Subscription Decline Sends Madison Square Garden Networks on Worst Slide in 4-Year History


Madison Square Garden Networks’ (MSGN) – which includes MSG and MSG+ – share price dropped perceptibly (-12.4% to $14.76) on Wednesday August 21st after the company reported subscriber totals and adjusted operating income declined -6.5% YoY and -11% YoY (to $76.4 million) respectively, during fiscal Q4 2018. Cord cutting and the expiration of promotional offers from two unnamed distributors are to blame for the weaker-than-expected results. Wednesday’s sell-off continues a tough year for the regional sports networks. While the S&P 500 is +17% YTD, MSGN shares are languishing down -38% YTD.

The disappointing earnings report comes on the heels of Madison Square Garden’s (MSG) worst day since the networks were spun off four years ago. Word of significant cost overruns on the MSG Sphere project – perhaps as much as $500 million over the $1.2 billion budget – sent shares tumbling -8.75% on the day. The price dropped another -2.3% on Wednesday (to $261.13).

Howie Long-Short: The -6.5% sub decline resulted in $3.3 million worth of lost affiliate revenue. That’s an absurdly high percentage – more than 2x “the broader Pay-TV industry average”, but investors shouldn’t worry about subscribers continuing to flee at that rate. The two companies who reported the expiration of promotional offers during the period experienced subscriber growth over the trailing 12 months.

MSGN is and has been vulnerable since Jim Dolan sold Cablevision to Altice in 2016. As independent networks – as opposed to RSNs backed by Sinclair or Comcast, MSGN lacks the protection needed to ensure widespread carriage. While the networks remain available on that cable system for the time being, it’s worth wondering what happens when their 10-year agreement runs out in 3 months. Altice is a notoriously tough negotiator and has publicly stated a desire to cut programming costs. Failure to come to an agreement with a top 3 cable company in the New York DMA would be a devastating blow to Dolan’s networks. It’s worth mentioning that MSGN has been previously mentioned as a potential acquisition target for Sinclair (SBGI).

Most would assume that having the rights to Knicks and Rangers games would make MSGN a ‘must-have’ for carriers in the tri-state area, but it’s important to remember that RSNs are among the most expensive channels and cable providers have become conscious of keeping costs down with subs on the decline. As for the virtual MVPD’s, with growth in the OTT sector having stalled (most companies were light on sports content, anyway), MSGN has been unable to make up for the legacy MVPD subs lost.

The value of Knicks and Rangers broadcast rights is also relative. New York is a baseball town. The Yankees and Mets draw the highest ratings of the local teams by a wide margin. While the Knicks still have a commanding lead on the Nets, viewership has been on a gradual decline for more than a decade and dropped -42% YoY (to .84 TV HH) in 2018-2019. For some context, the club averaged a 3.31 TV HH rating on MSG in 2011-2012. The Rangers have a passionate fan base, but it doesn’t translate to huge television ratings; there simply aren’t as many hockey fans in the city as there are baseball and basketball fans. The team pulled a .74 TV HH rating (-10% YoY) last season.

Fan Marino: While Howie repeatedly referenced the Knicks and Rangers, it must be noted that MSG+ also carries Devils (.24 TV HH last season), Islanders (.54 TV HH last season) and Sabres games.

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Obligation to Cut Down on Debt Load Has AT&T Exploring Sale of RSNs


AT&T is reportedly exploring the sale of the four regional sports networks (AT&T SportsNet Pittsburgh, AT&T SportsNet Rocky Mountain, AT&T SportsNet Southwest and Root Sports Northwest) that it acquired in its $85 billion takeover of Time Warner, Inc. The company has struggled to assimilate the well-established WarnerMedia assets into its portfolio and could use the cash that the RSNs would fetch to acquire additional live broadcast rights or pay down debt; the telecom giant is more than $180 billion in the red and CEO Randall Stephenson is intent on eliminating $8 billion in liabilities before the end of 2019. Bloomberg reported that AT&T is yet to start “a formal process to sell the networks and there are no guarantees a deal will be announced.”

Howie Long-Short: AT&T is considering dumping the four RSNs because they simply don’t fit with Turner Sports’ sales strategy any longer. Octagon SVP (global media rights consulting division) Dan Cohen explained that “the RSNs control local broadcast rights, which makes them difficult to bundle with national broadband, national mobile and national pay-TV packages.” AT&T’s digital approach to the RSNs – limiting viewership to those using the company’s streaming service – also conflicts with today’s “be everywhere, all the time” mentality. Cohen said that “while limiting carriage makes sense as a method of driving MVPD subscriptions, its counter-intuitive to how millennials and Gen-Z’s want to consume content” – on the digital distribution platform of their choice.

