Will Sphere’s Franchise Model Scale Beyond Abu Dhabi?

‍After months of speculation, Sphere Entertainment has found a second home in Abu Dhabi. I predicted Riyadh back in August, but Abu Dhabi makes more sense for a few reasons.

Abu Dhabi’s tourism infrastructure is more developed than Riyadh’s. The U.A.E. capital’s Department of Culture and Tourism, DCT Abu Dhabi, has partnerships with the NBA, UFC, TikTok, and tennis. It has courted musical acts like Coldplay, Backstreet Boys, and Christina Aguilera for upcoming shows. That list of artists will likely grow.

Despite the region’s human rights issues, DCT Abu Dhabi has bold goals in entertainment and has rolled out the red carpet to bring them to life. Since “sportswashing” is the term for the region’s investment in sports to overpower its negative perception in the world, then its push into music is a “culture wash.”

The warm reception to Sphere Abu Dhabi is a stark contrast to the ill-fated Sphere London. The city officials in London had a strong “not in my backyard” stance due to light intrusion, energy consumption, and other concerns, which ended the costly development talks.

But Abu Dhabi, unlike London, was willing to pay for Sphere and pay big.

Sphere Entertainment has adopted the franchise model for its expansion. Instead of James Dolan’s company self-financing another costly build, DCT Abu Dhabi will cover expenses and participate in the upside. Hedge fund manager Kevin Mak estimates Sphere Abu Dhabi will have a $1.5 billion build cost, a $50 to $100 million franchise initiation fee, and a $50 million annual license for Sphere’s content, IP, brand, and other operational expenses.

The structure allows Sphere to extend its low marginal cost content, like the U2:UV concert film and Postcard From Earth, to even more screens and capture the demand for its unique concert residencies. The franchise model’s financial upside for Sphere Entertainment is high, with few incremental costs to incur.

And since Sphere Entertainment is saddled with expenses from the costly Sphere Las Vegas build and the struggling MSG Network, this type of expansion helps Dolan’s broader Sphere - Madison Square Garden business.

But like any franchise model, Sphere needs to scale its locations. Not Starbucks-on-every-corner level of scale, but a few more than just two.

The ideal Sphere location needs to fit the criteria:

• strong tourism and high demand for entertainment beyond its pro sports teams
• willingness to pay construction costs, initiation fees, and annual franchise license fees
• space to build an easy-to-access venue that won’t create conflicts between residential or commercial neighbors
• progress on any human rights issues for business partners to feel confident in being part of the region’s future
• governments or business partners that are easy to work with

That’s a high threshold to cross. It’s why Las Vegas works well. Where else can you stroll through a casino and walk by a family of five on their way to the buffet, and drunk bachelor party that convinced themselves that “Vegas ain’t ready,” and a promoter offering free tickets to a random show? The city is a unicorn.

For other cities, costs are a common barrier. U.S. cities like Oakland, San Diego, and St. Louis have lost their pro sports teams because of the local government’s pushback on the team owner’s request to help fund new stadiums. The Sphere’s franchise model is slightly different since it allows for more financial upside for cities than the often overstated “economic impact” of sports teams on local cities, but the same challenges exist.

That leaves very few options in North America. My money is still in the Orlando and Lake Buena Vista area of Florida. A new Sphere would draft off the existing tourism from the Walt Disney World and Universal Studios parks.

If Orlando city officials themselves aren’t interested, I could see Disney itself becoming a Sphere franchisee. Parks still drive profits for the entire Disney business. Bob Iger and his team are always looking for new attractions for the entertainment conglomerate. Sphere Disney (with a paid livestream option on Disney+)! Don’t rule it out. Tokyo and Singapore are also strong options. There’s strong tourism in both areas, including Disney Japan.

The decision to build a Sphere is a big commitment. This isn’t a standard all-purpose arena that’s home to a pro sports team with 40+ home games attended by season ticket holders and their generational fans, plus concerts, monster truck shows, three-ring circuses, and the various events they host.

Spheres are brand-new builds with a less predictable slate of future events. The growing demand for superstar concerts is a positive headwind, but it’s still riskier than building another Yankee Stadium.

If there’s a plan for a build in a new city, there needs to be near certainty of its success, especially for the franchisee. Abu Dhabi has plenty of promise, but Sphere Entertainment will need to find a few more cities like that to maximize its potential.