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Implications of Shifting from Pay-TV Bundle to OTT Streaming

13 min read

Editor’s Word: This text has first been revealed on LinkedIn — as identical to many others, I needed to touch upon the reported untethering of Sinclair’s regional sports activities networks from the standard pay-TV bundle. Reached LinkedIn’s character restrict for feedback rapidly, ended up in a LinkedIn article masking:

📉 Bridge-financing Revenue Gap during Cable-to-Streaming Transition

💳 Over-Monetizing Niches with unprecedented Price Points for OTT Streaming

🔀 Stand-alone Local OTTs 🆚 Premium Add-Ons or Full Migration to National Streamers

💡 Conclusion: Additive/Cannbilazing Nature and MVPD as Key Stakeholders

On the optimistic aspect, it ended up shorter than my regular blogs. 🤓 It’s also much less of a Scorching-Take than only a Fast-Take. ✌🏼

Sinclair is raising more than $250M for an OTT/DTC streaming service that’s alleged to be constructed round its 19x previously Fox Sports activities, now Bally Sports activities – branded regional sports activities networks (RSNs; in all probability excluding their co-owned YES Community and Marquee Sports activities Community). [ 1️⃣ ]

Different articles have already extensively lined the authorized practicality (see/hearken to: Sports Business Journal): Within the two-sided market of sports activities broadcasting (= sports activities rights market + sports activities programming market), Sinclair is disliked by each the rights homeowners on the one aspect, not less than by MLB which additionally bid for the Fox Sports activities RSNs, and TV distributors on the opposite aspect, by leveraging its multi-market footprint to drive notoriously robust bargains about carriage charges. Whereas native streaming rights are typically included in any RSN deal (assume: sports activities rights market), its OTT distribution exterior of the standard pay-TV bundle through (digital) MVPDs would break most, if not all, carriage offers with TV operators (assume: sports activities programming market) — the foremost supply of revenues for RSNs.

A extra possible state of affairs of any OTT programming by RSNs, which can extra possible be an evolution fairly than revolution in type of a complementary direct-to-consumer providing has additionally been laid out. (see: John Wall Street). Such providing, untethered and co-existing with RSN’s conventional linear programming and distribution mannequin, would inevitably be:

  1. centered on die-hard followers (assume: direct-to-fan as a substitute direct-to-consumer proposition with a restricted addressable market),

  2. centered round incremental programming solely corresponding to highlights, editorial content material, e-commerce alternatives, free-to-play video games, and unsold/restricted native reside sport stock (if any) to guard the short-term worth of and authorized compliance with their offers with TV operators corresponding to AT&T (DirecTV), Comcast (Xfinity), YouTube TV, Hulu, or Sling TV; and

  3. one thing many MLB/NBA/NHL franchises in type of owned and operated workforce apps are already doing which may complicate issues not solely with distributors however rights homeowners.

Nonetheless, let’s assume that Sinclair pulls off the unbelievable and certainly launches a real stand-alone OTT service for live-streaming native video games and, thus, presents the identical content material as they’re doing on their linear programming through the (digital) MVPD system elsewhere (i.e. exterior of the pay-TV bundle). On this context, elevating further capital and an costly month-to-month worth level encapsulate two main implications of shifting reside sports activities content material distribution from the standard Pay-TV Bundle (Wholesale) to OTT (Retail).

