We are in the midst of another tectonic shift. The rise of the internet, dramatic declines in the cost of downloading data and rapid rise in download speeds are changing the global media landscape. The consumption of ‘linear’ TV (set broadcasts at set times) is declining, as viewers increasingly adopt so-called ‘video-on-demand’ (VOD) services that allow for streaming of content over the internet.
VIDEO ENTERTAINMENT AND THE RACE FOR VIEWERS
This means the creators of video content and the traditional pay-TV distributors of that content are facing increasing competition for eyeballs (as well as so-called ‘cord-cutting’ from consumers cancelling their service) from new ‘over-the-top’ (OTT) players like Netflix, Apple TV, Amazon Prime Video and Hulu.
But these new players now find themselves in a content ‘arms race’ and are spending vast sums of money on creating new video content to establish a beachhead in this new world. For example, Netflix is expected to spend $15bn this year on original video content, up from only $2bn six years ago.
This is great for consumers who now have more choice of what to watch and when to watch it. This latter point is important, because the rise of VOD reduces the proportion of video content that is watched in the form of linear TV. This means viewers are less likely to sit through advertisements, which makes such content less attractive to advertisers.
NOT ALL CONTENT IS EQUAL
This proliferation of video content available on-demand makes it more challenging for content creators and distributors to capture large audiences and monetise their content. There is one notable exception, however: sports content is hugely and increasingly valuable.
Sports content is attractive for a few reasons. The first is that people (increasingly) love watching sports. In 1998, 25% of the top 100 TV broadcasts in the US were sports events; in 2018 it was 88%. Second, at risk of stating the obvious, no new major sports are being invented. Unlike other forms of entertainment, someone cannot set up a new sport and churn out content to compete with existing sports. Third, most of the world’s big sports have well-established leagues and it is nearly impossible to start a new league.
This means the supply of sports content has constraints and is relatively limited versus most other forms of content. Finally, most sports are watched live: sports are viewed live more than 95% of the time versus less than 50% for non-sports traditional TV content. What this boils down to is that sports draw large, live audiences who are highly engaged, making it attractive to advertisers. This is certainly a compelling option in an increasingly fragmented and competitive media landscape.
CAN INVESTORS CAPITALISE ON SPORTS CONTENT?
Unfortunately, there are few options available to investors in public markets to invest in sports content. There is a limited number of global sports leagues and ever fewer that are directly investable. For example, one cannot buy shares in the Olympics or the FIFA World Cup. However, fairly recently, one truly global sport has been listed and is now investable: Formula One (F1).
F1 is the premier global motorsport series, with a long history and almost 500 million unique viewers in nearly 200 territories watching 10 teams fight it out in around 20 races across five continents every year. F1 is arguably the only global sports league or event other than the Olympics and the FIFA World Cup.
PRICED OUT
F1 makes most of its money from broadcasting rights and the fees it collects from race hosts. F1’s largest cost of doing business is roughly half of its revenue it pays to the race teams. Fielding an F1 race team is horrendously expensive – there are no budget caps and so there is an incentive to spend as much as possible to create the fastest car possible to improve one’s chances of winning.
A mid-tier team is estimated to spend roughly $150 million per season, while top teams like Ferrari and Mercedes likely spend as much as three times that amount. This means that despite F1 paying $1 billion of its revenue over to the teams every year, most teams are loss-making. The high cost of competing makes many teams unsustainable, deters even large automakers from entering the sport and can make for duller racing on the track as deep-pocketed teams simply outspend the rest of the field.
DRIVING EFFICIENCY
There is reason to be optimistic that the new owners of F1 can better monetise the sport and reduce how much revenue flows to the teams. For example, on a per-viewer basis, F1 earns $1 in broadcast rights for every $5 the NFL makes and every $3 the English Premier League earns. There is also room for improvement on sponsorships: when Liberty Media Corporation (Liberty) bought F1 in 2017, only 13 races had title sponsors.
On the cost side, if Liberty can negotiate better cost controls, it will improve team economics, increase how much profit it can retain, and possibly make for a better racing spectacle by creating a more level playing field. Liberty is currently in negotiations with the teams to make this happen and has some capable people in its ranks working on it.
Beyond this, Liberty is focused on growing awareness of the sport, including a recent 10-episode Netflix documentary and investing in an F1 esports series. After declining in recent years, F1’s global viewership rose by 10% last year. A standalone F1 OTT product is also being rolled out to monetise hardcore fans.
F1 is a rare and iconic asset, and one of the most watched events on the planet. As an investment, it is a way to capitalise on this heightened competitive environment and demand for sports content, while also offering levers that can be pulled by F1’s management to improve the sport and strongly grow its revenue and profits. DM
*Coronation holds F1 Group in the Coronation Global Equity Select unit trust fund. For more information about this fund, please view its comprehensive fact sheet here.
This is a shortened version of the full article written by investment analyst John Parathyras as published on coronation.com
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