Deep Dive Reports
December 19, 2019

A Look Back At 2019

A look back at the trends identified at the beginning of the year and an outline of some initial thoughts heading into 2020. 

2019 has been full of rapid transformation happening across the sports, media, and entertainment industries.  The wave of consolidation has continued as legacy media companies seek increased scale in order to better compete against the spending power of tech companies.  Incumbents, tied to traditional business models, have been aggressively shifting their strategies to capitalize on the changing consumption habits of audiences, especially the highly coveted millennials and Gen-Z.  At the same time, digital-first entrants are looking to capitalize on platform changes by establishing direct-to-consumer relationships that can facilitate their ability to aggressively gain market share.

As the year comes to a close, it’s a good time to take a look back at the trends we highlighted in early January (LINK), answer some of the questions posed, and outline some of our initial thoughts on these sectors heading into 2020.

 

The Continued Shift Away From Linear Television
19 3

It’s becoming increasingly clear that older audiences (the “boomer” generation), are the only ones watching linear television, either live or time-shifted.  Many media networks are (finally) embracing streaming video as they launch OTT products in order to engage with audiences on their schedule.  But the rapid advancements in technology, specifically the development of mobile as a leading platform, has seen a proliferation of ways consumers can spend their leisure time (LINK).  Legacy media companies are no longer just competing with each other for that coveted primetime slot.  They are now contending against video games, social networks, music, amongst others, and it’s a 24/7 battle.  From the few minutes waiting in line at a grocery store, to long travel trips, to free time at home, entertainment options are just a click and swipe away, and everyone is challenging for the attention of consumers (LINK).  As the competition intensifies, companies will not only need to attract audiences, but more importantly, they need to retain them.  Brands must learn to develop multi-platform capabilities that extend and enhance the overall relationship with the consumer.  The challenge will be creating new content, specific to each platform, that maintains their authentic voice without cannibalizing existing audiences and/or revenues.

 

The Fierce Battle For Talent
19 4

The continued rise in scripted series has been fueled by Netflix over the past few years as they have stopped relying on 3rd party library content and have aggressively invested in original programming.  As legacy media companies launch their own DTC products, many have pulled back on licensing, instead using their most popular programs to boost their new offering (LINK). This competition for exclusive, premium content is having an impact on new productions, leading to escalating costs, limited profit participations, as well as fierce battles for superstar creative talent.  Netflix signed massive overall deals with Shonda Rhimes (2017) and Ryan Murphy (2018), but did not hit the same highs in 2019, “settling” for Game of Thrones creators David Benioff and D.B. Weiss.  The biggest battle of 2019 centered around JJ Abrams and his Bad Robot Productions outfit, and there was plenty of interest from streaming-only platforms as well as traditional studios.  Everyone rolled out the red carpet in their pursuit, as Abrams was on-stage at the AppleTV+ launch event in March, was referenced numerous times during the Disney+ Investor Day in April 2019 (LINK), and was on-stage again at the HBO Max Investor Day in October (LINK), one month after signing his massive ~$500M overall deal with Warner Bros.  This neatly illustrates the complexity of content licensing deals, and the challenges many media companies face as they try to re-acquire worldwide rights.  As the “streaming wars” ramp up in 2020, the best creative talent, both on-screen and behind the screen, will reap the benefits.  Richard Plepler enjoyed acclaimed success at HBO (LINK), but left in February 2019 (along with several other executives) following AT&T’s acquisition.  Plepler appears to be nearing a deal with Apple, where his focus on quality over quantity seems like a perfect fit, and could start a domino effect for creative talent to join the mobile giant.