📉 Bridge-financing Income Hole throughout Cable-to-Streaming Transition

Sinclair, or similar-sized media firms with OTT/DTC ambitions like ViacomCBS who additionally raised capital for a similar objective, have neither the dimensions (assume: market cap / revenues vs. Disney) nor availability (assume: have to service comparatively excessive load of debt vs. Disney) of legacy money flows like Disney to cross-subsidize any new OTT enterprise. [ 2️⃣ ] It wants to boost extra money to serve short-term rights (and debt) commitments. Whether or not Sinclair reaches the opposite aspect of the bridge (= profitability) is the elemental query and would require the addition, or a whole ecosystem, of new income streams past subscription charges and promoting revenues to be constructed round reside content material. (assume: betting, NFTs, e-commerce) [ 3️⃣ ] The long-term nature of native rights offers within the US is definitely a aggressive benefit on this regard, in comparison with each US nationwide offers and the European sports activities rights market: OTT streaming requires long-term considering and lots of time to re-establish the financial income to which rights-holding broadcasters grew to become used to within the pay-TV bundle. Nonetheless, taking part in the lengthy sport is far simpler to abdomen for SVOD companies corresponding to Disney+, HBO Max, or Netflix as a result of basically totally different nature of reside/sports activities and non-live/leisure content material (assume: content material shelf life, long-term worth of library/IP, international allocation of content material prices). Variablizing income streams (by going from wholesale to retail) whereas going through mounted prices in type of multi-year rights charges commitments in the direction of rights homeowners such because the MLB, NHL, and NBA entails lots of monetary dangers and makes bridge-financing a necessity. To tug of a reside streaming service, investments in know-how needs to be a minor value place within the grand scheme of issues. (assume: commoditization of not less than some modules of the know-how stack) As a substitute, advertising and marketing and promotion to construct up a buyer base from scratch don’t solely require monumental monetary investments but in addition a shift from a B2B- to B2C-centric mindset because the goal market shifts from content material distributors (= wholesaling) to content material shoppers (= retailing). In comparison with the pay-TV bundle, OTT is not going to solely have slower subscription ARPU progress because of lack of built-in annual escalators however aggressive pricing and promotion additional cut back efficient ARPUs within the brief time period. OTT-enabled upside exists in type of simpler advert monetization (which requires scale within the first place although and the inherent sub-scale nature of RSN’s footprints might need an outsized unfavorable influence on advert alternatives) and the chance for incremental income streams. (assume: betting, NFTs, e-commerce) Closing the monetization hole between the pay-TV bundle and OTT economics by including new income sources will likely be key in the long term, however short-term revenues can be pushed by maximizing the direct monetization of shoppers by means of subscription funds.

🧾 Over-Monetizing Niches with unprecedented Value Factors for OTT Streaming Companies

Conventional Pay-TV had unprecedented scale (assume: highpoint at 100M households), stickiness (assume: lock-in through long-term contracts + bodily receiver), and pricing energy (assume: pass-on improve in rights payment outlay to distributors through built-in annual escalators of carriage charges as a part of multi-year agreements). Oblique pricing within the pay-TV bundle resulted in over/under-earning of various channels: Non-sports followers cross-subsidized sports activities followers.

OTT, however, has a lot smaller scale and stickiness, however the willingness to pay of the addressable market (which is narrowed right down to sports activities followers solely) is far larger — a chance that sports activities programmers, specifically, should and may seize in type of considerably larger worth factors (= ARPUs) to make any unbundled, a-la-carte economics work: Equally, when/if ESPN decides to untether its linear flagship channels from the standard pay-TV distribution system, we must always inevitably see a worth level of $30+ monthly to maintain/rebuild current economics, which can be pushed by its still-enormous scale of approx. 80M TV households regardless of the undisputed secular decline of the pay-TV bundle. Nonetheless, ESPN’s legacy enterprise nonetheless generates a lot money that the “Worldwide Chief in Sports activities”​ remains to be (not less than) a few years away from that inflection level that Sinclair has seemingly already reached.

Pay-TV exclusives (assume: linear programming of ESPN 1/2, beIN SPORTS, Fox Sports activities 1/2) turning into platform-agnostic programmers, would additionally require a major replace of a earlier graphic masking distribution and income fashions within the sports activities rights/broadcasting market:

  • Pay-TV linear channels (e.g. ESPN, beIN SPORTS, Fox Sports activities),

  • Digital-only/first OTT choices from rights holders (e.g. DAZN, ESPN+, FloSports),

  • Digital-only/first OTT choices from rights homeowners (e.g. NBA League Cross, NF Recreation Cross)

  • NEW: Platform-agnostic linear channels that go over-the-top of (digital) MVPDs at a lot larger worth factors ($20-40/month)

ESPN, specifically, presently follows a dual-pronged content material method by sustaining two principally distinct units of programming with restricted overlap for 2 totally different distribution methods, one for linear and one for streaming. Doing this (and totally financed by money flows from its legacy enterprise), ESPN maintains optionality for future decision-making (assume: migrating content material from ESPN’s linear programming to ESPN+ or providing an untethered model of its linear programming at further prices). Sinclair’s pre-emptive untethering of its RSNs to permit unauthenticated in-market streaming, as a substitute, appears largely to be a operate of (1) its distribution issues on each conventional and digital MVPDs (assume: no carriage on Dish, fubo TV, YouTube TV, or Hulu) and (2) the lure of latest however unproven monetization alternatives. The one digital MVPD possibility shoppers presently have is costly AT&T TV Now ($85/month). It might nonetheless be a step that, for instance, beIN SPORTS, one other reside sports activities programmer with very restricted distribution, by no means risked taking regardless of much more extreme protection issues. (assume: much less monetary draw back of breaching carriage agreements). [ 4️⃣ ] Granted, they went with the free-to-air proposition of beIN SPORTS XTRA as its go-to coping mechanism.

