Discovery's Eurosport Invests in Premium, Local Sports to Boost Growth
A more country-by-country approach uses pan-European sports as a backbone and more relevant rights to locally popular sports in key markets, which the company says has boosted ratings.
In the U.S., Discovery Communications is best known for the likes of Shark Week, Gold Rush, Cake Boss, Oprah's Master Class and Finding Bigfoot.
But in Europe and other international markets, it is also the owner of pan-European sports network Eurosport, which airs the Tour de France and other cycling events, tennis and winter sports, among others.
With its reach of 241 million subscribers in 93 countries, predominantly in Europe, Eurosport has sometimes been compared to ESPN in the U.S., even though their strategies differ. Big, expensive sports are a hallmark of ESPN. Eurosport in the past focused on rights to second-tier sports that it can air across the continent.
However, under the ownership of Discovery, this has changed to a more country-by-country approach using pan-European content as a backbone to support more relevant rights to locally popular sports in key markets. The focus of this new strategy is more premium, more exclusive and more local content that can be acquired in a financially disciplined manner that allows investments to be cash flow-positive.
All in all, Eurosport now wants to be home of grand slam tennis, athletics, winter sports and cycling across Europe, plus get select premium content and local events that fans crave. Nearly 50 percent of its regular schedule is dedicated to Olympic sports. But it is no longer interested in non-exclusive and lower-tier sports that are not as popular on a local level. Instead, the company has bought select premium content across markets, such as the Olympics, and premium local sports rights, such as to the German soccer league, that have strong appeal in certain countries or regions. The company has said that this will drive value with viewers and distribution partners. Overall, it has struck more than 70 deals since Discovery got involved in the company.
The deals have made Discovery a big sports player on the continent, and with close to 50 percent of the company's revenue coming from international markets ($3.1 billion, or 48 percent of $6.4 billion overall in 2015), Wall Street analysts say the performance of Eurosport has become a bigger driver for Discovery's financials.
The company has touted ratings gains as proof that the strategy is working. Discovery says 2016 is building on the double-digit growth enjoyed in 2015 with audience growth and share driven by local rights investments. For example, ratings in Norway were up double digits due to local rights for Europa League soccer and handball. And Eurosport in the U.K. saw double-digit growth and early this year celebrated its best ratings ever thanks to the Australian Open tennis tournament's women’s and men’s finals.
Discovery moved into the sports space when it bought a 20 percent stake in Eurosport in 2012 from France’s TF1 Group for $222 million. "The cost of the sports content for Eurosport is very, very manageable, much more predictable," Discovery CEO David Zaslav said at the time. The company later increased its stake before buying full ownership last year for $534 million.
But some recent content deals have surprised Wall Street, with one observer suggesting Discovery may still have more educating and explaining to do to show how the deals enhance Eurosport's updated strategy.
The biggest broad-based premium content deal came last summer when Discovery bought the European rights for the Olympics starting in 2018 and through 2024 for $1.45 billion. More recently, a big local play came when Eurosport Germany picked up a pay TV package of rights to matches in the German soccer league, including live Friday matches as well as relegation battles and the so-called Supercup game, the season-opening match between the first- and second-place finishers of last season. It's believed that the four-year deal is worth a bit north of $110 million (€100 million) per year.
The Bundesliga deal followed agreements for the local soccer leagues in Poland, Norway and Denmark. In other deals for sports that rank No. 2 or 3 in the respective countries in terms of popularity, typically behind soccer, Eurosport has picked up rights to national handball games in Sweden and Norway, as well as rights to MotoGP motorcycle races for Germany, France and the Netherlands.
“I think Discovery realizes for Eurosport to grow it needs more flagship properties,” MKM Partners analyst Eric Handler said in explaining the changed content approach. “The strategy has definitely seemed to change since Eurosport was first acquired. I think it is safe to assume that second-tier sports properties don't hold the same value…as the Olympics and soccer.”
Wall Street’s eyes have been on the financial trends, of course. Discovery in its annual report listed Eurosport's 2015 revenue at $507 million, up 54 percent from $330 million in 2014 and 9 percent of the company's total revenue of $6.39 billion. It also reported 2015 adjusted operating income before depreciation and amortization of $37 million for Eurosport, down 46 percent from $68 million in 2014 and 2 percent of the company total of $2.40 billion.
