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Good Thursday Morning. I’m excited to be speaking on the panel “Looking into the Crystal Ball: The Next 10 Years in Sports” at the Michigan Sports Tech Conference tomorrow. This event has a special place in my heart, so highly recommend checking it out. Registration is here.

Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: “Spulu,” the sports-focused streaming joint venture between Disney (ESPN), Fox, and Warner Brothers Discovery was announced over a month ago, and it’s been under fire since. We’ve yet to receive any substantive details other than some incredibly low target numbers, and it seems important to dig into the parties’ motivations on why they’re doing this.

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: March Madness ad dollars are madness

• 💪 Weekly Reminders that Sports are Awesome: A story about the first openly gay coach in men’s basketball winning in the most unlikely place, and a touching end to a challenging year for Georgetown Women’s Basketball.

Hey team,

It’s been over a month since Disney, Fox, and Warner Brothers Discovery announced their sports-focused streaming joint venture. Playfully dubbed “Spulu” by one former TV executive for its similarities to Hulu when it was first built, the streaming service would bring 14 channels worth of sports content to one place in a “skinny bundle.”

Many hailed this as the beginning of the “great rebundling” and a “total gamechanger” for a media industry with major storm clouds on the horizon.

Since then, though, the JV has been hit with an antitrust lawsuit by a competitor, partners from all sides — leagues, cable providers, and more — have expressed concern about the deal, and most importantly, we’ve received few details on what it actually is.

Plus, Fox head Lachlan Murdoch said last week that they were projecting a very pedestrian 5 million subscribers to Spulu after 5 years.

What gives?

One explanation is that the three companies got out over their skis with the announcement (they apparently do not even have a binding agreement yet), and they’re now backed into a corner trying to figure out how to thread a needle amongst the tangled web that is sports media.

There is probably some truth to this, but I think there are longer term motives at play here for each of the three parties.

In this edition, you’ll learn:

• What Spulu’s skinny bundle actually is

• Why it may not be enough

• The three key parties’ potential motivations for doing the deal

• My crystal ball for what could actually happen

Sports Media 101

To catch everyone up on the state of sports media, here’s a quick primer. If you want to dive deeper, read these past breakdowns here and here.

📈 The catalyst for the whole industry: Sports media rights are one of, if not the, biggest driver of sports rightsholders (team/league) revenues and valuations at this point.

🤑 The golden goose: Cable was the greatest business model ever set up for the media companies because they could extract value from two key revenue streams — affiliate fees (essentially the amount each subscriber pays for a channel in a cable package) and advertising. The loser usually: the end consumers because they had to pay higher prices and also have to deal with cable companies.

😱 A brave new world: With the arrival of Netflix (yay no commercials!) and MVPDs (Sling, YouTubeTV) that brought the beginning of “cord cutting,” almost all of the media companies began to develop standalone streaming platforms to try to keep up with the changing consumer preferences. Think names like ESPN+, Max, Peacock, and Paramount+. One interesting nugget: Fox has never waded into the streaming world. They have a free, ad-supported TV (FAST) channel in Tubi, but that’s it.

😶 Oopsies: Ironically, this alternative, streaming focused path further eroded the cable subscription base, and it turns out that the unit economics of streaming are pretty terrible. So, for the companies who engage in live sports rights, they’ve all lost considerable amounts of money jockeying for position in this new world while also eating into the revenues of their golden goose (and pissing off a lot of the legacy cable providers). A few key stats to drive this home:

• ESPN+ has plateaued at 25m subscribers, and it actually lost 800k last quarter. Watchtime data suggests that most of the signups are coming from bundle deals; not standalone.

• The unit economics of streaming vs. cable: ESPN makes half as much with ESPN+ (~$5.50) compared to cable (~$10)

• BR Live (WBD’s poorly named sports add-on package to Max) has not driven incremental signups for the provider

🤷 Well, now what: The rightsholders continue to push for greater price points in their media rights deals, particularly with the entry of big tech companies — Amazon, Apple — which applies further pressure to this situation. Sports are the last vestige of live TV consumption, though, so the media companies are almost bound to them at this point. They continue to raise prices (much to the chagrin of the consumer) but have realized they cannot replicate the cable bundle revenues 1:1 with streaming service.

Given the conundrum described above, there have long been predictions of a “great rebundling,” where the media companies would reform into a conglomerate of some kind to help recalibrate the economics.

This skinny bundle is not that, but it’s a small step in that direction. Here’s what we know about the joint venture at this point.

Spulu takes shape

Timing

Allegedly set to launch this fall. Who knows how real that is.

Content 

The three companies plan to offer 14 networks — 12 sports-centric cable networks, ABC, and FOX — and Disney is also throwing in its existing streaming service, ESPN+. In sum, this package comprises roughly half of all sports media rights, including some or all of the NFL, NBA, MLB, College Football, and much more.

While that’s a lot, it may not be enough — there’s a “glass half full/half empty” joke there somewhere — because the two major players not included, NBC and CBS, have large pieces of the NFL, college football, March Madness, and several other sports. Plus, it does not include the regional sports networks that capture local fans’ interest.

