Tech Companies Move into Streaming Live Sports

We hear a lot about the exploding budgets that tech giants are spending on original content as consumers continue to cut the cord. In the last few years, some of the same players have started to add live sports to their platforms. We wanted to dive into some of these deals and compare them with existing TV contracts for NFL, NBA, and eSports. First, let’s establish the players.

Amazon – Amazon owns Twitch, the leading gaming streaming platform. Twitch started out as an exclusive video game streaming platform but has added traditional sports in the past few years. Twitch offers eSports, the NBA G-League, and beginning in 2018, Thursday Night Football.

Oath – Oath is a subsidiary of Verizon Communications. In June 2017, Verizon completed its acquisition of Yahoo and placed it under the Oath umbrella. Oath offers NFL games streamed on Yahoo Sports and go90. Verizon also manages the streaming of games through the NFL app.

Tencent – Tencent, the Chinese tech giant, has a contract with the NBA to stream games in China.

Twitter – Twitter was one of the first tech companies to stream games, winning the first NFL contract for Thursday Night Football in 2016.

YouTube – YouTube has also been competing in the live sports streaming space. They are taking a different approach, first by launching YouTube TV to stream traditional broadcast networks, and second by partnering with networks to simulcast games as opposed to negotiating exclusive rights.

Disney – Disney owns ESPN on the broadcast TV front, as well as BAMTech, a spinoff of the digital arm of the MLB. Disney recently announced ESPN+, a streaming service for live sports shown on its network channels.

Traditional Broadcast Television – FOX, CBS, and NBC offer a broad range of live sports to their viewers. These parties negotiate streaming contracts with the leagues. Lately, these contracts have included some rights to game streaming.

Methodology. In order to figure out what these companies were paying for, we broke out the contract price by year, looked at the number of games the contract included and found or estimated the number of viewers. This gave us a price per viewer per game for each contract. A few notes about the estimated average number of viewers:

  • For TV viewership, we used Nielsen’s average minute audience when available.
  • For streaming viewership, we used average audience numbers. Total impressions is a much higher number, but not accurate for viewership.
  • We tried to be as accurate as possible for the total number of games in a season. For the NBA, this number can change as the playoffs are a best-of-series, and not a set number of games.
  • Some TV contracts include streaming rights. It’s hard to quantify the exact effect that the additional streaming rights have had on contract negotiations.

It’s also important to realize the average viewership numbers aren’t always an accurate representation of each game, nor what the contract is worth.

  • For example, an average of 14.8M NFL fans tune in to a game. According to Nielsen, 36.5M viewers tuned in to the NFC Championship Game in 2017. The NFL TV contract doesn’t break out regular season and playoff games, and it’s easy to understand that airing playoff games is much more valuable.

First, let’s look at TV contracts for the NFL and NBA.

Looking at the above chart, it’s clear how valuable the NFL has become for broadcast television and ESPN in particular. These contracts are in the billions of dollars annually for the ability to broadcast games. Cost per viewer per game differs based on the contract. Despite including post-season games (and the Super Bowl), the contract for FOX, CBS, and NBC appears to be the most cost-effective, despite ringing in at the highest dollar amount.

When it comes to streaming rights to NFL games, Verizon, Twitter, and Amazon have all been involved.

Verizon has paid a much higher price per year, as well as per viewer per game, than Twitter or Amazon. They have, however, been able to stream all games during the season on either Yahoo Sports, go90, or NFL Mobile. An interesting change to Verizon’s latest contract is that they are opening up streaming to non-Verizon customers. Previously, you had to be a Verizon customer to have access to the stream on any of the apps. Verizon seems more interested in increasing their viewers for selling advertisement spots than it does in earning market share in the carrier space.

Amazon has taken a similar open stream approach to their Thursday Night NFL deal. Last season, Amazon offered Thursday Night Football to its Prime customers only. Beginning this fall, Amazon will stream the games to not only its Prime customers but to anyone on Twitch as well. This move signals Amazon’s confidence that bringing more people to the Twitch site will boost Twitch’s notoriety. According to Streamlabs, Twitch’s average viewership in Q1 was 953K. This puts Twitch in the same ballpark, and by some measures, ahead, of CNN and MSNBC for daily average audience.

