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February 21, 2023

MLB Clubs Ready to Emulate NFL’s Centralized Local Media Distribution Model

Diamond Sports Group, the parent of the 19 Bally Sports branded RSNs, skipped a $140 million debt payment last week. The delinquency has set off a chain of events that moves the company closer to filing Chapter 11 bankruptcy.

Major League Baseball Commissioner Rob Manfred has stated Diamond defaulting would put nearly $1 billion of club revenues at risk this year. 14 MLB franchises have local broadcast agreements with Bally Sports RSNs.

A host of NBA (16) and NHL (12) teams could also suffer short-term losses should the company elect to stop making payments on its rights agreements.

NFL clubs do not have to worry about Diamond Sports’ pending demise or the headwinds facing the broader RSN business. Their live game rights are controlled exclusively at a league level and the revenues derived from them are distributed equally amongst the teams. That approach has helped to make every franchise profitable on an annual basis.

MLB has historically been unable to convince its most valuable clubs to forego short-term local rights revenues for the sake of the greater good and long-term prosperity.

However, league insiders believe Diamond’s actions in the coming weeks could serve as the catalyst needed to finally spark change. They say there are now enough organizations ready to emulate what the NFL has done with its teams’ media rights and see the ongoing turmoil as the opportunity needed to begin the transition.

Despite reports to the contrary, Diamond Sports did not file bankruptcy last week.

The company has another 30 days to make the overdue interest payment.

In the interim, it will work to coordinate a pre-packaged bankruptcy; a plan the major creditors can get behind on a go-forward basis.

The league fully anticipates Diamond will declare its regional sports network bankrupt at the conclusion of the grace period. There’s no real alternative considering the need to restructure nearly $9 billion in debt.

That includes the profitable RSNs in the bunch. While each of the 19 regional sports networks is a separate entity, they are all cross collateralized against the debt. The whole organization must go into bankruptcy for Diamond to restructure the organization.

The Sinclair Broadcast Group subsidiary will be expected to continue fulfilling its obligations, including making payments to the clubs and broadcasting games, throughout the bankruptcy process.

Only if/when Diamond fails to make a payment to a club can it go to court and petition to get the rights back.

Diamond seems likely to fulfill its obligations to teams on profitable RSNs. But the company could choose to reject clubs on the non-profitable ones. Manfred recently told the AP the league "would be in a

position to step in

” if Diamond decided to immediately return team rights and stopped broadcasting games.

Diamond could also restructure its debt with creditors, rework some of its less profitable team deals and retain control of all 19 RSNs. The league has asked the media company to put forth a solution that could work for all parties moving forward.  

To date that has not occurred pushing MLB down the path of standing up its own broadcast capabilities. The league is preparing to produce games for teams and will work with the cable companies and streamers to distribute them.

Baseball is not starting from scratch. The league regularly produces games for MLB Network and distributors already have sports fans paying for bundles that are expecting to see the home teams’ games.

MLB games drew 402 million gross viewers to RSNs in ’22. For comparison purposes, NBA games pulled 136 million and NHL games attracted 81 million last year.

MLB would prefer the existing distribution model continue in its current state. The rights fees paid to the clubs by the RSNs have steadily risen over the last three decades.

But it sees the ongoing shifts in consumption habits and recognizes the business’ long-term future is in trouble as RSNs continue to lose content and reliable distribution.

The league also fears as RSN businesses become increasingly less profitable that they will stop investing in and innovating around league broadcasts.

MLB has concerns about the number of fans getting the product too. Teams are reaching less than half the households in their home viewing market on a regional sports network.

The league believes it needs to ensure a greater number of fans have access to games, and can consume them as they see fit, to be successful long-term. MLB’s operation and distribution of local rights would in theory allow the league to maximize its reach and ensure game broadcasts were produced to expectations.

Competitive balance should also get a lift from the change in approach. As it stands, there are extremely profitable RSNs and ones that lose money. That creates a large disparity in the rights revenues earned amongst the teams.

But there will likely be short-term negative revenue implications for many teams, particularly those in less attractive markets or in cities with strong competition, should the league pivot to a centralized distribution model.

FWIW, insiders maintain clubs in that category will end up earning close to what they take home today from their respective RSNs.

The clubs are prepared to sign off on the shift knowing short-term revenue losses are likely because they believe the rights will be worth significantly more once the league has a vibrant, standalone OTT product and is reaching a broader range of fans.

While some teams in profitable RSN situations would likely prefer to maintain the status quo, if the league goes down the national distribution route the expectation is all 30 clubs will participate.

The league would claw those rights back over time as the teams’ existing RSN deals expire.

MLB’s out-of-market rights are already held at the league level. It’s not hard to envision baseball supplementing them with the teams’ local rights.

Of course, to take a national approach the league will have to rethink blackouts; at least as they’re traditionally defined.

MLB will also need to ensure it has the right people on staff.

The league recently named Billy Chambers its new EVP of local media. The former Fox Sports Net executive is the first of what will be many hires within the league’s media division in the coming months.