Future With MLB Is In Flux

As teams from the MLB which have deals with Bally Sports Network regional channels fight over rights fees, a bankruptcy judge on Wednesday ruled that BSN owner Diamond Sports Group must pay half of what it owes to four of the five MLB franchises. Diamond has withheld TV rights payments for the just started 2023 season. Law 360 and Sportico were the first to report on the judge’s order.

Diamond Sports Group, a subsidiary of Sinclair Broadcast Group
SBGI
, filed for bankruptcy on March 14 to try to reduce $2 billion a year in rights fees owed to 42 teams (12 NHL, 16 NBA and 14 MLB), almost half of which will be payable to MLB teams, as well as convert $8.1 billion in debt to equity. $640 million in debt will remain unimpaired.

When Diamond filed for Chapter 11, things were already tenuous with the MLB who issued a statement saying that “Despite Diamond’s economic situation, there is every expectation that they will continue televising all games they are committed to during the bankruptcy process. Major League Baseball is ready to produce and distribute games to fans in their local markets in the event that Diamond or any other regional sports network is unable to do so as required by their agreement with our club.” They added that they already hired seasoned local media professionals to bolster capabilities in the event they take over broadcasting the games.

The thinking is that if the Chapter 11 trustee rejects some or all of the MLB contracts, Major League Baseball teams could walk away and offer streaming through the Extra Innings channel and MLB.TV app, while regionalizing the MLB Network.

Diamond has been at odds with Major League Baseball over what their current rights deals are worth, and has withheld payments due to the fact that the bankruptcy judge could significantly reduce the rights fees. MLB says Diamond has the money to pay the fees and should go ahead and do so.

“So long as they have the money they purport to have, they should be paying those amounts to MLB and the clubs, and they should be paid currently,” James Bromley of Sullivan & Cromwell (representing the MLB commissioner and its clubs) told the court. “Only way it should be something else is if they filed an adversary proceeding seeking relief. They haven’t done it,” he said.

The MLB asked the court to compel Diamond to make those payments, or, in the alternative, force rejection of the TV contracts. A hearing on that motion to compel is set for May 31. Attorney for Diamond, Andrew Goldman of WilmerHale responded, “For the next six weeks, MLB and its clubs will have absolutely no concern that anybody can lien up those amounts,” he said. That’s due to the fact that Diamond is putting all payments due into a separate account which is free from other claims until the hearing on the matter.

Texas U.S. Bankruptcy Judge Christopher Lopez said the unpaid balances will be rendered next month, after the restructuring process resets the individual team fees Diamond must pay. The teams the judge ruled on were the Arizona Diamondbacks, Cleveland Guardians, Texas Rangers and Minnesota Twins. The judge has not yet addressed the Cincinnati Reds, which Diamond also has withheld fees from.

However, the amount of the payments could change after further negotiations between the two parties. “I want the parties to work on an order that provides the teams some payment,” Judge Lopez said in a virtual hearing. “There is a number that works. You’ll know much better than I would what that number is. If you come back to me, I’m just going to pick a number, and I’m hoping you don’t leave it in my hands,” said Judge Lopez.

Any loss of a major sport like MLB for an RSN can be devastating, so Diamond will have to move quickly in order to come to a resolution that MLB can live with. Diamond is asking the court to restructure deals for some MLB teams to what it calls market rates—clearly below what their current contracts are at. But with cord cutting (where cable and satellite customers leave for Internet-based video) and cord shaving (where multichannel customers switch to cheaper packages) continuing to cause subscriber declines for multichannel operators, it’s difficult to estimate what exactly the market rate should be set at under a long-term deal where future revenue is uncertain.

Many sports teams continue to lose money. However, they continue to increase in value due to the fact that many billionaire sports fans continue to bid up pricing for what they believe are prestigious marquis teams with a known fan base.

The day-to-day operations, however, are a different matter. Making the massive payroll and covering other day-to-day operational expenses can be challenging if the RSN on which your team airs their games suddenly stops paying rights fees.

RSNs have also struggled paying their bills in recent years. Since license fees from cable and satellite operators are paid on a per subscriber per month basis and subscribers have been going down as TV viewers migrate to lower cost Internet-based video services, revenue continues to decline. On the expense side, however, the opposite is happening. The RSNs typically sign long-term deals with teams that have annual price escalators, meaning costs continue to rise as revenues decline, causing massive margin compression.

The revival of Diamond Sports Group (which plans to emerge from Chapter 11 as a separate company, not part of Sinclair) depends upon it being able to come to amicable terms with all creditors, including the teams, so they have a viable business model going forward, both with the traditional RSNs (formerly Fox SportsNet, currently Bally Sports Network or BSN) and their new online platform.

In March of 2022 Sinclair cut a deal to give Bally’s naming rights for the Fox RSNs and in September they extended the partnership with a focus on sports betting, and in the process Sinclair got rights to buy 14.9% at a penny per share and another 15% based on performance metrics. So clearly the online roll-out is an important part of the BSN business model.

In July of 2022, Diamond Holdings Group started a major marketing push for its Bally Sports Plus channels, which are a Direct To Consumer (DTC) service which started after MLB’s All-Star break from July 18-21, 2022 featuring feeds of the Detroit Tigers, Kansas City Royals, Miami Marlins, Milwaukee Brewers and the Tampa Bay Rays.

MLB only gave Diamond rights to five of 14 teams and is demanding additional payment for the streaming rights, something which DSG has resisted.

The wholesale price for the channels operating in the five markets was $5/month, translating to about $7-$8/month as part of your cable or satellite provider bill. Diamond hoped that by providing more bells and whistles, it could attract avid sports fans to pay $19.00/month or $189.99/year for Bally Sports Plus. Sinclair noted it was targeting people who had already left traditional cable and satellite services, hoping not to alienate their multichannel partners.

Enhanced features with Bally Sports Plus include playing fantasy and predictive games for prizes, getting advanced statistics, and competing for prizes. Pre-launch, in January of 2022 management put out aggressive projections to investors for its DTC service.

It estimated that on the low-end it could attract 3.4 million streaming subs and another 2.4 million “feature subs” (which get a betting app but no live games) by 2027, and on the high end 9.7 million streaming subs plus another 6.4 million feature subs in its first five years after launch.

As a result, by 2027 they could have between 15.5 million and 25.7 million in average subs by 2027 generating a potential $500 million/year in ad revenue plus billions in subscription fees. Hopefully Diamond can move on from this bankruptcy reorganization and quickly build this business.

Source: https://www.forbes.com/sites/derekbaine/2023/04/21/diamond-sports-group-moves-closer-to-chapter-11-resolution–future-with-mlb-is-in-flux/