Back to the Future: BAMTech & League-Owned Venture Studios.
How to reconstruct another $6B accidental business.
In 2000, the MLB accidentally created a $6 billion business. In the process, they became the world’s most successful startup studio before the concept had even existed.
During a period where the internet was promising to transform everything, all 30 MLB owners allocated $120M over four years to a technically-savvy group holding the league’s digital rights. Two years later, the group later known as BAMTech produced a livestream of the Yankees vs. Rangers. Powered by the MLB's early resources and licensed rights, BAMTech got a head start in streaming and never looked back. The proprietary tech-stack that produced MLB games was later licensed to broadcast HBO shows and a future Disney acquisition ultimately netted MLB owners billions of dollars collectively. (This fantastic Verge article covers all things BAMTech.)
Many have attempted to replicate the BAMTech playbook. On a recent podcast, Michael Spirito, a lead partner at Sapphire Sport, acknowledged that streaming startup Buzzer as “a next-generation BAMTech has always been something in the back of our minds.” On the rights holder side, acquiring equity shares in partners has become a recent phenomenon.
The thesis for league-owned investment arms is relatively simple: in sports, licensing and access isn’t just a big thing, it’s the thing. When the NBA or NFL licenses their intellectual property (IP) to a company entering a new sector, it has the potential to significantly boost the valuation of that company, as they can leverage the IP to build enduring value. The combination of venture capital and the world’s most powerful IP can supercharge certain businesses.
Perhaps more than anything, these investment arms allow leagues to partner with companies building in sectors of growth opportunities. NBA Equity, for example, took an equity stake in StellarAlgo, a company aggregating fan data for teams. The NFL also entered a partnership with Genius Sports in order to capture some value in sports betting — a massive growth opportunity.
These investment arms have been return making machines. But let’s put our Doc Brown hats on. Here’s a theory on a playbook for higher returns by going back to the future.
Outsized Returns To Be Had When Building.
The MLB has a venture arm as well, but their (I apologize for this in advance) “home run” undoubtedly occurred with BAMTech in 2000. Similarly, RedBird Capital Partners describes, the NFL’s venture arm’s “most transformative transaction” to be On Location Experiences (OLE) — a hospitality business that, just like BAMTech and the MLB, spun out of a small division internal to the NFL. This group packaged experiences around the draft, international NFL games, and eventually the Super Bowl. Think of them as an end-to-end, luxury experience provider with the Super Bowl as its flagship experience. It turned out to be a hit.
The NFL later sold OLE to private equity for $70M in 2015 while the league still maintained a bit of equity. It turned out other rights holders had the same issue. After expanding into live event experiences for the NCAA’s Final Four, UFC, concerts, fashion shows, and more, Endeavor purchased the business for a hefty $660M. The NFL’s stake in the company was valued at $65.2M with call options to own up to 45%.
By far, the greatest potential for high returns lie in creating new ventures rather than investing in existing ones. By fostering 'mini-startups' within the parent league, the rights holders in these case studies gained a significantly larger equity stake. Instead of investing in the third-party, they built it — and later spun them out once the concept proved successful. The returns speak for themselves.
Which brings me to venture/startup studios, often thought of as a “startup factory” or an “idea lab”. In short, an idea is tested for product-market fit and if it’s found, the startup spins out.
The following Harvard Business Review chart decently illustrates how the model works.
A Problem Solving Team that Builds Products.
Drawing from this concept of venture studios comes a thought experiment involving a product-shipping engine that follows the BAMTech and On Location Experiences playbook. It’d be a team whose mission is to attack growth opportunities in order to capture more of the value chain (more on this later). Lean, fast-moving, and technically-sound, this team would be incentivized by the equity of a spinout and fueled by the licensing firepower of a rights holder.
While this may sound like a product team, think of it more as a startup. Once a successful proof of concept is carried out within this parent league, the group would spin-out, expanding their market to adjacent leagues and better yet, adjacent industries such as media.
Perhaps I’m overly confident in the success of a spin-out, but I believe most sports leagues have similar needs. A product that fits the needs for one league can be copy-and-pasted for others. To back this claim, look at all the startups mentioned in this piece thus far: StellarAlgo, Genius Sports, Buzzer, and Fanatics. These products don’t change from league to league. The first-mover’s advantage — both in terms of the product and relationships — gained within the parent league could kickstart a snowball effect.
Product-market fit is rarely found among startups and takes multiple iterations to find. In this scenario, however, a prominent market player (a sports league) would be creating the product with first-hand knowledge of what the market’s needs are. Just like internet streaming in 2000, there’s a number of growth opportunities that leagues are uniquely positioned to take advantage of. Anti-piracy software, first-party data collection, sports betting, web3, user engagement, and human performance are just a few areas where rights holders can wield their IP to make significant strides.
And after spinning out into a separate company, it just feels like your typical private capital play from here. Arctos, RedBird, Bruin, and the many other sports-focused PE firms can provide an exit opportunity and/or capital to scale further.
Two Examples & Reasons Why.
I’ll stop talking in generalities and get specific. I’ll take both sides of the argument but first, here are three reasons this may work:
1. Capture More of the Value Chain.
The impetus for On Location Experiences was a growing frustration towards Super Bowl ticket brokers. Some tickets to afterparties even sold for more than the preceding game. The NFL was clearly creating this valuable experience, but middlemen were capitalizing on it. That is, until the NFL made an aggressive play to kill the middlemen altogether with OLE.
Middlemen are omnipresent in sports. I’ll touch another one, Genius Sports, in this example.