Should AT&T decide to sell the lot of RSNs, they’re likely only going to fetch upwards of $1 billion. The inclusion of some less desirable markets (see: Rocky Mountain, PNW, Pittsburgh), the pending expiration of several T-1 media rights agreements (and the anticipated increase in price to retain those rights) and a limited pool of potential buyers have all contributed to the networks’ depressed valuation. The Pirates, Rockies and Jazz (3 of the 8 big four teams that have local broadcast deals with AT&T) are all either currently re-negotiating terms, or will be soon with agreements expiring no later than 2020-2021.

While it’s unclear how AT&T would spend proceeds from a sale of the four RSNs, Chris Lencheski (a private equity executive, a former Comcast-Spectacor executive and the CEO of Winning Streak Sports) believes that the company has an obligation to “their board and the people who trade the paper, to take what is effectively free capital from the sale and cut down on their debt load.” Lencheski reasons that the losses of David Levy and Richard Plepler also make it less likely that the company would pursue the few highly desirable properties (think: NFL Sunday Ticket) that are coming available as the prior mentioned execs had a great “lens” to the “narrative” to sell the leagues, viewers and their respective advertiser bases.

JohnWallStreet readers have been aware that AT&T’s lot of RSNs were on the market since we noted in Early Entrants Vol. XI (June 24) that Sinclair Broadcast Group (SBGI) was “desperately trying to buy” the cable channels. While that remains the case – the company has a bridge loan in place with J.P. Morgan so that it can close – Cohen says that he’s not sure SBGI is a shoe-in to take down the lot. “If the Sinclair-Disney deal goes through, they’re going to be sitting on 23 RSNs. The DOJ could certainly oppose their pursuit of four more.”

Lencheski – who was the first to peg Sinclair as the most likely landing spot for the Fox RSNs back within JWS’ Nov. 19th newsletter – doesn’t even think AT&T’s assets are worth Sinclair’s trouble. He said, “the company is in the driver’s seat on a transaction that would reshape the live sports broadcasting space. Why jeopardize that upside to buy four small [relative to market size] RSNs?

SBJ’s John Ourand noted in his weekly media column that Comcast would be another logical acquirer. The company already owns 8 RSNs (+ a stake in SNY) and the four AT&T networks all reside in Comcast cable markets. Acquisition of the lot would position Comcast behind only Sinclair Broadcast Group in an industry where scale is everything. It’s unclear if Liberty Media Corp. – another bidder for the lot of Fox RSNs – would pursue these channels. The BIG3 group is unlikely to get involved in the bidding unless the Fox lot were to hit the market once again (i.e. DOJ rejects the SBGI deal).

Fan Marino: It’s worth noting that Lencheski doesn’t believe AT&T will retain Sunday Ticket. He believes that ship has sailed, saying “they knew they weren’t going to win the rights again – otherwise they would have included it in their preps; plus they had access to what the package did numbers wise for DirecTV.” In other words, they know the new costs outweigh their upside with AT&T’s business model.

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Early Entrants: Vol. XII – Big East Going to Add a 12th Member

Editor Note: Early Entrants is a series of sports business “rumblings” before the news breaks.

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Big East Going to Add a 12th Member

The Big East Conference officially added its 11th member – welcoming back the University of Connecticut – in a press conference last Thursday. Commissioner Val Ackerman told the media that “there are no plans at this time to add a 12th member school”, but sources tell JohnWallStreet that “at this time” are the words to focus on in that phrase; that it’s inevitable. The conference inked a media rights agreement beyond fair market value in ’13 (the timing was right as it aligned with the launch of FS1 which needed marquee programming) and likely needs to grow to 12 schools to secure an increase when the deal expires following the ’24-’25 school year.

Wondering who the conference might add? The Big East is made up of of predominantly private, academically strong (see: Georgetown, Villanova), Catholic universities that don’t play football; all of whom are based in (or near) major media markets within the Eastern or Central time zone. While this is purely speculation, the St. Louis Billikens – currently of the Atlantic 10 Conference – fit that description and would be hard pressed not to accept a bid if one were presented. If the Big East would consider public universities (outside of UCONN), VCU would have to be at the top of the list.

Sinclair Plans to Introduce a Global OTT Service for The Tennis Channel

Much like ‘new Fox’, Sinclair Broadcast Group (SBGI) has tied their wagon to local news and live sports programming; in addition to buying the 21 FOX RSNs, the company has made investments in both YES Network and Marquee Sports Network (they also own Fox College Sports and Stadium). While those networks (and the rights they control) are all domestic in nature and linear focused (save Stadium), the company is said to have global ambitions for another one of its sports properties; The Tennis Channel. Sources tell JohnWallStreet that SGBI will introduce an OTT service – powered by Sportradar – incremental to local linear broadcasters in respective markets. Look for the company to start buying up global broadcast rights – particularly for tournaments where they have an inside line (see: Laver Cup).


