ESPN (DIS) has had an eventful week. The company finalized a distribution deal with Altice (ATUS); terms of which are particularly notable, as the deal represents the first of several renegotiations in a new round of carriage fee talks with pay-TV operators. On the content side of the business, the company announced a partnership with Cycle Media to create branded original programming and acquired the broadcast rights to Formula 1 racing (FWONA), beginning in 2018. As for talent, the company hired Katie Nolan, formally of “Garbage Time” on FS1 and confirmed reports of a new late-night show on ESPN2, hosted by Barstool Sports’ Big Cat & PFT Commenter.
Howie Long-Short: In the end, Altice caved. They agreed to pick up nearly every ESPN channel (including the SEC & ACC Networks), implement a rate increase for those channels and raise minimum household penetration thresholds. What choice did they really have? It’s not like they can afford to let subscribers walk. As for the FWONA deal, it’s noteworthy that the terms enable the racing organization to maintain OTT rights to their races.
Fan Marino: Nolan is a star that FS1 oddly wasn’t using. She’s got a great sense of humor, a sharp tongue and Sports Emmy to her name; a strong addition to the ESPN roster. For those not familiar with Big Cat & PFT Commenter, they are the hosts of Pardon my Take; a sports podcast that draws 2 million listeners/episode. You don’t have to be a fan of Barstool to like these guys. PFT is one of the funniest personalities in sports.
After a big week, ESPN is becoming cool again
Berkshire Hathaway’s (BRK.A) Russell Athletic has decided to exit the team uniform business (primarily HS and youth leagues) and turn its focus towards a “longer-term, more-healthier place” in consumer retail. A new line of “heritage” styled lifestyle and streetwear clothing, to be launched at Barney’s before to being sold at retailers like Urban Outfitters, will be a part of the company rebrand. A partnership with S&S Activewear (3rd largest U.S. distributor) provides the company with access to previously unreachable corporate and promotional business. Russell plans to maintain its team channel; selling non-uniform items and using S&S Activewear to service those sales.
Howie Long-Short: There is certainly some cache surrounding the “heritage” market, with companies like Champion (HBI), Fila USA (KRX: 081660) and Calvin Klein (PVH) experiencing recent resurgences. HBI reported Champion Q2 ’17 revenues were up 7%, with Fila USA and Calvin Klein up 11.5% ($71.3 million) and 8% ($786 million) respectively, over last year’s figures. It’s been 20 years since Russell Athletic has been relevant, but if you wait long enough, everything comes back into style.
Fan Marino: For those too young to remember, Russell was the largest marketer and manufacturer of athletic apparel in to the early 1990s; when Nike (NKE), Adidas (ADDYY) and Under Armour (UAA) began to pump big dollars into D-1 athletic contracts. Just 2 programs remain with the once dominant brand, Georgia Tech and Southern Miss, both of which have contracts ending with the company in 2018. There has been no word on if their new suppliers will offer cut-off jerseys, the signature look from Russell’s heyday.
Russell Looks To Build On Retail Momentum
California Treasurer John Chiang has urged state pension fund managers to divest holdings in companies that sell firearms and ammunition within other states, that are considered illegal in California. While this would be the first-time California, which has the nation’s largest state pension fund, has urged fund managers to excise connections to gun retailers in the state pension system; following the Sandy Hook massacre in 2012, state pension funds were asked to divest shares in gun manufacturers. Last year the New York City Employees’ Retirement system voted to divest shares of Dick’s Sporting Goods (DKS), Cabela’s (now private) and Big 5 Sporting Goods (BGFV).
Howie Long-Short: The California State Teachers’ Retirement System and the California Public Employee’s Retirement System own a combined $12.4 million worth of shares in DKS and an additional $1.7 million worth in BGFV. If this proposal were to pass, and in California that isn’t difficult to envision, public pressure could force other states to follow. I’m not ready to say a gun wholesale/retail sell-off is coming, but Chiang has sparked a movement that certainly could lead to one.
Fan Marino: Chiang sadly reported that 3 of the 59 killed in Las Vegas were California teachers.
