Why can't regional sports networks make money?
What happened with Sinclair's Fox Sports purchase, playoff free throw woes, and more.
OPENING TIP
In Ethan Strauss' eyes, there’s nothing more important in the NBA than its television ratings.
We can see why. Strauss is one of five writers for The Athletic who regularly covers the Warriors beat, and there are only so many different versions of the “Are we sure Wiseman doesn’t suck?” article you can write. So Strauss has his hobby horse, writing about ratings on June 25, June 11, May 28, May 21, May 14, and May 7 all in the last 60 days. Most recently, his fretting has centered around whether anyone is still watching the playoffs with all of the stars missing.
While we understand that Milwaukee/Phoenix was probably not the League’s preferred matchup before the season started, as we’ve written before, most of these takes miss the point. Ratings aren’t meaningless, but it’s almost like this issue takes place in a broader context (overall tv viewership is way down, and interest in the NBA is way up). Plus, the league is transitioning to a new set of young stars, who while exciting are not yet as marketable as LeBron and Steph.
But it’s not just the big TV networks that are feeling the impact of declining TV viewership. Another NBA-adjacent media property is in trouble: Diamond Sports Group (DSG), the subsidiary of Sinclair Broadcasting that owns the former Fox Sports networks (since rebranded Bally Sports). DSG owns 19 regional sports networks, or RSNs, and has broadcast rights to 43 North American pro sports teams, including the local TV contracts for 17 of 30 NBA franchises.
When Sinclair stepped in to purchase these assets in 2019 to assuage antitrust regulators fretting over the Disney/Fox combination, it was largely seen as a sweetheart deal. Disney originally hoped to fetch $20 billion, but Sinclair ended up paying less than half that.
Since then, things haven’t gone so great. Last fall, Sinclair reported it was writing off $4.2 billion of the purchase price, admitting it had dramatically overpaid. A stack of 4.2 billion dollar bills would be 285 miles tall (we like this type of ‘context’ because it conveys no real information, but might make Sinclair feel bad).
Why is it going wrong? Our analysis suggests it’s… lack of viewers. Many providers, including YouTube TV, Dish Network, and Sling TV, allowed their agreements with DSG to lapse, gambling that their subscribers wouldn’t care. And then COVID happened. DSG hemorrhaged cash as leagues shut down, and a sudden lack of games amid stay-at-home orders last spring led to accelerated cord cutting en masse.
DSG and its napalmed balance sheet quickly became a focus of the distressed debt community. Its unsecured bonds are currently trading in the high 50s, meaning those lenders have already lost almost half the money they lent Sinclair.
So how does this impact the NBA? Over half the league’s teams rely on a DSG-owned channel for a significant share of their revenues (typically 20-40%). These deals are typically structured as long-term contracts with annual escalation, “de-risking” the team from annual fluctuation in viewership. Teams may view these revenues like an annuity.
But they shouldn’t. If DSG’s underlying business model doesn’t work, the rights could revert back to the teams, which happened when CSN Houston collapsed in 2013. Rights fees dropped substantially to the teams involved, and their spending power cratered. What happens to an NBA Franchise when the business responsible for 40% of their revenue collapses? Please see above graphic. It’s a legitimately problematic situation.
Sinclair has a two-part strategy for saving DSG. First, it is investing in a direct to consumer (DTC) model, as John WallStreet covered in Sportico. But how many cord cutters be willing to pay $23 a month for their local team?
Second, Sinclair is counting on taking the renewal of its other channels, primarily dozens of local FOX, ABC, CBS and NBC affiliates, and bundling those offerings with local Bally Sports channels. But the overlap between those affiliates and its RSN markets is surprisingly sparse; we aren’t sure if the Minneapolis cable carriers will be so devastated to lose the CW network that they feel compelled to carry Bally Sports North.
