The New York Post recently reported that Sinclair Broadcast Group was working with global investment bank LionTree in an attempt to raise $250 million for a direct-to-consumer sports streaming service. The company hopes to offer fans in their exclusive markets an a la carte option for $23 per month to stream the local teams’ games.
Industry insiders agreed the venture is the latest step in the inevitable evolution toward unbundled (no need for a cable or MVPD subscription), direct-to-consumer local sports content. But Tim Hanlon (founder and CEO, Vertere Group) and Patrick Crakes (principal, Crakes Media Consulting) offered differing views on who will be delivering games in-market when the journey concludes.
While Crakes believes there will be a role for distributors long-term because he doesn’t “see teams ever being able to generate what they can make in a bundled system with partners,” Hanlon sees the MVPD world collapsing and wonders “how much value the middleman role will add” in five or 10 years. The Chicago-based media consultant ultimately views Sinclair’s efforts as “an interim step” on the way to teams and leagues controlling their own local broadcast rights. For the record, one MLB club owner said, “Both of those are possibilities, and it would be too early to make any predictions on where it will all go.”
Our Take: To those in the industry, the Post report was not surprising. There has long been speculation Sinclair would go down the same route the premium cable channels have taken. “[Regional sports networks are] a declining business,” Hanlon said. “Meeting the consumer where they are, in the streaming realm, is their last chance to maintain any semblance of a local sports bundle.”
The shrinking bundle and increasing popularity of streaming has Hanlon believing “there is a real existential question as to what the regional sports network business [will become] in the years ahead.” And if RSNs are struggling financially, it’s fair to reason the amount of money they’ll be able to pay for broadcast rights will be negatively affected. Hanlon suggested teams and leagues would reach a point where they could earn more money going DTC than they would selling the rights to an RSN.
Teams and leagues are not going to take a step back in terms of revenue. So, the three-link value chain is safe in the short term (i.e. teams and leagues will continue to cash RSN checks). But, “sports teams and leagues are already aggressively creating content that is dominating social media and other forms of DTC distribution. It’s not a big leap to a subscription model,” Hanlon noted. The media consultant reminded that a direct-to-consumer service would also give the team or league an ability to maintain deeper, data-rich relationships with their most avid fans. “It’s advantageous to convert customers to a more direct model,” he said.
Crakes doesn’t dispute that DTC would be best for teams, leagues and fans alike (if the numbers checked out). But he doesn’t see it as a strategically viable ambition—even as cord-cutting accelerates and streaming usage increases. “The problem [of teams being dependent on broadcast rights] will still exist in the future,” he said. “Every year rights fees must go up 5% to pay for the cost of running these teams. And if they don’t, it is going to wreck the system (remember, these rights can represent as much as 40-50% of club revenues Crakes noted). Everybody wants teams to go direct-to-consumer, but it’s going to end up being an evolution to a cooperative system that still somehow cuts in distributors” (think: a bundled price for broadband customers). Of course, even if the team or league were able to make the financials work on a pure DTC solution, they would be reaching a much smaller audience, making it difficult to sell tickets, merchandise, etc.
For what it’s worth, the MLB owner we spoke to said he believes the existing television model “is going to stay around long-term. Cable will be long-lived. Over-the-air will be long lived. Direct-to-consumer will emerge and find its rightful place, and the economic models will be shared where distributors, networks and the teams all have a piece of the pie.”
Sinclair has reportedly been telling prospective investors that it plans to charge $23 per month for an unbundled direct-to-consumer sports streaming service. Crakes insists the price point is a tell. “They’re not pricing it to move,” he observed. “They’re pricing it to break even, which means they’re not giving anybody who’s not a hardcore fan an incentive to go get it.”
A $23 price tag certainly seems high, particularly considering the relatively little programming it offers. For perspective, the Disney bundle—which includes Disney+, ESPN+ and Hulu—can be had for as little as $13.99 per month. But that has always been the problem with going DTC. “When you price it correctly, it’s impossible [to make the math work on subscription volume],” Crakes said. Remember, the price in the MVPD bundle is artificially low because even those not watching the channel are paying for it.
If Sinclair is able to raise the money successfully, it would further the narrative that the company is working toward a direct-to-consumer product. Crakes says that should serve its interests with investors and distributors alike (think: negotiations with DISH and vMVPDs), even if he doesn’t believe it has plans to stream games allocated to the RSN—exclusively or via simulcast—in the short-term. “That can only happen if distributors agree to it [as it would otherwise be a violation of the contract], and we haven’t heard that” (though some distributors are believed to be amenable to finding a way to share in the upside).
The teams aren’t exactly incentivized to work with Sinclair either, as a failed attempt at a DTC business could result in their rights fee being slashed. “If you’re the Reds and you own 40% of [Bally Sports] Ohio, you don’t have an incentive to destroy that revenue stream or even impact it, because it has to grow every year to pay the team the contractual fee increases,” Crakes reasoned.
The subject of a DTC RSN solution came up during a recent MLB owners’ call. While no offer is on the table from Sinclair (or any other RSN provider) and nothing was decided, it’s believed the owners desire a solution that both maximizes the value of their rights and gives fans the flexibility they desire.
As a result, should Sinclair find the funding (or a JV opportunity considering the weight already around their neck), Crakes believes a “cooperative evolution of the bundle will occur.” That evolution is likely to take shape in the form of an incremental (or supplemental) streaming service, consisting of shoulder programming, pre- and postgame shows and the “5-10 games for every sport, at every RSN, that are not allocated to national regional [sports] networks.” Sinclair could work with distributors to add the simulcast of some more games in the future. A cooperative evolution would protect the existing RSN model.
The Post suggested Sinclair needs to introduce a DTC service—even if it means losing cable subscribers—to meet debt obligations stemming from the company’s heavily levered 2019 acquisition of the RSNs. But Crakes insists the balance sheet is not driving the initiative. “At present, it looks like Diamond Sports is meeting its obligations to debt holders despite several high-profile carriage disputes,” he said. “It’s managing investor concerns about losing other distributors and how that would impact meeting all of the debt covenants that Sinclair is most concerned with. And [a DTC RSN] is not going to help them to service the debt. If they cut out distributors, distributors are going to cut what Sinclair gets [from them] immediately, and there is no way they can make up that delta. They have zero margin to go backwards on any of their income to service the debt.”