In the second of a three-part series on rugby’s streaming wars, Gregor Paul looks at the future of rugby viewing and a problem facing New Zealand Rugby.
PART I: Spark Sport’s rise and fall
In selling the virtues of doing a $200 million private equity deal with Silver Lake, New Zealand Rugby (NZR) frequently referenced that its proposed partner would be a conduit to opening new and lucrative revenue streams.
The arrival of Silver Lake, NZR has insisted, will deliver the capital means and know-how to sell All Black leadership programmes, coaching clinics, as well as build an e-commerce platform, drive more virtual signage income, and possibly venture into Esports.
No doubt some of these initiatives will prove financially viable in time. But look around the world at every major sports code and professional league, and it is irrefutable that TV money remains the single most important source of income.
The English Premier League (EPL) last year signed a three-year deal worth an estimated $20 billion, the NFL agreed to an 11-year, $200b deal and the AFL has announced a seven-year contract valued at $5b.
NZR will continue to try to diversify its revenue streams, but the only way it is going to see a transformational shift in its annual income is by agreeing to a vastly improved broadcast deal when the current one expires at the end of 2025.
Even now many leagues and codes have private equity partners, these investment gurus are essentially just trying to find new and innovative ways to maximise broadcast income.
The private equity firm CVC is given credit for vastly increasing the value of Formula One, which it did - through an improved broadcast deal.
CVC sold its stake to Liberty Media, which has delivered the Drive to Survive docuseries, which is yet more income from broadcasting - albeit a different genre.
NZR has highlighted how important broadcasting is to the future of its business through the appointments it has made, and tried to make, for director roles on the board of its newly formed joint venture company CommercialCo.
The Herald understands that former Spark chief executive Simon Moutter, who was the driving force behind the streaming platform Spark Sport, was approached to be the independent chair of CommercialCo.
He turned down the offer, and it is believed that former TVNZ chief executive Kevin Kenrick also rebuffed an approach to be chair.
The presence of Gina Borgi, a former president of global content distribution at 20th Century Fox, and Bailey Mackey, a renowned local TV producer, as board directors of CommercialCo, is further evidence of the importance NZR and Silver Lake are placing on their broadcast strategy.
The next deal is one CommercialCo must get right, but there are four significant problems that it will face in trying to improve the $100m a year it currently receives in broadcast rights.
The first is that it will again be inviting bids in a non-competitive, domestic market now that Spark Sport has collapsed.
Secondly, Sky, the only real contender to buy the rights, doesn’t have the financial capacity to stretch itself beyond the $100m it currently pays.
The third issue is that when the current deal was signed in 2019, NZR was not under any mandate to share its revenue with Rugby Australia. Now it is, and it currently pays its old foe $5m a year, although a long-term agreement on the mechanics of the split beyond 2023 has not yet been reached.
And the fourth problem facing NZR is that by 2025, between 5.7 per cent and 8.6 per cent of its commercial income will be owned by Silver Lake and possibly other institutional investors if they partake in what could be a $100m capital raise at a currently undisclosed date.
Given these new demands, NZR will need an estimated 13 per cent lift on the current deal just to equal what it currently has.
The advantage of a competitive broadcast market is that it allows sports bodies to offer packages of rights.
The EPL, at its last rights auction, had seven separate bundles in the marketplace - selling live content played in specific time allotments, highlights, digital and Free-to-Air (FTA) packages - with the condition that no one bidder could buy the lot.
NZR has previously never unbundled its rights, preferring instead to sell exclusive access to one domestic bidder, a strategy which former Sky TV chief executive John Fellet believes made sense.
Fellet, who makes it clear he has no inside knowledge of Sky’s strategy since leaving the firm four years ago, says that non-exclusive deals tend to entice conservative bids as it is harder to gauge the value of shared content. “I certainly think it will be hard [for NZR] to generate more value [by splitting the packages].”
Deciding whether and how to split the next rights deal is one of the major decisions that CommercialCo must make.
If it does decide to split, the scope will be relatively limited as some of the individual competitions - the NPC and Farah Palmer Cup in particular - would have relatively low standalone value.
