In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear. What happens next?"
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The dissolution of the Regional Sports Networks (RSN) business model reminds me of my argument in “The Linklater Problem.” I built that argument around a quote from “Built To Fail”, an excellent book on the history of Blockbuster Video written by former retail franchisee Alan Payne.
At one point, Payne highlights how the rental video market under Blockbuster changed the economics of movie productions because it:
generated more revenues for producers to fund more productions, and
aggregated the target audience at scale.
So, the additional revenue from Blockbuster stores catalyzed the supply of film productions, and Blockbuster stores catalyzed the demand for those films.
Similarly, the RSN model is not feasible without the built-in customer base guaranteed by multichannel video programming distributors (MVPD) and on-demand TV services like satellite broadcasters. But the catalyst is different: whereas independent films only generate revenues when a film is rented, RSNs earn from 100% of MVPD subscribers, whether or not they ever watch the RSN.
Scarcity and subsidies are two details worth focusing on in these examples. First, scarcity: Blockbuster’s focus on growing retail stores created scarcity that was beneficial. But in the long run that narrow focus left it vulnerable to Netflix's consumer and data technology strategy. Whereas the successes of the profitable MVPD model have prevented any competitors or alternative models from emerging for RSNs. Second, subsidies: Blockbuster's retail store growth unintentionally and indirectly subsidized the independent film industry, but MVPDs intentionally and directly subsidized RSNs.
Both details help to flesh out what an alternative to the MVPD model for RSNs may look like.
Key Takeaway
Will we ever see a model like MVPDs to subsidize RSNs again? No. The future may lie in a Blockbuster-like business that may unintentionally subsidize RSNs.
Total words: 1,700
Total time reading: 7 minutes
Blockbuster, scarcity & subsidies
Scarcity is the linear distribution model’s historical moat — the linear model enabled multichannel video programming distributors (MVPDs) to aggregate millions of households locally, regionally and later nationally. It has similar business logic to the circulation model of the print business
Blockbuster defined scarcity as total stores opened. At one point in the 1990s they were opening one new store per day. As Alan Payne writes in “Built to Fail”, the primary mission of Blockbuster was growth: “Within two years, Blockbuster grew from a few dozen stores to over a thousand, and then opened 2,000 more in just three years. Single-handedly, they would grow the entire video rental industry by over 50 percent in just five years.”
The first Blockbuster stores generated $1 million in annual sales with around 30% margins. But, as Payne writes:
For all of his genius in marshaling the resources to grow Blockbuster, [CEO Wayne Huizenga] simply did not care much about how the stores operated, so long as they were open and generating fabulous sales and profits. The underlying details of how that happened did not interest Huizenga, and that behavior permeated the entire company. Phenomenal success had been achieved by building stores faster than anyone else. But the company’s lack of curiosity about what went on in the stores, as well as competitors’ stores, left gaping holes in its understanding of the business. And there is no better example of that than its management, or lack thereof, of its massive movie database.
A key outcome of that approach was a significant competitive failure: “As computer technology marched forward, Blockbuster was left behind, long before movies via the internet were a factor. During its entire 29-year history, the store computer systems and back-office management systems were never significantly upgraded.”
Blockbuster’s blind spot became Netflix’s advantage: negligence of consumer data and operating software opened the door for Netflix to gather similar data and built out a better service for the same customer faster and better. It is also worth noting that Netflix seamlessly replaced Blockbuster as a subsidy for independent film productions. Like Blockbuster, it never sought to directly subsidize that market [NOTE: that changed only in the last decade after Netflix began investing in original TV series and films to grow its streaming business].
Blockbuster's scarcity was fleeting despite its retail store advantages over Netflix. But its model was a powerful growth engine for the video rental marketplace in a short period of time.
MVPDs, scarcity & subsidies
Multichannel Video Programming Distributors (MVPDs) define scarcity in terms of residential and business customer relationships. There are over 120MM U.S. households with permanent internet access. A recent Leichtman Research survey estimated that there are 60MM households with a linear-only connection (excluding satellite and virtual MVPDs). That is down from over 100MM a decade ago.
They are also highly profitable: in 2019 the cable network segments of the largest public cable network companies generated EBITDA margins of 38%, on a weighted-average basis. Consumers are monetized both with market-high affiliate fees (MSG Networks is now charging over $10) and local advertising (MVPDs get a share of local inventory). MVPDs are replacing linear customer relationships with broadband relationships, but not fast enough to capture Wall Street’s enthusiasm.
