Sports is embracing technology, but you can't 'replace the feeling of going to a game': Ted Leonsis

Key Concepts

• AI-Proof Business: The idea that sports, due to its inherent human element and the experience of live events, is resistant to complete replacement by artificial intelligence.
• SAS-like Business Model: Applying Software as a Service principles to sports businesses, characterized by recurring revenue, owned intellectual property (IP), and distribution through owned networks.
• Scale and Leverage: The importance of achieving significant size and market presence to gain competitive advantage and financial leverage.
• Market Concentration: The strategy of focusing on a specific, large media market (like Greater Washington D.C.) to build a dominant business.
• Integrity of Sports: The paramount importance of maintaining fairness and trust in sports competitions, especially in the context of legalized sports betting.
• Prophylactic Technology: The use of technology, particularly analytics and AI, to detect and prevent integrity issues in sports.
• Pre-IPO Company: Operating a business with the preparedness and financial discipline required for a future Initial Public Offering (IPO).
• Repeatable Revenue: A significant portion of a business's income that is predictable and recurring, similar to subscription-based models.

Monumental Sports & Entertainment: Strategy and Operations

Ted Leonsis, a veteran of the tech and media industries, discusses the strategy behind Monumental Sports & Entertainment, a company valued at over $7.8 billion, which owns the NHL's Washington Capitals, NBA's Washington Wizards, WNBA's Washington Mystics, Capital One Arena, and Monumental Sports Network.

AI-Proof Business and SAS-like Model

Leonsis emphasizes that the sports business is "AI-proof," meaning that while technology is embraced, the unique human experience of attending live games cannot be replicated by AI or simulations. Monumental operates with a "SAS-like business" model, characterized by:

• Large Audience: Attracting three million fans annually to their arena events.
• Owned IP: Owning the intellectual property of their teams.
• Owned Distribution: Distributing their IP through their own Monumental Sports Network.

The company views itself as a "global and digital-first enterprise" situated in the significant Greater Washington D.C. market, encompassing 10 million households. Their strategy involves combining technology and media outreach to build a dominant business in the region, with a core mission of winning sports teams and uplifting the community.

Impact of Government Shutdowns and Community Role

Leonsis expresses relief regarding the end of the government shutdown, highlighting its potential negative impact on consumer confidence and attendance at games. Monumental actively engaged with the community during the shutdown by offering free game tickets and dining certificates to government workers and donating $100,000 to local food banks. Leonsis states, "We're not red or blue. We're red, white, and blue. And we're here in service." He notes the company's central role in community events, including hosting inaugural events, and their employment of 5,000 full-time and part-time individuals. He hopes for a return to a "more normalized business cadence."

Scale, Market Concentration, and D.C. Development

Leonsis rejects the idea of expanding outside of Washington D.C., asserting that "scale" is crucial for media and technology companies to build value and gain leverage. He believes this scale is achievable by concentrating efforts within their existing market. Monumental benefits from league rules that make them the sole owner of basketball, hockey, and women's teams in the D.C. area, alongside two baseball teams (Baltimore Orioles and Washington Nationals). This allows for year-round programming on their network, leveraging ad-serving technology, and optimizing resources for team payrolls.

To compete with larger markets like Los Angeles and New York, which represent 10% of the overall market, Monumental aims to "fight above our weight class" by concentrating on the D.C. media market. The company is investing over a billion dollars in a new arena, with the city as a partner, aiming to make it the "new front door for downtown D.C." This initiative is tied to attracting tourists and showcasing Washington D.C. globally, especially in light of the city's 250th birthday celebration. Leonsis acknowledges the social responsibility of owning sports teams and their importance to leagues like the NBA, which he describes as a "hundred billion dollar plus enterprise."

Sports Betting and Integrity Concerns

Leonsis discusses the significant impact of legalized sports betting on the industry, noting that it emerged from the PASPA ruling in Washington D.C. Monumental was an early investor in tech companies like DraftKings and Sport Radar, recognizing the potential to bring an estimated $100 billion in illegal gambling into a regulated and taxable framework. He likens this regulated environment to Wall Street, with oversight bodies like the SEC.

Technology as a Prophylactic

Leonsis argues that technology, particularly the analytics used in sports gaming, acts as a "prophylactic" to detect anomalies and ensure the integrity of games. He believes the leagues' ability to self-report issues through this technology demonstrates the system's effectiveness. However, he acknowledges that recent incidents have "shaken us all to the core" because fans need to trust the fairness of competition. He commends the NBA commissioner's response and reiterates that technology was instrumental in identifying issues.

He clarifies that some NBA gaming issues, like poker games involving former players and coaches, were unrelated to the actual game outcomes. Monumental takes these matters very seriously, warning players that violations will result in lifetime bans, citing an example of a player banned for life. The substantial salaries paid to players serve as a warning to adhere to rules.

Protocols and Future Iterations

Monumental implements annual training sessions for players and staff regarding betting rules and insider information, emphasizing that this is crucial for maintaining the "integrity of the game." Leonsis draws a parallel to public companies managing sensitive information. He anticipates that sports will evolve similarly to Wall Street, with swift consequences for rule-breakers.

The leagues are actively adapting, with baseball, for instance, modifying prop betting on pitching. Leonsis notes that gaming companies are now major advertisers and partners with leagues and media networks. He stresses that no one wants to compromise the integrity of the game, as it would lead to decreased viewership and fan engagement. He believes technology and gaming, including fantasy sports and legal betting, enhance fan engagement, particularly among younger demographics.

Valuation and Future IPO Prospects

Leonsis addresses the rising valuations of sports teams, citing the Lakers' $10 billion valuation. While an IPO is not an immediate "endgame," Monumental operates as a "pre-IPO company," preparing for potential liquidity for investors. He highlights the unique position of sports businesses, attracting both strong retail fan followings and institutional investors due to their "SAS business" characteristics.

SAS-like Business Model and Valuation Metrics

Monumental's business model features 70-75% repeatable revenue, long-term contracts (10-15 years) with partners, and annual escalators of 3-5%. Leonsis compares this to companies like Salesforce.com and Oracle. He observes that few sports companies are publicly traded, and those that are often appear undervalued. He believes there is a need to "rightsize and retrain Wall Street" to understand and value pure-play sports tech companies appropriately, based on topline growth, cash flow, and EBITDA, similar to tech giants.

Leonsis expresses interest in taking the company public if it allows for appropriate valuation and benefits partners and fans by enabling them to share in the value creation driven by sports and technology.