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

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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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Author: John Wall Street

At the intersection of sports & finance.

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