Kwatinetz/IceCube Ready to Pounce “When Sinclair Fails to Receive Approval”

With three U.S. Senators (and Presidential hopefuls) urging the FCC and Justice Department to review Sinclair’s (SBGI) purchase of the 21 FOX RSNs – there are concerns about giving SBGI too much leverage in carriage negotiations and about the company being able to spread their “partisan political” agenda to a wider audience – it is certainly possible that Disney will be forced to re-open the bidding process. If that happens, runners-up Jeff Kwatinetz and IceCube will be ready to pounce. Kwatinetz told JWS that the funding is there and his group remains “committed to acquiring the networks when Sinclair fails to receive approval.” Should The BIG3 co-founders take control over the RSNs, viewers can expect a dramatic change in programming philosophy. Kwatinetz said, “in the morning we would have a program designed to compete with the TODAY Show. There would be a lot of national programming. We would run it as a national network.


Puma the Front-Runner for Zion?

NPD Group analyst Matt Powell recently told Yahoo! Finance that he was “betting that a Chinese brand” would ink Pelicans rookie Zion Williamson to his first shoe contract. Many others have speculated that Williamson will ultimately end up with Nike after the #1 overall selection in the 2019 NBA draft wore the swoosh to several high-profile workouts and appearances, but sources tell JohnWallStreet that it was Puma who “very close to signing Zion” before the top selection got hit with a $100 million lawsuit on the eve of the draft. It’s unclear if the German footwear provider will be able to retain its position as the front-runner while the lawsuit works its way through the legal system – it seems unlikely the high-profile rookie would make an eight or nine figure decision without representation.

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Sinclair Exploring In-Game, On-Screen Betting, Opportunity Limited Without Streaming Rights


Sinclair Broadcast Group (SBGI) CEO Chris Ripley told Reuters that the company is “exploring” in-game, on-screen betting with The Tennis Channel and that there are plans to “eventually” offer a similar viewing experience on company’s newly acquired RSNs. Ripley said, “we’re going to add on extra stats, the ability to do prop bets in the game, pitch by pitch, play by play; fans [will be able to] play along and wager while they watch.”

Those plans will include the formation of a strategic partnership with a licensed gaming operator (think: FOX Bet, though it doesn’t have to be exclusive) as SBGI “doesn’t [believe it] makes sense to be the licensee and run the book.” The decision by Sinclair to place odds on-screen during game broadcasts could impact as many as 44 clubs across the sporting landscape (16 MLB, 16 NBA & 12 NHL). The company obtained the local cable rights to 42 teams via their recent $10.6 billion acquisition of the 21 FOX RSNs and maintains ownership interest in both YES Network and Marquee Sports Network.

Howie Long-Short: Sinclair’s control of the RSNs would seem to give it a significant advantage over the established gaming companies as it relates to capitalizing on legalized sports betting – even if the company needs to align with a licensee (in each state) to profit on the wagers placed. While gaming operators wait for the leagues to carve up digital streaming rights for in-app wagering, SBGI can immediately begin to show odds during game broadcasts in states where sports betting is legal.

Sinclair also has the advantage of giving fans access to their game on the biggest and best screen available, making it more likely they tune in and thus bet through the company’s 3rd party platform (remember, media companies can’t just take bets on their own platforms without running afoul of regulations); in Europe, gaming operators with streaming rights broadcast in a lower resolution so not to dilute the audience of the leagues’ core digital rights holder(s).

Adam Candee (managing editor, isn’t so sure – at least, not without the RSNs acquiring local streaming rights too. “If you think of the Wizards alternative broadcast, the easiest way to place a bet while watching those games was still through a smart phone. So, what is gained by showing odds on a television screen during a sports broadcast? How does the fan mechanically place that bet? If the fan needs to be on their phone, then I’m not sure how much of an advantage it provides.” For Sinclair to maximize gaming revenues they’ll need to integrate odds into digital media (of course, that assumes league gives local streaming rights back to teams) and hope the DGE gets more comfortable with operators on 3rd party sites.

Speaking of alternative broadcasts, Sinclair is considering producing them in the mold of what the Wizards and Clippers have done. In the short-term, it sounds like a reasonable solution (particularly if they can force carriage), but if you consider Candee’s point that the marriage between live sports and gambling will occur via digital means and you believe that local streaming rights holders (again, assumes the league gives local streaming rights back to teams) will have in-app betting functionality and the DGE’s blessing, who exactly is watching?

Fan Marino: Ripley’s comments come on the heels of FanDuel’s announcement that the company would begin offering in-game betting on tennis matches and Bundesliga soccer games. FanDuel became the “first U.S. sports betting operator to offer live-sports broadcasts alongside odds on its website and mobile app” in the process.