An interesting piece of palace intrigue: Puck News sports media reporter John Ourand believes Spulu is a “warning shot” against Paramount and NBC because the Spulu companies believe the other two have been the most egregious in expediting cable’s demise due to cannibalizing content and undercutting on price.

Org Structure

This will be an independently managed company where each of the parent orgs owns 1/3 of the company, the fees/ad dollars will be split proportionally (meaning ESPN will receive more revenue than WBD because it’s bringing more to the table), and the costs to run the service will be as part of the JV’s operating budget and off of the parent companies’ books.

This is where the Hulu comparisons have come from.

The leadership for this new org? TBD.

Pricing

Also TBD, and I truly believe they don’t know yet.

This is where it gets verrrrrrrrrry interesting. The JV has to thread Spulu through a microscopic needle with landmines on all sides.

Most industry estimates had the package coming in between $35-$50/month.

Why $35-50? It’s the assumed Goldilocks price.

Too low: Anything below $35 and you’re talking about something that’s not worth it financially for the companies.

Too high: Anything above $50 would be considered too expensive for a skinny bundle that doesn’t include everything. When you start talking about paying $50-60+, you’re now in the range of the cable companies and vMVPDs but you’re offering an inferior service.

Just right: Spulu is effectively a cord-cutter competitor to a vMPVD like YouTube TV. According to media consultant Patrick Crakes on a recent podcast, YouTube pays ~$20 for ESPN channels, $8 for Fox, and $10-12 for WBD ($38-40). Therefore, this could be how you back into what to charge consumers.

The problem with these price points, as Crakes points out:

1. You go into direct competition by offering a lower cost alternative to the two distributor partners — cable and vMVPDs — that are still propping up the market. As I wrote in my article last year about the Disney-Charter carriage dispute, these partners are growing tired of paying higher fees while also having their packages cannibalized by the media companies’ streaming alternatives. They won’t like this latest alternative unless they can also offer it to their customers free of charge, which was how the Disney-Charter dispute got resolved.

2. They assume the unit economics of a bundle exist. Let’s dig into this more.

Crakes estimates ESPN on its own is worth ~$60, but they knock the price down significantly to make it palatable for the cable and vMVPD providers to carry their channels since they can get greater reach into more households and sell advertising.

It doesn’t work that way in streaming, though, because the value chain is different — the media company is now also the distributor, and the number of direct purchasers is lower than cable users.

We can assume Spulu will sell ads in some form, but they will be looking to make a large portion of their money in monthly subscription fees, which is attempting to take the place of carriage fees. To make up for the loss of reach, they have to charge this particular customer base more.

The problem with that? Their target audience.

Target Audience

At Morgan Stanley’s technology, media, and telecommunications conference last week, Fox head Lachlan Murdoch said Spulu was projected to have five million subscribers within five years of launch.

This is nowhere close to the streaming services (ESPN+: 25 million, Peacock: 30m, Paramount+: 67.5m), but more in-line with the vMVPDs like YouTube TV (8 million subs) and Hulu + Live TV (4.6 million).

The target audience is those known as “cord nevers” — the ~60 million U.S. households that do not have cable.

This is a deliberate choice by Spulu because they know the skinny bundle can’t compete with a full offering and is going to be priced too high to take the place of a singular streaming service.

What’s confusing here: “cord nevers” are generally not as big of sports fans as cable users. Most sports fans have either cable or a vMVPD type system so they can watch all of their content. Cord nevers are usually not interested in cable and its digital equivalents because they are not interested in sports content, which is one of the main reasons to have the services in the first place.

All of that being said, positioning a premium product in a way that gets them to move is going to be a challenge.

The Fallout

Safe to say, Spulu did not make many friends with this announcement. Pretty much all of the sports media value chain was pissed at them.

The rightsholders were not aware of this possible deal and were peeved that they were kept in the dark. Both Adam Silver and Roger Goodell spoke publicly about the deal and how they weren’t thrilled that this had taken place without their knowledge.

Several other key sports stakeholders were not impressed despite the big splash. TKO Group (WWE + UFC) President Mark Shapiro, who works with ESPN on the UFC, went as far to describe it as a “big nothing.”

And lastly, the cable companies are wondering why the media groups just created another possible conflicting solution that will confuse customers and further erode their market share (which also hurts them). In the same vein, the vMVPDs, namely FuboTV, went nuclear. Fubo has sued the JV for antitrust violations, and describes the lawsuit as a “duel to the death.” The DOJ is supposedly beginning to look into it as well.

On top of all of that, you’ve only got a non-binding term sheet and no planned leadership with a pending launch in 6 months.

So, again, why did these three groups do this?

What’s in it for each of the media companies?

For argument’s sake, let’s assume Spulu hits its subscriber targets.

In 2029, 5 million subscribers are paying $50/month for the service, which means Spulu is generating $3 billion annually. They will most likely have some form of advertising revenue to go along with it — the irony should not be lost on you at this point that streaming services have reverted to offering advertising, which was one of the core reasons we all wanted to quit cable in the first place.

Anywho, let’s say it’s equal, so there is $6 billion total revenue. That figure then has to be split up amongst the three groups in a proportional way.

