News & Insight
Posted on June 1, 2023
By Jon Kilmartin
How data and the pursuit of customer lifetime value will transform sports media rights over the next decade and drive new value for rightsholders.
In 2024, the global value of sports media rights will surpass USD $60 billion. However, uncertainty in the decade ahead is arguably the sector’s most debated topic. The percentage of total content spend in the media and entertainment industry dedicated to sports rights has dropped from 26% in 2018 to a forecasted 22% in 2023. Changing economic conditions in the industry will present sport’s biggest challenge but also, as Two Circles outlines in a new report, its greatest opportunity.
A media rights transaction can solely determine the short, medium, and long- term growth trajectory of a rightsholder, and the extent to which it can support key stakeholders such as fans, clubs, constituent federations, athletes, grass roots organisations and, increasingly, private equity. However, with continual changes in consumption behaviour and enabling technology, rightsholders are subject to unprecedented complexity when forging their media rights strategies and, importantly, bringing their stakeholders with them on this journey. The destination, however, can be transformative.
The Economic Playing Field
Ask any pilot and they will tell you that a headwind is favorable at takeoff because an airfoil moving into a headwind generates lift. The changing economics of the media and entertainment industry have created headwinds that sport is uniquely positioned to harness. By grounding their strategies in these economic trends and what they mean for potential licensees, rightsholders can accelerate growth in the value of their media rights over the next decade.
The trends, now well established and commonly reported, can be consolidated into four interdependent drivers (see Figure 1). Their combined effect is a reduction in economic profit available to media and entertainment companies (i.e. what’s left over after subtracting the cost of capital (or opportunity cost) from net operating profit). Under these conditions, customer retention, and the customer lifetime value (CLV) it generates, becomes pivotal. Media and entertainment companies are therefore increasing their focus on the accurate measurement of CLV and the content and marketing strategies to build it.
1. Oversupply of Distraction
The media and entertainment industry is subject to a constant and rapid inflow of added content, platforms and technologies, optimised to audience preference and targeted for distraction. Total global consumption of media per day has almost tripled in the last decade and with the ongoing maturation of AI generated content this inflow will continue to increase exponentially.
Potential licensees of sports media rights are therefore searching for highly differentiated and highly defensible content to cut through this oversupply. Sport’s ability to offer this differentiated product is proven, but it also has to be careful not to become part of the problem. Average daily video posts on social media globally by sports brands, organisations and professional athletes have more than doubled since 20184. If licensees of sports media rights (or consumers themselves) cannot satisfy their demand for differentiated, meaningful content through sport, their investment in time and money will go elsewhere.
2. Fragmentation of Demand and the Demand for Convenience
The steady decline in linear broadcast TV as the most popular form of media consumption globally continues; from 168 billion minutes consumed per day, 35% of total media consumption, in 2012 to 252 billion minutes consumed per day – just 21% of total consumption, in 2022. Conversely, social media consumption across a growing number of platforms has tripled during this period, to 340 billion minutes consumed per day in 2023, 27% of total consumption.
340bn
minutes consumed on social media per day in 2023
Underpinning this fragmentation of demand is the enabling power of technological development and a surging desire for convenience. For the US and UK markets combined, 85% of consumers are coveting a new ‘Everything App’ where their desire for sport, music/podcasts, ecommerce, lifestyle, entertainment and gaming are provided via a single access point as subscription fatigue continues to rise. Consumers’ demand for convenience eventually wins out in these economic conditions.
3. Consumer Pricing Power
Consumers of media and entertainment increasingly demand more for less. Growing price elasticity of demand (PED – the change in consumption of a product in relation to a change in its price) is a longstanding trend in the industry but one that is now having a consequential effect on the strategies of companies within it. There is arguably no more significant example for sport than ESPN’s plan to deliver its primary content offering direct-to- consumer in response to the continuing erosion of the cable bundle by this consumer pricing power. Although timelines are not yet specified, the company is reported to be already discussing the matter with both cable providers and rightsholders.