Existing television broadcast rights deals signed long before PASPA was struck down have prevented gaming operators from streaming NFL, NBA, MLB & NHL games, but it’s been a lack of interest from bettors in wagering on sports like tennis or German soccer that have prevented in-game wagering from making its way overseas sooner. U.S. gaming operators are well aware that “interest in specific events can double or even triple when odds are offered alongside live rights”, but the costs associated with putting on these streams has outweighed the potential returns to date. It’s unlikely that FanDuel expects much to change with the rights they’ve acquired, so it’s reasonable to assume that the company is looking to achieve a proof of concept and has plans to pursue the rights to bigger sports leagues down the line.

It must be noted that while FanDuel is the first U.S. gaming operator to combine live odds and game content in the U.S., DraftKings acquired the rights to stream Euro-League games within their DFS app back in February ’18.

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Sinclair Shares Spike +35% with Acquisition of Fox RSNs


The Walt Disney Company (DIS) has accepted Sinclair Broadcast Group’s (SBGI) $10.6 billion bid for the 21 Fox regional sports networks (not named YES Network) and Fox College Sports. Sinclair (the largest operator of local TV stations in the country) plans to acquire the cable assets “via a newly formed indirect wholly-owned subsidiary” named the Diamond Sports Group. Byron Allen – owns The Weather Channel – has purchased a minority stake (and will be a content partner) in the newly formed holding company. Sinclair CEO Chris Ripley said that the deal would “more than double SBGI’s annual revenue to $6.7 billion and triple its EBITDA to $900 million” – which explains why shares soared +35% to an all-time high ($60.48) on Monday.

Howie Long-Short: Not everyone is bullish on Sinclair’s purchase. BTIG media analyst Rich Greenfield wrote that “most, if not all of the [RSN] earnings could be wiped away over the next 4-5 years. It is no wonder that every major private equity firm pulled out of the process.” Octagon SVP (global media rights division) Dan Cohen respectfully disagrees with that assessment saying Greenfield is looking at the deal from the perspective of “today’s products, today’s rate of cord-cutting and today’s revenues; he’s not considering the expected changes in the marketplace that can propel the businesses forward. Sports betting and digital broadcast rights – which will help to balance out the linear offering – will play big roles in the years ahead.” Historically, RSNs have offered little beyond the game, pre-and postgame coverage.

Cord cutting and changing consumption patterns are undeniably, negatively impacting the cable industry, but as Cohen emphatically stated “live sports [and news] remain the most compelling programming a broadcaster can own and live community based viewership remains very healthy. The live broadcast of games will take different forms, but it won’t be going away.” Ripley agreed saying “no matter what happens to the cable bundle, streaming, digital — these games will have a place in any ecosystem.”

A lack of competition enabled SBGI to take down the lot of RSNs for less than initially projected. Without “the new digital tech giants” (think: Amazon, Facebook, Twitter) involved in the bidding process and companies like Comcast and Fox content to sit on the sidelines, DIS was unable to command in return what it paid to acquire the cable networks (lost +/- $6 billion). It’s not that the tech giants weren’t/aren’t interested in local sports programming – they simply “lack the technological capabilities to effectively monetize local advertising; which explains why all of the rights they’ve chased to date (yes, AMZN’s minority stake in YES is the exception) have been national or global in nature.”

Collectively the 21 RSNs hold the local broadcast rights to 14 MLB, 16 NBA & 12 NHL clubs. Maintaining those rights is crucial to SBGI’s long-term success and in a rapidly changing sports media environment there’s certainly no guarantee the company will be able to hold on to them beyond the expiration of the current deals, but with a weighted average of 11 years remaining on each of the team agreements and staggered expiration dates, SBGI does inherit a level of security.

RSNs carry amongst the highest retransmission fees on cable television and some will continue to rise with escalators in their current deal increasing payments to teams, so the possibility that SBGI runs into carriage disputes – much like SportsNet LA has in Los Angeles – is another potential threat to the business. To avoid the same results, Sinclair plans to take a different approach to negotiations; “they’re talking about tiers, bundling (sports with local news) and discounting based on the amount of programming a distributor will take on.” 

Moving forward Cohen believes that the leagues and teams themselves pose the greatest threat to SBGI’s ownership of the broadcast rights. “There’s an inherent interest on the part of content developers to own the pipes that their content flows through and the projected meteoric rise of sports gambling has teams and leagues wanting to retain a bigger slice of the pie.”

That doesn’t necessarily mean that Sinclair is going to be left on the outside looking in during the next round of local rights negotiations. Cohen says “it’s one thing for a team to say they want to take the rights back, but it’s another to become a DTC technology company; streaming sports remains a challenge. The alternative is to reacquire the rights and then re-sell them. But if the marketplace doesn’t shift much, there’s no one to sell them back to except Sinclair” (or a competitor like Comcast).

Fan Marino: As the runner-up for the RSNs, it’s unclear where Liberty Media goes from here. Cohen said, “they’re not going to buy local stations – if they were, they would have bought Raycom with the Braves in the Atlanta market – they didn’t get the RSNs, the rights to the WWE or the UFC.” One possibility is that they “continue to buy up more properties and own the IP.” NASCAR is on the market, but it’s not like Liberty has been successful with the first foray into motorsports. As we wrote back in January, the company is looking to decrease their stake in F1.

