Sector

Sports

Background

Deven Parekh is Managing Director at Insight Partners. We cover Fanatics' unique commerce model, how the company is aggressively entering the NFT market, and other prospective areas for expansion.

Cover

Date

March 23, 2022

Episode Number

51

Fanatics Business Breakdown

Background / Overview

Fanatics, founded in 2011 through Michael Rubin’s acquisition of Football Fanatics, is a global digital sports platform headquartered in Jacksonville, Florida. Initially focused on e-commerce for sports merchandise, Fanatics has evolved into a multifaceted business with four primary segments: Fanatics Commerce (core merchandise), Fanatics Collectibles (trading cards and NFTs), sports betting and iGaming, and joint ventures (e.g., 49% ownership in Lids and NBA China partnerships). The company’s history stems from Rubin’s earlier venture, GSI Commerce, which pioneered private-label e-commerce solutions for sports leagues. After eBay acquired GSI in 2011, Rubin bought back the sports merchandise division, rebranding it as Fanatics with $250 million in revenue at the time. Employing thousands globally, Fanatics operates in 11 countries, leveraging its vertically integrated commerce model and exclusive, long-term licensing deals with over 900 sports properties, including the NFL, NBA, MLB, NHL, and European soccer clubs.

Ownership / Fundraising / Recent Valuation

Fanatics remains privately held, with significant investments from Insight Partners (since 2009 in Football Fanatics), SoftBank, Silver Lake, and others. Some sports leagues also hold equity stakes, aligning their interests with Fanatics’ growth. Recent valuations are not disclosed in the transcript, but the company’s aggressive expansion into trading cards (via Topps acquisition), NFTs, and betting suggests a valuation reflecting its broadened total addressable market (TAM). No specific enterprise value (EV) or multiples are provided, but the company’s strategic acquisitions and $1 billion marketing investment since 2016 indicate substantial capital raises.

Key Products / Services / Value Proposition

Fanatics operates four economically separable business units, each with distinct value propositions:

1. Fanatics Commerce (Core Merchandise):
• Description: Sells sports apparel and merchandise (e.g., jerseys, hats) through Fanatics’ branded site and white-labeled platforms for leagues and teams.
• Volume: Handles 40 million annual transactions, serving 57 million customers from an 81-million-fan database, adding 8 million new customers yearly.
• Price: Varies by product; vertically integrated products (50% of sales) have higher margins due to reduced distribution layers.
• Revenue/EBITDA: Estimated $3 billion in revenue for the core commerce business. EBITDA margins are not specified but benefit from 40% gross margins, higher than typical e-commerce due to apparel and vertical integration.
2. Fanatics Collectibles (Trading Cards):
• Description: Acquiring Topps, Fanatics entered the trading card market, aiming for vertical integration and direct-to-consumer (D2C) sales.
• Volume: Not quantified, but the market is poised for restructuring to eliminate intermediaries.
• Price: Cards vary widely; D2C model aims to reduce scalper-driven price inflation.
• Revenue/EBITDA: Nascent, with potential to double or triple industry size through structural changes.
3. Fanatics Collectibles (NFTs):
• Description: Operates Candy, a platform for sports NFTs, focusing on collectibles over speculative assets, using fiat currency to stabilize pricing.
• Volume: Early stage, with cross-promotions driving adoption (e.g., e-commerce credits for NFT purchases).
• Price: Lower average dollar price points than crypto-driven NFTs, emphasizing accessibility.
• Revenue/EBITDA: Limited current contribution, with long-term potential tied to sustainable collectible market growth.
4. Sports Betting and iGaming:
• Description: Nascent venture leveraging Fanatics’ fan database for customer acquisition in a high-growth market.
• Volume: Not yet scaled, but targets a broader audience than traditional gamblers.
• Price: Not applicable yet; focus on customer acquisition efficiency.
• Revenue/EBITDA: Minimal current impact, with potential for significant contribution given lower acquisition costs.

Value Proposition: Fanatics’ core moat lies in its exclusive, long-term (20+ years) licensing agreements with major sports leagues, enabling control over digital commerce for sports merchandise. Its vertically integrated “V-commerce” model ensures real-time inventory management, higher margins, and exclusive products unavailable on platforms like Amazon. The fan database (81 million fans) drives cross-selling across segments, while alignment with leagues (via royalties and equity) fosters win-win partnerships.

