Pro August Update - Front Office Sports

September 2, 2022

Happy Friday!

This is the Pro Monthly Update. We’re bringing you the top 10 deals from August, key earnings releases, and One Big Thing about The Merge — the Ethereum OS update that every crypto enthusiast will be waiting for in September.

If you have questions, comments, or suggestions, please email me directly or contact me on Twitter at @Ronenain.

Pro August 2022 Update

Design: Alex Brooks

Reports This Month

One Big Thing

The sports industry has established a substantial alliance with blockchain and crypto technology — from digital collectibles and gaming to athlete contracts and huge sponsorship deals — creating a new multimillion-dollar economy.

Last season, the second-biggest spenders for sponsorship deals with the NBA were crypto companies, which spent between $100 million to $150 million — including the Crypto.com take-over of the former Staples Center in Los Angeles.
Multimillion-dollar companies like Sorare, Socios.com, Autograph, and Dapper Labs source revenues from and operate on the blockchain.
DAOs, projects, and NFT collections from some of the top brands in sports — the NBA, the NFL, Nike, and Adidas — also lean heavily on these new technologies.

But due to the novelty and vulnerability of crypto, the ecosystem’s value, reputation, and performance will be more volatile going forward.

Regarding mainstream market adoption, users from different projects, companies, deals, and collections will look for signs of safety, legitimacy, credibility, and operability.

In September, the biggest update in blockchain’s history, known as “The Merge,” will soon challenge all of the above.

The Merge

The upcoming Ethereum Merge might be one of the most critical events in the short history of cryptocurrencies. The main goal of this make-or-break crypto development expected on Sept. 16 is to shift Ethereum’s consensus protocol — the system used for validating transactions and securing the blockchain network — from Proof of Work (PoW) to Proof of Stake (PoS).

The PoW mechanism, which is also used for the Bitcoin blockchain, has been highly criticized for its energy consumption:

Bitcoin uses more energy than countries like Argentina and the United Arab Emirates.
Ethereum currently uses as much energy as the Netherlands.

PoS, on the other hand, aims to make it more efficient by reducing the energy consumption of the Ethereum block by almost 99.95%.

Why The Merge Matters

As opposed to Bitcoin — which is a digital currency or asset that can be bought, sold, and traded — the Ethereum blockchain is a general-purpose ecosystem that allows users to build decentralized applications and smart contracts on top of it.

The option to integrate Ethereum’s native digital currency, Ether (ETH), for its operations allowed the Ethereum blockchain to create the digital infrastructure for things like decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and many others.

The Ethereum ecosystem set the stage for developers to code thousands of applications including decentralized exchanges, new businesses, marketplaces, games, and platforms, all of which are contributing to this new wave of innovation.

But updating a $200 billion distributed blockchain is not as simple as updating your iPhone to its latest iOS. Many things can go wrong — unexpected errors, hacks, or bugs could challenge or harm the ecosystem and everything built on it. Similarly, a successful merge has the potential to appreciate the value of ETH and the Ethereum blockchain.

The Impact on Sports

The latest crypto downturn has already been taking its toll on sports. Crypto.com backed out of a deal worth over $100 million annually with UEFA, and FTX suspended talks with the Los Angeles Angels. And due to Ethereum’s size and market cap, The Merge may carry consequential shockwaves and several second- and third-order effects on the sports industry.

The most direct impact will affect sports companies, users, and projects with exposure to the value of the Ether currency. A successful merge might shoot the price up, but a failed one might also shatter it. A company or user within these projects and collections holding ETH or Ether-related assets will be exposed to the coin’s price volatility during The Merge.

Second-order effects could come from the chain’s reputation and ability to attract and retain monetary and human capital. A damaged reputation is less likely to attract talented developers or engage in deals and investments within a broken ecosystem (i.e., fewer jersey and stadium sponsorships, Super Bowl ads, players taking their wages in crypto, etc.).

Projects that work with other currencies or aren’t built on the Ethereum blockchain are also slightly exposed to The Merge. Third-order effects will come from changes in valuations from correlated assets, shifts in asset-portfolio weighting, etc.

