- SportBusiness Media takes a deep dive into the past, present and future of DAZN
- This first article takes a look at the creation of DAZN and its early years
- DAZN initially aimed to be a Spotify of sport, but its model quickly ran into trouble
The year is 2014. Barack Obama is president, the German national football team are good, and Perform Group is about to celebrate another profitable year.
Perform was a multi-faceted, mature business. It earned £250m (€285.6m/$310m) in 2014, posting an unspectacular post-tax profit of £3m. From 2010 to 2014, its core businesses – betting rights, content distribution, technical services and editorial – were all ticking over nicely, growing year-on-year and yielding consistent profits.
This wasn’t the kind of business that Perform’s primary shareholder, Access Industries, wanted to own. Sources say Access owner, billionaire Len Blavatnik, was yearning for something more dynamic and by the beginning of 2015, Perform Group’s then-chief executive Simon Denyer was ready to roll the dice on a bold new future.
“We definitely still expect the betting business to grow, but it’s not going to grow by more than five to 10 per cent, realistically,” Denyer told SportBusiness Media in 2015. “Unless something radical happens, like the US sports betting market completely opens up – which could happen – or other major territories become much more open in their regulation.”
Based on this logic, Perform launched a multi-pronged transformation of its business. A 10-year, $525m global rights deal with the Women’s Tennis Association – agreed in 2014 – set the company’s stall out as a major player in the business of rights-trading alongside the likes of IMG, MP & Silva, Infront and Lagardere. But the big idea – the one that would aim to revolutionise the world of sport – was DAZN, a new direct-to-consumer OTT platform.
“We’ve looked at the rollout of Netflix, we’ve looked at the rollout of the music services like Spotify and Deezer,” Denyer said. “Our major shareholder is Access Industries and they own Warner Music, and also own large stakes in Spotify and Deezer. They have a lot of experience of how this has worked in the music industry so we’re looking at applying that to the sport sector.”
Denyer’s belief was that Perform could use this model to become sport’s answer to Netflix and Spotify – a low-cost, mass-scale, global streaming platform that would aggregate premium live sport. For Blavatnik, it had the familiar scent of a billion-dollar idea.
“For the rights-holders it will be like Spotify – we are going to collect all the revenues and take all the risk,” Denyer said. “We’re going to do all the marketing and handle the platform, and we’re going to collect all the money. A proportion of that will go into a pot which will be shared between the rights-holders based on usage.”
In the same way record labels had been attracted to Spotify, Denyer’s initial plan was to attract sports rights-holders into DAZN’s ecosystem with large guarantees and keep them by paying out revenues from the communal profit pot each month.
“We need to do a good job on acquiring subscribers because that then dictates how much their percentage actually means in terms of hard cash,” Denyer admitted. “As long as we’re doing a good job driving the subscriber base and the rights-holder is getting all their content on to the platform, hopefully they’ll be pleased with the results they see.”
On DAZN’s target audience, Denyer said the service would be aimed at “blokes in their 20s who have never really watched TV like a 40-year-old watches TV”. For established pay-television customers, the service would aim to complement their existing packages, rather than replace them.
“In the UK and Germany in particular, people are still subscribing to Sky. They’re just buying Netflix on top because they’re managing to get some extra programming which isn’t on Sky,” Denyer explained. “If you priced Netflix at €50 per month you’d have no subscribers, whereas when you price it at €10 per month it works quite well.”
The first two, three years
Denyer’s expectation was that after “two to three years” of launching in a particular territory, DAZN should be profitable.
“Whether the actual division is profitable depends on whether we’ve launched in other territories. If we’ve launched in five other countries, most countries will be loss-making for at least the first two, maybe three years.”
It was on this model that DAZN OTT platforms launched in Japan and DACH in 2016 at prices of €15 per month and €9.99 per month respectively. A 10-year deal with the top-tier J-League underpinned the Japan launch, while both territories would launch with a slew of European football and American sports content.