California Treasurer Urges State Pension Funds to Drop Gun Sellers
Youtube (GOOGL) will be the presenting sponsor for the 2017 World Series; using commercials during the fall classic to promote YouTube TV, the company’s live cable-like streaming service. The ads will run on Fox (FOXA) during games, gain exposure across MLB’s digital platforms and be visible to fans within the stadiums in which games are played. YouTube TV, now available in 49 of the Top 50 markets for $35/month; targets sports fans with 40 channels (including ESPN (DIS) & Fox, the most watched sports channels on television). Financial terms of the deal were not released.
Howie Long-Short: The race to turn cord cutters into skinny bundle subscribers is picking up. Direct TV Now (AT&T’s (T) service) is trying to onboard subscribers by offering Netflix (NLFX) for just $5/month, while Hulu has made itself available through the X-box (MSFT) video game console. The goal of this campaign is to raise the sports fan’s awareness of the 6-month-old service, so having access to 40 million (2016 WS audience) engaged baseball fans gives YouTube the right audience. If the company can effectively convey that viewers will save +/-$100/mo. and still have access to “must see” sporting events, subscription numbers should spike. I would provide free access to YouTube TV during games, so that prospects can simultaneously compare video quality.
Fan Marino: The 2016 World Series was the most watched series in 25 years, so YouTube probably shouldn’t expect a repeat viewership numbers. As for YouTube TV, they have programming deals with ABC, CBS, and NBC (in addition to ESPN & FOX). In fact, you’ll get 80% of live sports programming with the bundle. Fans won’t get is the NCAA tournament though, as TNT and TBS aren’t included. No big deal, March Madness on Demand is free and carries all of the games.
YouTube Seeks Web-TV Boost Via World Series Sponsorship
Lululemon (LULU) CEO Laurent Potdevin remains bullish on the future of brick and mortar retail, saying “people don’t want to be stuck on their phone” and those that seek “mindful lifestyles continue to crave human connections”. The company employs 10,000 “educators” to develop those connections within in their 421 stores and an additional 2,500 “brand ambassadors” worldwide to foster human engagement. Potdevin points out that Lululemon should not be grouped with other struggling athleisure apparel companies, as the brand does not sell footwear and controls its fleet of stores (competitors tend to be wholesale companies).
Howie Long-Short: Yoga’s popularity in China is growing and Lululemon is cashing in with sales in the country up 350% YOY. LULU, who has an exclusive partnership with Tmall (BABA), China’s largest B2C e-commerce platform, saw a 100%+ increase in traffic and higher conversion rates lead to a 175% YOY increase in sales on the platform. Rapid growth within the Asian market puts the company’s $4 billion revenue target for 2020 in sight.
Fan Marino: Speaking of footwear, NBA MVP Russell Westbrook is the new face of Jordan Brand (NKE). Westbrook signed a 10-year deal that will make him the highest paid endorser in the history of the company. Westbrook will also get his own signature shoe line. While financial terms of the deal were not released, Westbrook shouldn’t be short on cash. He recently signed the richest deal in NBA history, a 5 year $205 million extension with Oklahoma City.
Lululemon CEO: Retail isn’t dead because people ‘crave human connections’
Stadium naming rights deals have become a lucrative source of revenue for sports franchise owners, but shareholders should not expect these deals to positively impact the company’s stock price. Sports Economist Michael Leeds studied statement rights deals over a 25-year period and has been quoted as saying “we find little evidence that the purchase of naming rights had a statistically, significant impact on the value of the companies that bought them, even less evidence that the impact was positive, and no evidence at all that there was a permanent, positive impact.” Some marketing experts will go as far as to say companies investing in stadium rights lose value, pointing to several companies that experienced financial distress or bankruptcy shortly after the deal was signed (i.e. Citigroup, ProPlayer, Trans World Airlines, Adelphia Communications).