However, the same challenge awaits once the likes of ESPN transition to a direct-to-consumer service. Subscriber churn is rising, with average monthly churn for SVOD services in the US growing from under 3% per month in June 2019 to 6% per month by September 2022. The new ad-supported tier launched by Netflix in November 2022 is symptomatic of a now industry-wide trend, with 76% of SVOD platforms recently surveyed planning to introduce ads by 2025 in response to this growing sensitivity of consumers to price. In the case of Netflix, early results are promising, in the last quarter the $6.99 “Basic + Ads” plan had a higher average revenue per user (ARPU) than its $15.49 “Standard” plan in North America10. The platform is also advancing the way it measures CLV to inform future retention and content strategies. This includes the use of new predictive, stochastic, measurement techniques (Markov Chains) to gauge the future value of both subscribed and churned users who may (or may not) resubscribe.
This fight to regain pricing power across the media and entertainment industry has focused on offering more utility to consumers through: CLV generating content (e.g. Marvel and Disney); diverse, bundled offerings across numerous products, experiences and services, highly targeted proposition/UX innovation, and increasingly complex content windowing and pricing models.
4. Substitutivity
Interdependent with the other three drivers, substitutivity across the media and entertainment industry is also rising. Consumers are increasingly leveraging their pricing power to jump between content platforms, and back again. In the US, data is showing a growing tendency for SVOD platform subscribers to not only churn, but also then resubscribe to the same platform within a 6 month period – this is particularly evident in the 11-26 and 27-42 age segments.
However, the brand loyalty that sport can generate is universally envied. NFL Game Pass International’s 12 month subscriber retention is comparable to that of Amazon Prime’s entire service offering (not Prime video alone). Given that Amazon (and Amazon Prime) frequently sits at the top of brand loyalty indexes in major markets such as the US and UK, GPI demonstrates the unique potential of sport to build CLV in the decade ahead.
The Media Rights Flywheel
Returning to our aeronautical analogy, how can sport harness these economic headwinds to create sustained, long-term growth of its media rights?
Growth in the value of sports media rights occurs via a flywheel consisting of three connected components: Fan Value, Market Value and Economic Value. These are represented below by connected cogs of different sizes, the size depicting the relative influence on the speed of the overall flywheel of each value type.
Turning this flywheel requires strategic alignment and data integration between each of the three value types. Although growing each of the value types has always been, and continues to be, essential in achieving cycle-on-cycle media rights value growth for rightsholders, in the past, the relative sizes of the three wheels (representing their relative influence on turning this flywheel) were very different. Market Value would have previously been the largest cog, with market competition, dynamics and concentration in any given territory and/or region having a proportionately greater influence on the growth rate of media rights value than either Fan Value or Economic Value.
The result of this was the popularity amongst rightsholders of shorter rights cycles where permitted, allowing the capture of sequential uplifts in the value of rights. However, current market conditions, created by the four economic drivers above, have switched Fan Value and the CLV it generates to be the key determinant of growth – leading, in turn, to extended rights cycles being frequently the preference of both rightsholders and licensees.
The report (link) provides rightsholders with a playbook to grow all three value types, but let’s touch on Fan Value as the key determinant here.
GROWING FAN VALUE TO POWER THE MEDIA RIGHTS FLYWHEEL
If Fan Value is now the key driver of the growth flywheel for media rights in sport, how does a rightsholder build the size of this cog and, crucially, connect it to the others in the flywheel to realise the growth potential in the decade ahead. We provide five strategic recommendations:
1. Build The Fan Data Advantage
Rightsholders understand the importance of first-party data but frequently do so without universal consensus, with some stakeholders seeking to prioritise shorter-term profitability in place of longer-term capital investment in data infrastructure and analytics. Doing the former in place of the latter now, however, will lead to lost ground on the Economic Playing Field.
This stark inflection point for rightsholders is the result of CLV’s increasing importance in the media rights market. Rightsholders are, however, uniquely positioned to build it through the long-term intimacy they have with fans across multiple physical and digital touchpoints.
