligence ratings analysis

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also has a greater appetite for content than previous OTT players, leveraging IP and mobile distribution, generations, although fragmented across platforms are well suited to serve these segments and are and devices. The impact for sports is an increasing starting to explore the sports rights opportunity as use of online and mobile screens as well as growing demonstrated through Amazon’s acquisition of NFL interest in on-demand and non-live content. During and EPL rights, the US and Italian expansion of DAZN the 2016-17 European football season fewer than and Facebook’s acquisition of and football 17% of TV viewers for the top five leagues were rights for certain Southeast Asian markets. OTT under the age of 35, for online this figure was 45%. players’ sports content strategies are still nascent As such, it is critical that sports can follow their with their share of rights value lower than 10% in audiences. In doing so, not only could they sustain the majority of markets. Close attention will be paid engagement of the existing fan base, but they can to their next moves, especially as premium live rights also reach new fans. reach their next auction cycles.

Exhibit 3: New buyer share evolution for selected sports leagues

New Buyer Revenue Share Evolution1 (%) 2013 2018 2013 2018

0% 3% 0% 1%

5% 6% 0% 12%

1% 17% 5% 7%

1 New buyers including OTT videos, Telcos without PayTV stream, ecosystem/ecommerce, hardware and social media players; New buyer share = recorded revenue of deals with new buyers / total recorded revenue in SportsCal; Source: PWC report, SportsCal, Delta Partners analysis

Segmenting the OTT sports rights avoid the unbundling of premium content from their approach core base.

While OTT players acquiring sports rights share similar Conversely, technology platforms such as YouTube over-arching characteristics, such as ability to stream may not have the pay-TV economics or existing live and on-demand across device types, the universe content rights, but they are able to take a digital- of players is highly segmented with different business first approach to sports content without the risk of model approaches. OTT approaches to sports content cannibalizing existing revenue streams. In addition, the can be split into five primary groups, each having sheer volume of personal data that can be gathered their own opportunities and challenges. by online and social platforms creates a compelling proposition for advertisers versus traditional Aware of the evolving consumer content consumption television. The availability of viewers’ personal data behaviour, traditional sports rights buyers (e.g pay- enables highly targeted advertisements, with pre- TV channels and platforms) are launching OTT ‘any- rolls and mid-rolls tailored for each viewer and new screen’ propositions both as a mechanism to extend formats such as dynamic product placement, whose their subscription value beyond the primary TV screen impact and reach can be measured accurately. These and as a way to enable segmentation through an game changing capabilities are crucial for platforms OTT-only offering. These players, such as BeIN and aiming to benefit by using the premium content to Sky Sports, benefit from existing content ownership drive engagement and monetise through alternative and economics from the traditional pay-TV base but forms, which, in the case of Facebook, is advertising. they must effectively develop a pricing approach to

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Exhibit 4: Five segments of OTT sports content plays

B2B2C B2C

Traditional sports OTT content players OTTs with other core Direct to Fan (D2F) rights buyers All content OTT Pure sports play OTT business

Examples

Reason for • Complement existing • Additional content type • Unique live sports- • Complement existing • New revenue stream PayTV offering to existing library focused content core business • Better monetization of OTT play • New revenue stream • New revenue stream fan data

• Complement core • Subscription (PayTV Business • Subscription, Pay-per- • Subscription, Pay-per- revenue stream (e- • Subscription, Ad-funded, and/or OTT), view, Advertisement view, Advertisement commerce, hardware Monetization of fan data model Advertisement etc.), advertisement

• Existing partners with • Experience in OTT space • Dedicated to only sports • Incentives for users to join • Opportunity to avoid content owners and advanced digital streaming & stay in the ecosystem margins to rights buyers Strengths / • Experience in content capabilities • International scalability • More access to customer and content distributors Advanced analytics to opportunities broadcasting • • Quick access to Sport data; improved customer • Better access to fan data • Imbedded in pay TV target customers rights bids targeting & monetization • Direct Ad-sales offer • International scalability • Leading digital capabilities

• Cannibalization of • Additional sports rights • Rack-up potentially heavy • Additional costs to non- • Lack of marketing and existing PayTV revenues costs along with other losses until customer base core business distribution muscle of • Limited internal content production and/ is sustainable • Additional sports rights the traditional sports Challenges technical capabilities or acquisition costs • Skepticism from content costs along with other rights and OTT players • Lack of brand association owners on viability content production/ • Non proven track record with sports or live events • Brand awareness acquisition costs

In the case of Amazon, the ultimate benefit comes In the past three years there has also been the from conversion to Amazon Prime and subsequent emergence of the pure-play sports OTT, like DAZN boost in e-commerce revenues which are seeking to replicate the -approach but focused on the sports vertical. Reports earlier

