The six-plus year stalemate between AT&T and Spectrum Networks has finally come to an end. Back on April 1st, it was announced that the two companies had agreed to a deal that gives DirecTV, U-verse and AT&T TV subscribers, in the Los Angeles area, access to SportsNet LA for the first time. Terms of the agreement were not disclosed.
Howie Long-Short: Back in 2013, Time Warner Cable (TWC) agreed to pay Los Angeles’ National League baseball club $8.35 billion for the exclusive rights to Dodgers baseball games over the next 25 years. The deal, meant to serve as the fulcrum of the company’s newly formed regional sports network (SportsNet LA), came on the heels of TWC’s purchase of Lakers broadcast rights (20 years, $4 billion) and the successful roll-out (see: widespread penetration in market) of another RSN (SportNet) in 2011. The presumption was that the Dodgers popularity in Los Angeles would force cable distributors in the market to carry SportsNet LA (as was the case with the Lakers) and that the sheer size of the DMA would guarantee the channel’s profitability – even after the company paid a “record” price for the team’s broadcast rights.
Unfortunately for TWC and Los Angeles baseball fans (it’s hard to argue the team lost considering it will rake in $8+ billion in guaranteed revenue from the deal), the assumptions made by the cable distributor turned RSN operator were off base. Media consultant Patrick Crakes explained that “running an RSN successfully requires a tremendous understanding of what distributors can afford to pay and the true value of the channel. Even though Time Warner was a distributor, they agreed to a deal that was always going to be a challenge to pencil out. Distributors were always going to have difficulty paying what Time Warner needed to charge for carriage and because it’s L.A. – and not a baseball first town like New York or St. Louis – they could get away with [not carrying the channel]. It also mattered that TWC didn’t have a large portfolio of channels/assets to add leverage in distributor negotiations akin to what the Dodgers previous home (Prime Ticket) had as part of the larger News Corp/21CF channel infrastructure.” As a result, TWC couldn’t find carriage, the company was forced to file Chapter 11 bankruptcy (Charter Communications, which has since been rebranded as Spectrum, bought the assets) and for the last several years – even after the RSN changed hands – the majority of Dodgers games have lacked robust reach in the market.
There’s likely been some write-downs on the channel side that would allow Spectrum to lower their asking price – at least initially (TWC was looking for $4.90/sub, which would have made the channel amongst the most expensive on pay television), but Crakes said it’s the changing media landscape over the last half decade (see: cord cutting) that led to the two sides finally coming together. “DirecTV – like all distributors – is now motivated to find programming that makes their bundle stickier.” The company lost nearly 3 million satellite subscribers last year. The hope is SportsNet L.A. can help both slow the rate of satellite subscription declines in Los Angeles and provide a boost to the company’s new digital strategy.
The media consultant went on to explain that “despite claims to the contrary, regional sports networks are still valuable. There’s an incorrect thesis out there that says because only 10% or 20% of the customer base is consuming the RSN, that the remainder of the distributor’s subscribers are subsidizing the channel. But in reality, that 10% or 20% is among the company’s most valuable customers. Hyper-consumers of one or two channels are probably subscribed to higher priced tiers and will often buy ancillary products or services; they’re also likely to view the RSN as a core reason to have a bundle.”
Considering pro sports are currently on hold the timing of the deal’s announcement is somewhat curious, but Crakes said “the current environment provides an opportunity for media companies to finalize transactions because they’re not distracted with other things.” It certainly wouldn’t be a surprise if DISH Network and Diamond Sports also announced a new carriage agreement before the games start up again.
Without knowing the deal’s length it’s hard to make a definitive statement, but if AT&T and Spectrum agreed to a long-term pact Crakes said it’s possible the breakthrough could have larger implications for the broader RSN business. “Other distributors could follow suit and draft off of DirecTV – they have in the past.” For what it’s worth, a pair of industry insiders did say the deal is longer than one year in length.
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