American Sports Watching Is About To Change

The regional sports TV industry, which was once thriving, is now struggling as cable bundles begin to unravel

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The future of two of the largest regional sports broadcasters in the U.S. may be on the verge of unraveling, something that is likely to affect the way professional teams are funded and how fans tune into the games in the future.

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Diamond Sports Group LLC, which broadcasts the games of more than 40 major sports teams across the country on its Bally Sports-branded networks, is expected to file for bankruptcy in the coming weeks, which in turn will lead to a renegotiation of rights fees - which constitute an important portion of teams' revenues - in the coming weeks.

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There have been some recent announcements from AT&T Sports Networks, a Warner Bros Discovery Inc WBD -2.84% unit that broadcasts games of a few Major League Baseball, National Basketball Association, and National Hockey League teams, that the company does not have the funds to pay for the rights to carry their games. The company said it might have to liquidate if no deal can be reached by the end of the month for the regional networks to be taken over by the teams at no cost.  

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Diamond, a unit of Sinclair Broadcast Group Inc., SBGI -1.78%, broadcasts games from about half of the MLB and NBA teams, and about a third of NHL teams. It is estimated that the company has a debt of more than $8 billion as a result of its 2019 deal to buy the regional sports networks from Walt Disney Company.

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Due to the financial unraveling of the once-thriving regional-sports TV industry, may have a strong influence on the shift to a direct-to-consumer model for live sports, allowing people who don't have cable TV to access the games of their favorite local teams through the Internet.

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There is already tension among the key stakeholders as a result of this shift. It is said that Diamond hopes to acquire local-streaming rights in all 14 of its baseball markets - it has rights to stream in five at present - and believes that this route will be the best way for it to plot out a stable future, according to people familiar with the situation. The MLB, however, appears to be reluctant to give up its streaming rights, according to sources close to the organization. 

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Due to the fact that these local sports streaming platforms are likely to charge subscribers higher fees than Netflix Inc., and Disney+ to be able to sustain themselves, the transition will prove whether streaming is a viable substitute for traditional TV channels.

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Those familiar with the plans of Diamond Sports Broadcasting say the company's executives believe there is no longer an economic model that will support regional sports broadcasting in the future. As a result, all parties involved in regional sports broadcasting will need to prepare for a future in which the company pays lower rights fees, according to people familiar with its plans.

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There is a lot on the line for baseball teams, which can earn between 20% and 50% of the revenue from local TV rights deals, according to people involved in the industry. Those revenues trickle down to the amount that teams are able to spend on the salaries and operations of their players.

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Sports networks located in regional markets have suffered greatly as a result of the annual exodus of millions of American households terminating their cable-TV packages in favor of streaming platforms, a phenomenon known as cord-cutting.

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About 100 million cable subscribers were paying several dollars a month to regional sports networks through their cable bills during the heyday of the cable bundle, whether they watched the channels or not, which means they were subsidizing the viewing habits of avid sports fans through their cable bills. With the advent of streaming and lower-priced pay-TV packages that do not include sports programming, consumers now have the option to quit paying for content that they aren't watching or don't want to pay for anymore, since these packages don't include sports programming.

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Over the internet platforms such as Alphabet Inc.'s YouTube TV and Disney-controlled Hulu + Live TV, which are the only segment of pay-TV that is growing, have been unwilling to carry most regional sports networks because they usually cater to a certain subset of viewers who prefer to watch them.

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Ultimately, the MLB wants to dismantle the regional sports network model and replace it with a national model, according to people familiar with the matter. As a replacement, it envisions a hybrid national and local programming venture that includes traditional television and streaming on its own platform, they said.

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Last month, MLB Commissioner Rob Manfred announced the league was going to produce games, hold new distribution deals with cable, satellite, and digital companies, as well as carry games on MLB.TV, so fans will be able to watch the games that interest them.

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The current regional sports network model does not provide enough viewers with access to professional baseball games, according to Mr. Manfred, in an interview he gave recently. “I think we can get into a mode where we are better able to say to fans: You can watch baseball on whatever platform you choose,” he said.

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There is speculation that the leagues may reduce the number of games controlled by teams because of the desire to offer access to these games through new packages on streaming platforms or via traditional television, according to Curt Pires, president of the Cap Sports Group, a consulting firm.

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Players in Major League Baseball are watching this potential change closely since their fortunes are tied to the revenue of their teams. “This move from local to a more centralized model has significant ramifications, and it is something the Major League Baseball Players Association will have to negotiate with us," said Tony Clark, Executive Director of the MLB Players Association.

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Industry observers believe that the major league baseball teams and regional sports networks will be better able to weather the storm than their mid-sized and small-market counterparts.

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"The sports networks in larger markets that have popular teams still generate meaningful cash flow and pay significant rights fees," said Marc Ganis, president of the consulting firm Sportscorp, in a statement. “However, the days of mid- and small-market clubs receiving ever-increasing rights fees from regional sports networks regardless of the teams' performance are long gone.”

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Diamond plans to file for bankruptcy in order to shed most of its $8 billion-plus debt and add more local games to its Bally Sports+ streaming app, people familiar with the company's plans said. There is a general price of $19.99 a month for Bally Sports+, which was launched last fall; however, the price of packages varies based on the market and the number of sports teams available on the platform.

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With its relatively steep price tag, Bally Sports+ illustrates the predicament of moving live sports to stream: The high fees that major leagues command have to be borne by a smaller, but less affluent group of users.

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It was announced earlier this month that MSG Networks, home of the New York Knicks, and the New Jersey Devils, along with other professional teams in the area, will launch its own streaming service, MSG+ in the coming weeks for a fee of $29.99 per month.

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The plan is for a group of creditors to take control of Diamond once it enters the bankruptcy process, according to people familiar with the process. Large investors such as PGIM Inc., the money management arm of the insurer Prudential, Fidelity Investments, and several hedge funds, such as Mudrick Capital Management LP, are among the group of creditors. 

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Diamond will almost entirely be given up by Sinclair, sources said.

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It appears that Diamond has been paying the rights fees it owes teams, despite missing a $140 million interest payment to bondholders last month, the people said. A company spokesperson reported on Friday that the company was not able to pay the Arizona Diamondbacks on time due to “a contractual grace period in order to maximize flexibility,” as stated by the company. “There is no change in our broadcast schedule and we are continuing to carry out our normal business operations."

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In addition, Diamond plans to continue developing Bally Sports+ in order to generate revenue that is not just restricted to subscriptions, but also from advertising and sports betting. In order to help with the effort, the company has hired Amy Hudson, formerly Spotify Technology SA's head of business operations and global sports partnerships, who has been working with the company for some time on the project. She will be helping with the effort on behalf of the company, some of the sources said.

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The negotiations, which are ongoing, have so far played out relatively smoothly with some of Diamond's partners, including the NBA, according to people familiar with the matter. As part of a year-to-year deal struck between the NBA and Diamond last year, Diamond has the right to play regional games on Bally Sports+ if it meets certain conditions.

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There are talks between the NBA and Diamond concerning the possibility of an extension of that agreement, even if it has filed for bankruptcy, as long as the NBA is assured that its teams will continue to receive their payments, according to people familiar with the situation.

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