Howie Long-Short: Rams owner Sam Kroenke is looking to sign the most expensive naming rights deal in NFL history. It’s been reported that Kroenke is asking for $600 million over 20 years. To put that number in perspective, the last 2 NFL stadium rights deals combined equaled $554 million (Falcons/Mercedes Benz (DDAIF) – $324 million/27 years, Vikings/U.S. Bank (USB) – $220 million/25 years) and just prior to making the move to Los Angeles, the Rams signed a deal worth just $158 million over 20 years for a potential new stadium in St. Louis. I wouldn’t want to be a shareholder in the company that ends up lining Kroenke’s pockets.
Fan Marino: Molson-Coors (TAP) has the best stadium rights deal in all of sports. Not only do they not pay for the naming rights to the Rockies’ Denver home (Coors Field), they have naming rights in perpetuity; and it cost them just $15 million, back in 1990. In March, the Rockies signed a 30-year extension with the state division that owns Coors Field; meaning TAP brand awareness will continue for another generation of baseball fans, on the house.
NFL Is Draining These Massive Companies Dry for Stadium Naming Rights
Gatorade (PEP), the official sponsor of the NBA’s developmental league, is using their partnership with the G-League for more than just branding; they’re using its players as “lab rats”. The G-League and the Gatorade Sports Science Institute are working together to test product formulations and ingredients that will advance hydration and fueling techniques. Gatorade Head of Consumer engagement Kenny Mitchell describes a process where new products are tested at the developmental level and then launched with NBA players, who have the reach and influence to showcase the latest innovation.
Howie Long-Short: Gatorade recently introduced the GX sports fuel customization platform. The GX ecosystem combines Gatorade’s science-backed products with newly designed equipment and real-time biometric and tracking technologies, to provide athlete specific fueling recommendations. Technological innovations include a smart cap (for squeeze bottles) and a digital sweat patch. I like the decision by the Pepsi Co. subsidiary to go down the sports science route. Performance fuel pods and personalized bottles are new revenue streams for a company that needed to rebrand itself, as sales of its sugary drink have declined.
Fan Marino: Gatorade was recently fined $300,000 by the California AG for disparaging water. Yes, you read that right. In 2012, the company released an iPhone game called Bolt! The premise of the game was to run through the levels, drink Gatorade to remain fueled and avoid dangerous water that would compromise the game character’s performance. AG Xavier Becerra found the message to be “morally wrong and a betrayal of trust”. It was a video game targeting teenagers. The taxpayer’s dollars spent prosecuting this case should have been used elsewhere.
Gatorade’s NBA Partnership Focuses On Innovation, Not Just Rebranding
Bridgestone (OTC: BRDCY) Golf CEO Angel Ilagan recently stated that Tiger Woods is more valuable as an endorser than he is as a player, arguing he’s “the single golfer who’s had the greatest impact bringing consumers into the game”. Ilagan argues that golf enthusiasts are familiar with Tiger’s reputation as a “sports science junky”, who only plays with very best equipment; while noting the game has seen an increase of 4 million players since Woods last participated (back surgeries, DUI) in a tournament (Feb ’16). The company signed Woods to an endorsement deal in December ’16, and generated record sales growth in H1 ’17.
Howie Long-Short: Bridgestone Golf falls under the Bridgestone Corporation umbrella, best known for their rubber & tire business. Bridgestone Corp. recently reported operating income for H1 ’17 was down 7.3% (to $1.8 billion), despite sales rising 5.8% (to $15.5 billion); attributing the earnings decline to rising raw material costs. As for Bridgestone Golf, it posted the 2 most successful quarters in company history and its single highest grossing month in company history, within the first 6 months of 2017. The Japan based company trades over the counter under the symbol BRDCY.
Fan Marino: Woods remains most valuable as an endorser, when he’s playing. Paid advertising has been driving awareness of the Woods/Bridgestone partnership, but nothing can replicate the exposure and impact seeing the Bridgestone “B” on a ball that Tiger is lining up to putt on 18, on Sunday.
