Three months after winning the bidding for the 21 Fox Regional Sports Networks from The Walt Disney Co., Sinclair Broadcast Group could face some major pushback from a key distributor for the channels, Comcast.

Concerns about the RSNs — typically among the highest priced in the industry — has weighed on the broadcaster’s stock, which is down nearly 20%, to $35.84 per share from $44.39, since it closed the RSN deal in August.

Sinclair’s $9.6 billion bid topped that of Liberty Media chairman John Malone, whose company had teamed with Major League Baseball to bid on the networks that Disney was forced to divest after its acquisition of 21st Century Fox’s cable and studio assets. Another bidder was rapper Ice Cube, whose Big3 Networks had planned the channels to bolster its professional three-on-three basketball league.

Sinclair acquired 21 former Fox RSNs, in markets including Detroit, Miami and Cleveland.

Sinclair also is a minority partner in the YES Network, a separate, New York City-area network that was formerly in the Fox RSN stable and was purchased in August by the New York Yankees and Amazon.

So far, Sinclair has managed to reach deals for carriage of the RSNs from key distributors, including Charter Communications in July, Cox Communications in August and AT&T and Mediacom Communications in October. But in July, Dish Network dropped the channels, complaining of high prices.

Comcast’s carriage agreement with Sinclair for stations and channels expires in June 2020. The cable operator has expressed concern over the high costs of sports programming and recently went to the mattresses with another regional sports network, Denver’s Altitude Sports.

Rocky Mountain Row

Altitude, which televises Denver Nuggets and Colorado Avalanche games, went dark to the cable operator in August. In late November, Altitude sued Comcast in U.S. District Court in Colorado, claiming the cable operator, after carrying the network on its expanded basic tier for 15 years, insisted Altitude be moved to a higher-priced sports tier and accept a lower fee. That, Altitude said in court documents, would drive the channel out of business.

Comcast has said the suit is without merit.

Tiering sports networks, especially pricey ones like the Fox Sports RSNs (which can cost as much as $6 per subscriber per month), could become more common. Distributors looking to keep costs down as more and more consumers cut the pay TV cord (the pay TV business lost about 3.8% of its customer base in Q3) are increasingly looking at sports channels. RSNs are often considered to be must-have programming, but some distributors are finding that missing them doesn’t necessarily have that much of a negative impact. Case in point: satellite-TV provider Dish Network’s decision to drop the Fox RSNs in July over pricing concerns.

RELATED: Sinclair, Chicago Cubs Will Launch RSN

About 5 million of Dish’s 12 million total subscribers get the Fox RSNs, and in Q3 the two-month blackout had little impact on results: total TV subscribers were up by 138,000 in the period, compared to a loss of 341,000 customers in the prior year. While that was mainly due to increases at its streaming service Sling TV, the satellite service lost just 66,000 customers in the period (compared to a loss of 367,000 a year ago) prompting some to see it as a sign that cord-cutting at the satellite giant may be slowing.

Evercore ISI Group media analyst David Joyce reduced his 12-month price target on Sinclair stock on Nov. 21 to $40 per share from $50 “due to the ongoing absence of a key distributor of the company’s regional sports networks.”

In a note to clients, Joyce estimated that without a major agreement, the $1.3 billion in RSN cash flow he was expecting for 2019 will drop to just over $1 billion in 2020.

In an email message, Joyce said Ever-core’s estimates don’t anticipate another Dish-like distributor drop, but added that “with cord-cutting and cord-shaving impacting the tiers in which the RSNs reside more so than the rest of the industry, we see (6)% subscriber declines while the sports rights continue to grow with contractual escalators.”

In the research note, ISI looked at both the bull and bear case scenarios for the networks. “We think there is a risk in that bear case that there could be further re-tiering of the RSNs or price reductions,” Joyce said in the email.

While the Comcast negotiations are months away, the Dish battle is ongoing. Early in the fight, Dish chairman Charlie Ergen said it is very likely the Fox RSNs would never return to the satellite giant. Ergen similarly opined that Univision channels might never return after getting dropped in 2018, before restoring them under a new contract in March 2019.

Based on Dish’s Q3 results, though, the case for keeping the regional sports networks off only gets stronger with time.