 

The Year of Price Increases
19 5

Since they first launched in the U.S., the long term prospects of Virtual MVPDs (vMVPDs) were questionable as the unit economics were not sustainable, and would not improve as the subscriber base scaled.  Linear networks were never going to discount their normal affiliate fees, and as a result, many vMVPDs had programming costs that exceeded the retail price.  As expected, these services were initially attractive alternatives to cord-cutters who wanted to escape the price burden of the big bundle.  For YouTubeTV, where profitability wasn’t as important, pricing could be resolved over time, but pure skinny bundles with no other revenue streams needed to adjust their business models.  It came as no surprise this year when many vMVPDs, led by DirecTV Now, continually raised their prices (LINK) in efforts to become margin positive.  Virtual MVPDs are adding more networks to their line-up alongside the aforementioned price increases, but that doesn’t seem to be an enticing value proposition to consumers.  The majority of these early adopters were occasional TV viewers, with little interest in sports programming.  Now, as the combined price of a skinny bundle and broadband-only plan starts to inch back closer to the triple-play packages, consumers will be less likely to “shave the cord” (LINK) as they decide the best option for their TV viewing habits.  Non-sports audiences have more entertainment options than ever before thanks to the rise of streaming platforms, which should accelerate cord-cutting trends in 2020. 

 

The “Streaming Wars” Have Begun
19 6

As the traditional bundle continues to unravel and more SVOD services are launched, the ultimate question for investors and executives alike are how many subscriptions is too much for a consumer.  2019 saw the debut of 2 of the highest profile OTT services with AppleTV+ launching on November 1st, closely followed by Disney+ on November 12th (LINK).  After much speculation, the biggest surprise was the low price ($5.99 and $7.99, respectively) especially when compared to Netflix’s standard plan ($12.99).  HBO Max will launch in May 2020 at $14.99, but their pricing strategy may have been inhibited by HBO’s existing position as a premium add-on linear channel.  In the early months, it will be difficult to accurately gauge customer affinity towards these platform based on subscriber metrics.  Many of these OTT services have partnered with mobile platforms on heavy promotional offerings, where many customers have free access during the first year (LINK).   This is important for Disney+ and AppleTV+ who both launched with minimal original programming and will take some time to scale their output.  In addition to the major players, several niche OTT services have launched in 2019 including Food Network Kitchen, BET+, and EPIX Now.  There are well over 100 SVOD services available to U.S. consumers ranging from general entertainment (Netflix), to sports (DAZN), to genre-specific (Acorn TV), to news (Fox Nation), to premium (Showtime).  The early consensus is that consumers will subscribe to 3 – 4 services, but that is just video, and doesn’t include audio (Spotify), commerce (Amazon), movies (AMC Theatres) or digital (The New York Times).  The decision to offer family plans and multiple accounts has helped to lower the entry price and encourage adoption of these new business models.  But these features have also enables password sharing, making it even easier to access content than the existing modes of piracy (LINK).  Eventually, these OTT services will look to tighten up their security measures and increase monetization, but in these early stages it is very much a land grab.

 

The Unparalleled Value Of Sports Rights
19 7

The most watched programming on linear television is increasingly live content, such as sports and news.  After selling 21st Century Fox Studios to Disney, “New Fox” is leaning into the linear ecosystem (LINK) with the perpetual dominance of Fox News alongside their programming line-up of premium sports Thursday through Sunday (NFL, WWE, NCAA Football)The NFL is the clear sports leader, buoyed by the scarcity of inventory and the airing of the majority of games on broadcast.  After viewership declines in 2016 and 2017 (partly attributed to off-field controversies), ratings rebounded in 2018 and are up once again this year (LINK).  While they have experimented with streaming deals (Thursday Night Football non-exclusively on Amazon), they will most likely be the last major sports league to offer a noteworthy digital-only package.  This was highlighted when the NFL decided to keep their Sunday Ticket contract with DirecTV this year, when they had an option to opt-out.  Other sports leagues have been more open to digital platforms, with the MLB offering smaller, but exclusive packages on Facebook and YouTube, and the NBA broadcasting G-league games on Twitch.  This year, Amazon took a big step forward with the 3 year deal for exclusive UK rights to 20 EPL games during December, and has received a warm reception to their broadcast thus far (LINK).  Domestically, no tech platform has landed any major rights, but outside of Fox preemptively extending MLB in late 2018, none of the marquee contracts have been renewed.  Conversations and negotiations should start to pick up steam in 2020 as many of the long-term contracts signed earlier this decade are set to expire in the next few years.  The leagues prefer the established reach and revenue from traditional broadcasters, but as cord cutting continues, there is a need to embrace streaming (LINK).  With many legacy media companies now offering a streaming service (ESPN+, NBC Sports Gold, CBS All-Access), it’s more likely the Tier 1 rights will stay with incumbents.  However, smaller packages could be created as a way for content owners to slowly dip their toe in the water and experiment with new digital distribution partners.  While DAZN, led by John Skipper, has made a lot of noise since entering the U.S. market in 2018, it only has about 1 million domestic subscribers (ESPN+ has 3.5M), which is not an attractive proposition for the major sports leagues.  For now, it’s most likely they will continue to pick up niche sporting events or highlight packages of the Big 4 sports, such as MLB ChangeUp, in order to grow their audience.

