The investment landscape for sports is going through a substantial transition. Technology, media and telecom stocks with exposure to sports have been among the most resilient in those sectors, including through economic cycles and shifts in business models.
However, the broadcast rights for several major U.S. professional sports franchises are expiring in the next two years; this could spur a faceoff between legacy media players, which have shrinking revenues, and deep-pocketed big tech companies seeking margin improvements and returns. Also helping to catalyze change: an unprecedented influx of foreign money into major U.S. sports; a dominant sports distributor’s potential change to its business model; and the combination of two strong media and promotions businesses that are focused on live sporting events.
The upheaval could spell opportunity for investors. “Demand for sports has translated to increased consumer spending on everything from live sporting events to branded goods, amplified by the rise of legalized sports betting in the U.S.,” says Morgan Stanley’s U.S. Media Analyst Ben Swinburne. “As a result, sports offer compounding revenue growth, asset value and, in many cases, superior return on net operating assets. Recent underperformance by these stocks reflect uncertainty, but presents an attractive entry point,” says Swinburne, who sees sports assets and sports rights continuing to appreciate despite these factors.
Traditional Media Companies Are Rethinking the Bundle
For years, the monetization of sports has been dominated by legacy broadcasters beaming out content to consumers’ TV sets over the airwaves or via satellite or cable. These companies control more than 80% of sports rights contracts, which are expected to have total average annual value of $24.5 billion in 2023 and 2024.
The scarcity of professional team franchises, as well as the relatively fixed supply of content, has fed the rising value of rights to air or stream games and matches. Programming rights fees in the U.S., including professional and college sports, grew at an annual rate of 6.3% to go from $15.5 billion in 2018 to $19.8 billion in 2022, and are expected to reach $31.6 billion by 2030. Broadcasters have passed along the increased costs with higher advertising rates, distribution fees and viewers’ cost to tune in. But consumers have pushed back, “cutting the cord” by getting rid of bundled cable packages in favor of streaming services.
“There are more consumers that don’t consume enough sports on TV to continue to prop up cable bundles,” says Swinburne. “Cord-cutting has reached a level where subscriber losses more than offset price increases, sending down distribution revenues for national networks.”
Still, a full transition to streaming will happen more slowly than the market thinks, Swinburne says, with an estimated 50 million pay-TV households expected to remain by 2030, down 25% from today and 45% below a peak in 2014. Linear TV should also maintain a stronger share of consumer spending than streaming through at least the end of this decade.
To stay competitive in the rights market during this transition, the traditional media industry will need to consolidate, though perhaps at valuations lower than current levels. Broadcasters could also consider a specialized bundle created to appeal to a growing and passionate audiences of sports fans whose demand for content isn’t likely to be affected by price.
“This approach would allow a robust, consumer-friendly sports offering to scale profitably while allowing general entertainment services to continue serving non-sports fans at attractive price points,” Swinburne says.
Opportunity for Big Tech
If legacy broadcasters aren’t able to pivot to streaming and continue to see revenues diminish, they may not have the appetite or ability to boost their investments in broadcast rights for sports. This could create an opening for big tech companies to move in, including market-leading streaming services. In fact, Swinburne expects tech companies to claim a bigger portion of sports rights ownership and distribution over time. Especially since sports entertainment has consistently demonstrated a capacity to be translated and consumed via established and emerging digital platforms such as social media, broadening sports assets' appeal for potential distributors as an opportunity to extend reach.
“We would be less bullish on sports rights, in the near term at least, if not for the emergence of big tech companies as legitimate buyers, especially in the U.S.,” says Swinburne. “Owners of sports assets will increasingly need these well-resourced firms to step in to sustain asset and earnings inflation.”
For more insights ask your Morgan Stanley representative or Financial Advisor for the full report, Moneyball – The Investment Case for Sports, (June 21, 2023).