Genius or reckless: who will be the last one smiling?

Youku Sports and PP Sports are said to have formed a joint venture leading to the reorganization and restructuring of their sports assets. Youku Sports is owned by Alibaba Group, while PP Sports was a subsidiary of Sunning Holdings Group. With the two parent companies both being giants in their industry, this makes the joint venture especially interesting and shocking. Why did the deal take place?

The reason lies with PP Sports having acquired too many sports IP rights. Taking the English Premier League as an example. PP Sports have acquired the exclusive media rights of the English Premier League for 2019-2022 in Mainland China and Macau for $721 million. Converting it to RMB, that is nearly 5 billion, while only a few years ago, Xinying Sports acquired similar media rights for the 2013-2019 period for only RMB 1 billion. This means PP Sports have to pay ten times more for the media rights of the English Premier league.

And that is not the only cost PP Sports have to pay. It has also acquired the exclusive media rights for the UEFA European Championship costing $150 million over three years, and the exclusive 5-year media rights for the Bundesliga for $250 million, as well as the rights for some other top sports events. Putting that on top of the labor costs—PP Sports have close to a thousand staff—and operational costs, PP Sports are facing a very serious challenge and need to monetize the media rights to a very large degree to cover their costs.

Data seem to indicate that this is not an easy job. According to QuestMobile, the monthly active users for PP Sports are around 11 million. We do not have the data for their revenue figures, so we will use one of its competitors, Tencent Sports, as a basis to make  an estimation. The revenue Tencent Sports make from their partnership with the NBA is around $100 million, but their monthly active users are four times as many as PP Sports. We will make it simple and assume that with less active users, PP Sports are making as much as Tencent Sports do. That will be about RMB 2 billion over three years, On the other hand, the media rights costs PP Sports have taken on are about $12 billion for the next three years, according to Prism, a program hosted by Tencent Financials that focus on in-depth financial reports. In other words, PP Sports will lose around RMB 10 billion due to the media rights costs alone.

Unable to find a way out of this plight, PP Sports started searching for someone to help them cope with the situation, and that is where Youku Sports came on the scene. Though the details have not been disclosed, we know that the two parties have agreed to combine their resources and restructure their assets in the hope of not only making enough revenue to cover the costs, but making a profit. We know that PP Sports have acquired the media rights of many top sports leagues and events, but what do Youku Sports have? Being owned by Alibaba Group, it is to be expected that Youku Sports will have plenty of cash flow to deal with emergencies, but on top of that, Youku Sports essentially have users. It spent RMB 1.6 billion to acquire the digit medial rights of the 2018 Russia World Cup, and saw an accumulated total of 1.8 billion people watch the 64 matches on its video platform. Combining the media rights acquired by PP Sports and the users Youku Sports claim to have, it looks like they are heading in the right direction to make a profit.

However, as the name implies, the media rights acquired by PP Sports are only media rights. They are due to expire after a certain amount of time. In this case, PP Sports and Youku Sports only have three years to make RMB 12 billion and at least not to lose money. The sports IP rights market is volatile. There is no guarantee that after three years of operation and expanding the reach and influence of the games, they will acquire another three years, or six years, or whatever years of media rights again. They have to see enough returns during the limited amount of time they still have ownership of the media rights, otherwise all the investments will be wasted.

How do the rights holders make money? Through advertizing, membership fees, and the royalties they receive from reselling the broadcasting rights to other platforms. There has not been much innovation in terms of advertizing and royalties. The rights holders just need to find more companies that are willing to pay more for the time slots during the games, and more media platforms that will pay to share the broadcasts that will bring traffic to their own websites.

Membership fees is a more interesting area. Chinese users, especially the younger ones, who happen to be the main audience and consumers of sports events, are getting used to paid services. PP Sports spent massively to acquire the media rights partly because they trusted the spending potential of these users. However, how to monetize this willingness to pay for quality services asks for innovation. Common ways include increasing membership fees and separating members into different categories, with those paying more enjoying better services. These innovations have proved to be working, but in the case of PP Sports and Youku Sports, how much these members can contribute to cover the media costs remains to be seen.

The newly formed joint venture will soon be facing another big decision. The National Basketball Association is a hugely popular, and probably the best commercialized overseas sports brand in China. Investing in the NBA has proved effective for Tencent, whose five-year exclusive new media broadcasting rights deal with the NBA will end in January, 2020. There will be a chance for the joint venture to acquire the new media rights from the NBA, but as are the trends in recent years, the amount of money required to acquire the rights is almost certain to increase greatly. And Tencent, having seen great success through its cooperation with the NBA, will not let the rights go to another company without a solid fight. How much more of the cost burden will the joint venture be willing to take on? But letting the chance of signing a deal with the NBA will no doubt be considered a bad decision because of the league’s influence in China. The competition among the big players will raise the media rights fees, and we could see a bloody battle where no one will be unscathed but the IP owners.

With the rights fees piling on, and no clear way to make ends meet, will joining with Youku Sports be the answer for PP Sports? That remains to be seen.

Proofread by Raymond Fitzpatrick