 

The Pivot To Connectivity Is In Full Effect
19 8

The cord-cutting phenomenon has been a hot topic over the past few years, but it’s important to take a look at how it is impacting the various MVPDs (Cable, Satellite, Telco) at different rates (LINK).  Generally speaking, Pay-TV providers are collectively moving away from promotional pricing and shifting their focus towards profitable, long-term subscribers. AT&T has been the most vocal about this strategy, and their subsequent results have been pretty staggering (LINK).  Satellite companies are mainly in rural areas, and do not have the ability to offer other services to retain customers.  As a result, when these customers decide to eliminate their video service, they are also ending the overall relationship.  Cable companies (and some telcos) on the other hand, have the benefit of supplying high-speed broadband, which has become the crucial piece of the customer relationship.  As programming costs continue to eat into video margins, broadband remains a high-margin utility, and can help maintain overall profitability.  Most of the cable customers who cut the cord are still watching TV, they are just doing do so through streaming services.  In fact, data consumption is higher with broadband only customers, and they are willingly opting into higher speeds (and prices) to enhance their streaming capabilities (LINK).  The relationship between TV operators and OTT services has evolved from foes to friends, as traditional MVPDs have enhanced their customer premise equipment (CPE) in order to better facilitate the distribution of OTT services.  As more devices get connected to the network, there is a bigger emphasis on creating services that help households easily manage and control their network. Cable companies have the ability to seamlessly offer greater network speeds (compared to DSL or wireless) and in the short-term, upgrades will be gradual as they follow customer demand, rather than proactively upsell into more expensive tiers.

 

The Beginning Stages Of Fixed Convergence
19 9

The wireless industry is in the middle of transformation, as the pending T-Mobile/Sprint merger will create a new Big 4 of carriers, after DISH Network acquires Sprint’s prepaid business of ~8M subscribers (LINK).  The merger has been continuously delayed throughout the year, and most recently is facing scrutiny at the state level, but seems likely to go through in 2020.  This deal is becoming vital for Sprint (and Softbank) who have floundered without any clear independent strategy over the past years.  On the other hand, T-Mobile has become a disruptive force and has been able to consistently gain market share through the strengthening of their network and their “uncarrier” initiatives (LINK).  The overall industry has moved away from heavy promotional pricing and each wireless provider has been focused on building out their 5G capabilities.  AT&T is leveraging their FirstNet contract, Verizon has recently reorganized their business lines (LINK), and T-Mobile/Sprint builds around their “wedding cake” of spectrum comprising low-band, mid-band, and mmWave.  Additionally, new entrants have arrived as the 3 major cable companies are now offering mobile service through MVNOs (Comcast – Verizon; Charter – Verizon; Altice USA – Sprint).  Partly driven by the economics of the deals, this has mainly been thought of a way to enhance the customer value proposition and lower churn, and no one of has been aggressively promoting their service, or making big efforts to capture market share from the incumbents.  While fixed convergence is more common across Europe, it is unlikely to take hold domestically in the near-term.  The 5G era has begun domestically and is expected to take bigger strides forward in 2020, but the coverage of wireless isn’t quite ready to replace the reliability of fixed line networks.

