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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WSJ: Just 7 Ways to Publicly Invest in Sports, JWS: Not the Case


The WSJ published a recent story asserting there are few ways to directly invest in sports, a notion we dispute. The article deemed just 7 publicly traded equities to be sports-related and based their conclusion, that fans are better off watching and playing sports than investing in them, on the performance of 2 exchange traded funds; one of which (FANZ) has beat the S&P since its July ’17 inception, which would seem to counter to their argument. The article cites Matt Hougan, the CEO of Inside ETFs, and his belief that most of the economic value within sports (ownership and player contracts) “comes in private transactions”, to support the author’s thesis; but fails to pay consideration to the revenue streams that support those contracts (and generate ownership profits). It’s worth noting that JohnWallStreet follows over 100 sports-related equities.

Howie Long-Short: Sports teams generate revenue from 4 sources; broadcast rights, ticket sales, sponsorships and merchandising. Several publicly traded equities use a similar business model; Churchill Downs (CHDN), International Speedway (ISCA), Dover Motorsports (DVD) and Speedway Motorsports (TRK), and thus should also be included on the list. Others, like Acushnet Holdings Corp. (GOLF) and Callaway Golf Company (ELY), are undeniably directly tied to sports; and no one would claim your basket was unfocused if companies like Nike (NKE), Lululemon (LULU) and Fitbit (FIT) were to be included. Oh, and don’t forget Activision Blizzard’s (ATVI) new esports league (Overwatch); their inaugural season starts today.

Fan Marino: The story names the New York Knicks, New York Rangers (MSG), Atlanta Braves (BATRK), Manchester United (MANU) and Borussia Dortmund (BORUF) as the teams you can purchase equity in. The Toronto Blue Jays, Toronto Maple Leafs (RCI), Juventus F.C. (JVTSF), A.S. Roma (ASRAF) and SS Lazio (BIT: SSL) are also all publicly traded.

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Amazon Takes on The Sports World; 25 Companies That Will Be Affected

Amazon has been credited with killing everything from book stores to electronics retailers since its 1994 launch. Now, with a market cap +/- $570 billion and $16 billion in annual operating cash flow, the company is taking aim at the sports world. In our final newsletter of 2017, we look at 4 of AMZN’s recent initiatives and the 25 companies most likely to be affected in 2018.

Amazon Expands Brand Registry Program, Now Includes Nike

In June, Nike (NKE) agreed to join Amazon’s brand registry program; seeking to curb counterfeiting and non-licensed selling within the e-commerce marketplace. The partnership also supports the athletic apparel and sneaker brand’s initiative to boost revenue through a shift to digital and DTC sales, relying less on struggling retailers. Competitors Adidas (ADDYY) and Under Armour (UAA) already have direct-sales deals in place with AMZN.

Names to Watch: FINL, DKS, FL, HIBB, BGFV; LON: SPD, LON: JD

Howie Long-Short: Athletic apparel and sneaker retailers count on NKE (70% of FL business comes from NKE); but NKE launched its “Consumer Direct Offense” strategy in fiscal Q1 ’18, increasing e-commerce business 19% YOY. Mediocre retailers beware, the company is maintaining just a few dozen wholesale relationships as it looks to increase its e-commerce business (from 15% of revenue to 30% over the next 5 years).

Amazon Entering Private-Label Sportswear Business

In October, Amazon (AMZN) announced it was entering the private-label sportswear business and working with the same Taiwanese suppliers, Makalot Industrial Co. (TPE: 1477) and Eclat Textile Co. (TPE: 1476), that some of the world’s biggest athletic brands use. Elcat’s involvement is particularly noteworthy as the company manufactures high-performance sportswear for Nike (NKE), Lululemon Athletica (LULU) and Under Armour (UAA).

Names to Watch: NKE, UAA, ADDYY, LULU; TPE: 1476, TPE: 1477

Howie Long-ShortAMZN wants to be in the private-label clothing business because it pushes retailers to sell inventory on the e-commerce site. Should a retailer choose not to, AMZN will simply produce the item themselves and compete directly against the brand.

The Pursuit of Exclusive Broadcast Rights

In September, the company hired Brian Potter to lead its sports video business. In November, Jim DeLorenzo, head of sports, Amazon Video, said the company was pleased with viewership numbers, engagement and the reliability/quality of the cloud-based streaming service during its season long experiment streaming Thursday Night Football (10 games, $50 million); though it is too early to say if the company will pursue future exclusive sports broadcasting rights. The company has since done deals that will deliver Prime subscribers 37 ATP tour events (previously owned by SKYAY), the AVP Beach Volleyball tour each of the next 3 summers and docu-series on Michigan Football.


Howie Long-Short: NFL Senior VP, Digital Media, Vishal Shah recently said “we continue to think some of the best days are ahead [for traditional TV partners] despite some shifts in the media landscape.” That doesn’t sound like linear television will be excluded in the next round of negotiations, but the NFL is encouraging interested media companies to bid on both television and streaming rights for the leagues TNF package; leaving the door ajar for the tech giants to receive exclusivity for the first time.

Twitch: The Future of Game Broadcasts?