So far as the value level is worried, subscription-based companies like Netflix, Disney+ & Co. have redefined value-for-money expectations from shoppers — which make these proposed worth factors for OTT-distributed linear channels (but in addition transaction-based companies corresponding to Disney Premium Entry) virtually appear subjectively cost-prohibitive and a perceived cash seize within the eye of many shoppers.

In distinction to top-tier reside sports activities content material, there isn’t any lack of viable substitute merchandise for video leisure content material although. Sports activities, as a substitute, compete to a lesser extent purely on worth as the premise of competitors as a result of shortage of (excellent) substitutes. (assume: cheaper price sensitivity) Nonetheless, shoppers will nonetheless make the direct comparability between Bally Sports activities ($23/month) and lower-priced pure-sports streamers within the U.S. corresponding to ESPN+ ($5.99/month) and even DAZN and its event-driven portfolio ($19.99/month).

🔀 Stand-alone Native OTTs vs. Premium Add-Ons or Migration to Nationwide Streamers

Bally Sports activities hasn’t been the one regional sports activities community tinkering with the longer term distribution mannequin of native streaming rights although: Comcast-owned NBC Sports putting very selected local RSN content exclusively and for free onto Peacock — their multi-genre streaming service that’s universally priced on the nationwide degree — appears to be a misfit and would result in inconsistent value-for-money propositions relying on the buyer’s location if executed often. A buy-through method (i.e. RSN as an optionally available streaming add-on to Peacock in markets, during which Comcast’s subsidiary owns and operates an RSN) would possibly make extra sense long-term if/after they determine to untether any of their eight NBC Sports activities Regional Community from the standard pay-TV bundle and pursue a platform-agnostic method as a substitute. A buy-through method might be a steadiness between totally migrating native linear programming into nationwide streaming companies corresponding to Peacock or ESPN+ (as seen with NBC Sports activities) and true stand-alone OTT service for live-streaming native video games solely (as reported for Bally Sports activities).

On this particular case although, it fairly appears to be a one-off factor facilitated by NBC proudly owning the regional networks within the native media market of each concerned groups (Philadelphia Phillies vs. San Francisco Giants) and a few willingness to experiment on behalf of the MLB and ESPN+. The previous monetizes all out-of-market, non-nationally televised MLB video games through MLB TV. The latter airs over 170 video games of these video games co-exclusively (with RSN and MLB TV) and had in all probability given its thumbs-up as effectively.



💡 Conclusion: Additive/Cannbilazing Nature and MVPD as Key Stakeholders

Finally, to which extent a stand-alone OTT streaming providing by RSNs can be of additive and/or cannibalizing nature to the prevailing (digital) MVPD subscription base stays to be seen: So long as the introduction of a real stand-alone OTT service for live-streaming native video games is the ultimate nail within the coffin that makes the lowest-tier pay-TV subscribers (who don’t subscribe to extra premium channels corresponding to their market’s respective RSN) to chop the wire to be able to free-up disposable revenue for re-allocation throughout a number of OTT streaming companies together with OTT-distributed RSN programming, most TV operators may purchase into the thought of a mutually helpful co-existence: Low-tier pay-TV subscribers are the least-profitable clients for (digital) MVPDs given the character of enter value of video programming, i.e. affiliate charges to content material suppliers: However, many MVPDs additionally present high-margin broadband companies. Such companies will solely improve in significance/utilization as content material supply migrates from cable/satellite tv for pc/terrestrial to IP-based (video/audio) streaming. Put in a different way, telecommunications service suppliers would possibly choose broadband-only clients over the standard dual-play of Broadband plus TV in some circumstances — positioning themselves as super-aggregators and leveraging their huge direct buyer relationships as a substitute: You need not personal the content material to offer the content material. (see: Connectivity/Aggregation as USP)

Alternatively, the tribal nature of native sports activities has been the only real motive for a lot of shoppers to stay with the standard pay-TV bundle. A full-fledged in-market streaming service by Bally Sports activities that considerably erodes the MVPD’s most-profitable subscriber base (assume: subscribers to premium-tiers together with RSNs), whereas not taking part within the economics of such streaming service, appears to be a no-go and may create lots of pushback. (assume: dropping RSNs because of breach of carriage agreements) However, each (and particularly new) OTT streaming service that doesn’t have the model energy, advertising and marketing price range, and/or distinctive IP like Netflix, Disney+, Spotify & Co. will depend on a set of distributors (together with telecommunication service suppliers that additionally function MVPDs) to achieve crucial measurement of its subscriber base. These distributors will/need to be paid handsomely to intermediate the connection to the top shopper. (see: Weblog #46 – Content material is King, Distribution is King-Kong) Whether or not that is thought of enough “pores and skin within the sport”​ or participation within the economics by them will likely be seen. Backside-line, any buy-in from the present RSN distributors can be at the start: Streaming is likely to be the longer term, however shoppers are nonetheless early within the adoption curve. Transferring premium (sports activities) content material (co-)solely from one (assume: Cable/Satellite tv for pc/Terrestrial) to a different (assume: Streaming) distribution system can speed up adoption however shifting on prematurely from essentially the most worthwhile phase of the market (assume: high-income, extra prosperous, older demographics) entails insufferable/undesirable monetary danger. (see: Don’t leave behind your most profitable customers in pursuit of the incremental digital dollars.)

