The live sports conundrum

In the 1950s, boxing was America’s second most popular sport, narrowly behind America's Pastime. While the most commonly cited reason for its decline is the brutality of the sport, that stands in stark contrast to the NFL’s resilient popularity. Last year, well over 100 million Americans tuned into the Super Bowl, near all-time highs.

The real reasons are likely much more mundane; only exciting to business & strategy wonks. Most notably: the rise of other sports, such as Football and Basketball, which grew largely hand-in-hand with the growth of broadcast and, later, cable TV, displaced boxing. OK, part of the reason why boxing was denied continued access to these broadcast airwaves may have been because of its violence. To compound this competitive threat, boxing was increasingly placed behind the paywall (the first PPV event was a boxing match in 1960). On the one hand, this increased revenue & monetized superfans; on the other, it throttled total audience and further contributed to a decline in audience.

The big question: as we undergo another shift in media just like the one that disrupted boxing, why shouldn’t we expect disruption at a similar scale? To be clear, it’s not all bad news for the incumbents. Baseball, in spite of its challenges, is still a big 4 American sport, while boxing long ago settled for the margins. What is clear, though, is that when things all shake out, even the most familiar things about today’s sports ecosystem will look dramatically different.

Audience Down, Media Rights Fees Up 🤔

The decline of cable TV has been well documented over the past decade. Roughly two-thirds of Americans have cable TV – down from ~90% at all-time highs – with plenty of skepticism from media executives that cable TV can exist at a penetration rate much lower than where we are today.

And it’s no surprise that, for the most part, major sports viewership has declined right alongside its primary distribution channel. Yet, live sports are more valuable than ever. The annual cost of domestic rights for the largest professional US sports leagues has soared to $15.4B.

There has been endless pontification on just why this paradox exists – the relative importance of live sports on cable TV (hint: hugely important), digital streaming giants bidding up rights, and so on – so I won’t spend much time on the topic.

What’s more interesting: follow the money… where is all this additional revenue going… what’s it being spent on… and how does it create ripe conditions for disruption?

Cost structures and the innovator’s dilemma

In the past decade or so, empowered by rising media rights revenue, salary caps for major American sports have risen meaningfully; the NFL is closing in on $200M per year. Outside of the U.S., Manchester United, part of the uncapped English Premier League, incurred ~$400M of salary cost in a single year. The bottom line: The biggest winners on the revenue side are spending more than ever on the cost side. With all of this, it’s no surprise that ‘sports rights bubble’ yields 115 million results on Google with plenty of hot takes.

And rising player salaries aren’t the only parts of our favorite games that have been influenced by the business behind the game. The number of games, length of season, and number of teams have all increased in an insatiable search for additional revenue.

Why it matters: If media rights fees are a bubble then it will burst at some point (your guess is as good as mine as to if & when). And when revenues come down, costs will have to follow. But think about what those costs actually are. Something tells me that Giannis or Patrick Maholmes would not exactly receive the news that, performance aside, their salaries would have to come down in line with declining league revenue.

Bubble or not, these massive cost structures leave room for upstart leagues like the Indian Premier League (IPL), which is is the fastest growing sports league in the world, and has a whopping annual salary cap of… $13 million per team. It turns out that production costs and audience demand aren’t always in lock step.

The most fun part of all of this, from a strategy wonk’s perspective, is that these ballooning cost structures are perfectly rational if you own & operate a major sport. Drive revenue higher, increase salaries for your talent, and invest in an amazing fan experience — nobody gets fired for buying IBM! And, at the same time, all of these things create the seeds for disruption.

The fun part: Predictions. How might this all play out?

When it comes to live sports, the web of second-order consequences runs so deep that any kind of singular prediction betrays extreme arrogance and/or naïveté. So, instead, let’s play with a host of different tactics that may emerge. These tactics may be used by new leagues / sports to disrupt incumbents, by incumbents to play defense, or both simultaneously! But we’ll likely see meaningful attempts of each tactic over the next few years.

Tactic #1: Athletes move from employees to owners.

Currently, athletes are more or less organized labor for sports leagues. The organizations make money, share some of that with their employees, and negotiate via union on a fair amount.

But athletes are just celebrities at the end of the day. And, over the course of the social media, we’ve seen the power of influence. Kim Kardashian has founded multiple "unicorns” and even started a Private Equity firm. Ryan Reynolds recently made headlines after his company sold for over $1B. There’s no structural reason why a top athlete couldn’t leverage their brand & audience to do the same in their respective sphere of influence.

Prediction: we see at least one athlete-founded sports league break through in a real way in the next decade.

Tactic #2: Athletes maximize non-sport revenue channels.

While sponsorship is nothing new, we’ve come a long way from the famous Wheaties box, which debuted in 1958 sporting Olympic pole vaulter Bob Richards. Again, athletes are just celebrities, at the end of the day — and they’ve gotten much more sophisticated about how to monetize their names, images, and likenesses.

Even for those who don’t take the full leap of faith to become founders, you can be sure that athletes will find new revenue streams off the field.

Prediction: the upstart and incumbent leagues who lean into this, even offering agency services to help their athletes maximize this revenue channel will thrive. We’ve seen how F1 exploded after relaxing social media rules. And how recent growth of the NBA has been largely credited to a influencer-first mindset.

While leaning further into this ethos will be hard for incumbents, it’s absolutely critical. Some might say that it takes away from the purity of the sport — but the benefit is that it provides a major way to offset potential declining media rights revenue.

Tactic #3: Monetize super fans (direct-to-consumer and more).