The same forces that disrupted the cable bundle are coming for the RSNs. The idea of leveraging your niche audience for ever-increasing per subscriber fees paid by everyone, even those who don’t watch, is going the way of the dinosaurs.
There is still a huge market for NBA games of national interest, and the national contract should see healthy rights fee increases. But local games are like League Pass: a niche product of interest to a subset of the broader NBA audience. Teams will live and die by their ability to generate fan interest; merely existing in a big TV market is no longer enough.
As for DSG, we’re skeptical. As noted in Sportico, teams want to meet fans where they are, so we do expect more DTC models to gain ground. But it’s worth remembering that the NBA itself has massive experience with DTC via its League Pass product. With the NBA hungry for more revenue streams, relying on a poorly capitalized and politically controversial partner to navigate the transition to DTC may become increasingly unviable in the seasons to come. The Cavaliers’ and T-Wolves’ rights expire after this year - it will be fascinating to see what happens next.
TWEET OF THE WEEK
Let’s just say there are certain beer distributors that are pretty bullish on college athletes getting paid for image and likeness….
STL INVESTIGATES: THE CHARITY STRIPE
The last round of the playoffs was simply incredible, but even we have to admit it wasn’t… good… exactly. It featured, in a span of about 4 days, several potentially franchise changing disasters, as the Sixers, Bucks, Jazz, and Sixers blew massive, 20+ point leads.
Despite what the NBA is making it seem like, blowing such a lead is not an easy thing to do. Here is a look at the Hawks/Sixers Game 5 win probability graph.
But if one is really interested in gakking up such a lead, the number one place to start is by missing some free throws. A lot of free throws! It just so happens that we are blessed with a plentiful bounty of NBA stars who may (may) have a penchant for missing free throws.
Being an All-NBA player who struggles from the line is hardly a new phenomenon. Wilt Chamberlain managed to fill it up despite shooting 51% from the line for his career.
But NBA defenses and the rise of analytics has made being a brick layer from the line into an increasingly untenable proposition. Just ask Sixers war criminal Ben Simmons, who despite averaging 10+ assists in the series and being a defensive POY candidate, became literally unplayable in the 4th quarters of the Hawks series. His 33% shooting percentage from the line is hard to write, much less watch happen.
But Simmons’ futility might be letting a few other off the hook. Giannis Antetokounmpo is shooting 53% from the line in these playoffs, and the Bucks have unsurprisingly struggled in tight games. And Luka Doncic, the chosen one, after shooting 73% in the last two regular seasons, shot a shocking 52% in the playoffs.
The problem with missing free throws isn’t just the points. It’s the knock-on effects. Luka averaged 36 points per game in the playoffs, but only 5.7 in 4th quarters. His reluctance to get in the lane and do Luka things late was noticeable. Most of the media attributed this to fatigue, but we wonder if he was reluctant to get fouled. Giannis, meanwhile, became a distant second option in clutch situations. This article from two days ago spends a lot of time quoting Giannis on just how much he trusts Middleton, but curiously doesn’t mention the fact that putting the ball in Giannis’ hands late usually means ending up with one point at best.
There is another sneaky bad free throw shooter we will drop in there. One LeBron James hasn’t cracked 70% from the line in three years now, and shot just 60% before being ushered out of the playoffs this year. Free throw struggles are rarely something that just goes away, and so we at STL, without wanting to get sensationalist about it, simply wondered if the fan bases in Philly, Milwaukee or Dallas shouldn’t be freaking the f*$% and wondering if their teams have any future in the payoffs at all.
AT THE BUZZER
So if it’s not JJ Redick, who is going to make that sweet, sweet college likeness money? (Washington Post)
Why does this Kawhi Leonard knee story sound so eerily familiar? (NBC Sports)
P.J. Tucker may not shoot the three, but his clothes game is unparalleled (The Ringer)
Want to see video of Clips and Suns fans knocking each other unconscious? (Jordan Thrilla)
Management consultants’ views on the changing sports world (Bain)