Tiger Woods is more valuable as an endorser than a player: Bridgestone Golf CEO
Activision Blizzard (ATVI) has made some recent changes to its Overwatch League, designed to stabilize the fledging Esports ecosystem for game publishers, owners, players and sponsors. Permanent city-based franchises (plans for at least 28 world-wide), revenue sharing agreements and franchise fees ($20 million) are among the concepts ATVI has borrowed from the NFL, NBA, MLB & NHL. Moving forward, the development of a players’ union will be necessary to ensure gamers are compensated fairly. The league has announced 9 franchises, with Patriots owner Bob Kraft, Mets COO Jeff Wilpin, Rams owners Stan & Josh Kroenke and Sacramento Kings co-owners Andy Miller/Mark Mastrov among the pro sports owners that have purchased teams.
Howie Long-Short: Unlike pro sports leagues which are a collection of individually owned franchises with an elected commissioner overseeing the league, ATVI is a publicly traded company who must act in the best interests of their shareholders and they’ve done a great job of it. Company shares are up 82% YTD (500% over the last 5 years) as ATVI has proven capable of generating revenue growth without having to release new game titles. The potential for in-game advertising, creation of the Overwatch League and soaring in-game revenues (up 100% YOY to $3.6 billion in 2016) have the company well positioned for future growth. The recent release of Destiny 2 and the upcoming blockbuster release of Call of Duty: WWII, should give the company a revenue boost in the Q4.
Fan Marino: As Howie noted last week, Comcast Spectacor’s (CMCSA) acquisition of an NLL franchise made sense because the company’s strength is in hosting events and building businesses around pro sports teams. The same can be said about pro sports team owners investing in Esports franchises. The revenue model for Esports is based on sponsorships, advertising, merchandise, ticket sales and media rights; areas which pro sports teams can leverage established relationships. In the short-term, these acquisitions seem like a no-brainer; I have long-term concerns though. I can’t envision any scenario in which a game that is popular today, remains popular in 2030. Technology evolves quickly and attention spans are short. What happens to the value of these franchises when the next big game comes along?
Esports Leagues Set To Level Up With Permanent Franchises
Outspoken Seahawks star Richard Sherman has been critical of the NFL, questioning why a league that takes a public stance against gambling puts out daily injury reports designed to ensure a level playing field for gamblers. Sherman went on to express frustration with fan interest in fantasy football; saying the commoditization of players has resulted in a lack of compassion for real life injuries. The NFL responded to Sherman’s comments, but didn’t exactly dispute the allegations stating injury reports are “designed for competitive fairness purposes and curtails the potential for someone to attempt to gain and exploit inside information.” League owners have approved the Raiders pending move to Las Vegas, but insist that no changes will be made to the league’s gambling policy. Commissioner Goodell has been firm insisting that the integrity of the game remains the league’s number one priority and is something “we will not compromise on”.
Howie Long-Short: If the U.S. Supreme Court rules in favor of New Jersey and legalizes sports gambling within the state, a flood of others will follow (5 states have backed NJ). Should that happen, expect the NFL to quickly change its stance and turn legalized sports gambling into the league’s next revenue growth driver ($154 billion were illegally bet on sports in ’16). With a SCOTUS decision expected no later than summer ’18, fans could be legally betting on NFL games by Week 1 of the 2018 season. As for Sherman, he’s right, injury reports are for gambling purposes and the NFL’s stance on gambling does seems hypocritical; but to expect fans to care about how an injury effects a player’s mental state or family, when 26% of NFL fans make less than $40,000 and struggle to make ends meet, makes him sound both entitled and out of touch with reality.
Fan Marino: Gamblers that bet on the Chiefs/Redskins game Monday night, experienced one of the wildest finishes in recent gambling history. The Chiefs (-7) kicked a FG with 4 seconds to go, putting the team up 5 points and all but ensuring a win for those who placed their money on Washington. After the kickoff, Washington had a chance to run one last play. That play ended with a KC fumble recovery, a defensive TD giving the team a 29-20 lead and a win for those who bet on the Chiefs. The madness wasn’t over though yet. With the over/under set at 49.5 points, Kansas City had to make the XP for the over to hit. Coach Andy Reid chose to kneel on the ball, giving those who took the under reason to celebrate.
Richard Sherman gave an eye-opening explanation for why NFL players don’t care about your fantasy football team