In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "Media companies have millions of consumer credit cards on file. What happens next?” and "The definition of scarcity is continuously evolving away from linear. What happens next?"
Author's Note: Next week I will get to writing essays and posting on the Slack more regularly. I am currently playing catch-up after the holiday weekend.
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Last March, there was a flurry of deals and developments in sports streaming, but I observed then a looming uncertainty as to where the marketplace seemed headed, and concluded, “now fans must navigate an emerging maze of options that muddle whether a game is being broadcast on linear or streaming, and if/how they have access to that broadcast.” [NOTE: A reminder that I have learned not to focus too much on sports streaming primarily because “streaming has made sports distribution deals highly technical and somewhat convoluted."]
Last December, former NBA executives John Kosner and Ed Desser argued in Sports Business Journal that the sports media business “reached its point of no return” or “Rubicon” when Amazon Prime’s streaming service delivered 15 million viewers for an exclusive NFL game. They added, “As a result of this Amazon revolution, sports fans who were once largely anonymous — with no direct relationship with the broadcaster, league or team — are suddenly, continuously and personally connected.”
Both are important precedents to what is now transpiring with Diamond Sports Group — the outside entity Sinclair formed to hold TV rights to regional sports games from the NBA, NHL and MLB. It is currently in a 30-day grace period which “most observers expect will lead to a Chapter 11 bankruptcy filing.” Any outcome that forces the RSNs out of business results in an “axiomatic” problem best summarized by Sportico’s Anthony Crupi: “As local fandom is the lifeblood of American sports, the leagues cannot abide a disruption in the transmission of their live games.”
Key Takeaway
The post-RSN world challenge of aggregating and keeping local fans “suddenly, continuously and personally connected” in DTC streaming and at scale seems impossible for MLB, NBA & NHL to do on their own.
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Since we are at “a point of no return”, it is worth asking what leagues can do. An outcome where they figure out DTC would imply two things:
Leagues have millions of credit cards and existing direct-to-consumer streaming relationships on file; and therefore
They will be able to aggregate scarcity both locally and nationally.
The challenge that will emerge if Diamond Sports enters bankruptcy or stops making payments without a clear agreement for a roadmap with its creditors and the leagues, is that each of these leagues will be forced to re-aggregate these audiences at both a local and national level. At a time of declining interest in live sports, and the Rubicon having been crossed, that seems like an impossible challenge.
The economics of the problem
The regional sports networks (RSN) produce the broadcasts of games and monetize those games. They then share affiliate and advertising revenues with the leagues, pay down creditors and then keep the rest for their business. Diamond Sports is saddled with $9B in debt from 2019 when it paid Disney $9.6 billion to buy 21 Fox regional sports networks and Fox College Sports. The deal was driven by Disney’s need to meet antitrust clearance for its acquisition of 21st Century Fox film and television assets.
Two factors hurt Sinclair and Diamond Sports: the pandemic — which created shortened seasons and lower advertising revenues — and the acceleration of cord-cutting, which reduced the number of homes subsidizing their business model. A recent Leichtman Research survey estimated that there are 60MM households with a linear-only connection (excluding satellite and virtual MVPD). That is down from over 100MM a decade ago.
Diamond Sports now faces the predicament of having to keep leagues and creditors financially happy with declining revenues and changing consumer behaviors.
Leagues have millions of credit cards on file
So far, the NBA, MLB and NHL all seem to be willing to be patient during this 30-day grace period, which started last week on February 15th [NOTE: MLB allows each team to negotiate separately for their respective digital media rights. but the NBA and NHL own digital rights for all of their teams. So the NBA serves as a proxy for the NHL for the purposes of this essay].
Several NBA and NHL teams have been renewing deals with RSNs. Sports Business Journal’s John Ourand reported recently:
“In a best-case scenario, the clubs hope they will continue to be paid for their rights even through a bankruptcy. In a worst-case scenario, these teams think it is better to be paid even for a couple of months. There is still no alternative that would pay as much for rights as RSNs.”
The NBA recently renewed its streaming deal with Diamond Sports in June 2022, allowing it to continue to stream the games of 16 NBA teams locally via Bally Sports+. That is the streaming service that Sinclair launched mid-last year, priced at around $20/month to discourage cord-cutting (linear CPMs are higher than streaming CPMs in local broadcasts).
I wrote about this deal last March. If Diamond files for bankruptcy in mid-March or if Diamond misses any rights payments to one of its NBA teams, the NBA will be faced with a choice in June 2023: “Should it take the digital rights back, which would undermine Diamond’s ability to keep its linear business healthy? Or should it leave its digital rights with Diamond to help with its restructuring, at least until the end of the deal?”
