The New Order Cometh: Decoding the Economics of Sports DTC Platforms

A little over three months ago, Diamond Sports Group, the broadcaster of 22 erstwhile Fox Sports Networks and Fox College Sports channels, filed for bankruptcy protection. This came a month after it defaulted on payments to some of its largest stakeholders. Prominent among these were sports franchise owners, many of whom relied almost completely on Diamond Sports to air their content. The collapse of the network, therefore, has had or will have a cascading effect on franchise owners’ revenues.

A primary driver of the Diamond Sports’ financial woes was declining viewership revenue. This, though, wasn’t an isolated example. 25 million households have already moved away from cable TV since 2012, with another 25 million estimated to follow by the end of 2025. This trend is estimated to cost US media companies an estimated $25bn in lost subscriptions alone, not counting associated losses in advertising revenue.

But what brought about this seismic shift?

From cable to cord-cutting: Internet-based streaming is nosing ahead in the sports broadcasting race.

Live sports coverage first made the jump from radio to TV with the telecast of the 1936 Berlin Olympic Games. This was followed by the first live US broadcast in 1939 – a college football game between Waynesburg College and Fordham. In no time, radios began to fall silent, while all across the world, fans glued themselves before flickering TV screens.

The post-war popularity of TV saw sports programming boom. Mainstream news and entertainment channels quickly devoted more and more time covering popular sporting events.

Inevitably, the market responded to popular demand and dedicated sports channels – most famously, ESPN in 1979 – came into being.

Rooftop antennae were replaced by cable connections, but TV ruled the roost anyway, raking in big bucks for themselves, their advertisers and the franchises they served.

Pay-per-view TV took things even further, monetizing a captive audience for major sports events, especially boxing – Muhammed Ali’s 1974 fight against George Foreman, for example, drew 50 million paying customers worldwide. TV was king, or so it seemed.

What changed everything was when streaming services made their entrance in the early 2000s. The first were slow and clunky, but growing Internet penetration, coupled with better data pipelines like fibre optic networks soon came along.

The popularity of OTT platforms surged, as viewers revelled in the new experience that they offered. Rather than watch selected programming on a few channels, which often excluded lower-ranked teams or disciplines, fans could watch whichever fixture took their fancy.

OTT platforms also added to the viewer experience by making additional content, like pre-game interviews, replays and stats, available on demand. And, if you couldn’t catch the game live, there was always a replay waiting to be served up at a time of your convenience.

Another huge game changer was that streaming took sports far beyond traditional boundaries. Soccer fan in India became ardent fans of English Premier League or La Liga team, or followed the F1 Tour wherever it went.

Similarly, the easy accessibility of streaming video over a variety of devices took viewing out of living rooms to just about anywhere. Social media integrations made it easy to share content or create watch parties, making streaming the in thing with a connected generation.

Sports became a global game like never before, and viewership exploded. None of these revolutionary new features had been possible with linear TV, giving sports franchises huge opportunities to reach new audiences, delivery better experiences and, importantly, monetize their content.

It’s little wonder, then, that OTT platforms are slowly but surely eating into linear TVs share of the market – in 2019, Spain’s LaLiga calculated that OTT made up just 8% of its revenue, but estimated that it would hit up to 50% by 2025. Diamond Sports Group’s travails seem to suggest that this might have been a serious underestimation.

Are lone linear TV partnerships still viable for sports content owners??

There are several factors that are stacked up against cable TV broadcasters. The first are costs.

A cable broadcaster faces three main financial outflows – licensing fees, infrastructure costs, and distribution costs. On the licensing front, cable TV has experienced a double whammy. First, leagues and franchise owners now have a very good idea of their sports’ potential worldwide, and their asking rates have soared accordingly.

India’s lucrative Indian Premier League, for example, has more than doubled the cost of its media rights and still found eager backers. Back in the US, broadcasters pay the National Football League $17mn a game, while a Major League Baseball game goes for $11mn.

At the same time, deep-pocketed OTT platforms are more than willing to cough up these huge amounts, as their rapidly growing user bases justify the expense. In fact, the IPL’s 2022 right deal saw streaming rights cost slightly more than the TV rights. These shifts are making a dent on viewer habits and expectations, and these changes are likely permanent. This shifts are making a dent on viewer habits and expectations, and these changes are likely permanent.

