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March 1, 2023

Reduction in Local Sports Rights Revenue Seems Inevitable

Diamond Sports Group recently skipped a $140 million debt payment and is widely expected to declare its 19 regional sports networks bankrupt at the conclusion of the 30-day grace period. While the sports world awaits the Sinclair Broadcast Group subsidiary’s next move, another media giant is planning its exit from the regional sports network business.

Warner Bros. Discovery (NASDAQ: WBD) recently notified teams airing on

three AT&T SportsNet branded RSNs

that the business does not have sufficient cash to make upcoming rights payments. It proposed returning the programming rights, and ownership of the networks, to the clubs in exchange for nothing more than a release from future claims against the networks. The media co. stated that the teams’ failure to agree to a transfer of ownership by March 31st would result in a liquidation filing. 

WBD’s actions can be viewed as the latest evidence of climate change within the media environment–that the revenues needed to cover local rights fee payments to clubs are no longer realistic in many cities.  

A reduction of fees is likely necessary for the RSN model to work in those markets. “Ultimately, that is what is likely to happen,” Chris Bevilacqua (co-founder, Bevilacqua Helfant Ventures) said. “Rights holders need the flexibility to simultaneously offer [the product] through MVPD’s at a reduced sub rate, thus reduced rights fees to the teams, while also having a stand-alone DTC offering untethered from the bundle [that is priced to sell].”

It is probably not a coincidence WBD’s letter to the clubs was sent in the days following Diamond’s decision to skip its debt payment. It will be worth watching Comcast to see the company looks to renegotiate its rights deals next.

Local sports media rights remain valuable programming, even if two large media companies threatening to put rights agreements into breach suggests otherwise. Games that air on RSNs are almost always among the highest-rated in the local market on any given night.

However, the RSN business finds itself in distress as media distribution makes the transition from a wholesale model to a wholesale-retail one. That is because the local sports business was built on the backs of MVPDs and

has evaporated over the last seven to eight years. 

“That’s a lot of revenue getting sucked out of the system,” Bevilacqua said.

As the pay TV universe has eroded, so too have regional sports network profits. “If the average RSN is paying $75 million/year of rights fees [to a team] and has lost 35% of its revenue because the industry has shrunk, those rights fees don’t go down 35%. They still have to pay those [fixed costs],” Bevilacqua said.

Some RSNs, in some markets, remain cash-flow positive; even as subscriber and affiliate fee increases are replaced with cord-cutting and distributors’ reluctance to increase costs. 

“RSN businesses used to be 25-30% margin businesses,” former Fox Sports Networks president Bob Thompson said. "Sure, the margins would decrease when you signed a new rights deal or deals, but affiliate fees and subscribers were growing and over time those would offset the increased rights fees and your margins would return to previous levels…Lose half of that margin and it is still a pretty profitable business.”

But with more than $8 billion in debt to service, interest payments have been eating Diamond Sports alive.

WBD is dealing with its own over-levered balance sheet. The company took on $43 billion in the debt as part of last year’s merger with AT&T. The RSNs were acquired in that transaction.

WBD is undoubtedly looking to cut costs. The company tried to negotiate more favorable deal terms prior to sending the letter to the teams.

But the RSNs are also no longer a strategic fit within its long-term content vision. 

“[WBD is] in the national and global IP business, not the shrinking MVPD regional sports business,” Bevilacqua said. 

And the company is leaning into cheaper, unscripted programming, as opposed to costly live sports rights and scripted content too (at least in the US).

MLB commissioner Rob Manfred has stated his league will be ready to step in and aid teams with production and distribution should a rights holder cease operation of an RSN. Baseball would like to eventually

centralize the teams’ local rights at a league level

, like the NFL does. 

There are apparently enough clubs that believe their rights could be worth significantly more than they are today if MLB had a vibrant, standalone OTT product and were reaching a broader range of fans.

The NBA and NHL could move to do the same. Neither league responded directly to the possibility. 

But that doesn’t mean regional sports networks are going extinct–at least not anytime soon. For perspective, the Philadelphia Phillies deal with

Comcast SportsNet

runs through the 2041 season. 

“People said radio was going away when television came about. People also said broadcast was going away when cable came on the scene. Now people are saying that linear television is going away now that streaming is here. They'll all still be here. It's just going to be a different business going forward,” Thompson said.

The long-time Fox Sports Networks exec. anticipates there will continue to be a place for a regional sports cable distribution model as “a big part of an over-arching [local] TV strategy that could include possibly some over-the-air telecasts and a streaming element as well.”

NBA Commissioner Adam Silver stated over All-Star Weekend there are many platforms "including local over-the-air television, streaming services, other methods" that the league could potentially lean on to deliver games to fans long-term.

So, the natural question becomes who –if anybody– will buy the RSNs that do end up in bankruptcy. 

While baseball would like to take back the teams' local broadcast rights, it’s less far less certain the league wants to be in the traditional RSN business. 

In some markets across the NBA and NHL it could be the teams. Clubs with strong brands, a large densely populated market and talented sales and creative teams can find RSN ownership lucrative. Team-owned RSNs are also well-positioned moving forward as they have managed to cut out the middleman and are essentially direct to the cable operator, local TV station and consumer. 

Of course, one must assume most organizations who fit the description have already gone down that route.

Comcast, which owns several RSNs, would seemingly be another possibility. 

But there is animosity between the company and the two teams in Houston (Rockets and Astros) over a failed RSN JV, and Comcast seems unlikely to take ownership of an RSN in Colorado; it is currently fighting an antitrust lawsuit in the market.

Comcast has also been non-committal about its long-term future in the video business. 

No matter who ends up owning the RSNs, long-term viability will be contingent upon the creation of new cost structures. 

“Flexibility is going to need to be built into the distribution ecosystem–and that means prices must come down,” Bevilacqua said. “Instead of getting a $5 sub fee from the MVPDs, the sub fee might have to go down to $3-4 so that [the rights holder] can create a standalone competitive product in the retail lane.” 

The goal will be for rights owners to have their product distributed in a way that delivers the most reach and value. That means giving consumers the content they wants, on the piece of glass they’re using at the time, at a price point that reflects the new wholesale/retail environment.