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Sinclair Submits Auction’s Highest Bid for Fox RSNs, Bankers Continuing to “Work the Deal”


Bankers at Allen & Co. received final-round bids for the 21 Fox RSNs – not named YES Network (sold separately to Yankees/Sinclair/Amazon for $3.47 billion) – from Sinclair Broadcast Group (SBGI), Liberty Media (LBTYA) and the Big3 basketball league. Fox Business reported that while SBGI submitted the auction’s highest bid – worth +/- $10 billion – they’ve yet to be declared the winner; the possibility remains that one of the other bidders could still put forth a more attractive offer as bankers continue to “work the deal.” While the Fox story suggested a decision could occur “in the coming days”, Walt Disney Company (DIS) has until mid-June; the company was given 90 days from their March 20th closing (on 21st Century Fox’s entertainment assets) to unload them.

Howie Long-Short: When Disney agreed to buy the Fox RSNs it presumed that on the open market the lot would command bids between $20 billion and $22 billion – they were valued at $20 billion based on what DIS paid – so, the house of mouse wasn’t planning on taking a +/- $6 billion loss in its efforts to comply with antitrust regulations. But with the TV bundle continuing to fray, the number of cord cutters growing and “sports leagues maintaining ownership (rather than the networks) of digital rights” many of the parties expected to submit bids (see: Comcast, Fox, Amazon) remained on the sidelines.

MLB was interested in taking control over the RSNs because they feared a private equity firm – focused solely at the bottom line – wouldn’t invest in the promotion and marketing of its small market teams, not because it wants to become a “big media house”; Octagon SVP Dan Cohen (Global Media Rights Consulting Division) said that the sale of BAMTech was a “clear indication they did not want to own and operate technology” (aside from MLB Network and Ultimately the cost of acquisition got too high for the league to submit a solo bid and they opted to take a minority position alongside Liberty Media, but Cohen believes that MLB ends up in a limited partner capacity with whomever the declared winner is (with an investment post-close). “They are the content creators. If you’re going to invest $10 billion dollars amidst a rapidly changing landscape, you need to be aligned with them.”

If Cohen’s hunch is correct, Sinclair is going to be named the auction winner. While he admittedly doesn’t have any “inside information”, the company has “made it clear that the RSN business is important to them. They’ve partnered with the Cubs to launch Marquee Sports Network and they’re the lead investor in the group that has agreed to buy the YES Network. If you follow the money, it’s logical they would end up with the remaining 21 RSNs.”

MLB is riding the Liberty bid to the finish line, but Cohen says that it is Sinclair prime positioned to operate the collective of cable sports networks. “They understand the local market content business – they own a lot of local markets – and on a national level, they’ve proven to be deft negotiators; look what they’ve done with The Tennis Channel” (see: fastest growing TV network).

SBGI’s familiarity with local markets should prove beneficial, but the company is still going to need to find a way to “navigate changing consumption patterns and cord cutting” (see: AT&T lost 544K TV subs, 83K OTT subs in Q1). Dan believes the way to do that is to “retain more rights and to get creative – in collaboration with MLB and the states – to monetize the sports betting opportunity. All of these potential buyers are gambling that they’ll be able to retain viewers longer during a 9-0 blowout by serving up prop bets – and acting as the intermediary [assumes the RSNs eventually obtain the local mobile rights] to place those bets. That’s where the upside is within the RSN business.”

Fan Marino: The Big3 won’t be the winner – aside from lacking the infrastructure to operate, they lack the capital; Forbes reported their bid was “heavily leveraged – but credit Ice-Cube and Co. for “reimagining the content that could live on a regional sports network.” Aligned with stars like Snoop Dogg and Beyoncé “their plan was to make each RSN a cultural initiative across sports, music and entertainment. They were going to supplement their live sports programming with concerts and original programming – leveraging their celebrity networks to provide viewers with exclusive access and BTS action.”

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Yankees, with Help from Amazon, Sinclair (and others) Reclaim YES Network


The New York Yankees, Amazon and Sinclair Broadcast Group (along with Redbird Capital, Blackstone Group and others) have agreed to buy Disney’s 80% stake in YES Network for $3.47 billion. YES is considered the crown jewel of the 22 Fox RSNs that Disney (DIS) acquired for +/- $20 billion as part of a $71.3 billion purchase of Rupert Murdoch’s entertainment assets. The Yankees, which already owned 20% of the regional sports network, will become YES’ new majority shareholder as the club’s interest grows “close to 30%.”

