OTT’s European Power Struggle and what it means for sports-media rights

Vincent Bolloré, the debonair 64-year-old French industrialist, has a reputation for telling it like it is, without pulling his punches.

But the casual, almost off-hand way in which he threw out the prospect of shutting down French pay-television operator Canal Plus wrong-footed even hardened Bolloré-watchers.

Talking to shareholders in his capacity as chairman of the supervisory board of Vivendi, parent company of Canal Plus, in Paris on April 21, he said: “If losses continue, at some point we’ll have to turn the tap off.”

These may have been comforting words for some investors, but they were chilling ones for professional sport in France, one of the biggest beneficiaries of the pay-television boom over the last 30 years. Indeed, right across Europe the top sports leagues have grown fat on the income from pay-television.

Founded in November 1984, Canal Plus is one of the bedrocks of the European paytelevision market. But in 2015 it lost €264m ($298m) and losses are projected to rise to €400m in 2016. “We are under attack by the major platforms, by OTT,” Bolloré observed, adding that “there will be tough times.”

Over the top

In December, Netflix content head Ted Sarandos said that the company would not rule out getting into live sports. In January, Facebook unveiled its Facebook Sports Stadium, a realtime hub targeting the platform’s 650 million sports fans. In March, in a clear signal of intent, Amazon hired former 120 Sports executive James DeLorenzo to head up a new sports content division. In April, American football’s National Football League agreed a $10m deal with Twitter to live-stream 10 of its Thursday night games on the social media platform. Rival bidders included Facebook and Amazon. In May, YouTube secured the rights to live-stream the finals of both the Uefa Champions League and Europa League European club football tournaments in the UK from rights-holder BT Sport.

From the beginning of the 2016-17 football season digital sports media company Perform Group will roll out its OTT pay service in Germany, Austria and Switzerland, having snatched the rights to England’s Premier League from dominant pay-television platform Sky Deutschland. At the time of writing, Perform was also in the bidding for live rights in Germany to football’s top-tier Bundesliga. A successful bid would be a marker for the threat posed by OTT to traditional broadcasters (see panel, page 18).

The incumbent players have not been standing still. In July 2014 Rupert Murdoch merged his pay-television interests in the UK, Germany and Italy to create Sky Europe, which looks set to become the biggest operator in Europe by subscriber numbers. In July 2015 US channel syndicator Discovery Communications took full control of pan-European sports broadcaster Eurosport and has set about repositioning the basic-tier channel with stronger content, including an audacious €1.3bn deal for the Olympic Games.

In April 2016 Vivendi acquired Italian pay-television platform Mediaset Premium as part of a wider deal between Vivendi and Mediaset designed to create a new European content powerhouse.

Canal Plus, meanwhile, forged an unlikely strategic alliance with its main rival, the Qatariowned beIN Media Group, agreeing a five-year exclusive distribution agreement for the beIN Sports channels.

Against this background of change, the sports industry is asking questions with profound long-term implications. Where will future growth come from for Europe’s pay-TV market? What impact will the expansion of the big OTT players have on the market? And, most importantly, what does this mean for the value of sports rights?

Growing pains

The rate of growth in pay-television has inevitably slowed over the last decade as the market matured, but there is still a margin for expansion. Analysts predict that pay-television penetration in Western Europe will increase from just over 60 per cent to about 65 per cent by 2024, when revenues will hit €50bn. The question is who will take up that four to five per cent?

Sarah Simon, media analyst and European equities expert at Berenberg, says that the bank expected growth to come “from low-cost players (Netflix, Amazon and the like), as they seek to persuade pay-TV holdouts to sign up to lower-priced services.” Incumbents using the traditional bundle-and-buy-through model – what Simon calls the “full-fat pay-TV market” – will face “headwinds in driving substantial further customer growth in most markets.”

She adds that it would now be difficult for the traditional platforms to expand into new markets, other than through acquiring entire businesses, as Vivendi has done with Silvio Berlusconi’s Italian pay-television platform, Mediaset Premium.

“It’s too late to start a new ‘full-fat’ platform in another market,” she says.

“The low-cost players have already entered Western Europe and there is, of course, the question of rights. Sky does not have French rights, for example.”

Growth for such players, she adds, will come from new services, such as multi-play offerings combining television with internet and telephony services, and OTT products.

The impact of OTT on the traditional market is not a remote threat. “We are already seeing a big impact from these guys,” Simon says. “It puts pressure on the traditional incumbents to up their game, we think. Sky has responded with its own OTT service, as has Vivendi. The OTT players are focused on movies and series. We think this commoditises that content in the sense that you don’t need Sky or Canal Plus to watch that kind of content.”

