UP547 Picks and Shovels: The Ecosystem Investment Thesis

22:46David Dellea:very successful at reaching a large audience of people giving people what they want on a mass scale on a regular basis and one of the conversations you quite often have with olympic governing bodies and national federations international federations is are you in touch with this group you know and they always say yes of course but how relevant is swimming cycling to the mass of that show jumping to people who are interested in horses that connection there's a sort of comms play marketing wise but i'm always interested in whether or not you see a direct at that line and whether it's actually connected as strongly as sometimes the sports industry i think overplays that line what do you think again i'm sort of being purposely provocative but i do think sometimes i think actually i think they're two different worlds quite often yeah and i would

23:41Christophe Sommer:agree. I also think it obviously varies sport to sport. One thing that I've seen, and sort of anecdotally, I'll take a sport like, I'll take two sports. I'll take softball, a daughter that plays. I'll take flag football. I have a son that plays. And neither of those are sort of tier one sort of trophy pieces of IP, but you have seen increasingly here in the US, increasing exposure, increasing live broadcasts of those sports and top tier competitions within those sports, which I've seen on, you know, again, on a personal level, connect directly to, you know, the athletes in my house who, you know, believe, you know, that is creating a stronger sort of affinity and engagement with them.

24:25Christophe Sommer:If that was absent, you know, would they still enjoy playing? Of course. But does it allow them to probably relate or at least look up to, you know, what they're seeing on the screen and does it maybe keep them engaged, you know, an extra couple of years in the sport? I don't know, but, you know, again, that's just anecdotal, you know, on a personal level. I'm curious if David, if you guys have experienced anything like that.

24:49Richard Gillis:Yeah, it's a good thought. So, and so I can, so through our work, we do quite some work with international federations. That is really the fundamental question, Richard, right? So how do we connect with, so we, it's a shifting focus away from say, look, we, you know, And we should add one more event to our calendar. We should try to squeeze this or that in to really how do I connect with this ecosystem of participants within my support. That's a fundamental question, I think, that exists actually for every international federation. Every international federation is having a slightly different nuanced way to answer it.

25:19Richard Gillis:Some try to answer with gamification, including gaming itself, or they try to do it through some degree of another digital platform. In any case, there's often kind of a digital proposition that comes at the center of it. this being said i would agree with you that and i would concur actually with what matt just mentioned is that there is definitely a link between both now is that link absolutely kind of statistically established and with clear evidence that there will just ace it i wouldn't know what's for sure is also again anecdotally clearly if you want to be able to continue nurturing the fan base effectively you need to have some degree of a link right and i think that ultimately culturally practicing a sport and then watching it has some degree of attention that is of linkage that that's for sure then we get to the elite elite that becomes an entertainment product in itself that's for sure but i think from a broader sense i think the fundamental hypothesis

26:14Matt Del Percio:remains that practicing a sport and a couple of years back we looked at fan segmentation as part of one of our sports surveys. And there we also try to flash out the segment of people who's interested in watching sports from those who are mostly interested in participating in sports and performing, right? And it was about 10 or 20 percent of the survey sample that was really focused on doing sports themselves but said that they had little interest in either specific players or specific athletes so there was very low athlete driven fandom as we called it back then and there was also very low to little more like club or team or sports driven fandom right this was a segment of the market that was interested in exercising and in training and i think the some of the example like high rocks and crossfit that you mentioned right these are examples of someone addressing also especially this target segment very well and there is then also somewhat of a disconnect between the entertainment product and the sport it's just a different segment of the market that you're trying to address with a different product and it can be very successful

27:32David Dellea:in either way i mean flag football you mentioned matt i look at that and in the same way as i look at paddle and if i'm running tennis if i'm running the itf or the lta or the usta i want to get my hands around paddle if i'm the nfl i want to i want to own flag football and i want it because i want to tell that story of you know a successful grassroots movement and then where my sport sits atop of it i just wonder if that's true could you talk to me about flag football what the connection is because I can see it flat you know it's they're talking about it ahead of the LA Olympics etc but that you get into sort of governing body or federation politics a bit but there is a sort of attribution question in terms of who is leading who yeah so the NFL does not own the concept of

28:25Christophe Sommer:flag football but it is heavily you know invested in well it is heavily invested and also investing in helping to control the sports, both expansion. And there is both professional flag football in the U.S., small, as well as youth flag football, which is big and growing and not just for boys either. Participation in flag football amongst girls is also growing quite quickly. I have a daughter that also plays flag football. I think the NFL, it's sort of a delicate act, right? I mean, tackle football is very different than flag football. Why is flag football so popular and growing, it's because it is a much safer form of the most popular sport in America.