Howie Long-Short: When DIS agreed to buy the Fox RSNs, it presumed that on an open market YES would command bids between $5-6 billion and that the remaining 21 networks were worth upwards $15 billion (they’re likely to fetch closer to $10 billion now), so DIS certainly wasn’t planning on taking a loss in its efforts to comply with antitrust regulations. But as the TV bundle continues to fray and the number of cord cutters/cord-nevers opting for streaming services grows, they’re simply not as valuable as they once were. The shift in perception has taken place over the last 5 years. When Fox increased their stake in YES back in ’14, it was valued at $3.9 billion – up from $3.4 billion, when the Yankees initially sold them a minority stake in ’12.

YES Network would have commanded significantly more money if it held nationwide streaming rights to Yankees games – or local streaming rights past ’19, but with MLB in control of them and no indication that they’ll be re-assigned to the individual franchises, one can understand why the purchase price was underwhelming. Harvey Schiller, former CEO of YankeeNets, told me that concerns about the viewing habits of the younger generation – whether you’re talking about cord cutting or the likeliness that they’ll follow baseball like the generations prior” may have also impacted bid prices.

Youth baseball participation is on the rise (we’ll have a story on it later this week), so I’m not particularly concerned about Gen-Z taking an interest in the game, but a perception exists – at least amongst Wall Street investors – that there’s limited demand for sports programming within that demographic. Some say that Amazon’s participation in the deal is a positive sign for the future of sports media, but that seems optimistic; Harvey says it’s more likely the company sees the deal as a “way of summing what they already have.”

The Bronx Bombers were wise to align with both Amazon and Sinclair Broadcast Group (SBGI) from a strategic standpoint. Sinclair gives the franchise the opportunity to continue to grow linear distribution, while Amazon provides them with the streaming capabilities (Prime Video) to increase OTT viewership. Harvey believes that “there’s also a sponsorship component to be made.”

On the other side of the deal, YES (has rights to Yankees, Nets and NYCFC games) provides SBGI with leverage in negotiations with New York area distributors (for channels like Stadium and Tennis Channel), while Amazon picks up the chance to “cross market their products to 4-8 million new households (it’s the most watched RSN), in a very attractive area; it’s a model I [Harvey] believe the other digitals – Hulu, Netflix – will look to follow as they seek to grow viewership.”

Now that DIS has found a buyer for YES, look for the company to unload the remaining 21 RSNs in short order. We first suggested Sinclair as a potential landing spot on Nov. 19th and their decision to take equity positions in both YES and Marquee Sports Network have done little to quail our suspicions; neither have reports that the company is “sitting on a lot of cash” and maintains the lowest debt level in company history, for that matter.

Fan Marino: MLB is among the bidders for the lot of 21 RSNs, not because they foresee a revenue growth opportunity, but out of fear that a PE buyer looking solely at the bottom line wouldn’t invest in the promotion and marketing of its small market teams. Their 2nd round bid was reported to be worth +/- $10B.

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Cubs Marquee Sports Network Closely Resembles PRISM, Not Sports Net LA


Sinclair Broadcast Group (SBGI) CEO Chris Ripley told listeners on SBGI’s Q4 ‘18 earnings call that he’s expecting the company’s investment in the Marquee Sports Network – a joint venture with the Chicago Cubs – to net between “$40 [million] to $50 million of free cash flow” annually. With other teams’ local broadcast deals expiring “in the years to come” and an existing presence in most major markets, Ripley said he sees an opportunity to replicate the model. The joint venture between SBGI and the Cubs closely resembles what Ed Snider and a pre-goliath Comcast built with the Phillies and Flyers back in the 1980’s – a precursor to all Comcast RSNs – a cable network called called PRISM (Philadelphia Regional In-Home Sports & Movies), so one should assume SBGI is responsible for the pick and shovel side of the business (think: operations, management of the network, ad sales), while the Cubs bring the content to the table. SBGI will pay the Cubs an up-front fee for the broadcast rights and then split profits with the club on the back-end. Marquee is scheduled to launch in February 2020

Howie Long-Short: The Cubs take in +/- $700K/game (+/- $65 million/year) in local and broadcast TV revenues, but in recent years the Dodgers (+/- $2 million/game), Angels and Phillies (+/- $1 million/game) have all signed deals worth more. SBJ reported that SBGI would give the Cubs a “substantial bump in [their] annual rights fees”, but no hard figures have been reported. If Sinclair were to pay $1.3-$1.5 million/game and the team was a 50/50 partner in the network, it could mean growing team revenues by more than $100 million/year (less their share of profits from NBC Sports Chicago). As for SBGI, $50 million would be a noteworthy boost to a company that reported $206 million in net income in Q4 ’18.

