Disclaimer: every number in this article is made up, apart from those that have been publicly reported. Also, Seven League do not buy or sell rights, it is a digital specialist.
Last month Amazon and the Premier League announced that from 2019, two rounds of live PL matches will be available on Prime Video in the UK as part of a new three-year deal.
Prime subscribers will have access to 20 matches, comprising two full fixture rounds (ten matches from one Bank Holiday and all ten from the Boxing Day fixture programme).
We’ve built a model that values this package at around £80 million – we’ve used no inside data from either party, and importantly we’ve arrived at the price based on assumptions we’ve made about Amazon’s business model, not what others have paid in the past. Interestingly, the per match value using our model is £4.55 million, about half of what BT and Sky paid collectively.
Amazon is a very different business to those that have traditionally bought sports rights, one which will survive comfortably whether this acquisition works or not. That clearly puts a very different complexion on the rights landscape and what they will have chosen to bid.
They’re also a phenomenally data-driven business and will have brought this approach to the negotiating table - something rightsholders are going to have to get used to.
With these points in mind, we considered how Amazon might have approached valuing content (not its core business).
Amazon explicitly use content as a lever to sell more Prime subscription packages and to bolster the value of existing packages so that users don’t leave.
"When we win a Golden Globe, it helps us sell more shoes," Jeff Bezos, 2016
52 per cent of Americans have Prime (compare that to the 51 per cent who go to church and the 49 per cent who have a landline) and according to Amazon’s own figures subscribers typically spend almost twice what non-Prime customers do.
Source: Gartner L2
As data-driven as they are, Amazon will have built a model that seeks to understand what commercial value sports rights are likely to deliver to their core business of people buying stuff.
Average annual amount spent on Amazon: Prime vs Non-Prime members @ Sept. 2017
A clue to this approach came from a leaked internal document earlier this year, revealing that the company’s 19 Amazon Originals acquired 5 million new Prime users globally. The Man in the High Castle alone cost the company US$72 million to make but was thought to have delivered 1.15 million Prime subscribers.
As an ecommerce world leader, one of the key metrics Amazon track is user cost per acquisition (CPA). In this example the Man in the High Castle had a CPA of US$63.
If you consider then that Prime costs US$99 in the States and UK£79 in the UK (it’s much lower in some developing markets though) and Prime users go on to buy multiples more on the platform, this starts to look like a decent return on investment (using developed market subscription pricing).
Amazon, we believe, will have tried to do a predictive model for how much value sports rights can deliver. So with no inside knowledge and no data to go on we wondered whether we might be able to use proxy values and assumptions to get close to a guess at what Amazon might have paid the Premier League.
Establishing what a new Prime subscriber is worth
Amazon will have a very clear idea of how much a new Prime customer is worth to them. It will be comprised of two elements: first, the annual subscription fee and second, the anticipated uplift in sales associated with converting that user.
We know from past announcements that in the US Amazon customers typically spend US$700 per year, rising to US$1,300 for Prime members.
Let’s assume then, using the US values as proxies that a UK Amazon customer spends on average UK£200 per year with this rising to UK£400 when they become Prime customers.
These numbers are lower than the US, even after currency conversion because we assume that the UK is a less developed market for Amazon, and so both their Prime and regular customers will spend less but that the ratio will be roughly the same.
So, that’s a sales uplift of UK£200 per customer per year.
Now, let’s assume given its lack of physical retail infrastructure, that Amazon operates at a healthy gross margin of 33 per cent. That would be a profit uplift of UK£66.
That means the annual value of a customer is the UK£79 subscription fee plus the profit uplift of UK£66 – a total of UK£145. Of course Amazon hopes you’ll stick around for longer than a year.
Calculating customer lifetime value
Subscription marketers use past data and trends to come up with an average subscription lifetime – a unit of time that tells you how long, on average, people stay subscribed. Let’s call this the Customer Lifetime (there are numerous terms and acronyms across different industries but the principle is fairly standard).
Amazon Prime, of course, is a relatively new service with only a few years’ worth of relevant data so it’s not as easy to calculate a customer lifetime as accurately as Sky or BT can.
You will inevitably have customers who ‘churn’ and they will do so for a variety of reasons: they’re not using the premium delivery enough, they’ve watched all the good stuff on the service, they’re cutting back on their spending, etc.
Retention marketers spend their lives working out how to reduce churn but it can’t be entirely eliminated.
Without extensive historic data we probably can’t make any wild assumptions that Prime subscribers will stay for ten years.
So let’s assume very simply (and very conservatively) that of the customers Amazon has now, 50 per cent will stay one year, 25 per cent will stay two years and the remainder will be loyal three year customers. After that, the horizon seems a little far away, so let’s not build it into our calculation.
That gives us an average customer lifetime of 2.1 years, which when multiplied against the annual value of acquiring a new customer, gives a lifetime customer value for Prime Subscribers of UK£304.50
Premier League Rights effect on the churn of existing customers
Of course, acquiring Premier League rights will be a draw to existing subscribers as well as new ones. Amazon hopes these matches will deliver a positive benefit to at least some of its existing subscribers. In the UK, the total figure is currently estimated to be circa 4 million customers.