Segments and Revenue Model

Fanatics’ four segments operate as distinct economic units:

• Fanatics Commerce: Generates revenue through e-commerce sales of licensed merchandise, powered by exclusive rights to sell for 900+ properties. Revenue comes from Fanatics’ site, league/team sites, and third-party marketplaces, with royalties paid to leagues regardless of sales channel.
• Trading Cards: Aims for D2C sales, bypassing wholesalers and retailers to capture higher margins and increase league royalties.
• NFTs: Sells digital collectibles via Candy, with revenue from fiat-based transactions and potential secondary market management.
• Sports Betting: Future revenue from betting and iGaming, leveraging the fan database for low-cost customer acquisition.

The commerce segment dominates revenue, with trading cards and NFTs in early growth phases and betting as a long-term bet. The revenue model emphasizes high-margin, vertically integrated products and recurring royalties to leagues, ensuring alignment.

Splits and Mix

• Channel Mix: Predominantly online (Fanatics’ site, league/team sites). Physical retail via Lids (49% stake) contributes minimally.
• Geo Mix: Operates in 11 countries, with U.S. dominance (all major leagues) and growing European soccer presence. China joint ventures face short-term challenges but target U.S. sports fans.
• Customer Mix: 57 million active customers, with 8 million new annually. Targets “displaced fans” (e.g., Yankees fans in LA) and passionate sports enthusiasts.
• Product Mix: Apparel dominates commerce (50% vertically integrated), with trading cards and NFTs as emerging categories.
• End-Market Mix: Sports fans across professional and collegiate leagues, with no specific revenue split provided.

Mix Shifts: The commerce segment is accelerating growth, driven by vertical integration (50% of sales, up from lower historically). Trading cards and NFTs are gaining share, with betting expected to contribute longer-term. No EBITDA splits are provided, but commerce likely drives most profitability due to scale and margins.

KPIs

• Commerce Transactions: 40 million annually, indicating strong volume.
• Customer Growth: 8 million new customers yearly, reflecting acquisition strength.
• Fan Database: 81 million fans, with 57 million customers, enabling cross-selling.
• Brand Awareness: 60% aided awareness, driven by $250 million annual marketing spend.
• Growth Trend: Commerce growth has accelerated over the last two years, suggesting strong momentum.

Headline Financials

Revenue Trajectory: The commerce segment, at ~$3 billion, has seen accelerated growth, driven by vertical integration and exclusive rights. Total revenue likely exceeds $3 billion with nascent contributions from trading cards and NFTs. No long-term CAGR is provided, but the business is positioned for tripling in scale.

Cost Trajectory: Gross margins of 40% are robust, with 50% of commerce sales vertically integrated, reducing distribution costs. Below gross margin, sales/marketing ($250 million annually) and technology (AI, machine learning) are the largest expenses. Fixed costs (manufacturing, logistics) are significant, but operating leverage is expected as revenue scales. The business is in investment mode, prioritizing growth over cost optimization.

FCF: Limited due to heavy investments in marketing, technology, and manufacturing. No specific capex or NWC figures are provided, but the operationally intensive nature suggests high maintenance capex. Cash conversion cycles are likely short due to just-in-time inventory.

Value Chain Position

Fanatics operates midstream in the sports merchandise value chain, between leagues (IP owners) and consumers. Its primary activities include:

• Manufacturing: Owns facilities for 50% of commerce products, enabling real-time production (e.g., Tom Brady jerseys post-trade).
• Distribution: Manages logistics for Fanatics’ site, league/team sites, and third-party channels.
• Marketing/Sales: $250 million annual spend on branding and quantitative marketing, leveraging AI for inventory placement.
• Service: Powers white-labeled e-commerce for leagues/teams, ensuring seamless consumer experiences.

GTM Strategy: Direct-to-consumer via Fanatics’ site and white-labeled platforms, with exclusive products unavailable on Amazon. The “displaced fan” thesis targets geographically dispersed fans, while AI-driven marketing optimizes inventory and promotions.

Competitive Advantage: Vertical integration and exclusive, long-term licensing deals create a moat, ensuring Fanatics captures significant value. Leagues benefit from royalties across all channels, aligning incentives.

Customers and Suppliers

• Customers: 57 million active customers, primarily sports fans (professional and collegiate). The “displaced fan” segment drives demand, with 8 million new customers annually.
• Suppliers: Leagues (IP providers) and manufacturing partners (for non-vertically integrated products). Key partners like Nike collaborate on transformational deals, with Fanatics handling online distribution.

