Sky Not Falling on Diamond Sports’ RSN Business

JohnWallStreet

Shortly after fuboTV dropped the 21 (formerly) Fox RSNs and YES Network on New Year’s Day, LightShed Partner's Rich Greenfield wrote that Diamond Sports (an indirect subsidiary of Sinclair Broadcast Group under which the RSNs now reside) was “moving towards bankruptcy.” He cited the acceleration of cord cutting, the lack of carriage on DISH and Sling TV (in addition to fubo) and the “likely drop by Comcast” (in the fall of 2020) as reasons why EBITDA (down from $1.6 billion to $1.1 billion) would continue to “go materially lower over the next 12-18 months.” Greenfield paints a bleak picture, but not everyone is on board with the respected TMT analyst’s forecast.

Howie Long-Short: While it’s indisputable that the cable bundle is eroding, one long-time industry consultant said that he/she doesn’t see “the sky falling” on Diamond Sports' RSN business. The content on the cable sports networks continues to drive consumption to levels that exceed everything else on television (with the exception of the NFL), so the channels still hold “incredible currency” with distributors. In fact, our source was adamant that “unless [a programmer is] in kamikaze mode like Charlie Ergen, there is no video business without the RSNs.” If that’s the case, Diamond Sports will have no problem retaining carriage - and pricing power - for their RSNs through the next negotiating cycle (think: 5-8 years).

The media authority we spoke to was confident in his/her belief that the maturation of the virtual ecosystem (VMVPDs) and “more importantly” the anticipated development of a direct-to-consumer business (along with a smaller MVPD bundle and sports betting) will “in aggregate” eventually off-set any losses associated with the melting bundle. “At the end of the day, people are going to watch [live sports content] and they’re going to pay for it one way or another.” 

DISH Network’s decision not to carry Diamond Sports' RSNs (they were technically dropped while under Disney control) and subsequent claims of improved profitability have negatively impacted the perception of the RSN business (see: Fan below). But the industry expert we spoke to insists one shouldn’t look too deep into DISH’s actions. “This is a classic negotiating ploy.” DISH currently maintains leverage because they still have SBGI’s 200+ broadcast stations under contract and aren’t required to carry the regional sports networks, but when the deal expires that dynamic will change. Remember, Sinclair affiliates broadcast local news, they’ll have the ‘20 Olympics and NFL games. “DISH cannot afford to lose those stations, so SBGI will say if you want the retransmission rights [to the 200+ broadcast networks] you’re going to take the RSNs too.”

Our source is also confident that SBGI will get a deal done with Comcast (the existing pact expires in June). Aside from the leverage the local affiliates give SBGI, as long as Comcast remains in the RSN business (think: NBC Sports Regional Networks, SNY) antitrust legislation should help ensure the carriage of Diamond Sports' networks. “Comcast can’t say it is going to [pick up carriage of its own RSNs] and pay themselves, but drop another company’s RSNs.” If they did, a lawsuit would surely follow. A new deal between the two companies would certainly include carriage of Marquee Sports Network - good news for Comcast subscribers in Chicago who could be without Cubs games for the first few months of the upcoming season.

Fan Marino: Greenfield’s bearish take on the RSN business is reflective of how the market currently sees it. While Nexstar Media Group (NXST) shares are +26% over the last six months (closed on Tribune Media in September), Sinclair Broadcast Group (SBGI) has seen its market cap decline -41% (closed on Fox RSNs in August) over that same period. Considering both station operators are navigating the same media landscape (think: advertising and MVPD marketplaces), it’s apparent the street is penalizing SBGI for its heavy local sports presence and long-term rights commitments (the $10B in debt the company took on to buy the RSNs hasn’t helped). 

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