There is, however, potential to carve out Super Rugby, and the clubs would be interested in exploring that route as it could potentially lead to them having more autonomy over their budgets and greater leeway for their games to be broadcast in a more distinctive style.
Also, the five New Zealand sides were interested to see last year that Moana Pasifika, whose licence allows them to explore broadcast arrangements outside the terms of the existing deal, came close to reaching an agreement to show their home games simultaneously live on Sky and TVNZ.
Sky didn’t sign off on it in time for TVNZ to fit the games into its programming schedule, but the nature of those discussions highlighted to the other Super Rugby clubs that there is wider broadcast interest in their product.
And the fact that TVNZ was so interested in showing live rugby, is believed to have strengthened the view of some NZR board members that the next broadcast deal has to include an FTA component.
Most major leagues have a significant FTA component and the evidence suggests this doesn’t cannibalise audiences, but grows them.
An FTA component will, however, as Sky chief executive Sophie Moloney says, come at a cost to NZR. “We are and have been supportive [of FTA partners] but there is a balance to be struck.
“Our key sport partners understand there is a premium for pay TV exclusivity. If it is all for free then it needs to be ad-funded, and we know from experience that ad-funding cannot compete with subscription when it comes to returns for the sports body.”
The argument against including FTA has been jaundiced to some degree by what happened in early 2022 when NZR encouraged Sky to see if it could retrospectively agree to on-sell a package to TVNZ.
The two companies met, TVNZ outlined what content it wanted, and the talks then collapsed when Sky said the price would be $30 million.
That figure, while realistic given that Sky had paid $100m a year to own exclusive rights, was way beyond TVNZ’s budget, but the question some within NZR want to find out, come the next auction, is what price it could fetch if it offered an FTA component as part of an overall portfolio of rights.
TVNZ’s director of content Cate Slater says the Government-owned company is in the market for rugby rights and a partnership with a pay-TV operator makes good sense.
“We have had great success with the Olympics in partnership with Sky, the Rugby World Cup in partnership with Spark Sport and America’s Cup which we took all rights for - we saw huge audiences for all of those,” she says.
“They are often done in partnership because of the cost of those rights. It is expensive to be able to acquire a code exclusively and we are not able to monetise in the same way a pay operator can. Live sport is not made to have commercial interruptions.
“Those partnerships almost give a sport body the best of both worlds, delivering both reach and revenue. I think giving rugby a free-to-air presence would do huge things for exposure to the sport, participation, helping stadia get full again.
“It helps with sponsorship exposure - more people see the brands on the fronts of the jerseys. I think there is a way of doing it which doesn’t cannibalise a pay model.”
As for the question of whether TVNZ would be able to put a realistic offer in front of NZR, she says: “I can’t speak for NZ Rugby on how they might prioritise reach, audience and the other aspects of it.
“We’d be interested in being involved in contestable process and be able to put something on the table for them to consider as part of the mix.”
If NZR’s next broadcast deal is going to provide transformational income, it’s not likely to come from unbundling the domestic rights. The key, observers say, will be working out what to do with the international rights, whether NZR should launch its own content hub, and most likely entering into a revenue-sharing agreement with the Six Nations to aggregate the value of the July and November test windows.
The core argument for bringing Silver Lake in as an investment partner was its ability to commercialise the All Blacks offshore by identifying and monetising fans not living in New Zealand.
“Our understanding is that the Silver Lake investment is very much about ensuring the growth and monetisation of the All Blacks brand in particular on the global stage,” says Moloney.
The private equity firm has never spoken publicly about how it intends to do this, but selling broadcast rights to international markets is an obvious way to dramatically boost income.
Almost half of the EPL’s $20b of broadcast income comes from international contracts.
Offshore rights to Super Rugby and the Rugby Championship were previously sold for tens of millions of dollars, but the arrival of Covid saw that market collapse and although a four-year deal has been secured with Sky in the UK, the value is believed to be significantly less than historical contracts.
What will encourage NZR is that Amazon Prime has invested heavily in acquiring sports content in the last 12 months and has specifically made a play in rugby by buying the three-year UK rights to the November test matches for an estimated $40m.
