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June 6, 2023

MLB, Padres Seeking to Maintain Established Economic Model

Major League Baseball recently began producing and distributing San Diego Padres games after Diamond Sports Group (DSG) walked away from its broadcast deal with the club.

The league is making games available to fans within the Padres’ territory via DirecTV, Spectrum, Cox and Fubo (all were existing distributors of Bally Sports San Diego). It has also introduced a new ala carte streaming service through MLB.TV.

But league is not shaking up the local media rights landscape and pivoting to competitively priced direct-to-consumer streaming. It is charging $19.99 per month for the OTT service, so not to threaten linear distribution partners. The goal is to reach more fans while maintaining the business’ existing economics, which still pays the bills.

“We think the most important part of the [media rights] equation, for years to come, is going to be the cable model,” Noah Garden (chief revenue officer, Major League Baseball) said. “You’re just going to have more points of distribution.”

By taking control of the club's local rights, the league can ensure Padres content is available on all platforms where fans reside and try to maximize revenues. In essence, it allows the league to control its own destiny, while maintaining the business’ current economics, until a more lucrative media distribution system emerges.

While many are convinced the RSN model no longer works (think: too expensive, not enough people watching), MLB remains confident in its ability to increase distribution of Padres games on linear television and turn a profit in the San Diego market. It believes the way Diamond was operating the business was the problem (think: too much debt, loss of carriage).

The Padres are the first club to partner with MLB on local broadcasts. The club’s situation was relatively unique amongst those aligned with DSG. Its RSN was not included in the ongoing bankruptcy proceedings.

That meant once DSG failed to make its most recent rights payment, and the cure period expired, the Padres were able to terminate their contract with the RSN and retake control of the rights.

MLB was prepared for the situation. It hired former Fox Sports Net executive Billy Chambers as EVP of local media back in January and has been building out production capabilities since.

“We got the call at 5:00 on Tuesday [May 30] that they were no longer going to be broadcasting the games, and on Wednesday [May 31] we put them up in every place that they were the previous day,” Garden said.  

And the league added an over-the-top product to the mix. Cord cutters and cord nevers in market now have the ability to get games, as can those living on the outskirts of the Padres’ home television territory where distributors have historically passed on adding another costly RSN to the basic plus tier (think: parts of Nevada and Hawaii).

But ala carte offering won’t come cheap. MLB priced the streaming service at $19.99/month, a number meant to be non-competitive with the cable TV bundle. It had to. 

“Baseball’s economics come from the general market,” former Fox Sports executive Patrick Crakes said. “You can’t go segmented and keep those economics. So, they stay with the distributors [instead of pricing the streaming service to compete].”

That will remain the case until the established distribution system collapses or there is a new system capable of growing local rights values.

While some have speculated it is going to be difficult for MLB to deliver the Padres $50 million plus this year, the league anticipates the club getting very close to what it expected to earn from DSG, if not the full amount. The team has already collected roughly half of its '23 rights fee, all the same distribution is in place and a streaming service now exists.

Central baseball has promised to backstop the Padres, and any other club whose contract Diamond rejects or fails to pay, and ensure it receives at least 80% of contracted revenues this year.

MLB did not assume Diamond’s distribution contracts for the Padres. However, it was planning for different contingencies in the event DSG defaulted, which enabled it to hit the ground running last week. The league is now engaged in discussions with each regarding long-term carriage.

“There will be a number of people who stream [games] because that is their preferred method. But the bulk [of viewership] will come from TV for the foreseeable future,” Garden said.

For reference purposes, DSG recently acknowledged that just 203,000 fans had signed up of its streaming service. Direct-to-consumer streaming is simply not a viable alternative to linear television for regional sports networks at this point. 

On a go-forward basis, the league is expecting the value of the Padres’ media rights to grow. The games remain among the highest rated programming on TV every night in market.  

Crakes sees the evolving media landscape and believes an extension that keeps the RSN on distributors’ basic plus tier and rights fees flat would qualify as a win.

Either way, the league recognizes it is going to have to cooperatively price its OTT offering to maximize the business’ short-term economics.

Building an independent media brand is a heavy lift. We use this space to shine a spotlight on some of our favorite sports, media and finance content creators. We hope you will check them out. 

Perfect Putt by Jared Doerfler

Breaking down the business of golf. Delivered every Monday morning to your inbox, for free. Recent Story: The Money Behind The PGA Championship

Excerpt: The PGA Championship is the primary revenue driver for the PGA of America. The PGA Championship has three significant revenue generators.  •    Tickets•    Merchandise•    ESPN/CBS Media DealThe PGA of America recognized $128 million in revenue in 2018 - $94.7 million was from tournaments. 

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