29:06Christophe Sommer:There is a very big growing movement amongst US parents to not allow their children to play tackle football. That is a big problem if you're the NFL. And so the balancing act is how do we, you know, invest in a sport that is a safer alternative to the current sport that will get people excited and interested in football as a whole. Everything's the same about it, except for the really just for the physical contact of it. It's the same rules. It's mostly the same team, slightly modified. And so that balancing act of how do we reach that next generation of football fans with a version of the sport that is slightly different and which could in the long-term impact participation rates in tackle football.

29:49Christophe Sommer:I think there is some data from SFIA that has shown that participation in tackle football is either flat or slightly declining, massive growth in participation in flag football, where does that put the NFL in terms of a pipeline of players and fans for the future? I think it probably has more of a potential impact on the long-term pipeline of players as it does for fans. I think it's a smart investment by the NFL, again, to sort of reach and try to cultivate that next generation of football fan, regardless of whether it's the tackle or the flag variety.

30:18Richard Gillis:Yeah. So now you know what Matt spends his time over the weekend, right?

30:23Christophe Sommer:This is why I

30:23David Dellea:don't get anything done on the weekends well you say that but your family is a sort of it's a case study of sports participation and the link between that and media is it it's like a so you could rent

30:33Christophe Sommer:these kids out instead they're renting my wallet out and my car and and my sleep habits but but look the owners they've invested i think something in 30 plus million dollars the nfl has invested and it's the owners that have to approve that investment into flag football there is an nfl flag organization. There's an organization that runs flag on behalf of the NFL around the country. So, and as you said, it's an Olympic sport. And just to tie this all together, when I was attempting to get LA 2028 tickets during a drop last week, and I asked my son, of all these 30 some odd events, if we could get tickets to one of them, what would you like to see?

31:10Christophe Sommer:He said basketball and flag football. So anyway, there weren't any of those tickets available, nor was there tickets for swimming or gymnastics. They had all been sold out in the pre-sale but anyway big big fan of flag and i think it's smart that the nfl is investing there

31:23David Dellea:okay there's the squeeze middle question and there's a leakage question so the value that the broader value that that the you know these televised sports mainly generate let's take i mean the world cup is an example that's not a squeeze middle question but it when i look at infantino and i look at fifa i see someone trying to plug leaks trying to say right okay i want to own the secondary ticketing market as well as the primary ticketing market i want you know i want to own gaming i want the money to come into my ecosystem my world and not be leaked out and betting is an obvious leak piracy is another big leak media piracy and there are lots of others and And one of the jobs of sort of today's C-suite is to try and identify, know what the market, the leak in your value is, and to try and work out how to plug it and whether it's going to be worth plugging.

32:21David Dellea:What do we think, David, of that as a framing for this? Because, again, if I'm an investor looking at your report, I'm thinking, OK, there's a lot to like about this, but I'm also worried about this is a leaky bucket and I'm going to work out how to stop that happening.

32:35Richard Gillis:Yeah, look, so there's two, I think there's two facets to your question, which is a perfect segue to one piece of analysis that we've inserted in our report, which was trying to kind of put in a bit of a structure of the broader ecosystem and put out, I would say, sort of a map of what we believe is the economic importance, if you want, of each one of the individual stakeholder within the sector, right? And we did this market mapping because of that for two reasons. First of all, trying to understand because there is a lot of numbers out there in the market, right? And what we wanted to do is really make sure that we understand how much money is being generated, how much money is being transferred from one stakeholder to the other.

33:14Richard Gillis:We believe that is an important thing for people to understand. And then, of course, what is left over is ultimately the pool. We size that at about 400 billion. That is the pool ultimately that is available for sports organizations to fund their own operations, have a margin, ideally. fund our own operation either through own insources or staff or also then for tech and service that's kind of the pool that is available for tech and services to tap into of course they're not capturing 400 billion clearly but that's kind of the pool now when you look at this at this data then that's where you see a lot of leakage and for example what stands definitely out from a data perspective is what happens in betting right when we look at 100 billion gross betting revenues after payouts and only about$2 billion going back to rights owners.