Now, this is not bad, but it’s not the “milestone” that the WSJ heralded it as. This leads me to believe there is more at play here for each of the parties.

ESPN: The Tinkerer

“Innovate or die” is one of the core tenets of Disney head Bob Iger’s management philosophy. Despite ESPN’s status as a certified cash cow due to cable, they’ve been working to figure out the streaming landscape and where their place in it is.

The next evolution of current streaming platform ESPN+ is the ESPN DTC service that is set to be released this year. Despite the news of this announcement, ESPN reportedly plans to press ahead with its OTT service.

There are reports that they follow some of what Apple did with its new sports app (live scores/stats, betting lines and tie-in’s to quickly place wagers, and one-click to watch with owned content), but it still seems odd that they would continue with both of these strategies.

From what I can tell, this is both a hedge by ESPN in the event Spulu doesn’t shake out as well as a testing ground, or R&D Lab as Puck News’ Julia Alexander called it, for them to continue to try to hone their approach to the streaming world.

Plus, they’re the 800-pound gorilla in this partnership, and they can dictate terms on how this bundle will evolve.

Fox: The Tortoise

Fox’s discipline to not jump into the streaming fray over the last decade while all of their competitors (and now partners) lit their money on fire is one of the least talked about smart moves in sports media.

This service gives Fox the ability to dip their toe into streaming while sharing some of the costs with two other partners. This gives them a potential angle to mitigate risk with the continued demise of cable.

Plus, because they will reportedly be providing the technical backend of the Spulu solution, it’s assumed they could be ready to run a standalone platform should it come to that.

WBD: The Leech

Since Warner Brothers and Discovery merged in 2022, the company has been cutting left and right to pay down the significant amount of debt — $43 billion —on its books.

Their sports-specific streaming endeavor with Max — the BR Add-on — has not produced great results, and it seems like they will likely do away with that package and create some kind of bundle with Max.

They bring the least amount to this service, but they also stand to gain the most by riding the coattails of the bigger players and sharing the costs of the platform instead of continuing to go it alone.

Bottom Line

As you can tell from this article, the sports media landscape is a mess.

My main takeaway: despite the big splash and homage to rebundling, I don’t see Spulu as the sea change needed to right the sports media ship.

It feels like this is a product in search of a problem, and their challenge of being more expensive than a standalone streaming service but staying lower than other providers because they’re not providing the full sports landscape creates two problems: 1). they’re a master of none, 2.) it throws the unit economics out of whack again.

One could make an argument that this is meant to entice Paramount and NBC to come into the fold, but that just creates another competitor to the cable/vMVPDs and will likely be met with intense regulatory scrutiny.

I’d expect to see some consolidation of these providers (i.e., Paramount is for sale right now) in the near future, but I believe that all roads lead back to the big tech companies that are beginning to slowly entrench themselves.

Ironically, they operate in the same way as the dinosaurs of the industry: the cable companies. They treat these media deals as loss leaders to further their interests in other products/services.

For cable companies, it’s usually broadband. For tech, it’s data.

They are orders of magnitude larger than the legacy media companies, so they have the patience and balance sheet to wait this out and let the market come to them.

Hot take to leave you with: I believe ESPN is owned by Apple within the next decade.

Buckle up, friends!

🍸️ Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: The joint venture streaming service between ESPN, Fox, and Warner Brothers Discovery, affectionately called “Spulu” (Sports + Hulu due to the similar deal structure), has ruffled some feathers in the industry. Spulu is set to carry about half of all sports media rights in the U.S and will be owned equally by the three groups. There are a ton of moving pieces to this deal, and it points to the rock and a hard place the industry finds itself in.

• Shot: As you know from being an avid SBP reader, despite being an incredible business for the media companies, the cable market has eroded over the last decade plus. These media companies are part of the problem, having set up standalone streaming services and cannibalizing their own cable businesses.

• Shot: While this sounds like a great win for consumers and all companies involved, a look beneath the hood suggests a lot of question marks with this joint venture. The pricing is a minefield due to all of the competing interests but it will likely be ~$50/month, and Spulu’s supposed target audience — 5 million of the 60 million “cord nevers” — is not that interested in sports.

• Shot: Revenue is one thing, but all three parties are looking at this through the lens of their own self interest. ESPN can continue to tinker with their streaming strategy as they launch a standalone DTC app next year, Fox finally dips its toes into the water after avoiding streaming for so long, and WBD gets a chance to ride the coattails of two bigger fish and offset some of its costs.

• Chaser: Bottom line: I don’t see this being viable long term. Because they can’t get every sport, the service is trapped in between and becomes a master of none. In my opinion, we are heading towards consolidation, but I believe it will be big tech companies absorbing legacy media companies.

🤯 “Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. March Madness business is boomin’.

💪 Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. Matt Lynch, the first openly gay coach in men’s college basketball, is attempting to build his career by turning around one of the worst programs in the country.

2. A touching story at Georgetown. Darnell Haney gets the interim title removed after replacing head coach, Tasha Butts, who passed away at the beginning of the season from breast cancer.

Thanks for reading! Let me know what feedback you have.

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex