Did sports leagues whiff on current state of regional sports nets?

Before starting this article, I Googled the date the Fox Sports Net regionals were sold to Disney and believe it or not, it was only March 20, 2019. Disney punted them to Sinclair – under the Diamond Sports brand – in August of that same year.

And here we are less than four years later!

It feels like the internet's impact on the newspaper business was a long drawn out affair while the linear vs. streaming battle escalated quickly.

But here we are as the regional sports network model is rupturing before our eyes.

MLB has launched an “economic reform committee” in the wake of the potential Diamond Sports bankruptcy.

This should’ve been on the radar years ago.

“It came out of a recognition of a couple of issues — one new, one old — that were particularly acute for us,” commissioner Rob Manfred said. “The new one’s the local media situation. I think that people see it as an opportunity to rethink the revenue side of the house a little bit, which has been hard in our sport. People entrenched in their local (media dynamics).”???????????????????????????????????????????????????????????????????????????????????????????????????????

The Murdoch brothers – Lachlan and James – correctly calculated the warning signs in their 16 regional networks. The combination of cord-cutting combined with escalating rights fees and a desire for clubs to take equity stakes in their local broadcasters looked like a bad equation.

So the Murdochs punted them all to Disney in a massive exchange of Fox Corporate components. That alone should’ve signaled alarm bells among MLB, NBA and NHL executive leadership.

Really, though, the warning bells went off in 2009 when Smartphones and Tablets completed the “portability” desire of consumers. The overall consumer sentiment was to be unshackled “from the cord.” The ability to watch zombie shows while commuting on the train offered a new dynamic in media consumption.

“We got to find a new model,” Manfred said. “Maybe we ought to be driving the boat, what that model looks like. So, that’s the new challenge,” MLB Commissioner Rob Manfred, said.

This statement means the leagues had zero plan for what was a pending disaster.

WE ARE WITNESSING A MASSIVE WHIFF BY SPORTS LEAGUES

The key to winning a relay race is the handoff. You must pass the baton cleanly and quickly. That clearly did not happen through the lens of generational consumption habits.

Baby Boomers/Gen X buy tickets, sit in their seats, watch live games, pay for cable. A good portion of this generation is turned off by the injection of politics into league messaging. Don’t underestimate the quiet boycotts that are still in effect.

Millennials and Gen Z like?social media, have zero attention span (we all do) and have grown up with sports made for TikTok and social media. They’ll watch an extended highlights video on YouTube, follow their players and teams on Twitter, TikTok and Instagram and call themselves engaged fans.

This group is engaged. Maybe they buy jerseys, hats, sneakers, etc, but from a media perspective, they are very difficult to monetize. They like sports, but they are never going to sit through a three-hour baseball game. Not happening.

And they have a weird valuation. This generation will support companies that have massive human rights, social and production issues in their overseas manufacturing operations (there are several popular companies in this bucket), but they hate their cable company.

HBO’s Bomani Jones slam dunked it on the Season 2, Episode 5 of Game Theory. He dug into Gen Z consumption habits:

"I'm not interested"...nearly 60%!

Gen Z are interested in sports...but they watch unconventional things they see on social media and YouTube (more on that at bottom of article).

DIGESTING WHAT THIS MEANS

Manfred said: “I hope we get to the point where on the digital side, when you go to MLB.TV, you can buy whatever the heck you want. You can buy the out-of-market package. You can buy the local games, you can buy two sets of local games — whatever you want. I mean, that is, to me, the definition of what is going to be a valuable digital offering going forward.”

When you look at the generational layout of habits above, the reality of this statement is that, yes, there will be some fans who take advantage and have been waiting for the lifting of blackouts. I see those comments on stories regarding these subjects. Blackouts are an issue.

But is there enough scale there? From the pie charts I’ve seen over my years in sports, regional sports deals account for about 16-25% of a club’s revenue depending on the team, market and sport.

Let’s perform some super-rough math: If there are 16 Bally's Sports regional sports nets and they all have baseball deals, we’ll estimate an average rights fee of $50 million per team (and that is a low estimate). Multiple that by 16 and you have $800 million in regional TV rights revenue for 16 clubs. It’s probably closer to a billion in reality, but let’s called it $800 million.