34:01Richard Gillis:That's obviously a massive leakage that happens right there. Clearly, a lot more should be transferred. Ideally, you'd have a lot more actually being transferred to rights owners. I know the leakage, of course, happens within event organizer when you think about piracy, clearly. So that's a tremendous amount of leakage of value that unfortunately is not being generated. It's being captured by other parts illegally, of course. but still again demand there's clearly demand being captured by somebody else right and then of course a lot of the move or the example you've mentioned earlier on around ticketing and dynamic pricing which is very popular obviously it's kind of very popular in the us i think that's not nothing new for sure but now of course being a just popular when it goes down exactly exactly so but very sorry very prevalent let's put it in the correct word right and every one of us has probably been once in the US, at least us European and want to go to an NBA game and pay an absolutely outrageous price for sitting basically with a man in the head not to hit the roof of the stadium, right?

35:05Richard Gillis:We're used to that. So value leakage is an important point to understand. But I think most importantly is really to understand exactly how much there is in each bucket, how does this move, and how can you tap into it?

35:18David Dellea:Sometimes when I talk to people in the betting industry, They say, no, it's not leakage, it's marketing. One person's leakage is another person's marketing strategy. We betting is selling sport to a whole different marketplace that FIFA, UEFA, the NFL, PGA, golf, tennis. They will never do that. And that's what the job is. So even defining it as leakage is philosophically wrong. It should be seen as actually it's more like the sports rights holder is the sort of base and then around which people plug in and make money. That's an invitation to make money from the sport. That's the other side of the argument, isn't it?

36:02Matt Del Percio:And then it's a question for you, right? Like, how do you want to make money of the core product? And to your point, right, what is it I want to do myself and what is it that I may leave to others to bring to other target groups? And I think that one other additional component in looking at all of this, you already said it's important to look at the size of the leakage, at the size of the hole. Is it even worth fixing? Is it something I want to dedicate time to? And then it's the question, is the fix a commercial fix that can be found with a new optimized product or packaging strategy? Do I have a gap in my offering that I can bring to market and that changes something about the whole?

36:47Matt Del Percio:Or is it a technical solution, especially now in the privacy context? And in some cases, it might be a combination of the both. Maybe some more ad supported viewing of some content. but also tech advancement to be better at monitoring piracy and shutting that down.

37:07David Dellea:There's two things there. One is that when I look at your report and I see the sectors laid out, it's always quite useful to have that, you know, the map, as David described it. And then you go through each of those and say, right, OK, where's the leakage in that? OK, I see things like, you know, we mentioned betting, media, piracy. But you then get to things like hospitality. You get to sort of areas where, OK, what could I own? What shouldn't I own? Or is just too much effort? Let's take the FIFA World Cup this summer. So one of the ticketing questions is the hot one at the moment. Now, is it worth the PR hit that FIFA and Infantino are taking to try and control the secondary marketplace?

37:53Is that worth it?

37:55David Dellea:Both. There's a tangible and intangible bit of the question. Whether it's actually worth it money wise, are they making that much more money by capturing that secondary revenue for the potential brand hit that they're taking by doing it? and actually which they monetize incredibly successfully via sponsorship and marketing because people will look at the world cup and say we need to copy that we need to do a version of that that's what the top of the market is doing and the nfl always ahead of the game here so let's just talk about that whether it's actually worth it and whether there's a reputational downside

38:33Richard Gillis:to stemming some of these leaks yeah well look maybe the question may be matt you're so let's look at the perspective from the U.S. Do you feel that the ticketing strategy that have been adopted has posed a reputational challenge from a U.S. perspective?

38:48Christophe Sommer:In this moment, the transportation issues are the only thing that are top of mind right now. To be quite honest, just given the cost and the amount of press and public debate and discussion that's happening between FIFA and some of the local municipalities. Look, I think when it comes to an event like the World Cup, I think there's a tremendous amount of excitement. There's been a lot of demand for primary tickets. I think perception of that secondary market and their control of it, I think will somewhat depend on how the secondary market plays out. And that could be impacted, obviously, by the fact that there's more games.

39:23Christophe Sommer:It depends on if people start to see that there are transportation issues, getting to some early matches. Does that impact willingness to spend on the secondary market for a match that you might have already? So I think time will tell a bit on how that decision to keep that secondary market in-house will go. In terms of the impact it has, I don't feel like I can comment on that. But what I would say is, I think, look, it's a once in a lifetime event for many people here to have the World Cup here. I think ultimately the games will go off. I think fans will have a great time. I think people will be glued to their TVs, gathered in bars.