While the NFL remains the contract king for professional sports, the NBA has negotiated contracts with Amazon and Tencent for streaming NBA games. While the NBA, like most major professional sports leagues, offers its out streaming service for fans to watch games, they understand the importance of their content reaching different tech platforms.

In an attempt to boost international exposure, the NBA negotiated a contract with Tencent in 2015 to stream games during the season. Despite China being on the other side of the world, an average of 2M fans tune in to each NBA game. During the 2017 NBA Finals, Tencent saw an average of 12.2M unique viewers per game.

We also wanted to look at the first streaming contracts for the three franchise eSports leagues we wrote about in our franchise economics note. While there is no TV comparison, the cost per viewer per game is on par with TV contracts for traditional sports but lags behind streaming contracts for traditional sports.

Who else might attempt to add live sports to their platforms?

Facebook – Facebook recently announced an agreement with the MLB for exclusive rights to 25 games this season on its platform. Last season, they simulcast some Friday afternoon games. Facebook has big ambitions in the live sports space. Adding live sports would be a great way to increase engagement on the Facebook Watch platform.

Netflix – Reed Hastings has stated before that Netflix won’t do live tv, nor live sports. Today, Netflix is focused on continuing to strengthen its original content. With Amazon, Netflix’s biggest rival today, making a big push into live sports, it will be interesting to see if Netflix breaks away from its tradition of original and on-demand content.

Apple – Apple has made an effort to incorporate live sports streaming onto its Apple TV platform, but to this point, has not negotiated any exclusive rights to stream any games. Apple will likely focus on building out its original content offerings in the near future before it explores negotiating streaming contracts.

What does this mean? It’s clear that tech companies are willing to make large investments in original content, and we expect this to extend into professional sports. This is good news for professional sports leagues, as their product will be able to reach more people. While cord cutting continues, more and more people are able to access the internet each day. As professional sports leagues seek to expand internationally, having partners who can reach these parties will be important.

Traditional network television and cable television giants might be in trouble. Live sports are one of the most compelling reasons for cable television subscriptions. as these products are available at a lower cost and through a more easily accessible platform, cord cutting will further accelerate. This is good news for tech companies, who can increase engagement on their platforms and attempt to reach new users by adding more live streaming content.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

WWDC 2018: The Customer Is Always Right

  • Today, Apple said loudly and clearly that the customer is always right.
  • There were more new features for users than there were new tools for developers: screen time limits, monitoring, and reports, grouped notifications, Do Not Disturb at bedtime, Siri shortcuts, new Safari privacy features, performance improvements for previous generation iPhones, and even third-party navigation apps on CarPlay. Apple is forgoing near-term benefits for developers and themselves in favor of a better user experience.
  • Apple is drawing a hard line between itself and other companies that rely on consumer data.
  • There are now 20M registered iOS developers building applications for 1.3B active devices.

Source: iMore

Democratizing Machine Learning. Apple spent the bulk of its limited developer-centric discussion on new ML tools. Specifically, Create ML on the Mac and Core ML 2 for iOS, which make it easy for developers to build ML techniques into their apps. When thinking about the ML announcements at WWDC, it’s important to note that the keynote is designed to inspire developers and the “state of the union” session (which followed the keynote) shows developers how to actually use these tools. As investors in the space, we’re excited to see Apple making it easy for entrepreneurs to harness the power of ML on Apple’s 1.3B+ device ecosystem.

As investors in the space, we’re excited to see Apple making it easy for entrepreneurs to harness the power of ML on Apple’s 1.3B+ device ecosystem.

No New Hardware. Apple will take some heat for the lack of hardware product announcements, but we did a quick check and found that 11 of the past 19 WWDC keynotes have not included any hardware announcements. We didn’t see a new iPad (which we continue to expect in the coming months), and any discussion of new Beats hardware with Siri integration was nowhere to be found 🤦‍♂️.

At the beginning of the keynote, Cook declared that WWDC 2018 was “all about software.” And he kept his promise. iOS, macOS, tvOS, watchOS – each one saw improvements that make those product lines more appealing. In many ways, Apple finished what they started with the software updates announced at WWDC 2017.

ARKit 2: a measurable step forward, but we’re not there yet. We are still believers that AR will transform human interaction, but it will take time. ARKit 2 is a measurable step forward, making it easier for developers to build compelling experiences with the additions of multiplayer sessions (allowing two or more people to share an AR experience) and a new file format (USDZ), which allows you to add AR content to existing media formats. While these two additions will clearly streamline AR development, mobile AR tech still lacks “persistence” (the ability of a virtual object to remain in place after a session has ended), as well as the mapping of the AR cloud (managing virtual data and privacy).

Apple Watch Improvements. Apple Watch is running away with the wearable space. Today, Tim Cook announced Apple Watch grew units by 60% last year (2017). While Apple Watch had a slow start in 2015, it appears to be picking up momentum. Apple doesn’t disclose the number of watches sold, but we estimate, in 2015, the company sold 5.7M, compared to 10.2M in 2016, and 16.1M in 2017. We believe that number will increase by 44% in CY18. We expect the Apple Watch business to grow in the mid-to-low 20% range through 2020, which implies Apple Watch will account for 6% of revenue in 2020 compared to 3% in 2017. Apple Watch is gaining momentum because Apple created the computer-on-your-wrist category allowing for significantly more advanced functionality compared to other wearables. For example, today, Apple announced walkie-talkie, new personal and group fitness features, Siri’s accelerometer integration, and a handful of Universities enabling student IDs on Apple Watch. Apple Watch’s measurable utility lead in the wearable space gives us confidence that the product can account for 31M units in 2020, nearly double the units sold in 2017.

Expect $32B in Apple Developer earnings in 2018. Apple announced that developers have earned over $100B since the App Store launched in 2008. That compares to $86B in earnings at the end of 2017, and $70B a year ago (June 2017).  While Apple reported that developer earnings grew just over 30% in 2017, we expect that growth to be closer to 20% in 2018, in line with the overall growth of Services. This implies that developers will earn about $32B this year, a number that we believe is big enough to continue to entice world-class developers to continue to code on iOS and macOS.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Secret Weapon: Tesla’s Over-The-Air Updates

  • Tesla has several underappreciated, unique advantages including their tech brand, battery production, charging network, autopilot data, and over-the-air updates.
  • Tesla is the only automaker that is able to perform over-the-air (OTA) updates. Every other car manufacturer requires the car to come in for service to receive an update.
  • The power of OTA updates was demonstrated this week after the Model 3 failed to receive Consumer Reports’ recommendation due to long braking distances. Tesla pushed an OTA software update that was able to recalibrate the ABS system and reduce braking distance by 13%. The Model 3 was then retested and earned CR’s recommendation.
  • Updating vehicle performance without having to service the vehicle in person shows the real power of OTA updates, which we believe will be a continued advantage for Tesla as vehicles become more reliant on software.
  • Because of the heavily entrenched relationships between automakers and dealers, few other vehicles are able to receive OTA updates. This compounds with the fact that Teslas are manufactured with more heavily-integrated software that is able to control more functions of the car.

On May 25th, Fiat Chrysler issued a recall of 4.8M vehicles due to a cruise control issue. Each one of those vehicles will need to be brought in for inspection, costing the company an enormous amount of money and causing damage to the brand. OTA updates not only save money and delight the consumer, but they also allow Tesla to have a more direct relationship with customers. Automakers are not allowed to compete with their dealer network on sales or service. That means they can’t service things like ABS calibration without dealers receiving their cut. Tesla, unencumbered by this relationship, is able to control more of the customer experience and open the potential for future revenue like upgrades for “full self-driving” and longer range.

Aside from being largely prohibited to perform OTA updates, other automakers are far behind in manufacturing vehicles that are well equipped to benefit from them. Tesla’s integrated hardware and software approach means that a software or firmware update is able to fix issues like braking distance or faulty windshield wipers. Jake Fisher, the director of auto testing at Consumer Reports said, “I’ve been at CR for 19 years and tested more than 1,000 cars, and I’ve never seen a car that could improve its track performance with an over-the-air update.” Meanwhile, a typical vehicle has several kilometers of wiring harness and multiple electronic black boxes from different companies, not a unified system. Similar to the iPhone’s control over hardware and software vs. Android’s fragmented system, Tesla’s integrated approach gives them a leg up as cars become computers on wheels.

OTA updates will soon be a crucial tool for every car on the road, and we believe Tesla’s head start is an under-appreciated competitive advantage.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Posted in Tesla  • 

Security Tokens: An Emerging Opportunity in Crypto

This is the first in a multi-part series analyzing the potential of security tokens in the world of crypto assets. 

