Tiered RSN Package Could Help Solve Teams’ Local Economic Puzzle

Tiered RSN Package Could Help Solve Teams’ Local Economic Puzzle

Several professional sports teams have pivoted from the regional sports network model that has thrived for the last three decades. The reasons and their plans for local distribution moving forward vary (see: Padres, Suns, Jazz, Diamondbacks, VGK, Coyotes).

A few were forced to find a new strategy because Warner Bros. Discover CEO David “Zaslav decided the three RSN's WBD owned weren't additive to the larger channel businesses anymore,” media consultant Patrick Crakes said. Diamond Sports relinquished others’ broadcast rights as part of their ongoing bankruptcy proceedings, and some clubs “were worried about the amount of economics promised in the future, [didn’t get along with their existing local distribution partner] and recognized the need to find a new route.”

Major League Baseball offered to help affected clubs stand up, operate, and distribute newly branded RSNs in local markets, and backstopped losses ensuring the teams received at least 80% of anticipated revenues in 2023.

The NBA and NHL teams referenced have instead chosen to pursue various ‘stream and beam’ approaches (a combination of over-the-air broadcast and direct-to-consumer streaming).

All of clubs remain optimistic –at least publicly– about their local distribution plans.

But what if the new systems fail to increase reach and/or replace revenues as expected?

“In the next year, some fans are going to complain they can’t see/find the OTA signal and/or that it’s too expensive for the streaming service,” Crakes said. And some of these clubs will have a “large hole in the P&L because of the reduction in local rights revenues. Those organizations may launch tiered RSNs.”

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Making the move from a cable TV station to a free over-the-air network should, in theory, increase a team’s potential audience.

“An OTA broadcast signal can reach across an entire market,” Crakes said.

But the reality is, many people are unable to see and/or do not know they can get it. ~30% of U.S. households are considered broadband-only homes. That figure is even higher in markets like Phoenix and Las Vegas.

And it’s not as if these teams’ game broadcasts will air on a local ABC, CBS, NBC, or Fox affiliate. Existing primetime commitments mean most games are going to appear on another network that the station group owns or a digital sub-channel.

Clubs and their media partners will have to educate fans (and prospective fans) on where/how to find game broadcasts, and some MVPD's and vMVPDs may not carry the local channel. So, there’s no guarantee viewership climbs with a pivot to the ‘stream and beam’ approach.

The distribution strategy is not certain to keep local rights revenues flat (never mind growing), either. Station groups are guaranteeing teams a portion of the rights revenues received from their respective RSNs.

Clubs hope the expanded reach leads to advertising, merchandising, and ticket sales growth, and when combined with streaming subscription sales, and any newfound revenue streams that emerge, they can collectively offset planned rights fee increases.

Perhaps that will be the case for some organizations. Outcomes are likely to vary across teams and leagues.

Of course, that’s how it was under the old RSN model too; some clubs were paid more handsomely than others.

But on average, unless a station group is going to be able to command increased retransmission fees from Pay TV distributors in the market (which they may) and share those revenues with the club, that seems like unlikely.

“Even with access to station group retrans fees we don’t know if the dollars will add up,” Crakes said. “Some teams are [likely] going to have local revenue holes to cover, in particular against future plans.”

Some team owners have said they are willing to absorb short-term losses in pursuit of long-term growth and are committed to building their fan base and first-party data capabilities.

But as the losses add up, it’s fair to wonder if others will pivot again and pursue a tri-cast model that includes Pay TV distribution.

Doing a deal with a broadcast network or building a DTC streaming offering “doesn’t preclude a team from saying they want to go launch a tiered RSN a year or two from now because they want to make more money or increase audience size,” Crakes said.

The presumption is with Pay TV distributors no longer needing exclusivity over the rights (since it would be tiered), the cable channel could strategically coincide alongside a broadcast option and/or streaming service.

In the past, sports teams would have balked at their RSN landing on a tiered cable package.

It was akin to “getting sent to Siberia,” Crakes said. “There was nothing there [content wise] and it was very expensive.”

But with Charter recently agreeing to allow other distributors to tier its RSNs (in negotiations with Disney), and the company establishing a sports tier for general market fans, teams in need now have a roadmap to follow to retain the bulk of their local revenues. In addition, the said Charter-Disney deal sets the precedent for ad supported DTC services to be offered by Pay TV distributors for free, which should provide more reach and awareness for a team's streaming service.

To be clear, clubs on a tiered RSN will still likely “go backwards because they aren’t going to reach every single sub [as they did in] the basic package. But the package [should be] reasonably priced and have value, so maybe they can keep something like 70-80% [of fee-based revenue],” Crakes said.

Plus “they’ll have more reach because of the additional circulation and content discovery inside the Pay TV distribution platform,” he added.

Major League Baseball has supported its clubs from a production and distribution standpoint helping those in need to quickly standup RSNs in their local markets.

The Padres and Diamondbacks’ networks were on basic or basic plus tiers this season. But don’t be surprised if they too move to a sports tier next season with MLB no longer guaranteeing revenues. It is the easiest path to much needed rights owner economics as distributors are all but certain to take back the valuable content.

“It’s a reason for an important customer segment (sports fans) to have or keep the Pay TV bundle,” Crakes said.

But distributors are not going to pay full boat for the games again.

“They’re going to pay less than what they were paying before,” Crakes said.

Of course, team expenses, including player salaries, continue to increase. So, if they can’t offset the difference, economic growth will need to come from somewhere else (to maintain margins).

It is possible national rights could be part of that solution for the most valuable properties. Though, their road looks more complicated than it has been in years’ past too.

The addition of a tiered RSN option would seemingly be a win for fans.

“There’s going to be multiple avenues to get these games, which is a good thing for the consumer,” Crakes said.

But each of those avenues will likely have less games, they may be harder to find, and fans will have to pay more to see them all.

It’s back to the future, alright.

Remember, “it wasn’t until the mid-90s/early 00s that every local team for all three RSN leagues was available on TV everywhere,” Crakes said.

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