39:55Christophe Sommer:And I think any ill will will probably soon be forgotten. But look, between the transportation challenges, potentially the availability or the pricing of the secondary for fans, like me that did not participate in the primary yeah there there's there could be some real challenges here here that's sensitivity than we europeans would feel in our echo chamber here right

40:17Richard Gillis:i mean pricing of football is a it's a big political topic in europe right and you see different markets reacting differently the reality is that if you have a capacity and constrained capacity just like airplanes have dynamic pricing is unfortunately very unfriendly but it's the only way actually to optimize the revenue so it's a matter of priorities and clearly right so and yeah so it's as simple as that then the repetition question that's not the question for us to answer

40:42David Dellea:that obviously so it's sort of it's also interesting in terms of the where a governing body wants to start and stop you know where so you know fifa will be running new jersey coaches and trains soon you know if that's you say the footprint of the of a major event is seemingly sort of you know both physically but also philosophically expanding these things are really interesting because it talks to back to the the sort of market that you mentioned there a number there david which is 400 billion can we just sort of unpick because i see a lot of numbers and you do as well in terms of what is the size of the sports business and what's the marketplace let's just focus on that 400 because people land on numbers and we just and i agree with you that i see quite a lot of double counting and i'm not an accountant just talk to me about that 400 number

41:38Richard Gillis:yeah so as i was alluding before so with our purpose here was really map out the market right and have a distinction a clear distinction between what are core participants within the sports ecosystem what we call rights owners or rights holders right and let's make the distinction either you own or you hold the right a sponsor is a rights holder not the rights owner so understanding those and we purposely put the agencies there because they are often a rights holder within that spectrum beyond offering services so for us it was really important to really identify exactly clearly who who are the and this is important specifically for a professional investor is not just living within the breeding within these sports because it's to understand the structure the second one and then understand in the second exercise that we've done okay now let's see how much money moves right within how much money is being generated how much money moves actually within this right because otherwise you run the risk of double counting right so if you obviously you sum up how much a media a broadcaster is doing in terms of subscription and you add up to the value of rights or obviously double counting right and we see a lot out there also of this so that's why we've taken that out and we've seen and in the end how much again net revenues remains available and the reason we were doing this was to try to understand how do then these stakeholders spend their money so obviously tech and services is driven ultimately by the operation of an event organizer of a team of athletes of a rights agency of a sponsor event etc right and i think that for us was important to try to identify really how is money being spent by the key stakeholders.

43:16Richard Gillis:Because that ultimately will be the proxy for you to identify where tailwinds and headwinds are driving opportunity or challenges for tech and service provider. That's why we believe that this is valuable to bring that level of structure and rigor in terms of how you look at it. Now, of the 400 billion I was mentioning earlier, it's a big number. I would say maybe 20, depending on the stakeholder, could be 20 to 50 % being outsourced to a service or a tech provider. And of course, the second question I need to understand, how much of that is actually liquid? Many contracts are long-term. They don't come up every year, right?

43:53Richard Gillis:So that is, obviously, all of that needs to be, you know, need to be taken in consideration. But again, you see, already through this conversation, I'm trying to bring out that level of structure that would allow then a professional investor to kind of place, I would say, the pieces of the puzzle together.

44:08David Dellea:Okay, right. I'm going to ask we're going to sort of finish off with a bubble question is this a are we in a sports bubble are we in a sport asset value bubble Christophe what do you think when it comes to media rights right there's a lot of discussion about the plateauing of rights and

44:24Matt Del Percio:we definitely see differences in in growth trajectory if you look at top assets and their performance and a bit more of the of the mid-market as soon as you get to the mid-market though there is also a bit less of reliance on those media revenues, right? And higher relative importance of sponsorship, of match day and gate revenue. So I think if you look at the industry really holistically, and if you now, from our more European perspective, comparing that to the US especially, it seems like there is room for further growth. So I would argue that that's not bubble territory yet. Okay.

45:08David Dellea:Matt, you might have an American lens on that question.

45:13Christophe Sommer:Yeah, I would say not yet, but I think the next three to five years will be very telling. And I say not yet because there is still, you know, we're still seeing healthy growth and step ups in the value of media rights that U.S. broadcasters and cable networks are spending to be able to carry live games like that. The NFL, as you probably well know, is going to be exercising an opt-out clause in its media rights contracts and is expected to see anywhere from a 50 to 100 percent increase in the value that they will receive from certain distributors of its content. You, but it will be, and you certainly have a wider base of bidders for those rights with Amazon and Netflix continuing to lean into live sports.