The biggest impact of the Dish blackout so far seems to be it resulted in Sinclair having to pay Disney less for the Fox RSNs. On a conference call with analysts to discuss Q3 results, Sinclair CEO Chris Ripley said as part of the RSN purchase, there was a purchase price reduction of about $400 million “related to potentially protracted negotiations with Dish.”

Ripley: We’re Not Worried

Ripley said on the call that Sinclair considers the Dish stalemate a “temporary issue” and that he is confident of the RSNs’ value proposition. Viewership, he said, is greater than the top 10 entertainment programs combined, and hopefully the satellite TV service will recognize that value over time. If not, Ripley isn’t sure if Dish, which has lost more than 1.3 million satellite-TV subscribers over the past seven quarters, is in a position to matter much.

“Either we come to a deal with Dish or their relevance in the industry will be reduced over time,” Ripley said on the call.

Sinclair has gone all in with sports in the past few years: it bought Tennis Channel in 2016 and wrestling promotion Ring of Honor in 2011. In 2017, Sinclair created Stadium, a joint venture focused on college sports and professional highlights. This year, Sinclair formed Marquee Sports Network with the Chicago Cubs, planning to launch in the 2020 baseball season. According to Sinclair’s Ripley, with the inclusion of the Fox RSNs, more than 70% of the company’s revenue will be derived from distribution fees.

While that has helped the broadcaster rely less on the increasingly volatile advertising market, it also has placed a huge burden on Sinclair’s ability to attract and maintain high carriage fees for its networks.

“There’s a feeling that maybe RSNs aren’t as much a ‘must have’ for viewers as was once thought,” TV [R]ev co-founder and lead analyst Alan Wolk said, noting that even as Dish did lose about 66,000 subscribers, it was nowhere near the 1.4 million that AT&T shed in the quarter.

“Given the number of games that MLB, NBA and NHL teams play, it seems increasingly difficult for fans to watch most of them,” Wolk continued. “Add in the fact that they can check scores in real time online, and see highlights online as well in close to real time, the need may indeed be diminishing.”

Liberty’s Malone, during a Q&A session at its annual Investor Day in New York Nov. 21, said pundits should not to read too much into the Dish numbers in relation to the Sinclair blackout.

“A substantial part of his [Charlie Ergen’s] base doesn’t have a choice,” Malone said at the Investor Day. “That’s less intense than somebody that has three or four immediate competitors in a local market. It’s a tougher call.”

Malone: Tiering Could Prove Painful

If the inability to secure proper carriage for the RSNs led to the insolvency of Diamond Sports, the Sinclair subsidiary that owns the sports channels, Malone joked, it “would break my heart.” But the perception that distributors are getting fed up with pricey sports channels is becoming a dilemma throughout the industry. Live sports and news are the two main drivers for linear video viewership and advertising, but for some distributors the cost is just too high.

Malone said that Liberty’s Fox RSN bid was “a little more rational” and didn’t tie carriage of the networks to other properties like broadcast stations’ retransmission, which he said has helped accelerate the decline of the overall programming bundle. Sports rights, he said, have been a major factor in driving the cost of the bundle beyond many consumers’ budgets.

“If you didn’t have that component, there would be far [less] cord-cutting for economics,” Malone said.

Malone said eventually sports programming, because of escalating costs, will have to be placed on premium tiers.

“That’s a process that will take years,” Malone said of the transition of major dollar sports rights to premium tiers. “In a world where [sports programmers are] extracting multiples of their fair value from the distribution system, they’re not going to voluntarily go that route. This is going to be painful and it’s going to take years.”

The triennial election cycle for commercial broadcast stations will occur again this fall. And where broadcasters elect retransmission consent, one can expect the negotiations to be even more contentious than the last election cycle (2014).

If recent election cycles are any guide, broadcast stations can look forward to average license fee increases of more than 1,000% over the inflation rate. For some of the smaller cable operators, the current cycle will likely see a $3-per-subscriber rate for the first time for retransmission of the Big Four network stations. Cable systems can expect broadcasters to request license fees not only for the primary broadcast signal, but for each broadcaster’s multicast signal as well. To paraphrase a line in the Mel Brooks film History of the World: Part I, “It’s good to be a broadcaster.”

In addition to license-fee increases on multiple channels, multichannel video programming distributors can expect no relief of any kind from the Federal Communications Commission. While the FCC occasionally rouses itself to the appearance of action, its record of indifference is a matter of record.

In 2000, the FCC promulgated a good-faith bargaining standard incumbent on all broadcasters. Seventeen years and thousands of retransmission-consent negotiations later, the FCC has never found a single instance of bad faith dealing on the part of any broadcaster. The FCC’s bias is so well known that MVPDs have given up filing bad-faith dealing complaints. Occasionally, the FCC will add a new category of per se violations to its bad-faith standards, but it has steadfastly refrained from ever finding either a per se violation or a totality of the circumstances violation on the part of any broadcaster. Yes, “it’s good to be a broadcaster.”

MVPDs can expect broadcasters to insist on some very expensive new asks including those with an anti-consumer flavor. Broadcasters will seek to prevent consumers from being able to skip commercials. Although the technology exists for ad skipping and the MVPDs would like to offer this functionality to their subscribers, broadcasters almost always insist on prohibiting MVPDs from offering this feature to consumers. One might be forgiven for thinking that, as consumers will ultimately bear the economic burden of the gargantuan increases in broadcaster license fees, that consumers ought to be able to avail themselves of technologies that MVPDs are willing to provide gratis. That will not be happening anytime soon.

Finally, it is reasonable to assume that broadcasters will demand a commitment from MVPDs to retransmit broadcast signals in the new ATSC 3.0 format.

Even though the ATSC 3.0 standards have not yet been adopted by the FCC, the broadcasters will be insisting that MVPDs retransmit the ATSC 3.0 broadcast signal whenever the FCC issues its final regulations. While no one can predict what the standards will be, what we do know is that it will be expensive for MVPDs to retransmit these signals, because the ATSC 3.0 format is not “backward-compatible” with current equipment. To receive and retransmit an ATSC 3.0 signal, MVPDs will need to purchase new receiving and transcoding equipment, switch out set-top boxes for many subscribers and allocate more capacity for retransmission of broadcast signals in the ATSC 3.0 standard.

It’s good to be a broadcaster.

Gil Ehrenkranz is counsel at Manatt, Phelps & Phillips in Washington, D.C.

Charter Communications’s $78.7 billion acquisition of Time Warner Cable and Bright House Networks has yielded two major spats over license fees, including one involving top Spanish-language broadcaster Univision Communications.

On July 8, Univision — the biggest player in the U.S. Hispanic media world — filed a lawsuit against Charter in New York Supreme Court seeking a legal solution to its claim that the company’s contract with Time Warner Cable, rather than with Charter, is the controlling contract. The suit claimed that Charter was trying to pay for Univision’s network at Time Warner Cable’s lower license fee.

Charter completed its acquisition of Time Warner Cable and Bright House Networks on May 18, a deal that bolstered Charter’s overall cable subscriber rolls from about 4 million to more than 17.3 million. Time Warner Cable had been the second-largest cable operator in the country prior to the deal, with about 11 million video customers. TWC’s deal with Charter is not set to expire until 2022.

 “Univision had no alternative because Charter outright refused to negotiate a renewal agreement,” the company said in a statement. “Charter insists that the contract Univision had with Time Warner Cable is controlling, rather than its own contract with Univision. Charter bases this argument on the preposterous theory that as a result of the merger, Time Warner Cable, rather than Charter, is managing all these cable systems.”

Charter has remained relatively mum on the spat, stating, “We have a long-term contract with Univision and we expect them to honor it.”

For its part, Univision is seeking to stir up the pot. “The longstanding CEO and the executive team of Charter, as well as its pre-existing board of directors, now manage and control all of the cable systems,” the broadcaster said in a statement. “Indeed, Charter pitched this deal to regulators, its subscribers and the public as one where its management team would take control of the combined company, and that is exactly what happened. Quite simply, Charter promised one thing publicly in order to secure approval for its acquisition and is now privately claiming the exact opposite to Univision.”

According to copy of the lawsuit obtained by Multichannel News, Univision licensed its programming to Charter pursuant to a 2014 distribution agreement that was set to expire June 30. That agreement contained a provision that stated if Charter were to purchase the distribution systems of another entity, “the purchased distributor would remain subject to the operative agreement between Univision and that other distributor, but only until the end of the calendar year in which the acquisition occurred. After that time, the Charter agreement would govern the acquired systems.”

Univision isn’t the only media company challenging Charter’s view on what controlling contract shall be enforced regarding network license fees. In mid-July, 21st Century Fox sued Charter for applying its TWC contract to Fox News Channel and Fox Business Network, rather than a deal signed with Charter in 2014. As with the Univision agreement, Time Warner Cable’s deal with 21st Century Fox was for a lower rate.

Court dates for the 21st Century Fox and Univision lawsuits have not yet been set.

The carriage contracts between Dish and four Comcast SportsNet regionals expire at midnight as the threat of darkness continues to loom for the DBS provider’s subscribers.

The deals for four Comcast SportsNet services – Bay Area, California, Mid-Atlantic and Chicago – conclude at the end of Dec. 1, with the RSNs potentially going black shortly thereafter.

NBC Sports Group, which operates the RSNs, on Nov. 20 launched multimedia campaigns – on the networks’ websites, plus on-air crawls and reads – warning Dish subscribers about possible drops and urged them to call  1-888-I-Want-CSN or Visit I Want CSN.com.

On Nov. 25, the programmer established dedicated microsites, where Dish subscribers can voice their support for the RSNs. Combined with the toll-free calls, the number of visits to the sites and tweets on the topic, NBCU said there has been plenty of support among the RSNs’ subscribers who want to continue to watch the networks and the attendant clubs and programming.  

"As the deadline with Dish approaches, we continue to negotiate as the tracked volume of calls, emails, tweets, website visits and petitions filed in support of CSN programming climbs into the hundreds of thousands,” said NBCUniversal. “Until an agreement is reached, we expect Dish customers who are growing tired of showdowns and blackouts to continue to voice their displeasure and consider other providers."  

Dish, which has been out of contract with CSN New England since Aug. 1 and is also engaged down-to-the-wire contract talks with CBS for its owned-and-operated stations and cable services, including premium programmer Showtime and CBS Sports Network, declined on Thursday afternoon.

Dish previously stated the Comcast RSNs were seeking a 20% increase in monthly license fees for 90% of its customers in the attendant markets, despite that only a “small fraction” of the sub bases watched the channels. The DBS company called this “heavy-handed tactic troubling” in light of Comcast's proposed merger with Time Warner Cable that would give it more power to leverage content in “anticompetitive ways.”

As mentioned, CSN New England, the home of the NBA Boston Celtics, has been off of Dish's air since for four months in a carriage dispute. Charlie Ergen's company has never carried CSN Philadelphia and CSN Northwest, or the recently shuttered CSN Houston.  It previously distributed New York Mets-centric SNY, which NBC Sports Group operates and holds a stake in.

New York -- There will be a lot more NBA games and content in play under the rights extensions the league has inked with ESPN and Turner Broadcasting System.

And rightfully so, considering that the pro hoops league media partners are almost trebling the combined $920 million in annual outlays under their current contracts that run through the 2015-16 season. Together, the parties will pay some $24 billion over a nine-year term that will conclude with the 2024-25 season. Reports indicate that ESPN, whose current contract averages $480 million, will pay about $1.4 billion for each year of the new deal, which includes the launch of an over-the-top systems outside of the pay-TV ecosystem.

For its part, Turner will allocate some $1.2 billion per season, which features a new 12-game slate in the second half of the seasons, and more content for its Bleacher Report digital property.  TNT spends some $440 miillion per season under its present contract.

During the press conference announcing the deal at the Saint Regis Hotel on Monday morning, both ESPN president John Skipper and Turner Broadcasting president David Levy said the deals made financial sense for their respective parents The Walt Disney Co. and Time Warner.

“Sports rights are more and more valuable," said Skipper. “It continues ESPN’s long-stated strategy to invest in a portfolio of live rights. This is a key property for us given the ascendant nature of the league.”

Levy stated that the deal was a priority for Turner's parent. “Each year the playoffs help TNT win nights of television during the all-important May sweeps. We look forward to that tradition continuing,” he said  "It will be meaningfully valuable to our company at the end of this deal and we'll have a strong R.O.I. when the end of this deal happens."

Asked afterward, if that meant TNT affiliates should expect a meaningful increase in their monthly license fees accordingly, Levy said: “The value of TNT programming is reflected in its license fee and that includes the NBA.”

He said there would be no TNT surcharge tied to the NBA renewal, and that affiliate pacts “have to run their course. Going forward, the value of NBA will be reflected in Turner’s enhanced set of assets" with the league.

TNT, in addition to retaining its exclusive Thursday night doubleheaders, will tip off a dozen more live games on another night of the week during the second half of the season. The programmer will have NBA Opening Night, exclusive coverage of most of NBA All-Star Weekend, including the game itself and more playoff contests than ESPN/ABC.  Turner will also create a new NBA awards show and proffer additional programming around the beginning of the season and the start of the playoffs.

Turner Sports will also retain TV Everywhere rights that allows for all NBA content airing across Turner Broadcasting networks to be streamed live across the company's multiple digital platforms. Additionally, Turner will have enhanced digital rights to serve NBA content across its Bleacher Report online service.

Turner Sports will also continue to manage NBA Digital, including NBA TV, NBA.com, NBA Mobile, NBA League Pass, WNBA.com and NBADLeague.com.

Levy said Turner is eyeing Sunday and Monday nights as potential landing spots for the additional 12-game package that will begin after the All-Star break and be centered on delivering matchups with significant playoff implications.

Under its deal, ESPN and broadcast brethren ABC, which remains the home of The Finals, gain 10 additional games (plus 10 additional exclusive windows) raising their combined regular-season total to 100 (85 on the cable network, 15 on the broadcaster). The new agreements also give ESPN significant increases in their radio and international rights, as well as extend its agreement with the WNBA through 2025. ESPN will add about 750 hours per year of linear/digital content, and televise D-League and NBA Summer League games, giving pro hoops a year-round presence on the worldwide leader.

As to the planned OTT service, Skipper said it wouldn’t upset the current pay-TV system.

“There is no contradiction in continuing to enhance and buttress the current system by building new business and new way to reach fans,” said Skipper. “We think they are complementary.”

Skipper said the OTT service was in its incipient stages, but the plan calls for the inclusion of some live games, as well as studio programming, highlight and analysis. It also may include content beyond pro basketball. Whatever the ultimate content, it will reflect ESPN’s quality of production.

All that being said, Skipper emphasized this was merely a “framework” for the service. “We have a lot of work to do,” he told MCN after the press conference. 

The league’s partners also paid a premium to keep others from getting a chance to play in the NBA’s growing arena.

The NBA and the media companies, which were in the midst of their exclusive negotiating windows that wouldn’t have closed until next year, began their negotiations in earnest during February, which Silver said escalated to “around the clock” talks over the last 10 days or so. Skipper said he didn’t know what it might have cost ESPN had competitive bids were entered.

“We clearly made the calculation that we were uninterested in exploring that possibility,” Skipper said.

In announcing the first national rights deal under his watch, Silver said:  “We decided to renew our agreements with Turner and Disney two years early, because they have been terrific partners and they each share responsibility for the tremendous growth and popularity of our game.”

Silver said the league had engaged in “discussions, but not negotiations," with Comcast and Fox, both of which are deeply rooted with the league via their regional sports networks’ coverage of NBA clubs. "I don't think we left any money on the table."

After the presser, Silver said that NBA TV was also adding 10 games to its schedule, pushing its lineup of regular-season telecasts to 100. He believes that the league’s in-house service will grow beyond its current 60 million subscriber roster as Turner assumes primary distribution responsibilities.

Levy said “Turner will take more of a lead role in affiliate negotiations, but we will continue to work with Bill Koenig," the NBA’s president of global media distribution.

Although Levy acknowledged NBA TV will be rolled into Turner portfolio, he cautioned that buttressing its sub base will depend on “how it lines up” with other networks and their affiliate deal lengths.

A rift between Dish Network and Fox Sports 1 over a handful of college-football games that were scheduled to air over the Labor Day weekend put a spotlight on an often-overlooked aspect of carriage negotiations: the hidden costs associated with the conversion of a cable network to a new format.

