Sinclair Broadcasting Group’s Diamond Sports Group (home of its regional sports networks) dodged a big bullet last week by hammering out a carriage deal with the National Basketball Association for its upcoming direct-to-consumer streaming service and negotiating $600 million in additional financing that secures its survival for at least another year. But the sports giant still faces pressure in the next few months to reach deals with Major League Baseball and Charter Communications.
Sinclair reached a deal with the NBA on January 13, about one month after securing a similar arrangement with the National Hockey League on December 3. While both of those deals include rights for Sinclair to stream games via its direct-to-consumer service, slated for the second quarter, the content company still has to strike deals with Major League Baseball, which in the past has been critical of the company.
Sinclair said last year that it had rights deals with four teams -- and some have speculated those are the Detroit Tigers, Milwaukee Brewers, Miami Marlins and Kansas City Royals -- for its DTC service. But the company still needs to secure DTC streaming rights for another 10 MLB teams. The regular season is expected to begin around April 1, although a possible lockout of players by team owners that need to renew a bargaining agreement with their union could push that date back days or months. In an interview with the Wall Street Journal January 13, Sinclair CEO Chris Ripley said the DTC product would have a soft launch in the second quarter, rolling out more broadly in Q3.
DTC service is critical, and so is the linear carriage deal with Charter, which is set to expire in Q1. Charter has about 15 million video subscribers in 41 states, including many where Sinclair has an RSN presence. In a research blog earlier this month, LightShed Partners partner and media and telecommunications analyst Richard Greenfield predicted Charter would place the Sinclair RSNs on a separate tier, something RSNs across the board have resisted for years. Placing those channels on a tier could severely cut into their carriage revenue, as it is generally believed that about 30% of cable subscribers subscribe to tiered sports channels.
Greenfield pointed to the prevailing wisdom that as DTC sports services launch, the need for a linear counterpart diminishes. Dish Network, which reached a retransmission consent deal for Sinclair’s TV stations in November, declined to reach a similar deal for its RSNs. The same could hold true for Charter.
“Charter is not known for going to war on programming fees,” Greenfield wrote. “However, we expect Charter will demand RSN tiering vs. basic tier carriage, as minimum penetration requirements fall dramatically. If Sinclair balks at this demand, Charter will be forced to simply drop the RSNs altogether, as the content will be easily available to only the subs that want it via OTT.”
According to the Sports Business Journal, talks between Sinclair and Charter have already started, but the two are still far from a deal. The paper said Charter is looking for “more flexibility” in how it offers the RSNs.
That sounds like code for tiering, and if it is, it would be a problem for Sinclair. Because while everybody else is concentrating on the DTC service, Sinclair, like every other RSN, still relies on its linear TV deals to pay the bills. In an 8-K filing with the Securities and Exchange Commission, Sinclair mapped out three separate scenarios for the linear and DTC offerings. In every scenario, distribution revenue for the linear business remained relatively stable over the next five years -- $2.56 billion in 2022 dipping slightly to $2.39 billion in 2027. That 6.6% decline over five years comes as cable, telco TV and satellite TV businesses are experiencing a 6%-to-7% annual decline in subscribers. While traditional sports lovers are said to be stickier subscribers to the Pay TV bundle, it is unclear if the subscriber projections include Charter or not.
Sports consultant Lee Berke, CEO of LHB Sports, Media & Entertainment, said it appears that Sinclair’s projections for their sports businesses are making some interesting assumptions.
“It assumes that there is no more churn, there is no more shrinkage in the pay TV universe,” Berke said. “It’s tough to see how that could be the case.”
In a research note earlier this month, MoffettNathanson senior analyst Craig Moffett estimated that the pay TV universe shrunk by about 5.2% in Q3, the latest figures available. Cable operators shed 6.2% of their video customer base while satellite TV services providers like Dish Network and DirecTV lost 12% of their subscriber base. Even virtual MVPDs like YouTubeTV, Hulu Live TV and FuboTV are showing signs of a slowdown, adding under 1 million customers in the period, compared to 1.5 million in the prior year.
Sinclair has said in the past that its DTC service will be able to tap into a growing number of consumers who have no traditional pay TV relationship at all -- about 35 million homes at last count -- which could be a reason for the optimism. But it doesn’t explain the relative stability it seems to expect from the linear service, which relies on traditional TV distributors. According to the SEC filing, Sinclair doesn’t give estimates for linear subscribers, but it does project that EBITDA will drop from $396 million in 2022 to $150 million in 2027, so whatever customers remain will be less profitable.
“It seems like a really solid piece of financial engineering,” Berke said. “But the marketplace is still the marketplace, and the trends are still happening in terms of churn and in terms of shrinkage of pay television and what people would pay.”
At the UBS Securities Global TMT conference on December 8, Rutledge didn’t specifically talk about tiering, but said that sports is one of the biggest components of high-priced cable bills.
“We’re trying to -- given the constraints in our own access to content -- create as many packages as we can for customers to meet their needs, recognizing that most people would love to have the fat bundle if it wasn’t so expensive,” Rutledge said at the December conference.
According to the financial estimates in the SEC filing, if Diamond is projecting having about 309,000 subscribers to its DRC service in 2022, and generating about $75 million in revenue for the service, that works out to a charge of about $20 per month for the DTC service, below the $23 price point that some reports suggested in the past. The Sinclair revenue estimates also do not include possible revenue from gambling, which could be a huge profit center for the networks going forward. Ripley has said in the past that he expects the DTC service to be “lean-forward,” giving consumers a video game-like experience that allows them to play a game within a game.
A lot of sports networks are looking to gambling as a huge potential cash cow on the advertising and sponsorship side. Several networks have forged marketing and other relationships with sportsbooks and casinos -- MSG Networks has marketing and sponsorship arrangements with Caesars Sportsbook and BetMGM; FanDuel and DraftKings has a long advertising relationship with Turner Sports and other channels have similar deals with other outlets. Sinclair has a deal with Bally Inc., where the casino giant paid $88 million over 10 years for naming rights for the channels. As Bally continues to roll out its BallyBet mobile app, currently in four states it’s probably a good wager that it and the RSNs will have an even more symbiotic relationship. ■
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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