Exhibit 5: Timeline of Amazon, Facebook, DAZN sports content strategies

Key sports rights acquisitions of DAZN, Facebook and Amazon NOT EXHAUSTIVE

Won rights to For Champions League Exclusive Exclusive Exclusive rights for all La Won rights broadcast all Meiji Won rights to and Europa League, broadcast rights to Liga games, from 2019 broadcast 20 Yasuda Seimei J1, J2 simulcast 20 three year deals in rights of stream US to 2022, to viewers in Premier League and J3 league Major League & Japan Champions Open India, Afghanistan, soccer matches a tournaments for 10 Baseball games (exclusive) and League for tournament in Bangladesh, Bhutan, year from 2019 years, starting from in the US Germany & Austria three years in the UK for five Nepal, The Maldives, Sri to 2022 in the in the 2017 season (partially exclusive) Latin America years Lanka and Pakistan the UK

2016 2017 2018

Three-year deal to Exclusive rights Exclusive rights to Renewed rights Exclusive rights for all Exclusive rights to Won rights to broadcast 114 Serie to stream ATP stream Premier to stream 10 English Premier League stream 25 Major stream 10 NFL A matches per World Tour League, La Liga, NFL Thursday games, from 2019 to League Baseball Thursday night season in Italy, all tennis games in , night games in 2022, to viewers in afternoon games on games in the Serie A games in the UK for five and US for two more Cambodia, Laos, the social network in US Germany, Austria years in Japan seasons Thailand, and the U.S. and Canada

Source: DAZN, press clippings

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this year indicated that DAZN could spend $2.5 economics, and a significant sudden move to new billion on sports rights during 2019 to bolster a buyers as replacement could be perceived a risk portfolio already including MotoGP, and by sports organisations. For example, in the most football. The challenge for a platform such as DAZN recent EPL rights auction for the 2019-22 seasons, is building a sufficient subscription base to sustain despite speculation that internet platforms would on-going investments in rights, and to be able to acquire several of the rights packages, Sky and BT make investments build a sufficiently comprehensive accounted for 98% of the domestic live broadcast portfolio of rights which makes them a destination rights revenues. for sports fans. The immediate opportunity for sports rights owners is to understand how they can exploit the emergence, and spending power, of OTT players to increase the Implications and opportunities for overall value of their content. In this, there are four content owners primary opportunities:

In the short-term at least, traditional sports content Content segmentation buyers are likely to continue to be at the forefront of rights auctions with premium sports one of the Splitting content rights can allow rights owners to few, if only, content categories that drives home stimulate competition through making packages converged service adoption or switching and acts attractive to different categories of buyers. For as an anchor to retain subscribers. 82% of pay-TV example, while some digital platforms may not bid for subscribers indicate that they would reduce or cut exclusive live rights, packages of in-game live clips or their subscription if they no longer required it for highlights could be attractive. Given the cyclicality of live sports access. Alongside this, pay-TV providers rights auctions, owners have opportunities every cycle have generated a sustainable revenue stream for to evolve their packages of rights based on the buyers content owners, underpinned by their scale and that they could attract. With the emergent interest

Exhibit 6: English Premier League domestic rights 2019-2022

Case Study: ENGLISH PREMIER LEAGUE

Domestic Rights 2018/19 to 2019/22 TV rights (Live UK rights) (£m per season) Live Matches Broadcasting No. of games Winner per season Package A 32 matches on Saturdays at 12:30 1,548 30 1 20 Package B 32 matches on Saturdays at 17:30 325 52 24 matches on Sundays at 14:00 and eight Package C matches on Saturdays at 19:45

Package D 32 matches on Sundays at 16:30

24 matches on Mondays at 20:00 or Fridays at Package E 19:30/20:00 and 8 matches on Sundays at 14:00 1,193 128 20 matches from one Bank Holiday and 1 Package F midweek fixture programme 20 matches from two midweek fixture Over 98% of domestic Package G programmes EPL rights revenue generated from • Maximum number of 184 matches are broadcast live in the UK 2019-22 traditional buyers • Any broadcaster is limited to a total of 148 matches

Notes: 1 Fee paid by Amazon is an estimated figure, actuals are not disclosed, Source: Mediapro, Interviews with SMEs, press clipping

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of OTT players across the five segments described 2. Increased division of live packages, and non- before, there are three predominant approaches that exclusivity – by offering some packages of live should be considered for rights segmentation: rights with fewer games, a lower overall cost can open the market to new buyers. Additionally, 1. Separating television and digital platform by selling some live rights on a non-exclusive rights – distinct categories of rights for linear domestic basis can increase overall value where television and OTT broadcast. For example, the two complementary buyers, for example TV Board of Control for in India conducted broadcaster and social media platform can the auction for the 2018-2022 IPL cricket acquire content to offer to their target segments domestic TV and digital rights separately, leading without overly cannibalizing each other due to a 158% increase in broadcast rights revenues to demographic focus. The NFL and MLB have compared to the previous cycle where rights were begun to explore this strategy. combined. Competition for domestic digital rights were led by players including Reliance Jio 3. More ‘snackable’ content – packages such as and Facebook. ‘fourth-quarter only’ for NBA games on can be used to structure content for

