Last week we wrote a story entitled ‘Sky Not Falling on Diamond Sports’ RSN Business’ making the case that the cable sports networks “drive consumption to levels exceeding everything else on television (save the NFL)” and thus the Sinclair (indirect) subsidiary would have “no problem retaining carriage – and pricing power – for their RSNs through the next negotiating cycle (think: 5-8 years).” But what happens if cable and satellite programmers continue to squeeze the RSNs on pricing (see: DISH) and the cost of sports broadcast rights keeps rising? Industry observer Ben Miller said “it’s hard to imagine a scenario so dire that Diamond Sports is forced to file bankruptcy in 2020, but it’s not beyond the realm of possibility if the company isn’t able to generate the revenue needed to cover the debt service it took out to acquire the channels in the first place.” That’s because with $8.2 billion in debt on the RSNs, the $1.5 billion loss Sinclair (SBGI) would take if it filed bankruptcy might be its most palatable option. There’s seemingly little chance another buyer would be willing to pay $9.7 billion plus for the lot of cable channels.
Howie Long-Short: Miller (founder of The Worldwide Reader in Sports & Entertainment) is particularly concerned that Sinclair has yet to rebrand the FOX Sports RSNs (closing occurred in August ’19). He reasoned, “if Diamond Sports was still going through the carriage disputes (see: DISH, Sling, fubo TV), but had rebranded the properties and was expanding their content offerings one would assume the company had a plan and was going to weather the storm. It begs to wonder why Sinclair has been so reluctant to spend the money to go through this rebrand?”
Advocates of the RSN business have suggested that a direct-to-consumer business (along with a smaller MVPD bundle and sports betting) will “in aggregate” eventually off-set any losses associated with the melting of the cable bundle, but Miller doesn’t see it that way. He insists that DTC is simply “a stalking horse the RSNs use in carriage negotiations and not a Pandoras box that they really want to open.” That’s because “with just +/- 5% of people with RSNs in their cable bundle watching more than one game/week, there is a fear that just +/- 5% of sports fans would be willing to pay a monthly subscription fee for the channel if it were sold ala carte. And if a cable or satellite provider could tell subscribers who wanted to watch the games that they could have access DTC, the cable and satellite companies would have even more pricing power over the RSNs [because there would be no pressure from customers to include the channels in the bundle].” Miller believes that maintaining widespread distribution through the bundle and pushing down on the amount of money being paid out to the teams – so that the math works out – is the optimal path forward for RSN owners.
Diamond Sports’ existing agreement with Comcast expires in June. Should the RSNs be dropped (as Rich Greenfield projects) it will push the company closer to bankruptcy. Those who believe a new carriage deal will get done cite the potential for anti-trust lawsuits if Comcast were to retain carriage of its own RSNs and drop those owned by a competitor. But the problem with that logic is one could argue Comcast benefits if a lack of carriage ultimately forces Diamond Sports to push back on the amount of money its paying out for broadcast rights and Miller believes the company would be willing to limit carriage of its own RSNs to achieve that outcome. He said, “Comcast must have some level of regret as to how much they’re paying teams. If the Detroit Tigers are forced into taking a haircut because Fox Sports Detroit is now in less homes, Comcast could theoretically push down on the amount of money it’s paying out to teams on their own RSNs. And if lowering the amount of money going out to the teams is contingent upon placing their own RSNs in a more premium package (to avoid lawsuits), I think they would be OK with that tradeoff.”
Fan Marino: MLS recently announced that the league is considering a plan that would see each clubs’ local rights housed under a single roof. While not a concern specific to Diamond Sports, Miller finds the possibility of pro soccer leaving the RSNs troubling. “If MLS were to get a lucrative rights deal from [a digital first platform like] ESPN plus and viewership remained strong for teams in their local markets, there is the possibility that other leagues would follow suit.” Of course, the subsequent loss of MLB, NBA or NHL rights from the RSN ecosystem would be catastrophic for the business model.
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