Twitch, the live-streaming platform most often associated with video games, has agreed to stream up to 6 live G-League (Gatorade sponsored NBA minor league) games. Broadcasts will include interactive overlays (viewers can click a team name/logo for player, team, game and season stats), a loyalty program to reward viewer engagement during broadcasts (i.e. custom emotes for group chat) and the ability for users to provide their own live commentary (over the game feed) via the Twitch co-streaming feature.


Fan Marino: NBA Commissioner Adam Silver has gone on record stating he’d like to see changes in the way sports broadcasts are presented; pointing out the lack of live stats and chatter surrounding the broadcast, that gamers have become accustomed to. I’m not ready to give up Mike Breen, Marv Albert and Ian Eagle for Towelliee; but it’s worth watching to see if anyone else is.

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NY Sports Fans No Longer Need Cable, MSG Now Available on DIRECTV NOW

DIRECTV NOW has added MSG Networks (MSG, MSG+) to its programming lineup, becoming the 2nd live TV streaming service to make the RSNs available nationwide. While news of the distribution deal broke back in September, the channels just became available to subscribers through the networks’ live streaming and video on demand platform, “MSG GO”. It should be noted that DIRECTV NOW subscribers within the greater New York metro area (and all of NY State), have access to all MSGN content (i.e. no blackouts).

Howie Long-ShortMSGN, spun off from MSG back in 2015, reported Q1 ’18 revenue grew 3% YOY (to $157 million). It’s not surprising to see the company simply plugging along, as 90% of MSGN revenue comes from affiliate fees; fees negotiated to span extended periods of time. Earlier this month, the company announced plans for a $150 million share buyback plan. DIRECTV NOW is an AT&T (T) subsidiary.

Fan Marino: The addition of MSG Networks (MSGN) gives DIRECTV NOW subscribers access to Knicks, Rangers, Islanders, Devils, Sabres, Liberty (WNBA) and Red Bulls (MLS) games. The OTT service also carries the YES network, home of the Yankees and Nets. NY sports fans (except for Mets fans) no longer need cable. Of course, once ESPN renegotiates the contracts for the 22 RSNs it acquired from FOXA and adds MLB games to ESPN+; Mets fans can join in on the cord cutting fun.


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MGM Announces Plans to Open New Jersey’s 1st On-Site Sportsbook at the Borgata Casino

The Supreme Court is going to hear arguments on December 4th surrounding New Jersey’s right to legalize sports gambling and there seems to be a foregone conclusion that the SCOTUS will rule in the state’s favor before the end of June 2018. MGM Resorts International (MGM) seems particularly confident, announcing its intention to become the first casino in the state with an on-site sportsbook. At last week’s Sports Betting USA Conference, Jay Hood, the company’s VP of Race and Sports, said development has begun on a $7 million sportsbook at the Borgata hotel and casino in Atlantic City. But ESPN gaming writer David Purdham isn’t convinced we’re going to see legalized gambling in 2018, placing odds on the high court siding with New Jersey at -$110 (or just 53.5%).

Howie Long-Short: Experts have estimated a legalized sports gambling industry could be worth $150 billion, but Monmouth Park owner Dennis Drazen believes that number to be as high as $400 billion. Either way, Drazen (and William Hill) is prepared to cash in once the Professional and Amateur Sports Protection Act of ‘92 is repealed. Back in ’11, when NJ voters approved sports betting legislation, Drazen partnered with William Hill (OTC: WIMHY) on a sportsbook at Monmouth Park. That property, which was turned in to a sports bar, is currently being converted back to its intended use. Drazin said the Monmouth Park sportsbook could open within weeks of a SCOTUS decision.

Fan Marino: Give DraftKings credit for being creative in finding ways to engage fans. The company recently partnered with MSG Networks (MSGN) on a live fantasy show that ran parallel to a Knicks game broadcast and as of Q1 2018, will be airing select Euroleague games within their mobile app; enabling fans to flip between their fantasy contest and a live game broadcast. Unfortunately for those invested in daily fantasy, legalized gambling is set to put the industry out of business. In-game betting is going to replace it.

A Borgata Sportsbook, An NBA Pivot And What Else We Learned From A Week Of Sports Betting Conferences

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Madison Square Garden Networks (MSGN); the regional sports network owned by Jim Dolan, is up for sale, but lacking interest from bidders. Fox Sports Networks (FOXA), the most logical potential buyer, is reportedly not interested as it already owns the regional YES Network in the New York market. With cable subscriptions declining, ad revenues reflecting the Knicks disappointing on court performance, a cap number of $1.7 Billion and shares trading at 10x EBITDA, the company may simply not be worth the price at this time. If Dolan is unable to sell the company, there is always the possibility he will put it back together with MSG.


No one wants to buy James Dolan’s TV networks

Howie Long-Short opines: This stock had a huge run over the past year, in part on deal speculation. Who knows whether, or when, a deal gets done? Probably not the NYPost. Their M&A reporting tend to be all over the place.

Fan Marino says: On behalf of Mongo Nation, all I ask is that whomever ends up purchasing MSGN simulcasts whatever show Francesa & Russo end up doing in 2018.