JohnWallStreet is on vacation and will return Jan. 4. In the meantime, enjoy this “Best of” selection from 2021.
Major League Baseball commissioner Rob Manfred made headlines last week when he suggested the league intends to own and control any business built on the backs of its direct-to-consumer digital broadcast rights. His comments, which took place at the CAA World Congress of Sports, came in response to a LevFin Insights report that claimed Sinclair Broadcast Group subsidiary Diamond Sports sought permission from MLB to stream games on a new DTC RSN service (as part of a renegotiation with creditors) and that the league responded by requesting an equity stake in the venture. But while the two sides posture and negotiate their digital futures, Progress Partners senior managing director Sam Thompson said, “The reality is that both need one another.” MLB and the RSNs need to find a viable, direct-to-consumer business model as the media landscape shifts, and yet neither can afford to walk away from the economics of the established system. This is true for all RSNs, not just those owned by Sinclair.
JWS’ Take: There are three distinct types of digital rights. TV Everywhere rights, which enable users to access the RSNs on their mobile device; sports betting rights, which enable the rights holder to conduct electronic transactions in gambling; and true in-market standalone direct-to-consumer streaming rights.
Manfred strongly pushed back on the notion that MLB is seeking equity in Sinclair’s planned direct-to-consumer RSN service. “An ownership ‘stake’ probably understates it,” he said. “We believe those digital rights are crucial, and we want to own and control the platform on which they’re delivered.”
The commissioner was equally adamant that the league controls the sports betting rights, not the RSNs. “The other set of rights they’ve talked a lot about is gambling rights—they don’t have those either,” he said, pointedly. Lee Berke (president and CEO, LHB Sports, Entertainment and Media), who attended the panel session, said the message was clear. “It’s great [Sinclair] has Bally’s as an entitlement partner,” Berke summarized. “That does not mean they can create an app that allows for the regional streaming of, and betting on, those games—not without permission from and the substantial involvement of Major League Baseball and its teams.”
Manfred acknowledged, “The key for [MLB] is the development of direct-to-consumer products to increase our reach.” So, if that is the case and MLB controls the rights needed to launch a standalone in-market streaming service, then why hasn’t it? Thompson explained the commissioner’s characterization of local streaming rights ownership (he said the league was not going to just throw them in to help Sinclair out) was not entirely accurate. “The challenge with Manfred’s argument is that he treats digital and cable as two different channels,” Thompson said. “Instead, [he needs] to see them as closely tied together.”
Established and digital need to be viewed as a package because what happens with one can directly affect the other. Technically speaking, the league could launch a competitive, standalone digital service in-market as soon as next year. But doing so would put the clubs in violation of their RSN contracts, which give the networks exclusivity in-market, and could result in RSN partners slowing or stopping the flow of rights fees.
If Sinclair is unable to get a deal done with MLB for the TV Everywhere digital rights, games that air on the Diamond Sports RSNs may no longer be available on authenticated mobile devices come January. But it’s unlikely MLB would play hardball in negotiations. If MLB cuts them off, distributors (think: Spectrum, Comcast, DirecTV) might look to cut the RSN sub fee, which would in turn hurt team economics.
It is clear Sinclair and MLB have not been seeing eye-to-eye on the structure of a local DTC business arrangement. “The place where they most diverge is in the area of who should decide [on strategy],” said Ed Desser (president, Desser Sports Media). But Manfred’s recent comments would indicate the league also has concerns about “the substantial amount of debt Sinclair [took] out to purchase these RSNs in the first place, the financial condition of the overall group because of the drop-off in pay TV subscriptions and the ongoing amount of interest that needs to be paid,” Berke added.
While MLB may have real hesitation about entering into a long-term deal with Sinclair, the publicly traded telecom conglomerate (NASDAQ: SBGI) is not going to be filing bankruptcy under the weight of Diamond Sports’ debt load. The debt is secured by the EBITDA of the RSNs, and as long as Diamond doesn’t lose another distributor, they should be able to continue to meet their debt covenants. Of course, if Diamond gets a deal done with DISH Network, as has been rumored for some time, that would further alleviate the financial pressure.
MLB may prefer to partner with a company they believe is better-positioned to support and grow a new DTC digital product. But that is not really an option. Diamond controls the established local broadcast rights to 14 MLB teams. “There’s nobody else that baseball can deal with right now,” Berke said. At least not without affecting the rights fees paid to the teams, which gives Sinclair just as much leverage in negotiations.
The most likely endgame is that a variety of parties (think: teams, RSNs, distributors) come together on a broad agreement that maintains current system’s economics, while they collectively explore new means of distribution. “There is probably going to need to be some sort of direct-to-consumer opportunity,” Desser said. “The teams are going to want to have some sort of control over their business relationships with their fans…. But there are important revenue and exposure elements that everyone wants to maintain. There are still tens of millions of subscribers to RSNs. So, they still matter a lot.”
The DTC solution referenced is unlikely to be the replacement for the established bundle the sports fan desires. More likely, the collective will roll out a pricey product (think: ~$20 per month) that offers a limited number of games, so that the distributor can participate in the upside without viewing it as in-market competition.
MLB could make a clean break from the established system and pursue a standalone in-market product—eventually. But to do it the league would have to wait for existing linear deals to expire (some contracts go on for more than a decade) and then have an investor convinced that, after spending billions to offset lost rights fees, the money would flow back.
With negotiations ongoing, Major League Baseball opted not to elaborate on the commissioner’s statements. Sinclair declined the opportunity to comment.