Assume the rights fees evaporate 100%.

Is there enough scale to make up that $800 million from streaming? And how will it be divvied up?

Of course, if the Leagues take on production, you’ll have to net out those costs…that involves crews, travel, equipment, setup, breakdown, production, transmission costs, union contracts, insurance…significant costs. This is no longer a straight up check for rights. It’s now a different business.

Let’s take the Tampa Bay Rays as an example. There’s been published rumors of the Rays getting $82 million a year, the reality is that it’s somewhere between $35-65 million. The Rays payroll currently sits at $62 million. Given that team’s excellent management, the payroll is probably close to the TV rights payout.

The bulk of the Rays payroll is covered by their local TV rights fee. They receive additional revenue from tickets, concessions, merchandise, parking and their share of MLB licensing deals and revenue sharing. BUT, they play in an antiquated building and rank among lowest attendance teams in baseball.

The TV deal puts the Rays on a comfortable financial footing. If the regional sports dollars dry up, the Rays face a significant financial crisis. And I just don't see them making up, say, $50 million in streaming rights.

ATTENDANCE, MARKET SIZE VS TV DOLLARS

The NBA is in better shape than MLB and the NHL. The NBA has huge national TV deals and lower overhead costs with smaller rosters (although the player salaries are high) and lower expenses in personnel, travel, player development, scouting, equipment and even injuries. They also have a younger audience.

We can go down the list of teams that have low attendance and low payrolls and quickly understand who will start to face lean times. That’s why MLB’s Manfred talks about a disparity taking place. The Yankees, who own YES Network, are going to retain their local TV revenue while the Kansas City Royals will struggle.

The one advantage MLB has over the NHL is the amount of live game inventory that they can license to local stations (outside the RSN) and seating capacity. They can mess with ticket prices and make up the delta a little bit.

The NHL, where many rinks are max capacity, will have trouble increasing already expensive ticket prices. Arena capacity is limited.

If you’re the Arizona Coyotes, currently playing in a 5,000-seat college rink while they wait for a new arena to be built, you have some serious issues.

Remember, the NHL has a salary cap floor that teams must reach. And if they don’t have the local TV revenue to help them, many teams may struggle to make the floor.

The New Jersey Devils are at the end of their TV deal. They have long struggled in the New York area where they compete with the Rangers and Islanders for fans. Their move to Newark altered their attending fan base. What does their future look like? Suffice it to say, their current partners will have an idea of what the ratings value is. Granted the Devils have struggled on the ice in the past couple of years, but what is their long-term fan value?

QUEBEC CITY IS SMILING

Quebec City built a new arena in anticipation of receiving a new NHL franchise and they ended out in the cold when the League selected Seattle and Las Vegas. Could Quebec now be a viable option for a relocation candidate like the Coyotes? They will certainly dominate their region in terms of popularity and Canadians take their hockey seriously.

Re-brand the team as the Nordiques and bust out their iconic logo and uniforms and people will go bonkers. That is certainly a chicken salad out-of-you-know-what moment hanging right out there for Arizona.

THE NEXT TIME BOMB TICKS

Let’s assume the RSN model collapses.

Let’s assume people smarter than me figure out a plan to stop the bleeding and maybe even make some money.

There still looms a massive, massive time bomb – the passing of the Baby Boomers and Generation X.

The leagues still don’t have a plan for how to handle Millennials, Gen Z and below. Social media, the internet and Smartphones have destroyed long-term memory, created a garbage-in/garbage-out content economy.

How do you build monetizable fan bases with a short attention span to watch your game and digest your narrative – and the answer ain’t “more social media!”

Cricket evolved into the T-20 version of the game and its popularity has exploded.

The next step for all these leagues is finding that T-20 Cricket moment. The NFL is immune from these broadcast issues, but I think their issues are more on the player safety/grassroots/player supply side and lowering that demographic age group.

What do you think?

How would you approach these problems?