Sunday, November 14th, 2010...10:59 pm

Digital Sports: Level The Playing Field For Startups

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The wide world of sports should be a great sector for digital startups to build innovative products, services and businesses. Sports are one of the few places in media that continues to experience growth in consumers, programming and advertising. The audience for sports is passionate, engaged, affluent and aggregated. Fans are demanding new and better ways to enjoy their sports entertainments experiences. An ideal example is the growth of fantasy sports, estimated to now have an economic impact over a $4 billion, which is directly attributable to the rise of the web over the last generation.

Unfortunately, the startup ecosystem for sports is nowhere near what it should be. There are a handful of companies that have been funded and two significant exits this year (Citizen Sports and Yardbarker). But there is much more room for digital innovation. Part of the issue is that the current conditions for a startup to gain traction and grow revenues in sports media are more difficult than it should be. Here are some of the reasons why.

Big Media
The top sports websites are good. Really good. ESPN, Yahoo Sports and CBS Sports all have big name journalists, comprehensive coverage and huge budgets to cover major sports events live. Combine that with the major digital upgrades by the official professional sport leagues and there is little room for an upstart to break through to the mainstream. Even when a clever blog or website is able to carve out a niche (recruiting, free agency, etc.) they often have trouble monetizing since their niche is not a large enough audience for major advertisers.

Fickle Audience
The established digital sports properties are the barometer that sports fans judge other digital experiences. Personally, I’ll try new products but if it’s not better than ESPN there’s no chance it’s going into my lineup of sports sites. (In comparison it’s not hard for a new news site to beat out the experience on Yahoo or Time). Sports fans are a digitally savvy audience with extremely high expectations. Unlike most early web adopters, sports fans have little to no tolerance to spend their time helping to develop an unfinished product. Even the biggest sports fanatics only have so much time to spend feeding their sports addiction. A new website has to replace an existing website for a sports fan. There’s too many good options for the consumer to commit to a digital product that’s not better than the status quo.

Programming Access
Sports media is driven by live games and events. Just look at the billion dollar rights deals that sports properties sign with big media companies. Most of the major stakeholders in sports are inclined to protect the value and exclusivity of these rights. Any sports startup that needs to rely on broadcast rights must come to pay with a war chest of cash to dole out. More often than not, they don’t have the capital or ability to secure the rights necessary for their web application to scale.

Official Partnerships
If a startup can’t obtain official media rights the next most valuable asset would be to work with the leagues, teams and organizations that have access to the best content. Ideally, new technology and applications could better distribute, leverage and monetize sports. But sports leagues and teams are notoriously difficult for startups to partner with (especially in digital media). The top sports leagues are often more concerned about protecting their existing relationships and investments than to take on risk or upset the current business models. The top business drivers for sports teams are media rights, advertising/sponsorship and stadium/game revenues. New digital opportunities are not always viewed as a core business unit. Teams and leagues often take the view that a company must pay their prices upfront for the right to access the value they bring in distribution, audience and brand value.

Advertising Business Model
Advertising and sponsorship is the dominant business model for sports media properties. Sports fans are used to the concept of sharing their time and attention with brands in exchange for a better or free experience. VC funded companies such as Fantasy Sports Ventures, SB Nation, Bleacher Report and Weplay all are trying to capture dollars (and thereby compete with big media) from sports marketers. Brands want aggregation, reach and confidence that they can make an impression on their targeted male audience. Traditional media companies are in better position to sell large advertising deals because of their scale and relationships. Until a startup can establish its brand and hit a critical mass, it’s difficult to consistently capture sports marketing budgets.

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There are ways to knock down these barriers and there are some promising signs in the market that this is already happening.

Professional sports teams and even the athletes themselves are getting more involved in early stage funding and development. Silver Chalice (backed by Jerry Reinsdorf), Fenway Sports Group and Steve Nash have all formed independent ventures to leverage their access, rights and relationships to invest in sports companies. These groups can help superb technology or digital products accelerate their business by giving them the inside track on promotion, access or relationships. For example, Steve Nash can help get a company a meeting with the NBA, connect them with professional athletes for PR and marketing and introduce a company to his brand sponsors.

Hopefully, more of the major organizations in sports (pro leagues, teams, rights holders) will consider adding a digital venture arm to help stimulate digital innovation. Most sports entrepreneurs would probably agree that working with leagues, teams and rights holders is challenging. These organizations view digital startups as just another vendor, licensee or potential threat. Instead, it would be interesting to see the NBA, NFL or MLBAM develop a program to support and work with digital companies to enhance the sports fan experience. Creating a more favorable environment would be welcome by the tech community as there’s no shortage of ideas, sports-crazed entrepreneurs, and potential in sports.

Right now sports startups are still the underdog. But the spread is shrinking. As any sports fan knows, if a team is hungry, tenacious and executes on a brilliant game plan the underdog can and does pull the upset.

9 Comments

Filed under Internet, Sports Biz

  • http://blog.littyhoops.com Litty

    Probably need to add more hard data in this post. Also, would be good to compare sports to how other sectors stimulate (or block) new innovation by startups…

  • http://www.thegetdownguy.com willcole

    Two things we always ran up against when building Chalq (a fantasy sports site) were:

    1) Defining the size of the market is not clear cut. You mention that there is a $4billion economic impact, but for the life of me I can’t get anywhere remotely close to that number. When we were researching the FSTA data in 2007 it was said that the fantasy market was around $1-2 billion, and even then it was a difficult number to get close to.

    2) Related to the above, it was hard to see what the incumbents are getting out of their current fantasy businesses. We derived that CBS, ESPN, and Yahoo! could be making in the range of $100 million a year from their online fantasy products (this is still highly estimated, and probably on the high end) which doesn’t include the content side of the business.