Marquee will work because “ad incumbency and ad migration will be significant” for the Cubs, but as Chris Lencheski (an experienced global sports, media, and private equity executive; founder of sports consultancy group – Phoenicia and an adjunct professor at Columbia University) reminded me “not all teams are created equal” – so I’m not sure just how many more viable opportunities are really out there for SBGI. “No matter how great one team may be in their market, they likely don’t have that same hold over the customer as the Cubs do in Chicago. It doesn’t matter whether the Cubs are successful on the field or not, there are people watching and listening around Chicago and to a greater degree around the United States. You have the Yankees. You have the Dodgers. I don’t know where else you find a team with that kind of nationally-scaled customer. You’re not going to attempt this type of investment anchored to small-market one-team platforms.”

Pessimists will cite the failure of Sports Net LA to gain carriage in the market as the reason why the Marquee Sports Network is doomed, but the “very, very high subscriber fee ask” (which caused distributors to pass) was needed “to make the financing work” for the purchase of the club; in other words, the Dodgers transaction “needed to get X dollars per subscriber based on the number of subscribers it projected it would have within the market, so that the network would generate enough revenue to finance the acquisition in the first place.” There is no “huge ask on the table” here. SBGI and the Cubs will be within a financial zone of possible alignment between anyone on the cable side and anyone on the customer side.”

If teams want to be in control of their own content, it’s worth wondering why they hadn’t taken that into consideration during their last round of broadcast rights negotiations. Chris said it’s –partially the result of a changing market, “but most importantly consumption of the product and the habits of the consumer have changed; and the costs associated with creating and operating networks have declined. The cost levers to acquire and broadcast and to create new distribution revenue strategies have dropped dramatically. Costs on the pick and shovel side have dropped because of technology (and only improving with 5G) and consumption disruption, that now more than ever, means great content actually drops more to the bottom line.”

The partnership with the Cubs is Sinclair’s first stab at a regional sports network, but Chris says that it won’t be their last. “The next one up is going to be the Detroit Tigers and Detroit Red Wings. They’re really going to cash in because they’re owned by the same owner and they also own the building.” Of course, SBGI is also in pursuit of the 21 Fox RSNs that Disney has on the block.

How does ownership of the building play into a broadcast partnership?

Chris: “The context of the word subscriber is changing. I don’t want to be a subscriber to Marquee. I want to be a member and in a world where I’m watching content through my handset, that membership has quantifiable value. If I own my building, I can bring Marquee members in on non-performing or lower-performing nights. The ability to bring in a large data-set of qualified customers via a digital turnstile would make Marquee – or for that matter DAZN – a new rail of revenue for tickets.”

Fan Marino: If you’re wondering what kinds of non-Cubs centric programming Marquee will offer, look to the high school broadcast rights SBGI has been buying up in rapid fashion. Chris said, “go to Stirr, you can see just about every high school sport and the markets that they are in. H.S. sports programming makes sense because it brings an audience and helps to develop a relationship with the community at the grassroots level.”

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DOJ Changes Tune on Sports Broadcasting Monopoly


Josh Kosman and Richard Morgan (NY Post) are reporting that the U.S. Justice Department has altered its position on The Walt Disney Company’s (DIS) acquisition of the 22 Fox regional sports networks and are said to be considering a scenario that would allow DIS to spin-off the cable networks; the company would cede operational control of the RSNs. The DOJ had initially mandated that Disney sell-off the sports networks within 90 days of the Fox entertainment deal closing to prevent a sports broadcasting monopoly, with subsidiary ESPN already owning the rights to more sports content than any other broadcaster. The news comes just days after New Fox – the perceived front-runner to take down the lot of cable assets – confirmed in an SEC filing that it would not be bidding on any of the networks. DIS reportedly remains committed to a sale before the end of February.

Howie Long-Short: The DOJ initially felt that if DIS were to add the broadcast rights to 44 pro sports teams to ESPN’s existing portfolio, that the company would be positioned to squeeze carriers in carriage negotiations; further driving up the cost of the cable bundle. While I don’t want to speculate as to why the DOJ is reportedly willing to reverse direction, there is a belief in industry circles that without DIS (or Fox) backing the RSNs (and the leverage that they hold), cable companies could/would opt to leave the costly networks off their basic tiers.

The Justice Department’s change of heart could end up saving Disney billions. New Fox’s decision to pass on what they perceive to be slow growth assets, leaves Sinclair Broadcast Group (with P.E. backing) as the last viable legacy media company capable of buying all 22 RSNs. The NY Post article said Fox’s decision to drop out of the bidding lowered the value of the sports networks to between “$9 billion and $11 billion” (or 5-6x EBITDA). If that’s true and DIS’ theoretical RSN pure play were to trade at the same 8.7x multiple ($16 billion) that MSGN does, a spin-off could net DIS $5 billion to $7 billion more (+60%) than an auction would.

That won’t be the case though. As Dan Cohen, Octagon SVP, Global Media Rights Consulting Division told me, “it’s quite different to compare a single RSN in the U.S.’ largest media market to a set of RSNs. There are factors beyond the viewership differences such as the costs, sets of rights, programming opportunities, etc. Remember, MSG owns the Knicks and Rangers. That dynamic creates stability and a guaranteed cash flow. It’s not the same as 22 RSNs whose rights are varied, where competition exists and higher costs play factors.”  

