This week’s Heat Check covers environmental, social, and governance (“ESG”) opportunities in sports with a focus on the Electric Vehicle’s market. The ESG market has exploded over the past 10 months with fund flows in the U.S. increasing 40% over the last 10-month period to $330 billion. 

In the ESG space, the sports industry still lags behind other industries. 

While there have been initiatives from direct sponsorships, naming rights, and “sustainability partnerships,” there are indicators that there is significant room for growth and improvement when it comes to ESG. A study by the New Weather Institute which indicated that advertisements at major sporting events came from companies with outsized carbon footprints.  

The study specifically called out the automotive industry, with the traditional auto manufacturers spending roughly $1.29 billion on advertising with sports properties. Fortunately, the electric vehicle market has made strides to meaningfully compete with the traditional automotive market, with new entrants and new initiatives from existing automotive manufacturers pushing the electrification trend forward. 

EV specific companies could soon be significant capital providers in the ESG sponsorship space.  

Check out the full Heat Check now.

ICYMI: Last week, we published a new Scouting Report on Fan Tokens and the applications of Blockchain in Sports, with a specific focus on Socios.com.

One Big Thing:

This week Roku announced it would be continuing its deal with Google – keeping valuable assets such as Youtube and Youtube TV on the platform. 

The agreement — a multi-year deal allowing Roku’s 56.4 million users to continue accessing Google’s streaming assets — also avoids a Youtube TV blackout, which would have likely led to a large swath of customer’s defecting from the platform. Competitors such as Amazon Fire TV and Apple TV carry YouTube.

The sticking point in the negotiations was related to advertising revenue. According to CNBC, Roku asks for a percentage of advertising inventory to sell to its customers in each carriage deal it negotiates. Due its size and popularity as the second most visited website on the internet, YouTube was not inclined to acquiesce to Roku’s regular way of business. Allegedly, Google would have required Roku to preference YouTube content over that of other providers in the company’s search results.

YouTubeTV is an important sports streaming asset for Roku, as the streaming service carries a wide variety of sports programming across ESPN, TNT, and the four major U.S. TV networks, along with niche and PPV options. From a viewership standpoint, YouTube became a refuge for sports fans during the pandemic: Sports viewing on the platform increased 65% in July 2020 compared to the previous year.

Roku is growing a reputation as a tough negotiator with media companies. This year alone, Roku reached agreements with NBCUniversal’s Peacock and Warner Media’s HBO Max after extended disagreements related, once again, to how advertising inventories would be allocated. 

What do we think?

Roku calls itself a “TV operating system company.” The company’s business model requires Roku to provide operating systems either through their branded set-top boxes or built into television systems. According to 2020 data, nearly one-third of smart TVs in the United States shipped with a built-in Roku operating system.

Why is this important? According to Roku executives, Smart TVs are going the way of smart phones. In the early days, smartphone manufacturers would construct their own operating systems until the entire segment of the market converged on two operating systems – namely iOS and Android. Roku SVP of GM Platform Business Scott Rosenberg believes that the same dynamic is playing out in the television OS space.

Winning the OS battle, however, is just the first step for Roku; the company also has to monetize their consumer base, and this is where the content side comes into play. Roku monetizes its audience through the purchase and rental of movies, fees on content subscription services, and advertising deals. Of these three, advertising and fees on subscription services have been the main cause of friction with content providers.

• Advertising inventories: In ad-supported services (i.e. YouTube) the company looks to participate in the sale of ads in that application – usually in the amount of 30% of ad inventory.
• Subscription revenues: Roku takes a 20% cut of revenues derived from content or subscription services sold through the application.

The thought process here for Roku is simple: the market for content distribution, particularly for many of these applications, is not a zero-sum game. In order for services like HBO Max and Peacock – which are in hyper-growth mode – to execute on expansion targets, they require immense distribution, something that Roku can offer.

For Roku, the equation is similar to the proposition many strategic investors have when they invest in startups. Find a promising company (in this case differentiated IP) and create a value exchange which is beneficial for both sides. In Roku’s case, this means growing alongside the content platforms they partner with.

OTT services require distribution, and Roku is prepared to provide the required distribution.