Pricing

Pricing varies by product, with vertically integrated items commanding higher margins due to reduced distribution layers. Royalties to leagues are fixed, not volume-dependent, placing manufacturing risk on Fanatics. Pricing drivers include:

• Mission-Criticality: Fans’ emotional attachment to teams/players supports premium pricing.
• Real-Time Demand: V-commerce enables rapid response to “hot markets” (e.g., Super Bowl winners), capturing peak pricing.
• Exclusivity: Products unique to Fanatics’ platforms reduce price competition.

Contracts with leagues are long-term (20+ years), providing revenue visibility. No specific contract magnitudes are disclosed, but royalties have increased 20x from 2006 to 2021.

Bottoms-Up Drivers

Revenue Model & Drivers

Commerce:

• Model: E-commerce sales of licensed merchandise, with royalties paid to leagues. Vertically integrated products (50%) drive higher margins.
• Price: Varies by product; exclusivity and real-time production support premiums.
• Volume: 40 million transactions, driven by 81-million-fan database and 8 million new customers annually.
• Drivers: Exclusive rights, vertical integration, and AI-driven marketing. “Hot markets” (e.g., player trades, Super Bowl wins) spike demand.

Trading Cards:

• Model: D2C sales, eliminating intermediaries to increase margins and league royalties.
• Price: Aims to reduce scalper-driven inflation, offering fairer pricing.
• Volume: Early stage, with potential to double/triple industry size.
• Drivers: League rights (post-2026 for MLB), Topps acquisition, and vertical integration.

NFTs:

• Model: Fiat-based collectible sales via Candy, with cross-promotions from commerce.
• Price: Lower than crypto-driven NFTs, emphasizing sustainability.
• Volume: Limited, with growth tied to fan adoption.
• Drivers: Fan database, league partnerships, and focus on collectibles over speculation.

Betting:

• Model: Future betting/iGaming revenue, leveraging database for low-cost acquisition.
• Price: Not applicable yet.
• Volume: Nascent, with high potential due to TAM growth.
• Drivers: Database (81 million fans), team-specific data, and operator expertise (Matt King).

Mix:

• Commerce dominates revenue, with trading cards and NFTs growing. Betting is a long-term play. Vertical integration drives margin expansion in commerce.

Cost Structure & Drivers

• Variable Costs: Manufacturing (50% vertically integrated), royalties to leagues, and logistics. Royalties are fixed, with Fanatics bearing manufacturing risk.
• Fixed Costs: Marketing ($250 million/year), technology (AI, machine learning), and manufacturing facilities. High fixed costs create operating leverage potential.
• Gross Margin: 40%, with vertically integrated products boosting profitability.
• EBITDA Margin: Not disclosed, but expected to expand with scale. Current investment mode limits margins.
• Cost Trends: Marketing and tech dominate opex, with no focus on cost optimization yet. Fixed costs (facilities, logistics) are significant but scalable.

FCF Drivers

• Net Income: Not disclosed, but EBITDA is pressured by high opex.
• Capex: Heavy investment in manufacturing, logistics, and tech. No specific figures, but likely high maintenance capex.
• NWC: Short cash conversion cycle due to just-in-time inventory. No inventory buildup issues noted.
• FCF: Limited due to investment mode, with potential for improvement as revenue scales.

Capital Deployment

• M&A: Topps acquisition for trading cards, Lids (49% stake), and China joint ventures. Synergies include leveraging Fanatics’ infrastructure (e.g., database, logistics).
• Organic Growth: $1 billion marketing spend since 2016, tech investments, and vertical integration expansion.
• Buybacks: Not applicable (private company).

Market, Competitive Landscape, Strategy

Market Size and Growth

• Commerce: Part of the global sports merchandise market, with a TAM of billions. Fanatics redefines its TAM to include broader sports (e.g., trading cards, NFTs, betting), significantly expanding addressable revenue.
• Trading Cards: Stagnant industry ripe for restructuring, with potential to double/triple in size.
• NFTs: Emerging sports NFT market, with fragmented rights but high growth potential.
• Betting: Rapidly growing TAM as U.S. states legalize iGaming, though competitive.

Growth Drivers:

• Volume: Fan database growth (8 million new customers/year), league partnerships, and new segments.
• Price: Premium pricing for exclusive, real-time products.
• Industry Growth Stack: Sports fan engagement, digital adoption, and legalization of betting.

