The Sports SPAC Streaming Opportunity
Why Deltatre is poised to capitalize on shift to streaming, and how SPACs can supercharge it
Executive Summary
Streaming is the future of sports media distribution. While sports remain the linchpin of the cable bundle, it is unclear how much longer the center will hold especially as cord-cutting and cable viewership declines continue to accelerate. These dual trends are generating headwinds on cable operators two primary revenue streams: affiliate fees and advertising. In the face of these secular trends, rights owners and holders are investing heavily in streaming technology for the next wave of growth. Deltatre, as the independent market leader in live event streaming technology, has a unique opportunity to capitalize on this shift by positioning itself as a neutral technology arms dealer in a heated war for consumer’s attention. Unlocking this opportunity though, requires an injection of capital, which would allow Deltatre to ramp up both sales and marketing efforts, and investment into its product roadmap. For sports-industry focused SPACs, who are holding a collective ~$5B of dry powder per estimates, Deltatre should be a prime target to bring public.
The SPAC Opportunity Set in Sports
The majority of SPACs tout three core advantages: operational expertise, deep industry relationships, and capital. The key question is what space across the sports industry will these advantages confer the greatest value add.
The sports business press has focused largely on the opportunity for various teams to be taken public. However, due to the mandated 2-year window within which SPACs must finalize a deal, bringing a franchise public would likely mean agreeing to terms without full knowledge of how quickly ticketing and other in-venue revenue streams would recover. In addition, the model for sports media rights is under scrutiny right now with regional sports networks in the US struggling to adapt to a smaller base of cable subscribers, and European leagues seeing down rounds in rights deals. The multiple layers of uncertainty and the constrained timeframe make it unlikely that more than one SPAC consummates a franchise centered deal.
Outside of a team purchase, there are three opportunity areas where SPAC’s competencies can help drive outsized returns: League Ownership, Data Management & Integrity, and Streaming Technology. All three of these nascent spaces have strong growth outlooks, secular trends providing tailwinds, and private firms with revenue/growth to support a $300M+ valuation.
League Ownership
While offering attractive return prospects (see Endeavor $4B acquisition of UFC) , the risk profiles of league ownership and sports data firms within most sports-focused SPACs funding range are not well suited to the public markets. League ownership opportunities, such as Premier Lacrosse League and Drone Racing League (future essays coming about both!), despite significant successes are bound to face lumpy paths towards mainstream adoption as they continue to evolve their gameplay and business models. Staying private is likely the smart play to allow each to continue to iterate without public market scrutiny.
Data Management & Integrity
Data markets tend to function under winner take all dynamics. Nielsen’s dominance in media ratings is but one proof point, and within the sports industry Genius Sports and SportRadar are well positioned to form a durable duopoly as market leaders. Between the two of them, they have coverage across all the major sports leagues globally giving them impressive growth paths as sports gambling becomes more prominent. Given SportRadar’s most recent raise in 2018 valued the firm at $2.8B though, it seems unlikely that taking it public would fit within the funding capability of most SPACs (Sports Genius has already IPO’ed via SPAC at $1.5B valuation). The largest groups listed in Sportico’s roundup of sports SPACs have around ~500M+ of capital.
Streaming Technology
Streaming is rapidly replacing Pay-TV as the primary way viewers around the world consume video content. Sports is a straggler on this trend and given this status the valuation of the tech firms supporting sports streaming have yet to realize their true potential. Further, many leagues, teams and media companies are still formulating their strategies and know-how around streaming and how to best engage fans through this new medium. This uncertainty around the path forward for multiple players across the sports media landscape creates an opportunity for a well-funded independent technology firm to provide plug and play solutions and best practices. This firm will see its addressable market and revenue potential grow significantly and catch-up with other OTT technology firms as streaming continues to unseat broadcast and cable as the primary way fans engage with live sports. There is a unique window over the next 2 years to take public one of the market leaders in this space, Deltatre.
Pay-TV Decline
Per MoffetNathanson, Pay-TV penetration in the US has dipped below 70%, down from a high watermark of 88% in 2010, for a CAGR of -3%. Simultaneously though, an analysis by Entertainment Strategy Guy concluded that CAGR from 2000-2019 for college sports was 4.4%, while professional sports was even loftier at 5.8%. The upshot here is shrinking margins for linear sports rights holders, as costs rise while affiliate fees decrease.