The addition of Premier League rights will stop a segment who were considering leaving from doing so, while for others it will contribute to a sense that the benefits package just got better, which will increase the longevity of their stay. When calculating the price it was prepared to spend Amazon will have modelled the expected benefit the rights might deliver to existing customers.
This is tricky: you’re dealing with a new content class, a new package of rights on a (relatively) new service, so we imagine Amazon will have had an optimistic upper limit, a pessimistic lower limit and a realistic middle ground on which they based their assumptions.
In our model we’ve assumed that Premier League rights will improve customer lifetime by a factor of 0.3 per cent for retention (keep those who were considering leaving) and 0.2 per cent for satisfaction (making those already satisfied stay longer).
That brings customer lifetime up from 2.10 to 2.11 years, or UK£1.37 per customer per year for existing customers.
If you consider this across a subscriber base of 4 million users that has a monetary value of £5.48m per year.
But we think the perceived value of benefits will decline over time as customers get ‘used to’ having these games and competitors up their packages. For that reason we’ve reduced this value to 75 per cent in year two and 50 per cent in year three of the deal. That’s a total of UK£12.3 million over the three years.
Likely new users acquired
With 20 matches broadcast over two match weeks, Amazon only has a small slice of the rights package, making it a ‘nice to have’ for many football fans and a ‘must have’ for only a few.
How then do you work out how many fans for whom these rights will be a ‘must have’ that moves them from non-Prime to Prime?
We’ve taken the number of Facebook fans each club has in the UK and used that as a proxy value for core fans, the rationale being that only a core fan will actively ‘like’ a football club’s page.
International fans are much less parochial and will frequently follow more than one big European club, but this is less the case in the UK. Facebook fans are also by definition digital adopters, so a good fit for the Prime service.
That said, a football fan can go without two match-weeks so we can’t expect to convert a huge number from these games alone.
We’ve erred on the side of caution and plugged in a one per cent conversion rate for year one with this reducing to 0.75 per cent in year two and 0.5 per cent in year three when you have fewer early adopters and less of a novelty value. Clearly the list of clubs here has already changed and will do so twice again during the period of the deal but we don’t see this having a materially significant effect on the model.
Source: Newton Insight
Using these proxy fan numbers and these conversion rates, Amazon would get 201,000 new subscribers over three years and a total new revenue of around UK£68 million.
Total deal size
Alongside the direct revenues Amazon can attribute to this deal, there will be additional marketing value in three broad categories:
- PR – the deal was widely reported and that PR has a monetary value. You could value it in retrospect, but in advance you could only plug in an assumption about how much press you’re likely to get from this kind of deal
- Data – these rights will give Amazon a whole new set of insights about its customers, which will contribute to the more efficient and accurate acquisition of rights in future as well as new ways of serving customers
- Differentiation – with Netflix vehemently staying away from live sports, the fact that Prime has Premier League rights (as well as NFL programming, ATP, Masters etc) positions Prime as a complement to, as well as a substitute for, Netflix who are concentrating on original narrative programming
With these three factors in mind, we’ve added a nominal marketing value of UK£1 million in year one, declining in years two and three which takes the total value calculation across the three lines to UK£82.5 million for the life of the deal.
Sense checking and benchmarking
Would this price make sense in the context of other deals done? We know Sky and BT’s last rights buy came in around UK£4.5 billion over three years, a package that incorporated 492 matches – that’s around UK£9.2 million per match.
We also know that Amazon’s package comprises 20 matches, but these are distributed across only two of the total 38 match weeks (five per cent of match-weeks).
This doesn’t make Amazon’s matches one twentieth as valuable, but having only three per cent of total games and five per cent of game weeks echoes our earlier distinction between ‘must have’/’nice to have’ packages – the latter we would expect to attract a discount.
Our UK£82.5 million valuation prices each match at around UK£4.1 million per match, or around 45 per cent of the UK£9.2 million that the bulk packages attracted. That feels about right.
So what does it all mean? Well, nothing really, it’s just a bit of fun (yes, at Seven League this is how we have fun).
The bigger point is that our capacity to measure marketing effectiveness is getting ever more accurate and sport needs to respond to this, given its revenues are still largely derived from broadcast and sponsorship deals.
Also, if you’re going to get different types of businesses bidding for rights, it’s important to understand their business models and what drives value for them.
Of course, it was ever thus – what digital has changed is the input of data and the reduction of speculation. Businesses’ ability to align their rights investments with a direct return will make rights negotiations more black and white, and this will only increase as they gather more data.
In a world where every company has the capacity to say ‘we think this deal will deliver this revenue uplift’ or even ‘I need this sponsorship to deliver me three times my investment’ have you delivered your capacity to respond?
One area in which Seven League applies this thinking is the valuation of digital content. If you’re keen to understand what value you are creating and potentially leaving on the table, then do please get in touch.