Disney paid +/-$20 billion for the RSNs as part of their $71.3 billion acquisition of Fox entertainment assets, so spinning off the networks would seem like a more attractive option than taking a +/- $10 billion loss, but if the rest of the legacy media companies are suggesting that RSNs are “slow growth” businesses – “at best” – I wondered why DIS would have interest in keeping them. Dan explained that moving forward the RSN business will be “slower growth, not slow. For the past decade+ the RSN business has been booming, a meteoric rise of the like cannot continue at that speed without slowing a bit for some time. However, growth on a RSN level will still move forward and the smart ones will develop business propositions around legalized in game betting and new interactive viewer technologies, and most certainly will need to further exploit the local digital rights as they play out.” For those who read “Early Entrants” (Vol. 1) on Sunday morning, you know that Disney is exploring entrance into the sports betting space.

Fan Marino: New Fox supposedly has a renewed focus on sports, but in the same week the company declared it was out of the regional sports networks business, it declined an option to carry the Big-12 championship game in ’19, ’21 and ’23. SBJ reported that the decision had to do with scheduling (see: they didn’t want it up against the SEC and ACC championship games), but I’m hearing that Murdoch’s company is preparing to go “all-in” on the Big 10 conference. ESPN, which aired the game in ’18 and has the rights in ’20, ’22 and ’24, is likely to pick up the 3 “odd-year” games.

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New Fox Out of Bidding for RSNs, Sinclair the Front-Runner


New Fox has confirmed in an SEC filing that it will not be bidding on any of the 22 regional sports networks that were sold to Disney (see: $71.3 billion sale of entertainment assets), viewing the RSNs as slow-growth (or no-growth) assets. The perception that Disney has “overexposed” the RSNs has also tempered Fox’s interest. With countless teams and distributors privy to their detailed financials, there’s now a belief that future broadcast rights will become costlier and that carriage rate increases will be more difficult to come by (both of which would further slow growth). Sinclair Broadcast Group (with the financial assistance of a P.E. firm) is now widely considered to be the front-runner (and the last viable option) to take down the entire lot (vs. piecemeal) of cable networks – estimated to be worth between $15 billion and $20 billion. Final bids are due before the end of January.

Howie Long-Short: Remember, the Justice Department is requiring that Disney (DIS) sell-off the RSNs to prevent the company from maintaining a sports broadcasting monopoly. With ESPN under the company umbrella, DIS already owns the rights to more sports content than any other broadcaster.

Many assumed that Fox would buy back the RSNs because of their renewed focus on sports programming, but Chris Lencheski (an experienced global sports, media, and private equity executive; and an adjunct professor at Columbia University) first told you in our November 19th newsletter that not only was Murdoch’s company unlikely to re-acquire the regional sports networks, but Sinclair Broadcast Group (SBGI) was “uniquely positioned to take them down because of their owned and operated channels”; and that “they (SBGI) could perform well, have invested in and have wanted to further acquire sports rights but on a truly scalable format.”  You heard it here first, folks.

Sinclair’s ownership stake in Stadium – a 24/7 multi-platform sports network with the broadcast rights to several Group of 5 conferences – makes the RSNs more attractive to SBGI than they might be to other prospective bidders. As Chris told me, Stadium already has a name amongst “early adopters” and “cord nevers”, the technology and the existing agreements with OTT providers like Sling and Pluto; which makes the addition of the broadcast rights to the 44 pro sports teams “plug and play”.

Amazon is said to be participating in discussions surrounding the YES Network (estimated value: $5 billion – $6 billion), but it’s unlikely they (or any other tech giant) will pursue the entire lot; RSN coverage is restricted by the leagues to a defined local footprint (see: YES Network only available within metro NYC) which limits their value to a global enterprise. While 40+ companies were said to be involved in the first round of bidding, without the tech companies (+ Comcast, Charter and now Fox) DIS is unlikely to pull in offers anywhere near the $25 billion Guggenheim Securities originally pegged the RSNs at.

Fan Marino: The Sinclair sports portfolio includes the Tennis Channel, the “fastest growing” network in television; now in 61 million homes (+ 41% over last 2 years) after gaining 5 million subscribers (more than any other Nielsen-measured cable network, just 1/13 to add subscribers) in December ’18. If you’re a fan of the sport, you need the channel; it aired more live coverage than any single-sport network last year (2,300+ hours of matches).

ICYMI: It was recently revealed that the Cubs would be launching their own sports network come 2020 in partnership with SBGI. That’s a wise decision. Sinclair can offer widespread distribution and brings much-needed experience in both carriage negotiations and game production to the venture; issues that have plagued other start-up sports networks (see: Pac-12 Network).

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