To cross the chasm between strategy and successful execution, rightsholders need to capture, structure and activate data effectively. This requires the appropriate tools and a long-term outlook. Such a continuing commitment will increase the accuracy and efficacy of predictive models and generative AI used to interpret fan demand. As accuracy increases, so does the success of subsequent IP and marketing investment designed to grow CLV. Data can range from granular transactional, demographic and psychographic segmentation to predictive behavioural and propensity AI modelling – but building this Fan Data Advantage needs to be a sustained strategic priority for the rightsholder across the organisation.
The Fan Data Advantage created via the virtuous cycle of fan data capture, CLV generative insight and optimal IP creation and marketing by rightsholders becomes even more important in the cookieless world. The value of the first- party data and insight on which CLV is built, to advertisers, sponsors and media rights licensees, continues to accelerate dramatically and is now resulting in the adoption of data clean rooms enabling collaborative second- party audience development.
“To cross the chasm between strategy and successful execution, rightsholders need to capture, structure and activate data effectively. This requires the appropriate tools and a long-term outlook.
A data clean room is a secure way for media rights licensees and rightsholders to work together to meet the ever- increasing consumer expectations for (hyper) personalised experiences and content in a privacy-safe manner and in the absence of cookie-driven behavioral tracking. It is a closed, secure, cloud-based environment that allows both parties to match data for advanced measurement, enhanced analytics and more effective consumer targeting through the creation of co-mingled audience cohorts. They allow the clear attribution of value to rightsholders’ first-party data as part of media rights transactions by providing the means for data driven value exchanges across lengthening media rights licensing terms.
In the past, once media rights had been licensed, a rightsholder would typically lose the ability to derive deeper generative insights on CLV stemming from the activity of the licensee and the licensee would be dependent upon its own user insight to capture (increasingly scarce) economic profit. By building the Fan Data Advantage and using technology such as data clean rooms to harness it, rightsholders and licensees can collaboratively enhance CLV in a controlled, secure and mutually beneficial way.
Furthermore, as licensees’ consumer propositions continue to evolve in response to the economic trends noted above, offerings such as connected TV (CTV), free ad-supported streaming (FAST) and ad-supported SVOD will directly benefit from the improved advertising addressability resulting from this value exchange. With 80% of advertisers with media spend of more than USD $1 billion this year expected to use data clean rooms14, the technology’s place in realising the value of premium first-party data in sport is expected to become increasingly relevant across both media and sponsorship markets.
2. Develop and Extend IP with Precision
From digital, OTT and experiential asset creation, to original content, competition format and rights innovation, IP ecosystems can create bundling and packaging opportunities to increase both rightsholder and rights licensee pricing power. However, for rightsholders to build connected and integrated IP ecosystems that realise their CLV potential, they need to do so through deep, data-driven innovation and insight. Developing IP that fans actually want, that is differentiated and defensible against substitutivity, but connected in a way that removes any friction in user experience, depends on building the Fan Data Advantage. Avoiding the temptation of new entrants in the (ever-more-powerful) technology hype cycle, and building IP around such entrants, is easier said than done; but Fan Data wins arguments – ask your fans – or even better, know them well enough so you don’t have to.
By measuring the success of such IP investment with longer-term KPIs such as CLV, rightsholders will avoid trying to be all things to all people which, under new market conditions, will (very) quickly erode Fan Value. With license terms increasing in length, rightsholders will have greater financial certainty from which to make these precise investments in fan- centric IP that builds and protects CLV, before other forms of entertainment dilute it. As we see from the Economic Playing Field, reducing the substitutivity of sport by consistently focusing strategic investment on building and measuring CLV will harness the economic headwinds to grow sport’s value in the media rights market.
3. Create an Omnichannel Mindset
A clear understanding of the purpose of each constituent in a rightsholder’s IP ecosystem, and each marketing channel employed across the fan experience, should not be a remit reserved for the marketing department alone. The challenge for rightsholders is to cut through the Oversupply of Distraction from competitors (e.g. media companies, games publishers, advertising technology providers, social media platforms) who are rapidly taking attention share through seamless user experiences, increasingly accurate contextual targeting and highly integrated omnichannel strategies.