 

The Development Of 5G Leads To New Applications
19 10

It would be an understatement to say that recent investor enthusiasm around virtual reality (VR) has not lived up to the hype.  While there have been a few moderate success stories most of 2019 has reinforced the business and technology challenges of virtual reality.  After IMAX shut down their efforts in December 2018, Vreal, Google, and BBC have all shut down their VR business, with Jaunt selling their technology to Verizon Media.  The bulk and price of hardware products, need for high speed internet, inordinate data consumption, and user isolation makes it a tough sell for in-home entertainment.  Location-based VR experiences seem the most likely path towards early consumer adoption since they don’t require significant upfront costs or commitment.  One natural extension is the installation at malls (primarily ones with movie theaters), whose foot traffic is rapidly diminishing (LINK).  The Void has seen some success and plans to expand to 25 new locations over the next few years, but mainstream appeal still seems far away. While VR could see newfound growth as one of the early use cases from the development of 5G networks, it’s more likely that augmented reality (AR) takes a leading role in next-generation technology. The outsized success of Niantic’s Pokemon Go in 2016 showcased the potential of layering images into real-world environments. Apple has recently outlined their ambitions in the space (LINK) as they search for new services to bundle with the iPhone.  Snapchat has been an underrated pioneer in the space through the use of their lenses, and while the initial release of Spectacles failed, they are reinvigorating their efforts (LINK).  Magic Leap has been able to attract a lot of buzz, and dollars, receiving investments that valued the company at over $6B, but that hasn’t translated into positive results. Although that could be attributed more to the hardware aspect, rather than an indicator for AR as a whole, as it’s much more likely that early adoption will come through existing hardware such as mobile phones. 

 

The Concentration Of Franchises And Sequels
19 11

At the start of the year, many predicted a new domestic box office record of $12B+, but as the year went on, it was became clear that the milestone would not occur (LINK).  The shortfall comes despite the historical success of Avengers: Endgame, highlighting the lack of quality depth to the 2019 slates (LINK).  This should be expected as long-term trends continue to indicate the variability from year to year, rather than continued growth.  However, there might be more stability to domestic box office totals after Disney closed their acquisition of 21st Century Fox Studios in March 2019.  While the delay in closing the transaction might have impacted the current slate, Disney’s primary objective was obtaining a large of library of IP that can be developed into new franchises (LINK).  Studios’ shift towards a small number of blockbusters with state-of-the art CGI and sound effects helps to differentiate their content from the current “Golden Age of TV.”  In turn, major exhibitioners have renovated theaters, upgraded seating, and enhanced food & beverage offerings in order to improve the big-screen experience.  The resulting price increases, in combination with the growing library of OTT services, means that attendance figures are slowly declining (LINK), even as the box office grows.  In order to capitalize on the outsized demand for tentpoles, circuits are starting to experiment with new dynamic pricing initiatives, that have proven to be successful in Europe and China.  These will be based more around the timing of the showing (i.e. release date, weekend), rather than customizing pricing for each movie individually.  This will further boost ARPU, but may also speed up the decline of movie going, and at worse, could threaten the mainstream appeal of popular franchises.

 

