Madison Square Garden Networks’ (MSGN) – which includes MSG and MSG+ – share price dropped perceptibly (-12.4% to $14.76) on Wednesday August 21st after the company reported subscriber totals and adjusted operating income declined -6.5% YoY and -11% YoY (to $76.4 million) respectively, during fiscal Q4 2018. Cord cutting and the expiration of promotional offers from two unnamed distributors are to blame for the weaker-than-expected results. Wednesday’s sell-off continues a tough year for the regional sports networks. While the S&P 500 is +17% YTD, MSGN shares are languishing down -38% YTD.
The disappointing earnings report comes on the heels of Madison Square Garden’s (MSG) worst day since the networks were spun off four years ago. Word of significant cost overruns on the MSG Sphere project – perhaps as much as $500 million over the $1.2 billion budget – sent shares tumbling -8.75% on the day. The price dropped another -2.3% on Wednesday (to $261.13).
Howie Long-Short: The -6.5% sub decline resulted in $3.3 million worth of lost affiliate revenue. That’s an absurdly high percentage – more than 2x “the broader Pay-TV industry average”, but investors shouldn’t worry about subscribers continuing to flee at that rate. The two companies who reported the expiration of promotional offers during the period experienced subscriber growth over the trailing 12 months.
MSGN is and has been vulnerable since Jim Dolan sold Cablevision to Altice in 2016. As independent networks – as opposed to RSNs backed by Sinclair or Comcast, MSGN lacks the protection needed to ensure widespread carriage. While the networks remain available on that cable system for the time being, it’s worth wondering what happens when their 10-year agreement runs out in 3 months. Altice is a notoriously tough negotiator and has publicly stated a desire to cut programming costs. Failure to come to an agreement with a top 3 cable company in the New York DMA would be a devastating blow to Dolan’s networks. It’s worth mentioning that MSGN has been previously mentioned as a potential acquisition target for Sinclair (SBGI).
Most would assume that having the rights to Knicks and Rangers games would make MSGN a ‘must-have’ for carriers in the tri-state area, but it’s important to remember that RSNs are among the most expensive channels and cable providers have become conscious of keeping costs down with subs on the decline. As for the virtual MVPD’s, with growth in the OTT sector having stalled (most companies were light on sports content, anyway), MSGN has been unable to make up for the legacy MVPD subs lost.
The value of Knicks and Rangers broadcast rights is also relative. New York is a baseball town. The Yankees and Mets draw the highest ratings of the local teams by a wide margin. While the Knicks still have a commanding lead on the Nets, viewership has been on a gradual decline for more than a decade and dropped -42% YoY (to .84 TV HH) in 2018-2019. For some context, the club averaged a 3.31 TV HH rating on MSG in 2011-2012. The Rangers have a passionate fan base, but it doesn’t translate to huge television ratings; there simply aren’t as many hockey fans in the city as there are baseball and basketball fans. The team pulled a .74 TV HH rating (-10% YoY) last season.
Fan Marino: While Howie repeatedly referenced the Knicks and Rangers, it must be noted that MSG+ also carries Devils (.24 TV HH last season), Islanders (.54 TV HH last season) and Sabres games.
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