Market Structure

• Commerce: Oligopolistic, with Fanatics dominating U.S. sports e-commerce due to exclusive rights. European soccer is more fragmented.
• Trading Cards: Historically fragmented with intermediaries; Fanatics aims for consolidation via D2C.
• NFTs: Fragmented rights, with Fanatics positioning Candy as a collectible leader.
• Betting: Highly competitive, with FanDuel and DraftKings leading. Fanatics’ database provides a moat.

Minimum Efficient Scale (MES): High MES in commerce due to exclusive rights and vertical integration, limiting competitors. Trading cards and betting have lower MES, increasing rivalry.

Competitive Positioning

Fanatics positions itself as the premium, vertically integrated platform for sports fans, offering exclusive products and seamless experiences. Its database and long-term rights create high barriers to entry, deterring Amazon and others. In trading cards and NFTs, Fanatics counters legacy structures with D2C and collectible-focused models. In betting, it targets broader fans, not just gamblers, leveraging data.

Market Share & Relative Growth

• Commerce: Dominant in U.S. sports e-commerce, with all major leagues partnered. Growth exceeds market due to vertical integration and database-driven cross-selling.
• Trading Cards: Early stage, but Topps acquisition positions Fanatics for leadership post-2026.
• NFTs: Small but growing share, with Candy as a differentiated player.
• Betting: Negligible share, with potential to outpace competitors via low acquisition costs.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: High fixed costs (manufacturing, marketing) create operating leverage, with 40% gross margins and potential for higher EBITDA margins.
2. Network Effects: Limited, but the fan database (81 million) drives cross-selling across segments, reinforcing customer retention.
3. Branding: 60% aided brand awareness, built on $1 billion marketing spend, supports premium pricing and league alignment.
4. Counter-Positioning: V-commerce model (vertical integration, real-time production) is superior to traditional e-commerce, deterring Amazon due to Fanatics’ category expertise.
5. Cornered Resource: Exclusive, 20+ year licensing deals with 900+ properties are unmatched, locking out competitors.
6. Process Power: AI-driven inventory and marketing optimize demand prediction, enhancing efficiency.
7. Switching Costs: Moderate; fans are loyal to Fanatics’ exclusive products, but price sensitivity exists.

Porter’s Five Forces:

• New Entrants: Low threat due to long-term rights and vertical integration. High capital and time barriers.
• Substitutes: Moderate; Amazon and Alibaba lack exclusive products, but physical retail (e.g., Lids) competes.
• Supplier Power: Low; leagues are partners, not suppliers, with aligned incentives via royalties and equity.
• Buyer Power: Moderate; fans are price-sensitive but loyal to exclusive, real-time products.
• Rivalry: Low in commerce (Fanatics dominates); high in betting due to competitors like FanDuel.

Strategic Logic

• Capex Bets: Heavy investment in manufacturing, logistics, and tech is offensive, aiming to widen the moat via vertical integration and AI.
• Economies of Scale: Fanatics has achieved MES in commerce, with potential diseconomies if expansion (e.g., betting) overextends operations.
• Vertical Integration: Reduces costs and enhances customer experience, critical for commerce and trading cards.
• Horizontal Expansion: Trading cards, NFTs, and betting diversify revenue, leveraging the fan database.
• M&A: Topps and Lids acquisitions drive synergies, with no evidence of overpayment or negative mix shifts.

Risks and Opportunities

Risks:

• Operational Execution: Vertical integration increases complexity, with manufacturing and logistics risks.
• Irrational Competitors: In NFTs and betting, overpaying for rights or customer acquisition could disrupt economics.
• Competitive Intensity: Betting faces high rivalry, with FanDuel and DraftKings dominating.

Opportunities:

• Commerce Growth: Tripling scale via vertical integration and database-driven cross-selling.
• Trading Cards: Doubling/tripling industry size through D2C and ancillary services (e.g., grading, insurance).
• NFTs: Candy becoming the de facto sports collectible platform, expanding beyond baseball.
• Betting: Low-cost customer acquisition leveraging the database, targeting broader fans.
• Adjacencies: Potential in ticketing, sports media, or further geo expansion (e.g., China).

Conclusion

Fanatics’ business model is unique due to its vertically integrated V-commerce approach, exclusive long-term licensing deals, and an 81-million-fan database. The commerce segment, with ~$3 billion in revenue and 40% gross margins, drives profitability, while trading cards, NFTs, and betting offer high-growth potential. The company’s moat—built on cornered resources, counter-positioning, and branding—positions it to dominate sports e-commerce and expand into adjacent markets. Operational complexity and competitive intensity in betting are key risks, but Fanatics’ alignment with leagues and data-driven strategy create a defensible, scalable platform.