More worrisome even is that viewership decreased even more sharply than cord-cutting, especially among coveted advertising demos from 18-34, whose viewership was down 50-60% over the last decade (Exhibit 2). Cable and broadcast ad sales teams have been able to fend off significant rate decreases to date, but as more alternatives such as Free ad supported streaming services (FASTs) enter the market, their position will become more challenging.
Cable and broadcast channels are going to hit a tipping point in their ability to absorb continued rights fee increases. Rights owners will need to identify new strategies and partners to continue growing in a streaming future. Evidence suggests that both sports rights owners and media companies alike are recognizing this reality, with an estimated $6.8B, or 15% of sports distribution budgets, across global distributers being spent on streaming technology. Recent reorganizations across Disney, NBCUniversal and WarnerMedia were further viewed by the market as moves to right-size these organizations for a more streaming-oriented future. As the market continues to shift further away from cable distributed video content and towards streaming this market size has the potential to grow rapidly.
Case Study: Disney + BamTech Acquisition
As a case study, Disney’s acquisition of BamTech is instructive of the potential in this space. BamTech (originally MLB Advanced Media) was the original streaming technology provider, created by MLB to stream baseball games back in 2002 before YouTube was even created. As a first mover it leveraged its core competencies to become a platform provider powering streaming experiences across both other sports (NHL.TV) and more traditional media companies (HBO). Disney purchased a controlling stake in BamTech in 2017 at a valuation of $3.75B. This deal has enabled Disney to outpace competitors in bringing their streaming services to market and scaling its direct to consumer business to over 130M global subscribers. On the back of BamTech’s tech stack, Disney’s streaming services were estimated by some analysts to be worth $100B+ as a standalone unit at the start of 2020, and that valuation has likely soared in the wake of Disney’s latest Investor Day (see Julia Alexander’s excellent recap here).
Deltatre’s Opportunity
Disney’s acquisition of BamTech left a huge hole in the market, which Deltatre has started to fill. Deltatre is an arms dealer in the streaming wars that offers rights owners and media companies alike an end-to-end technology stack to power streaming services. Its technology has been recognized throughout the industry as top of the line, with it garnering numerous awards including SportsPro’s Best Technology Company for 2019. Deltatre’s client list already includes premier brands such as the NFL, MLB, UEFA & Discovery Inc. In recent years it has started expanding beyond sports as well, partnering with AT&T, Bell Media, CBS and BBC on select projects, suggesting that there is a more generalist role in the media world it could fulfill beyond sports.
The most compelling feature of Deltatre is that they are the only unencumbered player in the sports streaming market. Competitors such as Endeavor Streaming Services (formerly NeuLion) and Disney Streaming Services (formerly BamTech) are limited by the reality that they are owned by larger entities whose wider interests can conflict with growing these more niche business units. For example, many of BamTech’s legacy partnerships (i.e. HBO, WWE) have offboarded from the BamTech stack in the years following Disney’s acquisition. Potential clients as well may have wariness about working with a service provider whose parent company may be a direct competitor. For example, Major League Baseball is even beginning the process of moving some of its operations off of BamTech and onto Deltatre.
As the streaming technology stack continues to become deeper and more complex, Deltatre’s pure play focus and ability to offer each layer of the stack as either separate SKU’s or enterprise packages makes it well positioned to grow in line with the overall streaming market. Currently it offers five distinct products and services that can be mixed and matched.
· Diva (OTT Player): Interactive OTT player with built in data integrations and suite of commerce tools to support subscription and advertising. This is the core business.
· Forge (Content Management System): Comprehensive content platform built specifically for live sports to help editorial and content strategy teams serve fans the right content at the right time.
· Axis (UX Management Console): Easy to use interface for controlling all aspects of the user’s experience with streaming service, ranging from video presentation, layouts across devices and platforms, content carousels and more. This product allows leagues and media companies to avoid hiring teams of engineers and designers as the entire experience can be modulated by a small relatively non-technical staff.