Existing leagues’ DTC offerings serve primarily to monetize super fans who are interested in highlights, out-of-market games, the long tail of the season, and so on. But, given that sports revenue has been driven primarily by the top of the funnel (casual fans monetized via the cable bundle), it’s almost a guarantee that the bottom of the funnel has been underemphasized, and that opportunity exists.

A great recent example we’ve seen is F1’s Paddock Club, which takes a page out of Coachella and gives fans a VIP 3-day experience that can cost up to $10,000 per ticket. And there are tons of digital examples waiting to be tested. For one, I’d love to pay extra to have access to performance data of my favorite cyclists year round.

Prediction: we have a major breakthrough at the bottom of the funnel that matches the billions of dollars that boxing brings in via PPV; it’s hard to believe that Mayweather v. Pacquiao brought in over $400M of revenue, alone.

But, watch out: as we’ve seen with boxing, monetizing the bottom of the funnel without compromising the top is a delicate balance. If an existing league can accomplish this, it’s yet another lever for them to deemphasize the importance of cable media rights. And for the newcomers, an opportunity for business model counter-positioning.

Tactic #4: Lean into women’s sports as *fully* equivalent

OK, I’m becoming a bit of a broken record here: athletes 👏 are 👏 celebrities & entertainers. In any other form of entertainment, it’s generally accepted that both sexes are equally adept entertainers. The argument against women’s sports has never been credible: as an entertainment property, watching USWNT is every bit exciting as anything.

The bigger point: It’s as much about your connection to the athletes off the field as it is what happens on the field. And we’ve underinvested in telling the stories of women athletes to date. Change that — and there is no reason why the downstream results don’t change as well.

Upstarts like the NWSL, whose teams have been valued at over $100M each, and Athletes Unlimited, which has raised over $30M to build a series of women’s sports leagues are the most promising experiments — but it’s early days.

Prediction: A major women’s league breaks through, shattering the old, stereotypical a priori explanations for why women’s sports are not as popular as men’s. This leads to a massive wave of new investment in both new women’s sports leagues and also the media companies that will tell the stories and build fandom. An incumbent league may even buy a women’s league to become the first major sport to fully tap into both genders. Editor’s note: since I drafted this, a new fund, Monarch Collective, announced a fresh $100 million to fund women's pro sports.

Tactic #5: Go global (and not in the way you think)

The story of Coca-Cola comes to mind when one thinks of internationalization late into a storied American brand’s history. As the company’s flagship product saturated the American market, and started going backwards as health concerns came to the fore, its international popularity skyrocketed.

To date, international expansion from major sports leagues has been mostly a second-class citizen. Yes, there are a couple NFL games in Europe. Yes, the NBA is popular abroad. But, in contrast with Coke, or even a more content-centric brand like Disney, major American sports are curiously American. While ex-US leagues such as the EPL and F1 have shown an ability to internationalize, to a certain extent, the American leagues have had it so good domestically that there’s never been any need.

Prediction: A top 10 U.S. sport – on the fringe of breaking out but not quite on the main stage – puts all their chips on an international strategy. Perhaps they lean into certain Asian cultures where betting has long been an accepted part of certain sports (e.g. horse racing, keirin cycling). Perhaps racing & combat sports are primed to regain their status as the world’s most popular fare.

A not-so prediction: while I don’t expect it, it would be great drama to see a major American sport that feels its popularity has topped out in the U.S. commit fully to international growth, embracing new rules & formats that work with local populations outside of the U.S.

Tactic #6: Native advertising changes the game itself

The rhythm of every big 4 sport is dictated by capitalism: commercial breaks in the action are table stakes; so much so that they’ve been structurally built into our most popular games. Yet, from a first principles standpoint, is it not odd to break up a game with a series of highly produced, completely unrelated TV commercials? In a world where top athletes like Alex Morgan routinely represent brands like Hyundai and where stars such as Lewis Hamilton co-create custom watches with IWC, the classic just feels out of touch. And that mentions nothing about the fact that fandom & audience doesn’t actually mean watching the full live broadcast anymore.

Prediction: Shorter, more engaging content with fewer breaks is a prerequisite for relevance. Under pressure from new audience consumption patterns and demands from their athletes, both new & old leagues innovate on the same old ad format that’s been table stakes for my entire lifetime. A few examples to get the imagination going.

• Fashion: Athletes will co-create with the world’s top commerce brands; not just shill their products in 30 second ad spots. In other words, every athlete will have their version of Jordan brand.

• Sponsored content everywhere: Rather than a TV spot, the live broadcast will feature advertisements from the players actually playing in the game. As we saw, Alex Morgan (and all the rest) already do this — so when we’re watching Alex play… why don’t we also see her commercials?

• More on screen advertising real estate: Sports with no natural commercial breaks (e.g. soccer) have already figured this out. The front of the jersey may be thought of as hallowed real estate but, if it means you don’t have to sit through an hour of ads, the trade-off becomes all the more attractive.

• Affiliate linking: As smart TVs get even smarter, expect to see commentators featuring Lewis Hamilton’s latest look – perhaps even calling out who he’s wearing – and maybe even offering a code should you want to purchase the latest look. Not judging you if you do but…

The bottom line: we’re at an inflection point similar to the one that destroyed boxing, or the one that gave rise to the NFL — and it has less to do with sports than it does the business of sports. Those who take the right lessons from history from the last inflection point – be they incumbent leagues or new rivals – are poised to build the next great cultural icon that may last for a century to come.

PS: in none of these scenarios do I expect pickle ball to crack the top 100 sports, in an entertainment sense. Sure, it’s having a wave as a participation sport right now but… yikes. Yes, this is a subtweet at all of you betting that anyone’s gonna watch it ;)…