Ourand reported another dilemma for the NBA is that “the league can take back all of its rights and launch competing streaming services in those markets.” He notes that will impact the looming linear negotiations for 2024-2025 when the NBA will renew its rights deal.
The MLB faces a similar dilemma — RSNs generate about $1B in revenue per year. MLB Commissioner Rob Manfred said recently after an owners’ meeting that, in the case of a bankruptcy, “Our goal would be to make games available not only within the traditional cable bundle but on the digital side, as well.”
Both are casually dropping the promise that they can launch digital services. The NBA has been positioning itself to do so via its partnership with Microsoft Azure. The MLB quietly sold off its remaining 15% interest in BAMTech to Disney last November, but there is nothing precluding it from partnering with Disney to build out a DTC service.
The NBA does not reveal how many League Pass subscribers or registered users of NBA.com it has. According to the Nielsen Station Index, which measures local TV viewerships in Nielsen markets, combined NBA local viewership dropped from 1.411 million homes in 2015-16 to a low of 931,530 homes in 2020-21. In 2022 it was in 1.028MM homes.
Nominally, that scale seems attainable by any streaming service. However, that is the average across 27 RSNs. So the NBA would need to be able to possess credit cards for the 7.7MM TV homes in the NYC market *and* capture 644,000 homes in the Memphis market (for the Grizzlies). Effectively, it would need to capture a "long-tail" of homes, not all of which have broadband access.
Scarcity is attainable both locally and nationally
So, scale and scarcity are different variables in the RSN business when they shift to streaming. Scale seems less necessary because the local audiences are smaller, but national scale is necessary because the MLB, NBA and NHL must aggregate scale across all local territories where RSNs may fail.
Without scarcity nationally neither the NBA nor MLB will be unable to attract the advertising dollars it once did (and it has relied on its linear partners to sell those ad dollars). Moreover, with or without a streaming solution at scale, it is not quite clear how local ad inventory will be monetized.
Part of the problem lies in the basic laws of supply and demand. We witnessed this already with Netflix’s Basic Tier with Ads in Q4, which I wrote about last month. Netflix fell short of ad-supported viewership guarantees made to advertisers and allowed advertisers to take their money back for ads that have yet to run. That was an outcome where demand was greater than supply — a good problem to have — but there was also a shortfall in supply. That can be reaosnably expected for any DTC streaming successor to RSNs.
Another challenge is local advertisers pay CPMs based on the reach of a regional linear network. There is some minimum audience that is guaranteed to tune in and watch. The MLB, NBA and NHL will have to figure out both the abilities to:
drive a minimum audiences at scale across different regions and metropolitan areas, and
serve and target local ads across different regions and metropolitan areas.
That solution appears to be TBD.
Adapt and evolve?
Without instant solutions for scarcity, there will be no instant solutions for monetizing local broadcasts via streaming for the NBA, NHL or MLB. AMC Networks Chairman James Dolan's succinct explanation of his company’s challenges on its Q4 2022 earnings call also applies to the leagues and RSNs:
AMC has been a wholesaler, right, as most of the programming companies have been. And in wholesaling, somebody else takes care of the customer, somebody else watches the customer and somebody else actually ends-up pricing to the customer.
When you go to DTC all those things become your responsibility and for an organization to move from wholesaler to retailer is to really significantly change its focus. Things they are paying attention to, things like the customer journey and churn, they are all part of becoming a good retailer.
The pricing becomes very important and where you apply your manpower, you don't -- it is not affiliate relations, not that you're stopping affiliate relations, but affiliate relations is a much smaller task now, compared to understanding the customer and serving them well. And that is a cultural change for AMC, as it will be for a lot of other companies.
Applying Dolan’s logic to the leagues, it will not be enough to have a database of millions of paying and non-paying subscribers to league-owned services. The leagues must adopt a new culture of customer relations while maintaining the old model in a smaller form and chasing scarcity in a new form. This culture change has not been a core focus of the leagues, in large part because the Diamond Sports bankruptcy has so much uncertainty around it. Dolan’s take is that once they do adopt that culture change, it will not be instantaneous. Meaning, there will not be a one-to-one replacement for the loss of RSN linear revenues anytime soon.
Kosner and Dessner concluded, “crossing the Rubicon is one-way only, and not toll-free!” I think that crossing is more complicated and perilous than many observers of the RSN dilemma seem to realize. Aggregating and keeping local fans “suddenly, continuously and personally connected” at a smaller scale seems near impossible within the business dynamic described by Dolan.
I am struggling to imagine how the NBA, MLB and NHL will get to sufficient scarcity and scale for both viewers and advertisers without an Amazon or Google (perhaps even a Peacock) as a partner.