· Design Services: Consultative practice that helps clients conduct user research, develop proof of concepts and iterate on product strategy. Provides lead generation and chance to cross-sell to more comprehensive product offerings and engagements above.
· Data Services: Real-time data tracking solutions that can be leveraged for both user-experience enhancements and for broadcast solutions. Less bullish on this as a stand-alone opportunity, given SportRadar’s dominance, but as streaming becomes more prominent it could create an avenue for Deltatre to be more competitive.
This suite of offerings means its TAM is not just leagues and media companies, but even direct competitors who may not have the funding or R&D capabilities to develop certain parts of the streaming technology stack. Streaming technology is more expensive and complex to maintain on a recurring basis than the old cable world where you paid high fixed costs to lay the pipes but then could extract rent with minimal overhead, and many leagues, teams and even media companies will find they do not have the appetite for what it costs to build in-house expertise at each node.
While current sales figures are not publicly available, PitchBook’s latest estimate for 2019 revenue was $61M. Applying a 25% annual growth rate, which is relatively in line with the growth rate for the wider streaming industry, would imply a 2020 revenue base approaching $100M. This is likely an underestimate given recent large deals closed with MLB to run its content management system (replacing BamTech), and with Sinclair to power streaming services for its 21 RSN’s. Bruin’s effort to sell Deltatre in March for $1B+ further suggest Deltatre has grown at a faster than 25% year-over-year clip. Given estimated comparable acquisition revenue multiples of ~5x for BamTech and 3x for NeuLion, a revenue base ranging from $100M-$150M would suggest a comparable purchase price anywhere between $300M-$750M for Deltatre. While additional due diligence is certainly required to understand the revenue base, growth rate, and cost structure in more detail, this back of the envelope math suggests its within the target zone for most sports-focused SPACs.
SPACs with operational expertise in the sports and media industry, and deep relevant relationships, could provide rocket fuel to Deltatre’s growth prospects. While Deltatre has signed on several major US leagues already, having the right SPAC onboard could open the door to wider partnerships, and additional intelligence to inform strategy for Deltatre’s senior leadership. The additional capital will open new avenues for Deltatre to invest in its streaming stack to continue to provide best in class services, and to stay on top of new developments including 1) reducing latency with 5G’s rollout, 2) developing community and membership features to help leagues build both their own social graphs and more complex bundled products, and 3) building ecommerce features. This last point deserves a little more attention as an underestimated growth driver.
Ecommerce’s Unrealized Streaming Potential
While not yet a core part of their product offering, ecommerce constitutes a unique opportunity for Deltatre to add an additional leg to its growth story. Delatre helps leagues and media companies build direct relationships with their customers. As part of this process, Deltatre stores emails, credit cards and other contextual data about millions of sports fans. According to Fanatic’s CTO in an interview with Quartz, over half of Fanatic’s sales are made during live events, with that number climbing to 80% for certain “hot events.” This suggests an enormous opportunity for Deltatre to partner with Fanatics and other merchandisers to capture ecommerce revenue during live matches. Delatre can offer frictionless payment solutions to fans as there would be no need to switch apps/devices to make a purchase, and its analytic and content management tools could provide the backbone for targeted promotions in-game. As an example, Deltatre could easily allow its partners to offer a one-click offer to purchase a Tom Brady jersey directly after a touchdown pass. This would be a huge upgrade over the current user journey of having to pull out a phone or computer to seek out a specific item.
Concluding Thoughts
There are not many moments to beat the market to an obvious trend. As new rounds of rights negotiations come up for each of the major sports leagues globally, streaming will continue to be increasingly central to those discussions both to supplement broadcast/cable distribution, and in some cases as a replacement. Few firms are as well positioned strategically to benefit from this secular trend as Deltatre with its arms dealer positioning, top tier client list, and best in-class end-to-end offerings. The right SPAC could generate significant value via providing the capital and connections required to continue evolving the product and its centrality to leagues and media operator’s tech stack.
Thank you for reading my first post! This blog is called Shots on Goal, in part because I’m certain I will be wrong frequently. My hope is great readers like you will tell me where I’m missing the mark so I can continue to improve my thought process. If you have any questions, critiques or thoughts on what you’d like to see drop me a line or reach out on Twitter!