In response, rightsholders need to treat each touch point with each fan as a unique relationship, informed by previous interactions and tailored to what he/she/they expect from the brand in that moment. Any internal stakeholder ambiguity as to the strategic purpose of a touchpoint, whether that be developed IP (e.g. OTT platform, fantasy game, event day experience, e-commerce store, web 3.0 product, premium original content) or a marketing/commercial channel (e.g. out-of-home, experiential, social media, paid media) risks misaligned execution and a level of disjointed experience that fans no longer accept.
““Fan Data wins arguments – ask your fans – or even better, know them well enough so you don’t have to.”
An example specific to media rights is the ongoing development of a rightsholder’s retained rights position and/or rights innovation programme. In the past, this activity has primarily been undertaken to fuel rightholders B2C and B2B2C fan propositions and marketing strategies. Opportunity cost analysis and management was required to ensure the right balance was met between the value derived from these retained rights by the rightsholder and the Market Value sacrificed to do so. Now, retaining specific rights in the context of growing mutually benefical (for both rightsholder and licensee) Fan Value and CLV, changes the assessment criteria when doing so. When CLV is the unified, measured objective across the organisation and its stakeholders, an omnichannel mindset is established and Fan Value is grown.
4. Understand the Social Contract
Sport’s power to foster allegiance and create emotion at scale is unequalled. With this power comes a great responsibility to drive positive change in society. Sport is rising to this challenge but there remains so much still to do. The new generation of sports fans are a generation of activists. Sport needs to meet their expectations proactively, as opposed to waiting for the next highly publicised movement or zeitgeist to jump upon reactively. Also, more than ever before, any stance taken needs to be demonstrably impactful. Data is starting to show signs of Gen Z becoming increasingly aware and critical of sport’s role within wider society. They expect more from brands and corporations, but will increasingly only value those that engage in activity that has a clear impact.
For rightsholders this means actively and constantly listening to the sentiment of their fans and wider society, executing community management strategies (both digitally and in person) that uncover passion points which are inherently fluid in nature. It is one thing to acknowledge that such points exist, it’s another to process this quantitative and qualitative insight into prompt and authentic action that speaks with the fan, not at them. If rightsholders prioritise earning this trust, fan advocacy and CLV is the reward.
5. Organisational Integration
By committing to building the Fan Data Advantage and then leveraging it to grow CLV through targeted IP development, collaborative omnichannel and data strategies, and increased fan empathy, Fan Value is grown. However, to grow it quickly, rightsholders need to be organisationally and strategically integrated. At one end of the spectrum this could mean rightsholders undertaking Agile transformation, with a complete redesign of operational culture, methods and structure to breed nimble cross-functional execution and innovation. A far more realistic, and instantly achievable, practice is to ensure that a clear list of objectives and key results (OKRs) is built, endorsed and adopted across each corner of the organisation. The focus of these simple but critical OKRs should be the performance of the other four Fan Value drivers noted above.
Fan Value in Action
Game Pass International (GPI) is the NFL’s OTT product giving fans outside of the US the ability to watch every match of the season, alongside valuable feature content, in return for a paid subscription. Two Circles were the lead agency across marketing, proposition, insight, and commercial strategy during the last six years. When the NFL and DAZN Group signed a 10-year deal in February to deliver GPI worldwide, starting with the 2023 season, it demonstrated the power of a strategic focus on Fan Value in growing the value of media rights.
For the last six years the NFL and Two Circles prioritised CLV across marketing, content, commercial and proposition workstreams to drive 80% annual subscriber retention by 2023 (see Figure 2). GPI delivered over 60% of the NFL’s new international (outside of North America and China) first-party data records over the period. Every evolutionary step taken by GPI was made to develop Fan Value, ultimately creating a proposition that NFL fans across the world would return for, season after season. This consistent, long-term and relentless strategic focus enabled a double-digit growth multiple on GPI’s media rights value when it was sold to DAZN earlier this year.
What's Next?
Next report topics from Two Circles include “The Anatomy of Customer Lifetime Value in Sport” and “Finding Fandom – Originating and Acquiring Fans”.
Two Circles grows the value of media rights by providing industry leading services across Fan, Market and Economic Value – and uniquely integrates each to accelerate the flywheel.
We work in partnership with sports rightsholders and media companies across the world to create strategies that maximise the value of media rights for both licensee and licensor.
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