Marc Daniels Monday Notebook: Most Underreported Story In Sports

At Home Three Joyfuls Sports Fans with Painted Faces Sitting on a Couch Watch Game on TV, Celebrate Victory when Sports Team Wins Championship. Friends Cheer, Shout. Portrait Shot

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How much are you willing to pay to watch your favorite basketball, baseball or hockey team? We are about to find out.

The greatest model of media revenue for teams in those sports could be crashing soon. For decades teams were paid for an audience that never watched them play. And they were paid millions of dollars. 

Regional sports networks were basically created to televise games of the local teams that were not on a national package. Those networks appeared on cable services and every customer paid for that channel whether they watched or not. For years and years no one paid attention to the model of your cable bill being the total amount of what you paid for all the channels on your cable package. ESPN is the most expensive channel to have for obvious reasons. But you also paid for TBS, TNT, CNN, Fox News, HGTV, The Hallmark Channel and QVC. You may say, but I don't watch most of those. Exactly! Well for every channel you say you don't watch as a sports fan, the non-sports fan will tell you they don't watch ESPN, MLB Network, FS1 and any other sports related channel.

But that also applied to regional sports networks, like Bally's Sports and channels like Bally Sports Florida, where you watch the Magic and the Tampa Bay Lightning and Rays and Miami Marlins. You and everyone else pays for each channel and those teams have been making millions and millions every year whether you watch or not.

Over the years, people caught on to the game and started wondering why their cable bill kept rising. Well, the biggest reason was your cable company kept passing on the rising cost per channel to you. That's when cord-cutting became popular and new alternates to basic cable came along. Of course, now people are realizing your streaming costs have skyrocketed and you are likely paying as much or more than you did when you had cable.

But back to our story, where about four years ago Sinclair Broadcasting bought the regional Fox Sports networks. The deal included Sinclair taking on about $10B in debt. At the time, the regional sports network model was still raking in money. Sinclair rebranded the regional sports networks as Bally Sports. But then cord-cutting took off. Thousands and thousands of regional viewers dumped their cable. On a national level, ESPN saw their available homes drop from well over 100M to just over 70M. Put that in perspective by understanding that if each home was paying about $8 per month to get ESPN that would be about $800M a month in just the monthly fee. At 70M homes that amount drops to $560M a month and equals a $2.88B drop in yearly cable fees. It's why ESPN is pushing their ESPN+/Disney+ packages and why they continue to push programming to their ESPN+ platform.

Sinclair has been pushing their app as a means for viewers to follow their teams and they will likely be pushing it even more. 

Diamond Sports Group is the division within Sinclair that runs its regional sports networks(RSN), it appears Diamond is closer to file bankruptcy because of an $8.6B debt restructuring. Such a deal impacts the $55B in local sports rights fees paid. Sinclair is expected to miss its $140M interest payment due in February. According to Bloomberg, that will trigger a 30-day grace period and likely lead to filing for bankruptcy. It's complex but if Diamond files, the creditors become the biggest equity owners of the company. The restructuring could go into the summer where equity owners would then likely sell Diamond. Part of the plan and a potential bankruptcy judge ruling is that the media deals between Diamond and teams could be eliminated. While some leagues, like MLB, and teams would like to take back their media rights, any cancellation of media deals would see teams lose millions of already budgeted dollars. That means teams like the Magic, Lightning, Rays and Marlins could be looking at a financial hole that they did not expect.

Diamond started a streaming service asking fans to pay a certain amount per month to watch your favorite team. Here's the problem for a team like the Orlando Magic. While the Magic have become a bit more exciting with the addition of Paolo Banchero and Franz Wagner, the team has had some of the lowest local TV ratings in the league. If those games are no longer available on TV, how many are actually going to pay for a streaming service? Industry experts will tell you the number is significantly lower than those currently watching on a RSN. And while the thought may be if one person pays $20 a month to watch their team it offsets the concept of 20 people paying $1 a month on their cable bill. There is plenty of data to show the audience is not yet migrating and there is a price point where you can't make it. If the Boston Red Sox offered their games only on a streaming package(and they currently do) there is a greater audience demand for those games than the Orlando Magic since the Magic have struggled for more than a decade.

Diamond/Sinclair own stations in some of the towns where the regional sports network may no longer be an option and could place those teams on those local stations. That is not the case in Orlando and could you lose your ability to watch the Magic on Bally Sports Florida as the team fights for a playoff spot? Maybe. 

MLB is watching this story closely and have been preparing for the day. The league wants to take back local rights and restructure the way fans consume their games. They have hired industry executives and built an infrastructure to put in place a new model. But that will not replace the budgeted funds most teams have planned for. Remember, no matter how many fans in south Florida were watching Marlins games in a stadium with a couple thousand fans, the team was making money on every cable customer because they have been paying for Bally Sports Florida whether they watched or not.

February 15th is a key date and some don't want Diamond to make an interest payment because it would take more cash out of the company and creditors who become equity partners if Diamond files bankruptcy want that cash on hand. It's believed Diamond has just over $500M in cash on hand but owes about $2B in rights fees to teams. The biggest chunk of that $2B is due in the first quarter of 2023.

So a showdown is looming and most don't see Sinclair/Diamond keeping its regional sports networks and many don't see the model surviving if bankruptcy happens. So if you are already wondering about your rising streaming costs, you are likely about to be asked to pay more to watch your favorite team. But for teams like the Magic and Marlins and Rays it's a risky model. You already know your TV ratings are low, the reality of seeing how low might be really expensive...

Final note: Regional sports networks have seen their total subscriber base drop from 123M from 2021 to under 90M in two years.

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