Exhibit 7: Examples of content segmentation

Examples of content segmentation by sports leagues

1 2 3 Separating television and Increased division of live More ‘snackable’ content digital platform rights packages, and non-exclusivity

Source: NHL, MLB, NBA, press clippings

different consumption habits that can align of the market. The applicability of this strategy is with targeted distribution channels. Allowing higher with a homogenous league such as NBA, buyers to customize their purchase according where the demand for games are distributed to price sensitivity and/or time availability can more evenly than European football leagues, help unlock new market segments. NBA aims to where top three to four teams generate around enable fans to purchase any portion of a game 80% of viewership. In addition, the risk depends they prefer at a defined price. Content owners on the penetration of sports subscriptions; can generate incremental revenue from viewers markets with high penetration may have a higher with limited time or willingness to pay, but there chance of cannibalization, which would need is a risk of cannibalization, which depends on the to be managed carefully with pricing and other homogeneity of the league and the saturation levers.

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Market Expansion Monetising beyond ‘live’

Content owners can leverage OTT players not only OTT platforms do not face the same constraints for to increase domestic rights value but also to expand content as linear channels. As such, OTT provides an reach internationally, especially in markets that may opportunity for sports rights holders to increase their have low pay-TV penetration. International rights can ‘asset inventory’ of content around the live game – be attractive for OTT players who are able to acquire both from the use of existing content that has not content at a lower cost than in the domestic market traditionally been sold and to create new content. For and leverage their distribution scale to aggregate example, content rights of previous games could be an audience. Live streaming and on-demand free/ sold along with additional magazine and documentary freemium offerings can enable OTT platforms to lower content. has been a lead in this the barrier for premium content consumption while area with its All or Nothing documentary series, while also supporting their own monetisation. Facebook Netflix has also released several titles, however there has adopted this strategy and signed three-year is still room for significant growth. exclusive agreements in 2018 to stream all Spanish Going ‘direct to fan’ La Liga and EPL matches for free across certain South Asia and Southeast Asia markets. Using a pure-play IP and mobile distribution allows sports rights holders model, DAZN is another example. They will enter to distribute ‘direct-to-fan’ (D2F) where they can Spain and Brazil markets in 2019-2020 season with have the direct relationship with their customer a content library including some of the premium base. D2F is an increasingly explored model by foreign content such as EPL and but sports organisations with initial implementations lacking the rights for domestic football leagues. demonstrating how it can be a complement to traditional rights buyers.

Exhibit 8: Expanding the sports content opportunity

Overview of potential content rights matrix - logos are examples of relevant players NOT EXHAUSTIVE Traditional content categories Emerging content categories Example Editorial Live Streaming Live social Primary TV

Live Online

Mobile streaming

Social Fan content Magazine Documentary In-game clips User control Near live

TUNNEL CAM Highlights Re-run

Time horizon Same day

Match archives

Archive

UGC Pro-Am Short-form Long-form Short-form Full game

Social driven Professional Non-Game Professional at Game Content type

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Given the start-up challenges of building a scale and ESPN have long been associated with the monetizable base for a direct-to-fan proposition, it is EPL, La Liga and NFL through which beyond unlikely that in the short-term this can be a significant delivering significant revenues for the sports have or full replacement to traditional rights distribution, developed sizable fan bases. A significant move however such models allow rights holders to target away from these players could create commercial their core fan bases with a differentiated proposition uncertainty for sports organisations. versus what third party channels can offer. As the 2. The sustainability of the OTT sports business model direct-to-fan model matures it is likely to become is yet to be proven. Premium sports rights are an more prominent in the overall content strategy of expensive long-term commitment that require rights holders due to the diminishing risk. a clear path to direct or indirect monetisation. The appetite for OTT platforms to extend their investment beyond their initial tactical plays is yet Challenges to be overcome to be seen, as well as the long-term viability of Despite significant market interest in OTT platforms pure-play models like DAZN. acquiring sports rights, there is still some way to go 3. Scepticism exists from some rights owners to OTT until it becomes truly mainstream – of which the platforms suitability to be primary distributors of latest EPL auction in which only one package, the sports content. Sports rights are a perishable last to be sold, was bought by an OTT platform is commodity, unlike entertainment or drama, and evidence – and there are challenges to overcome. need to be renewed at regular intervals. Hence, There are three of note: the OTTs must prove their audiences to sustain 1. Sports rights holders have long standing engagement and monetisation in sports content relationships with traditional rights buyers. for the foreseeable future. For example, players such as Sky, Telefonica

