A business home run

AROUND this time last year, Home Box Office (HBO) turned a success into an embarrassment. Within a five-week period, two of the broadcaster’s shows drew such large audiences that its online streaming service for subscribers collapsed. The firm could not afford further hiccups during its launch this week of HBO Now, an over-the-top (OTT) service that delivers shows via the internet to viewers without a cable-television package. To ensure reliable delivery, HBO turned to an unusual source: Major League Baseball (MLB), or more specifically its media-technology arm, MLBAM, which has become a leader in the video-streaming business.

It would be hard to design a better incubator for a live-video startup than baseball. Sports are the type of content that viewers are keenest on watching in real time, which has driven rights fees to record levels. MLB, whose new season opened on April 5th, holds 2,500 games per year—and thus produces far more content than other sports. Moreover, most of its games are only broadcast locally, and cannot be seen on TV by fans in other cities.

In the internet’s early days, connections were too slow for live video. But by 2000 baseball’s officials foresaw mass broadband, and its 30 teams launched MLBAM as a joint venture. They agreed to chip in $1m per club per year over the next four years. That proved unnecessary: thanks to the launch of MLB.tv, a subscription service that shows live games to viewers outside the teams’ local markets, it only spent $77m before becoming profitable in 2003.

Next, MLBAM focused on improving quality and on complementary software, such as online ticketing and an app for Apple smartphones. By the mid-2000s other content owners began to notice its technical prowess. It is far pricier and slower to build video architecture from scratch than to use MLBAM, which can withstand crushing demand loads, and authenticate and geo-locate viewers in milliseconds. In 2010 the firm began handling online distribution for ESPN, a sports network owned by Disney. In 2011 it powered the launch of TheBlaze, a conservative news channel. In 2013 World Wrestling Entertainment hired it to run a new OTT offering. In March Sony unveiled PlayStation Vue, which uses MLBAM to transmit television shows over game consoles.

Baseball has reaped a windfall from MLBAM: its $800m in revenue last year was 9% of the major leagues’ total. Its growth could accelerate as streaming video gains ground. Last month Twitter said it had acquired Periscope, which lets users share live footage from their phones. Businesses built on such “social streaming” could create a new category of customers. Although MLBAM is sure to attract competition, it enjoys strong barriers to entry. Since reliability is paramount in live video, content owners are willing to pay up for a provider with a proven record. And only a well-heeled rival could replicate its network of data centres—its capital spending has already exceeded $500m.

MLBAM’s success has led analysts to ask whether its non-baseball services might fare better on their own. Wall Street banks have been encouraging it to go public since 2005, and Apple-watchers have identified it as an acquisition target, since its technology could help the tech giant secure exclusive content for Apple TV, an OTT service. Bob Bowman, MLBAM’s head, insists that it is only pursuing minority investments from partners within its industry.

MLB has no interest in disrupting networks like ESPN, whose rights fees help keep it afloat. So its own subscription service, MLB.tv, meticulously blanks out nationally broadcast and “in-market” games. This means that fans who want to watch their local teams must keep subscribing for pay-TV packages that include the sports networks.

However, streaming video could shift the balance of power between upstart OTT services and legacy cable providers. Thanks to MLBAM’s technology, numerous OTT platforms now carry the ESPN network. Sports fans may increasingly dump the cable firms’ expensive TV packages in favour of cheaper OTT ones. If so, cable firms may be relegated to mere “dumb pipes” providing only internet access, a business whose margins might easily be competed away.