To achieve/tackle the whole market, totally different distribution methods will inevitably co-exist for the foreseeable future (assume: no one-size-fits-all distribution system) as a result of totally different demographics are at totally different factors alongside the adoption curve or would possibly by no means undertake in due time. (assume: late majority, laggards)

Lengthy-term, utterly new income streams must be hooked up to (sports activities) content material to rebuild the financial income in OTT that existed in trad. Pay-TV bundle. This (and never the short-term pushback from distributors) will make or break the long-term way forward for the RSN enterprise, or many different pure-sports OTTs for that matter.

🔢 OTT ≠ DTC, Firm Valuations, Distributors vs. Rights Holders, Attain vs. Income


1️⃣ Treating Direct-to-Client (DTC) and Over-the-Prime (OTT) interchangeably doesn’t account for the intricacies of the sports activities broadcasting worth chain and the continued gatekeeper operate of intermediaries in type of each conventional (i.e. IPTV platforms corresponding to Comcast, AT&T, or BT) and new media distributors (i.e. TV working methods from Amazon, Apple, Roku) which I already lined extensively elsewhere and do not need to go into particulars right here: In a nutshell, OTT will be DTC (in case of the content material supplier having the direct buyer relationship). No matter OTT or DTC, most of these streaming companies stay Direct-to-Fan/Area of interest, particularly in comparison with the dimensions of conventional pay-TV. (see: OTT ≠ DTC) [ ↩️ ]


2️⃣ Initially, legacy media firms corresponding to WarnerMedia (HBO Max), Disney (Disney+, Hulu, ESPN+), or ViacomCBS (Paramount+) in all probability thought they should meticulously handle the trade-off between defending and leveraging money flows from current enterprise for brand spanking new enterprise strains. As soon as they seen that the inventory market purchased into OTT streaming, the long-term upside of building and multi-dimensionally monetizing direct buyer relationships, and began to seemingly base any firm valuation purely on subscriber progress whereas disregarding profitability or money move points within the brief time period, they began to go all-in and now not overly protected the previous enterprise (= Pay-TV Bundle) to detriment of the longer term enterprise (= OTT). For now, everybody has jumped on the bandwagon of subscriptions: constant, recurring income at elevated costs over time. (see: Subscriber Growth = Company Valuation) [ ↩️ ]


3️⃣ In distinction to digital MVPDs corresponding to fubo TV which makes new income streams corresponding to betting the core of their funding thesis, rights-holding broadcasters (as a substitute of mere content material distributors) ought to certainly be within the place to ascertain incremental income streams round reside content material that probably shut the monetization hole between OTT and pay-TV economics when it comes to buyer acquisition prices and buyer lifetime values (as a operate of ARPUs and churn). Digital MVPDs, however, will serve principally as pure distributors (assume: simulcast). Worth creation and seize will primarily occur on the extent of the rights holder — which is likely to be the explanation why fuboTV determined to develop into a rights holder with the (very costly) acquisition of unique streaming rights to the CONMEBOL WC Qualifiers 2022 (Link): It permits way more and the conclusion of latest monetization alternatives. (see: OTT Unit Economics) [ ↩️ ]


4️⃣ As a consequence of lack of carriage by each conventional and digital MVPDs, distribution of beIN SPORTS in the US dropped to such a level (i.e. approx. 10-15M TV households) that LaLiga didn’t face the standard/inherent trade-off between attain (conventional pay-TV bundle) and income (OTT streaming companies) any longer and received the perfect of each worlds when just lately switching in-cycle from beIN SPORTS to ESPN(+). The fact is that even the most-coveted content material can’t overcome a scarcity of distribution: In Q1/2021, beIN SPORTS averaged 4,000 viewers per day, making it the second least-watched cable community regardless of enticing content material such LaLiga, Serie A, and Ligue1. (hearken to: The Bundle #11) [ ↩️ ]

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