Exhibit 9: Case study of F1 and NBA direct to fan propositions

CASE STUDY Description Platform Price

F1 TV: (cheaper version) and Premium F1 Apple, Android, Amazon Fire Mobile/TV, OTT Service Premium: $8-$12 /mo. or $70-$150 /yr. TV Pro which includes Live races tablets, Android TV

Live Leader- F1 ACCESS members: Track the position of F1 website Currently free board drivers during the race

Free basic content and Premium version Mobile App Apple, Android Free/ upgradable which includes driver tracking and analysis

Exclusive live post-race show on F1's Post-race show Free Twitter page

Scores, schedules, videos, standings, stats, NBA website Free NBA.com blogs, etc.

Exhibition, regular season and playoff Satellite television network, also available For YouTube, additional $5 to the YouTube game telecasts, analysis NBA TV on YouTube subscription programs, specials, documentaries Free: Latest games, news, and stats NBA App With League Pass: live and on-demand Apple and Android, works on 11 devices Free / upgradable content for the entire season NBA playoffs, replays, classic games, Multiple yearly and monthly options NBA League Single product across platforms Pass interviews, press conferences live or VoD ($22.99/ on the NBA website)

Source: F1 website; F1 App; NBA website; NBA App

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4. OTT players offer services on a best-effort basis, using non-dedicated bandwidth unlike IPTV and cable. Thus, the quality of live streaming continues to be very much dependent on the internet connection quality, which may lead at times to issues such as buffering and poor picture quality. Even with high networks, latency could remain as a key problem, especially during high peaks of concurrent users. OTT players will need to address the resulting potentially sub- optimal experience during popular live events, as viewers demand a “real live” consumption. OTT’s recognize that this is a key area of investment and the importance of improving customer experience but given the ‘peak demand’ that live sports can put on a network there may continue to be challenges.

The Delta Perspective

• Live sports rights will continue to be highly-sought after both by traditional sports rights buyers (Pay TV, Telcos) and new OTT players in the market due to the inherent demand from end users

• Due to the long-standing association between traditional Pay TVs, Telco operators and content owners, it is highly unlikely that they will be rendered completely anonymous in the context of sports rights in the next five years

• In addition to their existing sustainable revenue streams from traditional buyers, content owners should explore value creation opportunities with OTT players through three ways: content segregation (to increase value); market Expansion (to capture new international audience); and expansion beyond live (to increase asset inventory)

• Furthermore, some content owners will also explore their D2F proposition to complement their content proposition through other channels

• The success or failure of new ventures such as DAZN will play a significant role in determining the impact of pure OTT plays in the sports rights market

11 Sam is a Partner at Delta Partners, a leading specialist global TMT Advisory, Corporate Finance and Investment firm. Sam has advised mobile operators, content distributors, network infrastructure providers, device vendors and payments networks across North America, Europe, Africa, Middle East and Asia. He has a degree in Philosophy, Politics and Economics from Oxford University. José is a Partner at Delta Partners and the Head of the Media, Sports & Entertainment practice, with over 18 years of experience in Media and Telecom industries. As the former CEO of Telefonica Media in Latin America, he has been actively involved in the management of Sports Associations and has extensive experience in M&A, going from startups to mature P&Ls. He has a bachelor’s degree in business administration and an MBA from Instituto de Empresa, with a specialty in Telecoms. Batuhan is a Senior Consultant at Delta Partners. He has worked with major telecommunications, media and technology firms across North America, Middle East, Africa and Asia Pacific regions with a focus on corporate strategy and digital transformation. He has a Masters in Management from Business School. Raghul is a Consultant based in Delta Partners’ Dubai office. He has worked in several corporate and commercial strategy execution projects across the Middle East, Africa and Asia Pacific regions with a key focus in digital transformation and financial services. He has an MBA from IESE Business School. If you would like to contact the author to further discuss this topic, you can email to: [email protected]

Delta Partners is the leading Advisory and Investment firm specialised in Telecoms, Media and Digital with offices in the Middle East, Africa, Europe, Asia, Latin America and the United States of America. We partner with global and regional telecom providers, digital players, other TMT clients and our investors to help them address their most challenging strategic issues. Our unique combination of Management Consulting, Corporate Finance1 and Investments2 creates unparalleled value for our clients, investors and business partners. For more information, please visit www.deltapartnersgroup.com and follow us on Twitter @Delta_Partners 1 Delta Partners Corporate Finance Limited and 2 Delta Partners Capital Limited are members of the Delta Partners Group of companies and are authorised and regulated by the DFSA.