A few years back, Greg Hoffman asked me what I think the best business in Australia is, private or public. My answer was the AFL. Slightly off kilter, yes. But were it a private business, I would love to own it.
Why? Content is king in the new world of multiple distribution networks. Now that the barriers to entry in distribution have been dismantled, what the owners of those distribution networks want is content. Preferably content people are prepared to pay for. Even more preferably, content people are prepared to pay for and watch live (to stop them skipping the ads).
If you want a feel for how valuable live sports content has become, look no further than NBA’s new contract with US television networks ESPN and TNT. At US$2.7bn per annum, the US basketball league will almost triple its annual revenue from television rights. From the Premier League to the NFL, from the AFL to Cricket Australia, each new negotiation is a bonanza for the sport.
Perhaps no surprise, then, that James Packer is buying a stake in the South Sydney Rabbitohs. Perhaps. But I’m not sure he’ll ever make money out of it.
Sport is a growth industry. That is something you can be supremely confident about. But, like any other growth industry, the next step is to work out who in the value chain keeps the profit. Is it the players who create the content? Is it the owners of the clubs and or leagues. Or is it the distributor of the content that has access to the eyeballs?
In different sports and different countries, the answer to these questions changes.
Despite generating more revenue than any other sport, football is one of the worst sports in which to own a team. Firstly, the clubs don’t own the competitions. Most are run and administered by an independent body. Secondly, there is no salary cap. So the clubs bid the prices of the players up until there is no profit left. Finally and most importantly, the different leagues around the world compete against each other. Not getting paid enough in the Premier League? Go and play in La Liga.
Most of the economic profit in football ends up with the players. Perhaps that is as it should be. But it’s not the same in the big US sports.
The NBA, NFL and NHL are all owned by the franchises that make up the league. Thanks to a series of mergers and acquisitions through the 1980s and 1990s, they have an effective monopoly on their respective sport in the US. And all three are predominantly local sports. Sure, you can go and play basketball in the European league, but you’ll get paid a fraction of the money you can earn in the US.
You can see the market dynamics play out each time there is a new round of negotiations between the players and the leagues. There are strikes and walkouts aplenty, but the clubs come out on top. The most recent NBA negotiations resulted in the players accepting 51% of revenue, versus 57% under the previous agreement.
That’s why we own, via listed company Maddison Square Garden, the New York Knicks (NBA) and the New York Rangers (NHL). Content is king, and these two franchises are set to be significant beneficiaries.
And what of the Bunnies? Owning an NRL team is probably not as bad as owning a soccer team, but it’s nothing like the US either. Yes, there is a salary cap. But, unlike the US, that salary cap is not set based on overall league revenue. It is set arbitrarily by the administrators and most clubs would argue it is already too high. The NRL also has competition from Rugby Union and England’s Super League. That gives the players bargaining power – just ask Sonny Bill Williams.
The next round of negotiations with television stations will undoubtedly result in a significant increase in revenue for the sport. Most of it will end up in the players’ pockets.
The AFL on the other hand … now if we could monopolise that …
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.