The Quest To Save The Theatrical Experience
19 12

MoviePass burst onto the scene in the summer of 2017 and surpassed 3M subscribers within a year, but without the buy-in from theater owners, the business model was never justifiable.  In response, major exhibitioners have launched their own subscription offerings with a focus on ensuring profitability by limiting visitations per month (LINK).  After early growth from the most avid moviegoers, these programs are starting to flatline a little bit, and AMC has already started to raise prices in some locations.  It’s unlikely these will become the core pricing model for theaters, but they can continue to drive incremental visits and spending from less frequent guests.  There is some difficulty in extending the reach of subscriptions because the moviegoing decision is ultimately driven by 3rd party content.  The increasing focus on tentpoles (LINK) has led to a swift decline in the success of independent films and original screenplays, drastically reducing the demand for future production of mid-budget movies.  These prestige films won’t vanish right away, as they remain the type of passion projects that lead to awards and can build goodwill between star talent and studios.  However, the debate about the art of cinema is becoming louder as studios focus more on maximizing profitability over taking risks with creative integrity.  This discourse previously came to light after The Academy’s short-lived to decision to include a “most popular film” category for the 2019 Oscars.  More recently, a similar argument played out in the public ahead of Netflix’s release of The Irishman (LINK), which seems a fitting symbol for the current state of the industry. Martin Scorsese’s film had been floundering in the traditional studio system because of its budget and questions about potential profitability.  However, the financial backing (and different business model) from Netflix has allowed it to be produced and is one of the leading awards contender, despite the criticism around length and de-aging technology.  Netflix has made their ambition around film clear, and while they continue to battle with exhibitioners over day-and-date releases, that has not impeded their aggressive spending.  Other new OTT entrants, such as Apple and Amazon, have been more willing to acquiesce to the standard 90 day window for their movies.  But as the major studios (Disney, NBCU, WB/AT&T), enter the direct-to-consumer world, there may more changes to the distribution of films.  There may be more instances where it will be more beneficial to bypass theaters, and the requisite P&A spending, to release movies directly on their OTT services.

 

The Need For Curation By Humans And Algorithms
19 13

The growth of music streaming services has made music discovery easier than ever more, much to the benefit of lesser known artists.  Terrestrial radio stations, playing the same few songs every hour, are no longer need to release new singles, or help artists breakthrough. Spotify has expressed their desire to create a 2-sided marketplace that will help benefit artists as well as the major labels, rather than compete against them.  With their abundance of data and listener preferences, they can help identify emerging artists, identify important cities for touring and efficiently promote new music.  But some labels remain skeptical of how the economics will benefit them, and it has been one of the reasons they haven’t renewed their music licensing deals yet (LINK).  Apple Music is the other large player, and after experimenting with exclusives (Frank Ocean, Chance the Rapper) seem content to play by the labels’ rules.  Unlike Spotify, music is not their sole business, and the service is just another way to keep their consumer engaged on iPhones and drive more hardware spending.  The biggest potential disruptor to the music industry might not be a music service (yet), but a social network (LINK).  TikTok burst onto the scene in the U.S. in late 2018 after ByteDance acquired Musical.ly.  The platform is best known for its memes, where users replicate existing videos but with their own original twist (i.e. The Haribo Challenge).  But in 2019, Lil Nas X became an overnight sensation thanks to the breakout success of Old Town Road on TikTok, which utilized a $30 beat bought online.  Lil Nas X promoted the song as a meme on the platform until it took off, and soon after hit the Billboard Top 100 for 17 straight weeks. This virality potential from becoming a 15 second soundtrack to popular challenges can boost back catalog content (Lizzo), as well as help jumpstart an aspiring musicians career on established streaming platforms (LINK).  It’s no surprise that TikTok is looking to launch their own music service, as they just launched their beta version in India and Indonesia.  However, the majority of recorded music is still controlled by the Big 4 labels, and they are use able to use that leverage to control (and limit) the success of distribution platforms. 

 

The Audience Is Listening, But No One Is Paying
19 14

Podcasts have garnered a lot of attraction in 2019 (LINK), especially on the heels of the sizable acquisitions Spotify made at the beginning of the year.  Podcasts will be a key strategy for Spotify, who need to diversify their content so they can reduce their dependence on music labels.  On the other hand, Apple has long been the leader in podcast consumption (RIP iTunes), but have shown little initiative towards building a moat around this area.  This has allowed the growth of several podcast-only distribution platforms, but they may struggle to gain scale, especially if they opt for a subscription model like Luminary.  The amount of spoken word content continues grow, making it even tougher to stand out, and further limiting the already small monetization prospects (LINK).  The majority of podcast creators are focused on reaching as a wide as an audience of possible, but some of the more established names have been able to secure deals for exclusive content.  These can be lucrative for podcasters as the digital audio advertising industry is way behind other digital forms, with very little programmatic inventory, dynamic insertion, or audience targeting features.  With minimal direct revenue, podcasts are increasingly being used by media companies as a way to extend the brand and reach new audiences, as well as deepen engagement with passionate fans.  The New York Times’ The Daily is a prime example, having reached over 2M daily listeners (LINK).  TV/Film producers are using podcasts as an IP engine, either to find existing stories for adaption, or for the testing and developing of new content. Many of the large scale digital audio companies (SiriusXM, iHeartRadio, Entercom) have all indicated their interest in making podcasts a bigger part of their business.  But for now, podcasts are in a developmental stage, but with rapid consumer adoption, there is a longer-term opportunity to take a sizable piece of the traditional radio advertising market.