Eurosport "has seen its OIBDA margin decline from mid to high teens at the original investment to mid-single digits even prior to significant sports content investments in the Olympics and Bundesliga," Guggenheim Securities analyst Michael Morris wrote in a recent report expressing some concern about financial trends.
Since the third quarter, cost growth has been higher because the cost of new rights has kicked in. But the company has signaled that once it reaches the anniversary of these higher gains later this year, Eurosport’s cost trends will see more normalized levels. Management has emphasized that it has continued to spend money on rights in a disciplined fashion, with an eye toward monetizing it via advertising revenue, affiliate fee increases and over-the-top services. It has said that its sports investments are targeted and cash flow-positive, but that they take time to show up in the financials and benefit the whole portfolio.
"We've done over 70 deals on Eurosport, and all of our deals are in the low single to mid single-digit increase" range, said Zaslav on Discovery's first-quarter earnings conference call. "Even on the Olympics itself, we were able to get the Olympics for a mid single-digit increase on what it had gone for four years earlier."
Looking ahead, Zaslav said that Wall Street should expect Eurosport's profitability to improve. "We've acquired the sports IP we think we need, and I think we're making the turn. We're very happy with the Olympics, and margins should start to grow now on Eurosport," he said. "We don't think we need to own a lot more IP. We'll do it opportunistically."
Importantly, Eurosport is integrated with the rest of the company's international portfolio, and Discovery sees it boosting the leverage for its overall business.
In addition to boosting ratings and thereby ad revenue, Discovery is looking to boost its carriage fee revenue over time via popular sports offerings. While Europe doesn’t have the tradition of network blackouts amid carriage disputes, Discovery is looking to boost its value proposition to pay TV operators. “We're leveraging the power of sports programming by driving meaningful affiliate value across our whole portfolio, which you will see grow further in the years ahead,” Zaslav said on the latest earnings call.
In addition, the Eurosport Player OTT service, which offers live streams of linear channels, but also added content, such as tennis action from up to 16 courts at the Australian Open, has become a growing digital business. The company has said it is targeting 1 million subscribers but hasn’t disclosed figures recently. Industry insiders say Discovery is looking to make the Eurosport Player the Netflix of sports in Europe.
The Eurosport Player is designed to super-serve super-fans with more content and expand Eurosport's audience to younger, digital-native demos and provide them with digital-only experiences. In that context, Eurosport has also been growing its investment in short-form content to reach the millennial audience. Among the most popular examples are The Commissioner of Tennis with John McEnroe, which aired during the French Open.
Meanwhile, the Olympics pact also shows the opportunity to limit the overall risk of content investments. Discovery has signed sub-licensing deals in such countries as the U.K., the Netherlands, Austria, Switzerland and others that allow networks there to also show Olympic events, while Eurosport retains exclusivities for its TV and digital services. "These agreements significantly exceeded our plan," Zaslav said earlier this year. "The Olympics will not only be profitable, but based on the deals that we've done already, we expect the Olympics will make real money for us on each of the Games." Discovery hasn't provided further financial details.
Some observers have wondered if the recent German soccer deal will mean a change of strategy for Eurosport as it focuses on the leading sport in only one market, and Zaslav previously said Eurosport was "sort of the home for everything but soccer."
One company insider says though that the investment was opportunistic and consistent with the firm's strategy of deals for rights that drive brand value, awareness and engagement in local markets. The insider highlighted that the company bought a new pay TV package that presented a unique opportunity to get must-see content at an attractive price in Europe’s biggest TV market and Eurosport’s second-largest in Europe. Said one observer: "It is the equivalent of NFL games having only ever been on one channel, and now Monday Night Football is on [their pay TV channel]." Plus, Discovery could offset some of its cost as it is already in conversations with other distribution companies to partner on offering Bundesliga across multiple platforms, including its own Eurosport Player.
“Eurosport was able to benefit with the decision made by the league to break up the rights package,” said Handler. “This event allowed Eurosport to make a bid that allows the network to not have to overly tax its programming budget."
Concluded the analyst: "[Discovery's] commitment has been to keep Eurosport profitable, and this contract should not result in any deviation from this strategy.”