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Sinclair RSNs: Timing Is Everything

New York Rangers play the Dallas Stars on Fox Sports Southwest
(Image credit: Fox Sports Southwest)

Sinclair Broadcast Group is reportedly considering its options concerning its regional sports networks, including a possible bankruptcy, about a year after it paid $9.6 billion for 21 former Fox Sports RSNs. A lot of reasons have been given for the need for a restructuring. The pandemic, which has decimated sports teams and networks as seasons were shortened or canceled; the pressure to issue rebates to distributors for undelivered games; and the decline in overall linear programming viewership have all contributed to RSN declines. And while those reasons are certainly valid, one very important factor in the Sinclair RSN’s current dilemma is missing: timing.

Sinclair got into the RSN business at a time when regional sports networks were on the decline, but were still considered to be one of the few places left that encouraged live viewership, so-called “appointment TV.” Part of the concessions The Walt Disney Co. made in gaining approval for its purchase of certain 21st Century Fox assets -- the government ordered the divestiture of the Fox RSNs because Disney already owned a dominant sports network, ESPN -- bidding for the channels was intense. But pricing was not. Originally, Disney thought it could attract as much as $20 billion for the networks. And though there was a lot of interest, as the rounds progressed it became apparent that they wouldn’t get anywhere near that valuation. 

The problem: while sports was and is still considered one of the few things that TV viewers watch live, the cost of the channels was getting out of hand. At the same time, distributors were pushing back against sports channel affiliate fee increases, claiming that not enough subscribers watched the channels to justify the cost. Cord cutting made the idea of carrying expensive programming even less attractive. 

Now, that all appears to be coming home to roost. According to a report in the Wall Street Journal Wednesday,  creditors of the unit that holds the RSNs -- Diamond Sports Group -- are preparing to possibly restructure about $8 billion in debt. Sinclair, which set up Diamond Sports to bear most of the debt load of the Fox Sports acquisition -- the broadcaster is only on the hook for about $170 million of that obligation -- had earlier tried to restructure the debt through an exchange offer. Bondholders, who would have had to take a substantial haircut in that exchange, took a pass.

In a research note, Wells Fargo Securities media analyst Steven Cahall said bondholders will have to consider whether to keep Sinclair as the operating partner for the RSNs -- a service for which they take about $100 million in EBITDA annually -- or go with another partner. The analyst prefers a Sinclair exit.

“We think the RSNs have been Sinclair’s Achilles heel as it's a distraction for investors, an asset in decline and a potential drain on retrans to support RSN carriage fees,” Cahall wrote. “While there's no equity value in Diamond these factors also mean less equity value in TV. Ultimately we view a separation of the RSNs as the best case scenario for Sinclair as it removes a big overhang that's needed management's attention since the get go.

But others believe the RSNs current problems seem more tied to the pandemic and that isn’t going to last forever.      

“They definitely took a hit on baseball, you lost 100 games per team,” said one sports executive who requested anonymity, adding that the possibility remains that the 2021 NBA, NHL and MLB could start late and could be compressed. “...Nobody is saying they aren’t watching games. The ratings for baseball regionally were very strong. If there is a finite number of games lost, it’s not the end of the world. The content is still valuable.”

And the sports exec added that Sinclair is still doing RSN deals and hiring people, an indication that it still feels the business is moving forward.  

Related: Why Sinclair’s Sports Bet is a Risky Play 

In its last quarterly earnings conference call with analysts, Sinclair CEO Chris Ripley said that it had locked up about 85% of its RSNs total customers for two years and beyond. That figure included the carriage deal for its Marquee Sports Network with Comcast. Marquee Sports was not part of the Fox RSN buy, instead it is a separate partnership between Sinclair and Major League Baseball’s Chicago Cubs. 

Related: Worry Over Sinclair’s Sporting Chances 

While it has been able to strike long-term deals wit h traditional distributors, Sinclair has had a tougher go with virtual MVPDs. In the past year it has lost carriage with YouTube TV, fuboTV and Sling TV. On Oct. 22, Hulu Live + TV added its name to the list, telling its customers that the 21 Sinclair RSNs, Marquee Sports and the YES Network would go dark as of Oct. 23.  That leaves only AT&T TV Now among major vMVPDs that carry the networks.    