 

The Walled Gardens Are Getting Bigger
19 15

After Netflix chose to bypass Apple’s App Store for new subscriptions, there hasn’t been a mass exodus of other apps from the “walled gardens.”  Companies like Netflix or Spotify, that have established their product, in addition to their sizable marketing budget, are not sacrificing much additional reach by handling subscriptions themselves. Epic Games has recently reinvigorated the debate around this “distribution tax” for Google Play and Apple’s App Store as they look to keep a bigger share of the in-game monetization from Fortnite (LINK).  It’s important to note, Epic Games has their own payment system which is used to support their own digital storefront (for Mac and PC), where they only charge a 12% fee for 3rd party game developers.  On the other hand, these app stores are essential for the discovery of smaller known apps, and for these publishers, it’s worth the mandatory 30% fee.  Apple is already in the middle of its pivot from hardware to services, and the App Store will become a bigger focal point of the company  (LINK).  As more legacy media companies roll out their direct-to-consumer services, there is an urgency to develop scale quickly and mobile platforms can help facilitate customer sign-ups.  Additionally, shifting from B2B to B2C is difficult, and most companies do not have the capabilities nor expertise in place to make that transition smoothly.  Discovery has already acknowledged their shortcomings in this area, and hired several senior executives from Amazon and other digital-first companies to help right the ship (LINK).  As mobile continues to grow its share of screen time, these app stores will gain greater power and leverage as aggregators and distributors.

 

The Regulators Have Turned Their Focus To “The Duopoly”
19 16

Amazon has turned on the faucet for advertising dollars this year and sponsored posts are overloading customers’ search results.  While Nike recently pulled their inventory from the e-commerce site completely,  smaller retailers will happily pay for better product placement when the customers’ intent to purchase is at its highest.  Despite their rapid growth, Amazon’s 2019 ad revenue ($10B) still pales in comparison to the duopoly of Facebook and Google ($70B and $100B respectively).  Regulators have begun to narrow their focus on these companies in an effort to curb their dominance and protect consumer data (LINK).  GDPR regulations went into effect in Europe in 2018 and had an immediate impact on the digital ad business and the adoption of CCPA in 2020 could serve as a similar template for legislation in the U.S.  In actuality, these platforms have become so intertwined with consumer habits that it’s hard to see their dominance dwindling without any substantial regulatory action.  Facebook is under the most scrutiny, and has been acting aggressively to defend their position by beginning to integrate their 3 core apps into 1 ecosystem (akin to WeChat) and making it more difficult to break up (LINK).  The decision to pursue a cryptocurrency, Libra, seems logical (further entrenching their platform), but the timing is a bit baffling as regulatory concerns have never been higher for the company.  As near-term headwinds persist for the traditional ad business, Facebook and Google are taking initial steps to slightly change their business models by further embracing e-commerce (LINK).  Instagram is an ideal platform for online purchases and their new Checkout feature will create a bigger push for more integrated click-to-purchase capabilities. 