2017 was the year of crypto. Bitcoin became a household phenomenon and increased ~13x in value, Ethereum spurred interest in decentralized applications (dapps), and ICOs became the newest speculative rage.

By contrast, 2018 is shaping up to be a year of maturation for crypto. The SEC has made it clear that they intend to oversee the industry. While some may dislike regulation, it does bring with it a sort of legitimacy and it should deter bad actors. In 2018, we expect to see the emergence of the security token.

The intent of this series is to explore the security token market and better understand the use cases and opportunities. In part 1, we’ll outline the basics of utility tokens, security tokens, and what makes something a security. Future parts will dive into specific analyses of opportunities.

From the highest level, it’s useful to delineate coins from tokens, which both fall under the higher-order bucket of cryptocurrency. Generally, coins operate on an independent blockchain with their own set of rules. It may be a native blockchain like Bitcoin and Ethereum or a fork of another blockchain like Litecoin (of Bitcoin). Coins are typically useful as mediums of exchange and/or a store of value. By contrast, tokens are typically built on top of an existing platform, like Ethereum, and add their own rules and functionality to an existing platform.

Tokens can be further broken down into two categories: utility tokens and security tokens.

  • Utility tokens give holders access to a specific protocol or network, oftentimes enabling them to use an associated product or service. With utility tokens, no ownership rights to the underlying company behind the associated product or service are granted to token holders.
  • Security tokens grant holders ownership rights to an underlying asset. In essence, they are asset investments governed by the protocol set forth by the associated blockchain.

Utility tokens are the most common type of token in existence today. Two examples of utility tokens are:

  • Filecoin – a decentralized file storage platform. Users can pay participants in the network to store files on participating computers’ unused hard drive space. Filecoin is similar to Google Drive or Dropbox, but with no centralized storage location.
  • Golem – a decentralized computing platform. Users can pay participants in the network for unused processing power from participating computers. Golem is a decentralized Amazon cloud compute platform.

The important takeaway is that utility tokens grant the right to participate in a network, not ownership of the network.

What makes something a security? The SEC determines whether something is a security under the Securities Act of 1933. The Supreme Court case of SEC v. W. J. Howey Co is often referenced here, which resulted in a structured test whether or not an offering qualifies as an “investment” and requires registration.

An important clarification needs to be made about the use of the word “security.” As an industry, the crypto world has adopted the term security token to represent ownership in an underlying asset as described above, but the SEC uses the word security to define a broad set of investment instruments, which they regulate. This could mean that utility tokens are also recognized as securities according to the Howey Test.

The Howey Test. If a token (or another instrument) meets all of the following criteria, the SEC considers it an “investment.”

  1. The user is investing money.
  2. The user expects to profit from the investment.
  3. The investment is in a “common enterprise.”
  4. Any profit comes from the efforts of a third-party or promoter.

The first part of the test is fairly easy and most tokens pass. Users are always investing money. This part of the test has been expanded to include the investment of other “assets” in subsequent court cases. Some cases have defined money as “any form of consideration with value.”

The second part, whether or not users expect a profit, is often the case in token raises today. Many of the networks and protocols that are offering utility tokens through ICOs aren’t live at the time of the ICO, so the argument that a holder simply wants access to a particular network (and doesn’t expect to profit) is a difficult one. If there were no expectation of a profit on the side of the ICO utility token buyer, it would make more sense to wait until the project is live before purchasing tokens. Where there is risk, there is reward. We’ve seen some tokens ask for “donations” in order to see a project launched. These tokens offer “consideration of allocation” when a project is live. This seems like a semantic workaround that the SEC probably won’t accept, but companies are likely to continue to try.

The third part of the test talks about whether or not the investment is in a “common enterprise.” Different courts have had different definitions of common enterprises. Some federal courts refer to a horizontal commonality and count the pooling of assets for investment in a common enterprise. Other federal courts refer to the vertical commonality and count the efforts of a third-party or promoter. With two broad definitions, it seems likely that most tokens will be considered a common enterprise.

The fourth part addresses whether or not the profit comes from the efforts of a third-party or promoter. This test is often passed by tokens, as there are always individuals working on the project or network. The profit would derive from their efforts in building a better network.