Denyer said DAZN would need a total of over one million subscribers across these markets to make the Spotify-esque revenue-sharing model work. However, the blokes in their 20s weren’t flocking to DAZN as expected. Sources say that as subscriber uptake was much slower than expected, this rights-holder pot quickly became an inconsequential part of the model. Its deals for sports content quickly became like any other – large annual guarantees in exchange for rights, monetised via subscriptions.
After the initial startup costs of DAZN tipped Perform into a marginal loss in 2015, Perform ended 2016 posting a £78.7m loss and making only £9m in OTT revenues – albeit on only four months of DAZN trading in DACH and Japan. With performance sluggish through the early months of 2017, the company quickly moved to acquire rights that could accelerate revenues.
In May 2017, it spent a total of about €80m per season on a ‘B’ package of rights to the Uefa Champions League in Germany and Austria, sublicensing the rights from Sky. It also acquired a primary package of Uefa Europa League rights in Germany for about €15m per season. Both deals were to run for three seasons, from 2018-19 to 2020-21.
In July 2017, it did the same in Japan, acquiring exclusive Champions League and Europa League rights over that cycle for between $40m and $45m per season. DAZN’s deals helped Uefa achieve significant increases across those markets.
The benefits of those acquisitions would not kick in until midway through 2018, but the reasoning for buying higher-quality content was clear. In the streaming service’s first full year of operation, 2017, DAZN earned revenues of about £90m across DACH, Japan and the newly-launched service in Canada. These revenues were a drop in the ocean compared to the already-heavy investments that had been made in launch content for the platform.
Even before the Champions League deals had begun, content costs were already well into the hundreds of millions of dollars each year. DAZN’s initial wave of deals for rights in DACH and Japan to a host of major European and US sports leagues had been incredibly expensive, while the J-League deal alone – initially agreed for 10 years from 2017 to 2026 – was worth an average of about $200m per year. This was over three times the amount of revenue generated from DAZN’s Japan business in 2017, which also paid out further tens of millions to other European and American rights-holders.
As a result, Perform Group lost £370m in 2017 on the back of the streaming service’s business across DACH, Japan and its newly-launched service in Canada.
Economies of scale
The mantra from those within DAZN at the time was that most startups – including the likes of Spotify and Netflix – incurred heavy losses in their early years before scaling their services globally, achieving a critical mass of subscribers across an ever-growing number of active markets, growing revenues to the point of significant investor interest.
However, the Netflix and Spotify model was proving difficult to translate to sport. Music and entertainment streaming platforms had found success by acquiring global rights to subscription-driving content. The economies of scale achieved via global content deals and a global tech platform helped both platforms quickly roll out across the world, growing revenues quickly as they penetrated into an ever-increasing number of markets.
DAZN’s model was, and is, different. As sports rights are almost always sold on a market-by-market basis, the company had been forced to roll out its service accordingly. In addition, it was facing significant competition to acquire those rights in each discrete market, driving costs even higher. Meanwhile, Spotify had grown its service at a time when non-exclusive, global deals for digital music content were gladly accepted by record labels that had been decimated by digital piracy – any revenues were good revenues for the music business in 2009.
Sports rights, on the other hand, were doubling in value as a matter of course. And unlike Netflix, DAZN had no way to produce its own premium sports content for global distribution; no way to create cost-effective, long-tail sports content; and no way to aggregate enough sports rights to create the necessary economies of scale at a cost of between €10 and €15 per month.
In order to scale globally, DAZN would not be able to follow the Spotify and Netflix model. Unlike its idols, its cost base would increase dramatically with every new market. And with young digital natives failing to fall in love with its offering of American sport and foreign football leagues, DAZN would have to go much, much bigger to start attracting the kind of subscriber base that investors could get excited about.
At the end of 2017, DAZN stood at a crossroads. With subscriber numbers well below expected levels, costs soaring and the goal of profitability in DACH and Japan all but gone, DAZN needed to go big, consolidate, or go home.
In 2018, DAZN chose go bigger than any sports broadcaster ever had before.
This article is the first of three on the past, present and future of DAZN. The second and third articles will be published on Thursday, January 19 and Friday, January 20.