Sports rights-holders have been wondering for some years if and when that focus on movies and TV series – content which can be downloaded and watched at any time – will extend to live sport. Despite some aggressive noises from the US, the signals that the big OTT players will go head-to-head with incumbent pay-television operators for live premium sport remain weak.

Peter Hutton, chief executive of Eurosport, believes that a lot of the reticence comes down to business models and their preference for sharing revenue around advertising sales.

“For years, we have heard the likes of YouTube, Twitter, Facebook and Amazon making noises about sports rights,” he says. “And clearly there is a huge amount of studying going into the process. You would see them as logical players in the space. But sports content is a really different area of business and one where revenue shares are generally sneered at.

“There has to be a big minimum guarantee. Everyone looks at the model and asks are the margins going to be there? These guys are used to working on long-term plans with very impressive margins. Sport doesn’t necessarily fit their models very well.”

He says that conversations in recent years with people in the OTT sector have always come down to the same thing: “Can we revenue share? Can we partner? Can we mitigate our risk in some way?

“One of the strange things about the brave new world of digital media is that there is a real reticence to take big sports-rights risks.”

Rights inflation

The most commonly-held view across the industry is that the changes taking place will make sport an increasingly important driver of subscription businesses. Should the OTT players develop an appetite for the risks involved in paying chunky upfront minimum guarantees, the trend could accelerate further.

As Simon puts it: “We think you’ll continue to see substantial sports-rights inflation in Europe. The incumbents’ model of offering choice plus movies and sports is coming under greater pressure. Digital terrestrial television plus OTT offer you choice and movies, so sport is the differentiator. The emergence of new competitors from the OTT sector will only increase that. If the internet giants start bidding on sports rights, we can expect another step up in the cost.

“For these guys, the rights aren’t much more than a couple of days of cash flow, so the cost isn’t a barrier. In the meantime, the competition between Netflix, Amazon, and YouTube is going to heat up further. Sports would seem to be the next way to differentiate themselves from each other.”

As a buyer, it would be in Eurosport’s interest to play down the value of rights, but nobody would be buying that. Hutton has worked both sides of the fence – as a buyer at Eurosport, Fox, and ESPN Star Sports, and as a seller at agencies like IMG and MP & Silva – and understands the commodity.

“Sports rights change lifestyles,” he says. “You choose how to consume media as a result of where your favourite sports content is. Sport has the power to make you change your choice. And that’s an amazing weapon.”

Those riches may not trickle very far down the sports pyramid, however. Sport will become more important vis-à-vis other forms of content, but investments will be increasingly concentrated around the super-premium end of the market – the ‘must-have’ leagues and events that really move the needle on the key performance indicators of a pay-TV service.

As Hutton explains: “In a time of change you are going to go for sports rights which are known and clearly valuable commodities.

The result is that the strong will get stronger. We are seeing a unification of bigger media groups and a reduction in the number of buyers. If it’s the big sports rights that will change the market, then it’s the big media groups that will be buying those rights.” The battle for the domestic rights to the Bundesliga being played out at the time of writing looked set to confirm many of the above observations.

A ‘full-fat’ pay-television platform, Sky Deutschland, the incumbent rights-holder, was expected to come under pressure from at least one of two telcos, Deutsche Telekom and Vodafone, a channel syndicator in the form of Eurosport and Perform’s nascent OTT services. The likes of YouTube, Netflix, and Amazon were not expected to bid. Nevertheless, analysts, including Simon, were predicting an uplift in rights fees, with estimates ranging from a 40-percent increase to an 80-per-cent increase on the €628m per season which the league currently earns.

Change is coming to the European pay-television market. But for Europe’s top sports leagues, that change looks good.

Perform at the forefront of OTT sport in Europe

The long-awaited OTT move on premium sports rights has not come from the big US internet players but from a British company – albeit one owned by a Russian-born American billionaire, Leonard Blavatnik. Perform Group’s low-cost premium service is initially being rolled out in Germany, Austria and Switzerland in Europe, and in Japan. It represents a considerable gamble that existing pay-television customers in those markets will be prepared to pay an additional cost – the monthly fee has yet to be made public – on top of a hefty pay-TV subscription. To back the gamble, Perform has invested heavily in exclusive premium rights, including Spain’s LaLiga, Italy’s Serie A and France’s Ligue 1, plus top US sports, such as basketball’s NBA and American Football’s NFL. Perform’s most eyecatching deal came in December, when it snatched the rights to England’s Premier League from incumbent rights-holder, pay-television platform Sky Deutschland, paying an increase of almost 200 per cent on what Sky had been paying.

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