Applying the Howey test, it’s clear that security tokens will be “investments” and require registration with or exemption from the SEC. This likely isn’t a major issue because security token issuers and investors will likely anticipate regulation in this manner. However, if the SEC applies the Howey test to utility token offerings, it may ultimately determine many of those offerings are also securities and regulate them as such.

Regulation and issuance of security tokens. Issuers of security tokens will have several different filing options with the SEC:

While the SEC hasn’t issued much specific direction regarding security token offerings (STOs) or ICOs, we expect many companies issuing security tokens to follow Reg D (Rule 506c) or Reg A+. Some high profile ICOs have moved to only offer tokens to accredited investors, like Telegram, allowing them to file under 506c. We expect this to be a continued trend given current market demand among large investors.

Security tokens face three major problems today. Despite there being relatively more regulatory clarity on security tokens versus utility tokens, there are some challenges that security tokens face before they become a more widespread investment option.

  1. Security tokens have limited liquidity options for investors. Today, investors in security tokens don’t have the same liquidity options as other crypto assets, which is arguably the biggest issue for the asset class. There are effectively no exchanges that exist to trade security tokens. To offer trading of assets that the SEC classifies as “investments,” exchanges must meet strict know-your-customer (KYC) standards and Anti-Money Laundering (AML) requirements. While there are some exchanges (e.g., Coinbase) that attempt to meet these standards, they are often the ones that offer the fewest cryptocurrencies and tokens to trade. Depending on the security token, exchanges may need to be set up to interact with dividends, distributions, or communications with customers about things like proxy voting. Because of the additional regulations imposed on exchanges listing “investments,” many existing exchanges have avoided security tokens. There are a few exchanges under development for security tokens (see tZERO), but it will be some time before these exchanges are launched and have sufficient trading volume.
  2. Current securities laws aren’t easily adapted and pose additional complications. The Howey Test is a good place to start for security token regulation, but there may be additional regulations required for token-based securities. For example, many in the crypto community want transactions to be anonymous or pseudo-anonymous, which makes compliance with KYC and AML standards difficult. The SEC may need to offer additional guidance on what is and is not acceptable when it comes to anonymity and security token ownership. Exchanges that offer trading of security tokens may also require additional regulation.
  3. There are unique technical challenges in creating security tokens. Security token creation faces different challenges than utility token creation. The stakes are not only higher, but additional securities requirements come into play. Beyond the security and compliance issues, security tokens may also need to include instructions on how to handle dividend payments, coupon payments, splits, voting, and other common functions of securities. Finally, security tokens need to be flexible enough to allow for changes in the terms of the security, which may be difficult after issuance.

A few companies like Polymath and Harbor see these technical challenges as opportunities and have set out to simplify these issues and make it easy for companies to issue security tokens.

What’s next? We’re going to dive into what a security token exchange might look like, and how it would compare to existing securities exchanges.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Thoughts on ARKit 2.0 at WWDC

  • In our meetings with AR companies at Augmented World Expo (AWE) this week, it’s clear the industry is waiting for Apple to announce ARKit 2.0 at WWDC.
  • Improvements in persistence and multiplayer functions are two of the most requested additions for ARKit 2.0.
  • Separately, we believe Apple could announce a new iPad with Face ID and advanced 3D-sensing for AR apps.

Multiplayer and persistent sessions most requested ARKit developer features. We believe Apple will announce ARKit 2.0 at WWDC next week. After meeting with several AR companies, it’s clear there are two important tools that developers need in order to advance AR, including improvements to multi-player and persistence. Multiplayer allows several participants to view the same virtual layer simultaneously and from different angles. The use case for multiplayer is straightforward for gaming, but non-gaming could be powerful as well. Take, for example, multiple engineers simultaneously working on a machine using AR. The second most requested feature, persistence, involves virtual objects remaining in place between sessions. For example, if you place a virtual picture on the wall, exit, then resume a session, the picture should maintain its position. This is a difficult but necessary component of compelling AR experiences.

iPad with Face ID. Face ID is currently on iPhone X only, but we believe, consistent with other reports, it will be added to the iPad this year. The advanced 3D-sensing needed for Face ID requires a VCSEL (vertical-cavity surface-emitting laser) array next to the front-facing camera. We expect this feature to be added only to the iPad Pro lineup. This would also help short-range AR, but front-facing AR has very limited use cases. We expect Apple to add a higher-powered, rear-facing array to iPhones and perhaps iPads within the next several years.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.