Genius Sports’ main product offering is to sportsbooks such as DraftKings and FanDuel. The company gathers raw data from sports leagues and refines it for accurate real-time betting odds. Think of them as the engine that turns raw sports data into actionable betting lines. That FanDuel live bet you made on Sunday afternoon? It’s thanks to Genius Sports (or a company like it).
Pictured below is a direct screenshot from Genius Sports’ investor deck. I’ve added the red markings to further illustrate the value chain. Follow the graph from right-to-left.
The end user bets on a sportsbook like DraftKings, who takes a cut. A portion of this cut is funneled to data/odds providers like Genius Sports. Then, a portion of that portion is distributed to the rights holders, the creator of the content in the first place!
Most of the value in sports betting accrues to the operators (FanDuel & DraftKings) and the data cleaners (Genius Sports & Sportradar). For reference, DraftKings has a market cap valuation of $14.4B, Sportradar at $4.38B, and Genius Sports at $1.72B.
When its shares fully vest in 2026, the NFL will own 10% of Genius Sports, worth $172M at its current valuation. That’s far from the $14.4B of value DraftKings has captured. 83x less to be exact. Now of course, the NFL can’t build a sports betting platform; it’s a clear conflict of interest. But for such a transformative vertical in the sports industry, rights holders seem to be missing out because their place in the chain.
Instead of taking 10% of the 10%, it’s possible an internal team could have built a Genius Sports equivalent. It’s not an overly challenging product to build from a technical prospective. Much of the heavy-lifting lies in gaining access to league data. And if this product were to excel in the NFL, other sports leagues would be clamoring for it. (Note: this is all under the assumption that such a product wouldn’t create a conflict of interest.)
At the very least, this product could be used as leverage to negotiate a more lucrative deal with a Genius Sports.
2. Leverage Against Potential Partners for a Better Deal.
Bidding wars are pretty cool. From lofty franchise purchases to media rights sales, rights holders have built multi-billion dollar businesses off the backs of bidding wars for their content. In fact, the NFL’s favorable terms on the Genius Sports deal materialized because of a bidding war with Sportradar. I imagine NFL+ was another leverage play against networks/streamings, basically saying “look guys, we don’t necessarily neeeeed to go direct-to-consumer with an OTT app but we can and I’d like for you to remember that next time we negotiate.”
At its lower bound, this hypothetical startup team could build tools for negotiation leverage against potential partners. Not only could the league threaten to go with another competitor, they could threaten to build another competitor and take it to market.
Again, at the very least, the rights holder would be building value through optionality. Even if the product ultimately gets scrapped, if a partner is forced to offer an extra, let’s say $50M, the product ultimately drove $50M in value.
Let’s Talk Logistics.
Perhaps the most important piece of this puzzle is the actual team of builders. There’s a few ways to form a fast-moving yet highly formidable team:
Existing relationships with former founders and technical operators.
A reputable VC/PE firm (doesn’t have to be in sports!) with tech recruiting access.
Technical talent at events like the MIT Sloan Sports Conference.
An open application with a potential founder and a valuable idea.
Venture studios are rightly criticized for often taking exorbitant amounts of equity. But given the licensing, access, and sheer resources a league could provide an early-stage startup, a substantial equity stake in a spin-out is certainly warranted.
Developing a healthy structure that, if there’s high potential for growth, encourages spin-out startups would be a win-win: founders venture into a bigger market and the rights holder still sits on the cap table.
In terms of what to build, think of problems that need to be solved:
If capturing more first-party data is the core need to increase TV revenue by ~$100M and there are no formidable partners, perhaps this team would have the answer. An anti-piracy product would solve the industry’s $28.3B problem — and there’s no doubt that all streamers from Netflix to Apple add many billions to this market. Apple’s Vision Pro suggests sports content may soon be consumed in some sort of augmented reality — how might leagues capture that additional value?
With a product manager who deeply understands the rights holders’ needs and a swift-moving, capable team incentivized by both equity and solid base compensation, this just might work. Unrelated, let me talk about all the reasons it wouldn’t.
Reasons This Wouldn’t Work.
I refuse to hide my unabashed Eagles fandom so I’ll continue with that theme: by far, my favorite Jalen Hurts quote to date has been to “keep the main thing the main thing.”
At the end of day, the NBA, NFL, EPL, and all major sports leagues are licensing businesses. Opting to partner with others — rather than building products internally — has likely been a feature, not a bug. Perhaps rights holders may sit lower on the value chain because of this but the risk also becomes significantly mitigated. These are mature, often family-owned businesses. Anything that damages the IP compromises the fan relationship and the entire business model becomes disoriented. Blending Silicon Valley’s “move fast and break things” culture with sports’ mantra to tirelessly protect the IP doesn’t always have a happy ending. FTX was a painful example of that. Licensing is the main thing and will forever be the main thing.
There could be a clash with incentives as well. Rights holders may prefer to keep certain products in-house, even if it could generate higher valuations out of the league. The product builders, however, would likely be eager to spin-out such a product.
That said, here’s the catch about Jalen Hurts’ earlier quote: it was borrowed from author Stephen Covey. He has another quote I love: “Live out of your imagination not your history.”
League-operated venture arms also carry risk. At one point in time, the idea of taking equity over guaranteed cash may have sounded crazy. Now it’s crazy to not have a league-operated venture arm given their returns. Perhaps the same will prove true for this concept as well.
Feel free to reach out @SBajajSports on Twitter.
Great read !