 

The Need To Convert Audiences Into Monetization
19 17

The end of 2018 saw a wave of cost-cutting, layoffs, and shutdowns at some of the most valuable digital publisher darlings.  It was no surprise to this trend continue in 2019, along with a flurry of consolidation most notably led by Bryan Goldberg and his Bustle Digital Group.  The over-reliance on digital ad revenue, which is diminishing for everyone not named Facebook or Google, makes the simple case for M&A in order to quickly gain scale.  While the roll-up of distressed assets can be a logical plan, this seems to be a strategy like dumping water out of a sinking ship, if there is no attempt to diversify the business model.  With a plethora of free content on the internet, it is difficult for any publisher to stand out in a crowd without a unique or distinguishable voice (LINK).  Many digital companies are extending into new business lines (commerce, podcasts, tv production), but run the risk of diluting the quality of their brand by moving away from their expertise.  Some publishers have turned to subscriptions, and have found a growing audience that is willing to pay for premium content.   The Athletic started from scratch and has already amassed over 500,000 subscribers, proving this can be a successful strategy in the competitive sports space (LINK).  After hiring a wave of journalists from local and national newspapers and publishers, they’ve moved away from the generic box scores and recaps that are found on 99% of sports sites.  Instead, there is a focus on unique stories that have a personal touch and go beyond just what happened during a game.  The New York Times has taken this strategic pivot even further with the extension of their brand through separate subscriptions (crossword, food), podcasts (The Daily) and now TV (The Weekly), in order to grow their audience base (LINK).  There are more customer touch points than ever before, and these digital-first publishers need to evolve into multi-platform companies to succeed, and build passionate audiences around their brand, rather than trying to drive audiences to their website.

 

The Emergence Of Much Needed Competition
19 18

One of the biggest stories of 2019 has to be Evan Spiegel’s ability to turn around the prospects at Snapchat. The short-term pain of replacing the senior management team is starting to pay-off, and the lengthy overhaul of their Android platform is finally allowing them to better expand internationally (LINK).  They have established a strong affinity with the Gen-Z audiences, although mainly as a communication tool, rather than for content consumption.  While the ability to reach this highly coveted consumers make them appealing to advertisers, long-term success will be dependent upon acquiring older demographics, and/or reaching the new generation.  The development of new features, such as Games and Maps can help deepen engagement between users on the platform.  But the most  crucial aspect, is that their unique feature of deleting old content has allowed them to evade a lot of the privacy issues that are plaguing other social media companies.  These platforms are actively trying to work with regulators to implement new protocols, where they have more say on how things move going forward, and can adjust their business models (LINK).  The rapid growth of TikTok, a Chinese owned company, has raised a lot of concerns in Washington DC as the geopolitical tensions between the U.S. and China intensifies.  The majority of the users are Gen-Z, or younger, which creates a lot more potential for wrongdoing, both from the company and/or other users.  There are also many privacy concerns around the Chinese government’s ability to access sensitive personal data and user profiles from the app.  Cybersecurity has become a hot button issue, especially after the Cambridge Analytica scandal, and regulators are stepping up their efforts to protect consumer identities (LINK).  Across social platforms, there will be a greater push to diversify revenue away from ads, but user data still remains the most valuable asset these companies have. 

 

The Potential For Cross-Platform Gaming
19 19

Fortnite’s rapid ascent in 2018 was a major step in bringing the gaming community to mainstream media audiences.  The battle royale genre created a unique multi-player experience, with each battle incorporating randomized features (i.e. starting point, weapons) that help even the competitive level.  Many established first-person shooter titles who primarily relied on campaign modes and online play have released battle royale modes (Call of Duty), and new games were developed specifically with this format in mind (Apex Legends).  Publishers are taking major strides to refocus their efforts around these key titles, and use the swift development of live operations to extend the life of the games (LINK).  Epic Games has shown how innovative and interactive video games can be, as they have already hosted a Marshmello concert, turned a map update into a live stream event (Black Hole) and premiered a trailer for Star Wars within Fortnite.  As fewer games are released, there is a need to expand the audience size and deepen engagement, by offering major titles on all platforms, highlighted by the launch of console games on PC (Read Dead Redemption 2) and mobile (Call of Duty).  Mobile is best poised to benefit from this shift as graphics and gameplay improve, but more importantly, these gamers are already accustomed to the in-game monetization model (LINK).  There has not been much cross-platform M&A activity in 2019, as console publishers have preferred to utilize their existing capabilities, but this transition can be more difficult than expected (LINK).  The launch of Stadia last month has turned the concept of cloud gaming into a reality, but given the lackluster initial reviews, it will still take time to develop consumer adoption (LINK).  Additionally, new consoles (PS5, Xbox Series X) are set to arrive in 2020, and AAA publishers will prioritize creating sequels of their key franchises for these established platforms.