45:57Christophe Sommer:And, you know, even on the most recent Netflix earnings call, talking about the value that live sports has brought to them. All that being said, there's a tremendous amount of live sports content and a lot of live sports content in the U.S. that is becoming available over the next three to four years. And when you look at the bidders for those rights, like Fox and Paramount and NBC and others, they're spending a tremendous amount of their overall content budgets on sports. Fox is spending over 60 % of its content budget on live sports. It's more in the 20 to 30 % range for some of its peers. But there are going to have to be some decisions made about where do we put those dollars within the sports content ecosystem?

46:37Christophe Sommer:Or are we going to have to pull some of those dollars out or reallocate them given some of the changes elsewhere within those businesses? So I would say not quite yet, but the next three to five years will be very certainly interesting and telling. David?

46:50Richard Gillis:My top line answer would also be no. And building on top of what Matt said and what both Christof and Matt said. So one obviously looking at the kind of additional revenue stream that are kind of the overarching value drivers, then also looking at pockets of media that are obviously going quite well. But to me, the fundamental reason why there is not a bubble or not a bubble yet is the fact that ultimately the broader sports industry is still undergoing a significant amount of transformation. That means that ultimately there needs to be a certain level of investment. When we talk about bubble is from an investor perspective.

47:27Richard Gillis:yeah right so and if you have an industry that is undergoing this level of transformation let's remember that a few years ago we're all wondering whether streamers were even going to come in so that was still an open question i think it was in 2022 that the netflix ceo was asked about sports and say we love sports but we also love to make money so as if both were in and we're in the profit business not the sports business exactly that's it exactly we're in the profit business So look where we are right now. So that gives obviously optimism to the fact that actually the transformation happening in media, we're not going to have a shadow.

48:05Richard Gillis:It's not going to be broken glass only, but there's new players coming in. Those new players are hiking their pricing and it's working. So there is optimism actually from that perspective, that thinking about media. But again, look at the broader spectrum. So we have fundamental transformations in media, but across all of the other actually activities and operations of sports industry. We have, so within the IP, we talk about the levers of professionalization that still allow actually for second tier properties actually to experience an uplift. And look indeed about how then all of this professionalization is translating ultimately downwards and tech and service provider that are helping stakeholders to manage complexity.

48:48Richard Gillis:And that is, I think, a fundamental driver of investments today. So, you know, Richard, transformation is synonymous with investments. So there is clear need to deploy capital. Deploying capital, there can be different ways of deploying capital, private equity being one, right? But once you deploy capital, then you need to anchor it, of course, into a case that will work for that capital deployment. That doesn't mean necessarily that any investment in sports is only predicated in continuously growing media rights. That's the wrong way to look at it. So you could you could deploy capital even in the context of decreasing media rights, right?

49:27Richard Gillis:Because you need to transform your sport. You need to transform your product. Right. That's what really is the driver.

49:32David Dellea:It's impossible to tell, but it's interesting moment. the Saudi sovereign wealth, because people over the last three or four years, five years, have made the assumption that money is just a tap that will just carry on being flooded into the marketplace. And a lot of rights holders, obviously, but then what we refer to or what you refer to in your report as the picks and shovels businesses is predicated on that money continuing. And now we don't know, but there are some ominous signs around the place you'll have seen them as much as I have. What do we think a sort of even a partial withdrawal of Saudi money into the sports economy would do?

50:14You know, what would next year's finance report look like if that

50:18David Dellea:happened?

50:19Richard Gillis:It's a good question. I wouldn't be able to give on my end a definitive viewpoint. It's obviously going to have a lot of impact. There are actual people working on properties, you know, and, you know, working day in, day out. I think it's definitely going to have an impact, leave being one obviously prominent example of the first alleged casualty right even i think the announcement of these last couple of days i think there's going to be more i don't think that is going to change the predicament of how the broader sports industry is evolving right i think there are some properties that will that had hopes to be able to break through and that they will they show that they didn't that it didn't work but i think it's going to have a normalizing effect on the broader sector.

51:01Richard Gillis:So I think some, I would say, anomalies that eventually were being created now are going to go away. Some will suffer for sure, but I don't think it's going to have an absolutely cataclysmic effect on the broader sports industry.

51:13David Dellea:Okay, we'll see. It's a nice place to finish off the conversation. Thanks so much for your time. And I will drive people towards, I don't want drive them, but I will point them towards a report. It's a good, interesting read, provokes a lot of questions for I think everyone in the sports industry so well done on that thanks very much for your time David Matt and Christophe