On the infrastructure and distribution fronts, cable TV companies are finding themselves on the back foot. Uplinks, OB vans, satellite time and licenses are expensive,– satellite costs themselves can go up to $30,000 a month. Cable TV channels also have limited control over pricing and packaging, given that their distribution costs are governed by agreements with cable and satellite providers.

Unlike in the case of streaming platforms, these costs are fixed for cable networks, impacting how much money they have to spare for their only variable cost – franchise fees. Franchise owners, therefore, stand to lose out, affecting their profitability. Franchise owners, therefore, stand to lose out, affecting their profitability.

On to income. Cable channels’ revenue streams are also based on three pillars – subscription fees, advertising revenues and syndication of their content by other broadcasters. These pillars are now looking increasingly shaky.

The emergence of Internet streaming, and the resulting rise in cord cutting has hit traditional pay-TV subscriptions hard – US cable networks lost 6,250,000 subscribers in 2022, up from 5,585,000 in 2021. Given that each lost subscription is estimated to costs a cable TV company $17.62 a month, it’s not hard to see why the cable TV industry is struggling. Advertising revenues are also under pressure, as they are tied to viewership ratings, which is possibly why global TV ad sales fell by 4% in 2019, a rate not seen since the Great Recession.

And, as other cable companies also tighten their financial belts, syndication revenues also get affected as partners become ever more selective about their programming choices. Franchises again stand to lose both revenues and potential fans as a result, making a only-cable strategy risky.

DTC and hybrid distribution models: The way forward for sports franchises

By being based on a totally different technology, Internet-based Video on Demand services neatly sidestep the pitfalls that challenge the traditional TV industry.

First off, DTC streaming services have lower setup costs, because they adopt a totally different distribution model. Being cloud-based, the technology driving them is simple, yet efficient and scalable.

Servers, not satellites, shoot content around the world, using shared infrastructure that costs a fraction of traditional requirements. Content can be streamed from anywhere, from even a smartphone. Geo-restrictions are minimal, easing syndication costs for anything other than top-tier events. Initial investments are lower – developing an app like Netflix or Amazon Prime Video costs under $80,000, most of which is a one-time investment.

Ongoing costs are predictable and manageable, being primarily related to app updates for multi-device strategy, content production, and marketing. Lower cost barriers open the market to smaller players – leagues, disciplines and streaming service providers. This widens the accessibility of sports content, creating more fans for more sports and, in turn, converting TV audiences to DTC streaming.

DTC streaming also give viewers an experience that cable TV simply cannot match. Content delivery is device-independent, letting sports fans watch high-quality video, live and on-demand. High-speed networks deliver uninterrupted video, even if traffic surges during a big game.

Technology is also evolving at a dizzying scale, with 5G Internet now making it possible for viewers to watch multiple games at the same time, switch camera angles on demand, or replay any part of a game. The appeal of being totally in control makes streaming irresistible.

But, from a business standpoint, possibly the biggest advantage that DTC streaming services have over traditional linear TV partnerships or even partnering with existing OTT brands is their ability to capture granular data about viewers. Unlike imprecise metrics like Nielsen ratings in the TV-era or walled gardens of the digital age, DTC streaming platforms allow platform owners to analyse viewer behaviour down to the last detail.

This awareness opens revenue streams – subscriptions, targeted advertising, partnerships, syndications and merchandising sales – that are unavailable to traditional TV channels, making streaming services less reliant on a single source of income. An owned DTC platform’s multi-device and social media capabilities also take monetization a notch higher, allowing for user engagement even while a game is on. Given that streaming services have a global reach, these capabilities allow them to target audiences worldwide with razor-sharp accuracy, maximizing ROI.

Now TV as you know it: Where do legacy TV channels go?

The billion-dollar question is, can traditional TV channels compete with streaming services? While the numbers may paint a gloomy picture, the reality is that legacy TV companies have a lot going for them – huge content repositories, trusted brand names, relationships with administrators, league and teams, plus a healthy number of loyal viewers who have continued to stick around.

The answer, as sports franchises have realized, is that adding their own DTC channel to their broadcast mix can insulate them from the fluctuations that a purely cable-led strategy brings. La Liga, for example, has hybridized offerings like La Liga Pass, which hitches the OTT experience with its TV programming. By moving with the times, TV sports majors, as well as new entrants, can make streaming video the foundation of their future growth.

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