Live sports broadcasts have been a natural fit for live-linear video delivery. The fundamental value proposition of RSNs programming is live sports, replays, and nostalgia, the latter two of which I have labeled “filler content” in the past. That programming has provided MVPDs and advertisers with the valuable demographic of 18-34-year-old males with disposable income to watch sports. For these reasons and more, MVPDs have been willing to pay high carriage fees to carry these networks, sometimes over $6.00 per subscriber (ESPN charges MVPDs nearly $10 per subscriber.
But not all MVPD subscribers watch RSNs: MLB's Pittsburgh Pirates average 55,000 viewers per game and are paid $60 million per year for their TV rights. So, each fan would have to pay $1,090 for the season ($181/mo. for 6 month season) for the Pirates to make the same from DTC.
A particularly notable example is MSG Networks, which has not been distributed on Comcast since 2021. Comcast has claimed:
"Almost 95% of all customers who received MSG over the past year did not watch more than 10 of the approximately 240 games it broadcast.
"80% of customers didn’t watch any MSG content at all each month in that timeframe."
Despite the vulnerabilities revealed in this viewership data, MVPDs have not had a Blockbuster-like competitive failure. That is in large part because they also control broadband distribution, and because sports leagues and teams have not yet had any incentive to seek an alternative model. There are no better economics or scale available beyond the MVPD model. Above all else, MVPDs are a utility service and movie rentals are an entertainment service.
On this point, it is worth noting Comcast’s Xfinity Flex platform for broadband distribution has become a default platform for Charter and Cox via the Xumo joint venture, and is available to 68MM customer relationships in the U.S. This means a single MVPD has begun aggregating local audiences with its broadband distribution software. Whether it succeeds or not remains an open question, but notably it is primarily a strategy to achieve national scale and less so a local and regional strategy.
RSNs future need a Blockbuster?
The speculation in sports media has been whether we will ever see a model like MVPDs again. Until or unless we see another entity focused on aggregating and retaining scarcity locally and regionally as an existential necessity, the answer appears to be no.
Notably, a focus on local scarcity has been anathema to streaming growth strategies, to date. Every service delivers a national and/or international value proposition that cares little for the local population (the exception may be in free ad-supported TV, which distributes local TV channels). No MVPD-style scarcity in the future will mean direct subsidy of RSNs. The model is dying and seems dead in the long run. Streaming has not proven it can replicate the MVPD model (as I argued on Monday),
So, that leaves us with the Blockbuster precedent: Is there currently a business so focused on top-line local, regional and national growth of retail stores or another non-media distribution business that it may unintentionally help the RSN business model survive?
The short answer is, I don’t know, but it is a question worth asking. Because if that business does exist, it should be in a position to both scale rapidly like Blockbuster and avoid the mistakes in streaming that Blockbuster made with technology and consumer data. With an emphasis on local and regional, first, that business would be a logical heir to the MVPD model.
That said, there are some big questions on the table:
What is a Blockbuster-type business that could indirectly catalyze the supply of local sports broadcasts while aggregating consumer demand at scale locally and regionally?
Which sports teams are best positioned to indirectly benefit from the growth of a Blockbuster-type business? Which sports teams are worst-positioned? How could all be better positioned for an indirect subsidy?
We can quantify the revenues lost with the RSN model disappearing, so what are the types of business models with an indirect subsidy that may replace those economics?
These may be the better questions to ask in order to start exploring answers for the future of RSNs.
Addendum
Netflix highlights a fascinating detail worth briefly discussing.
Netflix was able to capture Blockbuster’s customers with the same value proposition delivered by mail instead of in retail stores. Its focus on customer data and DTC ended up being a competitive advantage in the long run given that a lack of investment in both technologies was a corporate policy at Blockbuster.
But any DTC service launched by a sports league will not have the same value proposition as an RSN because it effectively disaggregates the sporting event from the Electronic Programming Guide (EPG). That means the event is disaggregated from the “filler” content, too. The value proposition has become narrower and requires a new conversion funnel for the user. If we use MSG as precedent, a DTC offering offers more friction for the 20% of customers who watched an RSN for any reason, and the 5% who watched more than 10 games per year.
A Netflix-like alternative future for RSNs would need to be un-Netflix-like in experience to replicate the RSN value proposition. Arguably, that would be something closer to a streaming EPG user experience like Pluto TV, Amazon’s Freevee or The Roku Channel. But those services would need to have a local-first strategy, and they do not.