Satellite-TV provider Dish, which has some 14.1 million subscribers, had threatened to black out four college-football games scheduled to air on Fox Sports 1 between Aug. 28 and Aug. 31 — Rutgers vs. Washington State on Aug. 28, Colorado St. vs. Colorado on Aug. 29, North Dakota St. vs. Iowa St. on Aug. 30 and SMU vs. Baylor on Aug. 31 — because of what it said was “a significant additional charge” to carry the events.

The two sides eventually worked out a deal. Dish said it would carry the games but offered little in the form of an explanation.

“We are proud to deliver the most college football anywhere, at the best possible value,” said Dish vice president of programming Josh Clark in a statement.

CONVERSION CHARGE

But sources in the distribution community said the rift was due to the unique launch of Fox Sports 1, essentially involving the conversion of the former Speed Channel, which focused solely on motorsports, to a broader sports channel.

As part of that conversion, distributors had the option of striking a new, longer-term FS1 distribution deal at a higher price, or opting to ride out the remainder of their Speed Channel agreement. While the latter option was cheaper — Speed was charging about 24 cents per subscriber per month — it came with a catch: FS1 would be able to charge an additional fee for event programming that normally wouldn’t have been aired on Speed.

And while Dish ultimately worked out a deal, other distributors that opted to stick with their Speed deals may face even higher fees as the college-football season moves forward and the games on FS1 draw more interest — and those fees could bleed into other sports. FS1 is scheduled to air several Major League Baseball playoff games next month.

Sources in the distribution community believe the Dish dispute was the first in what could be other battles as FS1 tries to convert distributors from their old Speed deals to more costly carriage agreements with the sports network. FS1 has reportedly asked for fees of about 80 cents per subscriber per month, escalating to $1.50 over time.

PLAYOFF LEVERAGE

Sports consultant Lee Berke, president of LHB Sports, Entertainment & Media, said he believes the baseball playoffs could provide FS1 with the leverage it needs to move distributors to long-term deals.

“It is inevitable that over time they [FS1] are going to raise their [subscriber] fees as they add on more and better events,” Berke said.

Berke said distributors could opt to not carry events, but that will be harder as the games and the stakes get bigger.

“Potentially, [distributors] might express their displeasure in a number of ways,” Berke said. “As I see it, this is the back and forth of negotiations that will ultimately lead to a revamped deal with FS1.”

Berke added that surcharges for additional events are commonplace in the sports world — particularly with regional sports networks that will charge distributors for additional games outside of their original rights package.

“I’ve seen it on the RSN front and I’ve seen distributors push back against it,” Berke added. “But ultimately these are short-term situations that get negotiated out.”

While Dish would not reveal just how “significant” FS1’s surcharge was, other sources in the distribution community said they are usually based on the size of the distributor’s footprint. So, if a network pays $100 million for rights and a distributor represents about 20% of its footprint, it could be on the hook for $20 million.

FS1 launched on Aug. 17, 2013, to 90 million homes, the single-largest debut for a sports network in cable history. That mark held last month, as ESPN’s SEC Network is available in 98 million homes, but counts some 62 million subscribers.

ROCKY LAUNCH

But FS1’s launch was not without its hitches. Fox initially tried to force distributors to renegotiate their Speed deals to the higher FS1 rate, but relented as the network’s launch date approached with few takers. Recently, the network has come under some criticism for poor ratings — it averaged about 267,000 total primetime viewers in its first year, behind NBC Sports (305,000 viewers) and ESPN (2.3 million viewers), but still well ahead of Speed (151,000 viewers). And those numbers are expected to climb as it adds more substantive programming.

FS1 is expected to air about 40 regular season baseball games this year and, as part of its parent’s $4 billion, eight-year rights deal with MLB, will air Division and League Championship Series games beginning this October. The sports network also is scheduled to begin airing NASCAR Sprint Cup and Nationwide races in 2015 and has inked deals for the FIFA Women’s World Cup and U.S. Golf Association championship events, including the men’s U.S. Open, in the spring.

“All those things combined add to the leverage that Fox Sports has and ultimately will lead to increased fees,” Berke said.