While those disputes, like most carriage fights, probably center around pricing, there are some in the sports industry that believe that Sinclair’s RSN problems are more tied to the rights fees the networks are paying the teams whose games they carry. 

“That is what it comes down to, are the RSNs covering their nut to the teams,” said one RSN executive who asked not to be named. “It doesn’t matter if the [LA] Clippers stink or not, they are still going to get top dollar from Fox Sports San Diego or Fox Sports West.”

Related: RSN Redux 

Others feel that while affiliate fees are still strong, the overall decline in pay TV customers means that the RSNs are getting less money as part of their deals. 

According to MoffettNathanson, traditional pay TV -- cable, satellite and telco -- has lost about 10 million customers since 2018. And the bleeding is expected to continue. Kagan, a unit of S&P Global Market Intelligence, estimates that by 2025 the pay TV universe will lose about 31 million customers.

That has some pundits wondering if the deterioration of the traditional model where linear networks pay fees to sports networks based on their total number of subscribers, is on the way out. 

But there is a danger in switching to a direct-to-consumer model, mainly that sports networks will have to rely on revenue from customers that want to watch them, not everyone with a pay TV subscription. That could be a big difference -- currently there are about 80 million TV homes, and some analysts estimate that only about 30% of those customers watch sports. That could mean that a D2C regional sports offering would have to charge about three times more per month just to make as much money as it was receiving under the old model. As a result, many in the industry are hoping for some kind of hybrid model. 

“At some point, you have to be thinking, ‘how do we offer this on a streaming basis as well,’” the sports exec said. “The pandemic, as awful as it is, is finite. But it’s accelerated the drop off in pay TV penetration. If you’re any network, you now have to figure out far more quickly than you thought how you’re going to handle streaming. It’s not abandoning pay TV, it’s a question of can you coexist on both.”

And then there is the question of ad revenue -- with less potential eyeballs, networks could be worth less to advertisers. And there is the threat that customers would drop the service after their favorite team’s season ends, meaning that the RSN could see a big drop off in revenue toward the end of the year. 

That could be especially hard for RSNs that basically only carry games in one professional sport, like SportsNet New York, home of the New York Mets. 

“From October until March, they could potentially have no income,” said the RSN exec who asked not to be named.   

In the meantime, some were hoping that legalized gambling would help the networks, both in terms of additional advertising and the potential of allowing actual wagering via the TV remote or online for everything from the final outcome to specific plays. That has not worked out to be the windfall it was expected to be. 

Related: Not Quite All In On Sports Betting 

So far, according to some reports, as of August only 18 states have passed legal gambling bills since the Supreme Court opened the door to sports wagering in 2018. Four states, -- Virginia, North Carolina, Tennessee and Washington - have passed bills allowing sports gambling but are not yet operational. And there are active bills in another nine states, and 12 states have rejected legalized sports wagering. But save for a few ventures, sports gambling hasn’t been the savior most RSNs expected. 

Sinclair was also counting on sports gaming being a bigger part of the business, and hired former Poker Central & Estars Studios chief business officer JR McCable to head up its D2C Gamification unit. https://www.nexttv.com/news/sinclair-hires-mccabe-to-build-gaming-business

In a research note Wednesday, LightShed Partners analysts Rich Greenfield, Brandon Ross and Mark Kelley issued a report on the state of RSNs, noting that even if legal gambling were more widespread, it probably wouldn't have made much of a difference and could have negative effect on viewership of sports channels. 

The analysts said that although the leagues’ claims that gambling would boost viewership is “intuitive,” albeit hard to quantify, it could also “catalyze the loss of community around sports and could produce offsetting effects.” They also noted that illegal sports betting has been around for decades, and so far hasn’t moved the viewership needle as much as could be expected. 

But the sports exec said that could change as the pandemic winds down. States will be looking for new sources of revenue, and gambling could fit the bill. 

“They need revenue, and gambling is an easy way to get it,” the exec said. “In terms of looking forward, in the next three-to-five years, I think you will see a majority of states, two-thirds or more offering gambling.”

Again, it’s all a matter of timing. And timing is everything.