The Takeaway

It’s a rare event that has the power to influence a whole market, but The Merge is a high-risk, high-reward proposition. Regardless, developments will be critical for the future of the intersection of sports and crypto.

Deal Tracker

Here are 10 of the most notable deals from August.

After owning a 36% stake, US casino operator Penn Entertainment exercised its option to buy the remaining shares of Barstool Sports for $387 million.
Uplift Labs, the AI-powered technology that captures movement and serves MLB teams, the NBA, and GOLFTEC, raised $2.5 million in seed funding, bringing the total amount to $5.5 million.
Limit Break — known for its NFT collections — raised $200 million from Buckley Ventures, Standard Crypto, and Paradigm Ventures.
eBay acquired TCGplayer, the online marketplace for collectible trading cards, in a deal valued at $295 million.
Cloud management startup WellnessLiving, which provides software solutions for fitness and wellness studios, raised $66 million from McCarthy Capital and CIBC Innovation Bank.
Serena William’s firm Serena Ventures — alongside Sequoia Capital and Lightspeed Venture Partners — led a $5 million round for Selena Gomez’s mental health startup Wondermind.
Sony will acquire mobile game developer Savage Game Studios for an undisclosed amount to expand and diversify its gaming offerings.
Happy Health, the wearable that measures stress and mood, raised $60 million in a Series A round led by Arch Venture Partners.
Metaverse avatar startup Ready Player Me raised $56 million in a Series B round led by Andreessen Horowitz and the cofounders of Roblox and Twitch.
A.l. gaming and e-sports company Regression Games raised $4.2 million in seed funding from investors, including a16z, BBQ Capital, and Roosh Ventures.

View the full Deal Tracker.

Earnings Summary

Selected earnings calls and results from the past month:

COIN: Coinbase missed analysts’ expectations after posting $808.3 million in revenues vs. the $832.2 million expected and lost $4.98 per share (expected losses of $2.65 per share).

DIS: Disney’s revenues rose 26% YoY, hitting $21.5 billion in the quarter. Disney+ recorded 152.1 million subscribers, exceeding expectations of 147 million.

EDR: Endeavor Group Holdings reported $1.3 billion in Q2 2022 revenue and expects annual revenues for 2022 to be between $5.2 billion and $5.4 billion.

FWONK: Liberty Media reported a 49% YoY increase in F1 revenues and a 20% increase in Braves Group revenues.

MSGE: Madison Square Garden Entertainment posted $1.7 billion in fiscal year revenues, compared to $814.2 million the prior year.

NVDA: Nvidia reported $6.7 billion in second-quarter revenue — falling short of hitting its outlook of $8.1 billion.

PTON: Peloton posted a net loss of $1.24 billion and a 28% YoY decline in Q4 revenue to $678.7 million, falling short of analysts’ estimates.

RBLX: Roblox reported revenues of $591.2 million, up 30% YoY, and 52.2 million Daily Active Users (up 21% YoY).

WWE: World Wrestling Entertainment reported sales growth of 24% YoY to $328.20 million, beating analysts’ consensus estimates of $315.52 million.

Closing

2020 and 2021 were extraordinary years for many businesses and operations, and a few permanent trends look like they’ll become part of this new reality (e.g., remote work). However, as the world slowly emerges from the pandemic, most consumer behaviors are reverting to the mean, bringing all overly optimistic predictions of future consumption habits back to reality.

For example, there’s a significant fade in demand for products from companies like Zoom, Peloton, and Netflix — forcing them to scale back operations through layoffs, store closures, and changes in business models. The recent drops in their market valuations reflect the lower estimates these companies expect for their future performance.

The pandemic caused explosive shifts in consumer behavior, inflating executives’ expectations for changes that weren’t truly sustainable.

According to Fitt Insider founder Anthony Vennare, gyms have been experiencing consecutive positive changes in monthly visits since February 2022.

Entertainment providers like WWE and Formula 1 have seen an important uptick in revenue numbers and attendance compared to 2021 — largely from the return of live events.

As we approach the last quarter of 2022, the mix of high inflation and recession will continue shifting some elements of consumer behavior. Still, it’s essential to track pandemic-related habits returning to normal and differentiate between temporary and permanent changes.

Written by Ronen Ainbinder