    The reason I bring up those two things is that they are major hurdles in receiving funding. And it’s very difficult to build a legitimate fantasy company (that doesn’t steal stats etc…) without funding because of the costs of content and live sports data. I think on the technology end of things we would likely see much more innovation from the startup community if we attacked the issues of access to sports data and its costs so that funding was not such a necessity.

  • http://blog.littyhoops.com Litty

    1) I’m not sure how you accurately size up the market. Is the additional 10%-20% of the audience tonite who will only watch MNF because of fantasy implications included in the fantasy market. I would argue that fantasy is undervalued by billions (I agree it’s hard to prove though).

    2) I have friends who work at these places and their business model and strategy is alot less imaginative than you think. They are media companies who care about ad sales. My guess is that sponsorship + advertising + member fees and you’re about on target for the big 3.

    This post started about how few sports startups are funded but realized i needed to callout the reasons why that is. If that’s improved the funding will be there.

    Your example is perfect. Traditional sports is making it so damn hard for a startup to create a fantasy sports company. Yeah, it protects the big players in the short-term but it’s definitely short-sighted and not sustainable if they want a product that keeps up with technology.

  • http://www.thegetdownguy.com willcole

    Yeah so economic impact could certainly be in the 1-4 billion range. But translating that into how much fantasy companies are actually bringing in is very difficult. If the big 3 are making a combined $300 million, then the direct take from fantasy sites has to be less than $400 million. I would expect this number to continue to soar as brand advertising dollars are moved online (fantasy sites will actually be one of the biggest benefactors here).

    Love that you’re talking about this though. I’d also be happy to help put together a NextNY event with you if you think there would be interest. Sure Kevin would be in as well.

  • http://www.dlewis.net/nik Dan Lewis

    Wow, something I actually know a ton about :)

    When we started ArmchairGM five years ago (wow), there were basically three types of indy sports sites:

    1) Reference/encyclopedic sites, like Baseball-Reference, DraftHistory.net, etc.

    2) Blogs, which were typically opinion/analysis

    3) The occasional blog-as-aggregator/curator, e.g. MLB Trade Rumors, MetsBlog, and in a different vein, Deadspin.

    In all three cases, the indy sites were crushing ESPN. Now don’t get me wrong, ESPN still was leading in a few things. They were generating news stories and were authoritative. They had box scores and more importantly, live scores. They had photos. They had Peter Gammons and John Sickles in a world where the vast, vast majority of customers (sports fan) deferred greatly to experts, who we assumed correctly had better access than we.

    Nowadays, though, that’s less and less true.

    * Most major news dailies have put beat writers on blogging duty, and react quickly to stories about their beat — with ESPN’s local sites entering. The indy aggregators are less important, and entering the space is basically impossible for a new indy site. (NB that the established ones, however, are so well entrenched as to dominate.)

    * Sports-Reference is maintaining its SERP dominance but is joined there by ESPN and the leagues. Even black-hat SEO isn’t going to get you in the top 3.

    * The opinion market is being destroyed by the mainstreaming of previously “outsider” opinion (especially the reliance on stats), and by the ability for amateurs to find a voice on third-party sites (SB Nation gives some teams’ fans an incredible audience; Twitter is powerful for an increasing number of people; etc.)

    Add that to all the things you pointed out, and there’s a big squeeze.

  • http://www.darrenherman.com dherman76

    Brian, good post. I’m a huge proponent of fantasy sports and certainly see this as an under-served area of the digital media ecosystem. For many of the reasons you list above is why it’s under-served but I do believe someone will un seed the big three.

  • http://blog.littyhoops.com Litty

    Thanks bud. The thing that gets me about the big three is that they totally ignore the product. That’s not really a sustainable and will come back to haunt them in the future. I get it that media companies aren’t development shops but why not at least invest in fantasy product/technology in some way.

    Thanks for all your comments. Enjoy your feedback and appreciate the thoughts.

  • http://blog.littyhoops.com Litty

    Dan –

    In hindsight, how do you think a site like Armchair GM could thrive in today’s environment? I guess biggest comparison is Bleacher Report but not sure how big of a dent or how monetize their network really is at right now . I do like what Bleacher Report is doing which will only get better as they build their brand.

    Great to see you talking digital sports again. Us sports geeks miss you!

  • http://www.dlewis.net/nik Dan Lewis

    Now, or five ears ago?

    Either way — and this isn’t unique to sports — community-run opinion
    sites quickly devolve into message boards. That was true for
    Armchair, is true for Bleacher Report, and for many many other sites
    (even Digg and reddit)as well. It’s also true for products with
    community-run features (typically comments). Check out the comment
    threads on Deadspin and you’ll see what I mean.

    That’s not a bad thing in and of itself, but it has to be recognized
    and adapted for. Deadspin handles it by subjugating the comments.
    Amazin Avenue, the Mets blog community I participate in, subjugates
    the community to comments and a subsection, but at times promotes
    community content to the main section and highlights the community in
    well-promoted open threads.

    Or you can get lucky and your community can become a bellweather.
    That’s rare but it happens. Digg, reddit, Fark, MetaFilter, etc. all
    fit this mold. When this happens, though, I think it’s unsustainable.
    (Fark and MeFi are still big, but neither are lynchpins of the web
    like they used to be.) As the community becomes more cohesive, it
    tosses us ideological/cultural barriers to dissent, and the
    community’s impact outside its own walls wanes.

    From a business perspective, that’s not necessarily a problem. An
    ideologically stats-driven baseball community site (where I fit in)
    certainly has the reach and engagement to attract advertisers. But it
    has to guide your product development.