Best of JWS: Diamondbacks Expect Streaming Opportunity To Be Bigger, Faster Than Expected

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Best of JWS: Diamondbacks Expect Streaming Opportunity To Be Bigger, Faster Than Expected

The Arizona Diamondbacks recently became the second Major League Baseball team to turn over its broadcast production and distribution rights to MLB Media.

Diamond Sports Group did not submit an acceptable 11th hour offer to keep the club's games on Bally's Sports Arizona. The company previously proposed a multiyear deal that would have paid the team its full rights fee in ’23, but it included stair-step reductions in future years and required the club to grant the media co. its video streaming rights, and all related revenues.

“They wanted something for free [in digital rights] that [they could] monetize, and [offered] to pay us less,” Ken Kendrick (managing general partner, Arizona Diamondbacks) said.

The offer was rejected. But even if the club had found it satisfactory, Kendrick said he probably would not have accepted the extension. The Diamondbacks owner does not believe the RSN conglomerate is long for the business.

“It’s not ultimately whether they will fail, it’s when they will fail,” he said.

Kendrick is also confident that the revenue opportunities associated with streaming are larger, and likely to come faster, than many anticipate.

To understand Kendrick’s position on Diamond, one must understand how the company came to be.

The story begins with The Walt Disney Company’s $71.3 billion purchase of 21st Century Fox’s film and entertainment assets in 2019, and the company's subsequent need to divest the 22 regional sports networks included in the deal. The justice department wanted to prevent Disney, which already owned ESPN, from dominating the sports broadcasting landscape.

An auction process ensued, and Sinclair Broadcast Group won the assets with a debt-laden offer.

“They leveraged the [RSNs] they were acquiring to the tune of 90% of the purchase price,” Kendrick said.

The combination of a heavy debt load and some new management fees quickly put Diamond in a hole; and then the shift to streaming began picking up steam.

“So, they operated for several years and then bankrupted months ago,” Kendrick said.

Prior to filing bankruptcy, Diamond asked MLB for and received the streaming rights to a handful of clubs whose deals were expiring. In exchange, they would receive new pacts.

Diamond had no intention of extending those teams' agreements without digital rights “and MLB decided early on to support them,” Kendrick said.

The RSN conglomerate later came back to MLB looking for the streaming rights to the clubs still under contract.

Now in bankruptcy, it said, “we have a right to reject your contract and we’re going to do so unless you give us the digital rights for free,” Kendrick recalled.

The league balked at the suggestion.

Diamond eventually proposed new contracts that included digital rights to, at least, some of the teams.

The Diamondbacks turned theirs down.

“We did not think it was as financially viable for the future as going with MLB Media [would be], where we have our digital rights and [can] benefit from them,” Kendrick said. “Digital rights are where the future is.”

Diamond’s pending litigation against its former owner, which the club anticipated, made the decision even easier.

Diamond subsequently rejected its contract with the team.

Diamond is no longer obligated to pay rights fees to the Diamondbacks; however, the overall Diamond business remains under pressure.

“Secondary debt holders have been converted to equity, but [the company is] still under water and can’t pay [all its] bills,” Kendrick said. “You can only stay in deep waters for so long until you drown.”

While Diamond has not yet submitted plans for reorganization, the Diamondbacks owner understands baseball’s importance to the RSN economic model, and recognizes how difficult it will be for the conglomerate to navigate shifting media winds without digital rights.

The business is “going to have continued attrition because they are [reliant on] linear. Even if they’re making money with other RSN’s this year, next year they’ll make less [as more people cut the cord]. They won’t be able to capture the digital market, so they don’t have any upside. They only have a downside,” Kendrick said.

And as teams like the Phoenix Suns choose to leave the RSN ecosystem, there is less linear inventory for them to sell against.

“In Arizona, baseball and basketball are [now] gone. [Diamond] only [has] hockey,” Kendrick said. “What do you think they’re going to do? They’re going to close the RSN. There’s just not enough revenue to run a network. It’s going to happen market after market.”

Diamond has stated it plans to pay the rights fees owed to its other 16 MLB partners through the remainder of this season. Kendrick does not expect that to continue into ’24.

“Several more teams will not be with Diamond when the new season begins,” he said.

The club owner predicted Diamond would shutter its doors completely within 12-24 months.

The Diamondbacks won’t be there if it does happen. The club has already made the move and started up Diamondbacks Media under MLB Media.

In doing so, the team has expanded its potential footprint.

“We [now] have an opportunity to sell video streaming into a five million customer marketplace,” Kendrick said. “Diamond did not have the privilege of doing that. They were limited to a 900,000-customer [cable and satellite] marketplace.”

There is evidence to suggest the opportunity will translate into eyeballs. The Padres have reportedly increased viewership 20% since MLB Media took over production and distribution.

Regardless of what Diamondbacks Media’s P&L shows for the remainder of this season, MLB will ensure that the team receives "significant payments" for its rights during the balance of 2023.

That won’t be the case next year. And much of the media is speculating the club is in for a steep haircut. Diamond was contracted to pay the team $63.5 million in ’24.

But Kendrick doesn’t think that will be the case.

“We will be flat over this year’s all-in revenues to perhaps modestly less,” he said. “In the second and third year, and future years [of the new partnership with MLB Media], we have a good chance to have an increasing revenue model because we control so much more than we [did before].”

That includes the ability to sell its own television adverts and streaming subscriptions. The team is confident many fans will pay the co-operatively priced $19.99 for the service.

“They’re already doing it in San Diego,” Kendrick said.

The Diamondbacks shouldn’t lose many (if any) of their old cable/satellite subscribers in the pivot away from Diamond. ~90% of Bally’s Sports Arizona subs (and revenue) came through Cox, and the distributor is carrying the new network.

The Diamondbacks are not under a long-term contract with MLB Media. When the season ends, the team plans to evaluate all its options.

“Do we want to set-up our own enterprise? Do we want to go with Gray or Scripps,” Kendrick said. “Staying with MLB is the [most] likely [outcome], but we’ll have had a chance to watch MLB in action and evaluate how well and successful they operate before we commit ourselves to the next year and future years.”

MLB has seemingly been successful in limited reps; at least relative to the competition.

“San Diego, from May until now, [has received] more video streaming account signups than any of the clubs Diamond has had for three years,” Kendrick said.