Fellet is adamant that Amazon has no interest in acquiring domestic All Blacks rights, saying: “If they wanted to do that, they could have blown Sky out of the water with their loose change.”
As to whether Amazon or even Disney or Netflix would be interested in making a big-money play to own international rights to the All Blacks is a source of debate among industry analysts.
Amazon bought the rights to the November tests to promote its shopping and delivery services in the build-up to Christmas because, with 60 million people, the UK is a big market for the online provider.
The All Blacks are certainly a well-known, global brand but one analyst with experience in selling All Blacks content to Asian and UK consumers is uncertain whether a major broadcaster such as Amazon could make a return if it spent large on international rights.
“The interest just isn’t there,” he says, and the relatively tiny number of subscribers RugbyPass picked up in 2021 when it was asked by NZR to stream Super Rugby Aotearoa in the UK, alludes to the battle the national body faces in monetising offshore fans.
The economics of NZR building and owning its own content platform are equally uncertain, but chief executive Mark Robinson has hinted in recent months that this is an initiative that will almost certainly be explored and sources have told the Herald that a commitment to build it has already been made.
NZR looked seriously in 2019 at not selling content rights to any external player, but to instead be its own broadcast partner, offering fans access to All Blacks tests via a streaming app.
It estimated that the production costs would be about $12m annually and revenue, based on the audience figures of Sky, could sit between $150m and $280m a year.
But the risks associated with going it alone were deemed too high. NZR would have to recruit and run a sales and marketing team; there would be potential for rural areas where wi-fi remains slow and patchy to be excluded and ultimately, the lack of certainty about income led the board to reject the proposal.
What’s changed since 2019 is the arrival of Silver Lake, which brings expertise in this area, and also $200m of capital.
In presenting the case to bring Silver Lake in as an investment partner, NZR estimated that a content hub - or Over The Top (OTT) platform - could deliver $20.4m of revenue in the next five years.
That figure suggests NZR envisages its own platform co-existing with other domestic and possibly international rights deals - so fans could choose whether to subscribe to Sky or watch via a dedicated All Blacks content hub.
Again, the risks associated with a standalone hub appear to outweigh the potential benefits, and as Fellet points out, major sports brands such as Manchester United have been running their own channels for years and they haven’t proven overly lucrative.
The presence of a hub/app would mean any domestic provider was no longer buying exclusivity - unless New Zealanders were geo-blocked from using it - and that would decrease the price they were willing to pay.
An app would be content-hungry, costly to fill, and as former Sky chief executive Martin Stewart told the Herald in 2020, it would be hard to sell just All Blacks content to an international audience.
“The All Blacks brand is massively important,” he said. “They are the most famous rugby team on the planet. But the Six Nations outranks Sanzar on pure eyeballs in other territories.
“You need everything. It is not just one thing that helps grows rugby - you need to have all those teams, all those leagues together.”
There’s no dispute that the All Blacks remain a much-loved sporting brand with significant international appeal.
Rugby is booming in popularity around the world, particularly in Europe where the Six Nations has caught the imagination of fans.
With the World Cup being hosted in France later this year, the sport is likely to enjoy the sort of global audience numbers it has previously never seen at a time when big broadcast players such as Amazon and Disney are looking to snaffle live sports rights.
But the difficulties of owning a major, global sports brand which is based in a relatively tiny country will forever challenge NZR’s ability to maximise the value of the All Blacks through a broadcast deal.
Silver Lake, which clearly has a strong investment track record, will have people forensically analysing audience data.
But whatever faith NZR has in its private equity partner should be tempered by the knowledge that CVC similarly crunched the broadcast numbers after buying a 14 per cent stake in the Six Nations, and only managed to deliver an eight per cent jump in real terms once it had taken its share.
NZR has gambled everything on Silver Lake being able to mastermind a massive uplift in broadcast income - a prospect that certainly looked more likely at the time when the deal was signed, Spark Sport was a player and global recession wasn’t biting.
NZR opted not to allow any staff or board members to be interviewed for this series.