 

The Valuations Continue To Outpace The Revenue
19 20

After the launch of Overwatch League (OWL) and Riot’s switch to a franchise model for EU LCS, there has not been a wave of radical changes to the Esports ecosystem.  Newer titles, such as PUBG, Fortnite, and Apex Legends have opted to officially enter the Esports space through tournaments, although that could be attributed more to the nature of their games.  These tournaments are reminiscent of NCAA March Madness since the randomized elements that are integral to the battle royale genre make upsets more likely to happen, which can lead to more fan excitement.  Regardless of the title or genre, tournaments can be still financially lucrative (LINK) but ultimately the structure of Esports competitions will come down to the publisher’s desire of involvement.  Franchised leagues require more investment up front, but can have the potential more bigger rewards over the next decade.  This is the path that Activision Blizzard is taking, as they get set to launch their Call of Duty League in January 2020, which will mainly mimic the existing OWL (LINK).  As publishers continue their strategic shift to live operations, the stability of recurring seasons will help keep players engaged with these titles.  With a global passionate fanbase in place, the focus has been on improving the operations and monetization of these leagues through media rights and sponsorships (LINK).  This strategy is closely aligned with traditional sports, and can provide a structure that allows for long-term growth. With a similar structure in place at multiple leagues, there has been a rush of activity at the team level as existing organizations look to expand into new titles, despite the growing franchise fees.  With larger organizations, there is an ability to build out the brand through improved monetization of sponsorships, merchandise, and players’ live streams.  The profitability of Esports organizations remains limited, but that hasn’t slowed investor demand, as they see the enormous potential as the industry becomes less fragmented and the value consolidates towards a smaller group of companies.

 

The Next Frontier For Fan Engagement
19 21

After the federal legislation (PASPA) was lifted in 2018, the legalization of sports betting at the state level has been rapidly picking up momentum.  Thirteen states now have legal, regulated sports betting industries, and many more are in the middle of drafting new legislation.  This gradual acceptance will eventually make its way to all 50 states and companies are starting to position themselves to capitalize on this opportunity.  With limited availability for actually placing bets, sports gambling will serve more as a customer engagement tool, rather than a monetization product in itself.  The impact of legalized gambling on sports viewership was one of the key factors in Sinclair’s acquisition of the Fox RSNs (LINK).  Live sports is an integral part to the linear bundle, and its value should continue to increase as its one of the few forms of content that can draw large, passionate audiences.  Networks are starting to incorporate gambling into their programming through on-air references to point spreads, dedicated shoulder content, and second-screen free-to-play games.  But as sports networks continue to raise their affiliate fees, distributors are starting to push back in carriage negotiations, most notably led by Charlie Ergen at DISH (LINK).  As media rights fees start to approach a ceiling, professional sports leagues and teams are looking for a piece of the action to expand their revenue streams.  There has been speculation of integrity fees, but that is unlikely to happen as sportsbooks already have notoriously low margins (~5%).  For now, the teams and leagues are starting to build relationships with sportsbooks through sponsorships and advertising.  Over time, as sports arenas begin to shift into entertainment complexes, looking to attract fans before/after games, there is a push to turn these venues into sportsbooks.  But as we’ve seen in other sectors, technology has reduced the friction of consumer spending, and the capabilities of mobile betting will accelerate the adoption of sports wagering (LINK). The traditional types of pre-game bets (spreads, props) will remain intact, but as wireless latency reduces, in-game betting will become one of the most common forms of sports wagering.