In the last week, Comcast announced it would spin off most of its once coveted cable channels, while Diamond Sports won the judicial nod to emerge from Chapter 11 bankruptcy after 18 long, hard months.
The moves on the surface appear like the last hopeless gasps of the beleaguered pay TV world, beset by cord cutting, the rise of streaming and an oversaturation of content. Can Diamond survive, who wants Comcast’s depleted castoffs; these are questions in the air.
But what if rather than a precursor to the collapse of the traditional media structure, it is a sign the drop in cable subscriptions is nearing a bottom and that pay TV is not fated to end up like the dodo.
“There are plenty of pay TV channels that have 20, 30 percent margin still and the pay TV bundle isn’t going anywhere, isn’t going to zero tomorrow,” said Patrick Crakes, a media consultant. “So you have to have it. And through all this process, the NBA and all the Wall Street celebrity media futurists and all the cheerleading from the media business for streaming. The truth of the matter is that streaming pays really zero of all content and these businesses remain, really really challenging businesses compared to the old pay TV bundle era.
“So if you’re baseball, if you’re the NBA, if you’re the NHL, you still need access to the pay TV bundle for most, if not all, of your teams. And the ones that have forgone it have made a decision for a while to go to zero on the rights fees, my guess is they’ll probably have to come back to it.”
That’s right; Crakes is predicting a back to the future development for those teams that have touted a move away from pay TV, like the Utah Jazz and Phoenix Suns. These teams are using a combination of over the air channels and streaming. And they are not shy about boasting a huge increase in viewership, which is a given when a paywall is removed.
But does it make economic sense? If one believes RSNs are dying, cable channels are dying, then yes; it is a smart move to get ahead of the final collapse of the pay TV world. But if pay TV is not going anywhere but at worst offering reduced rights fees, which is the case now, then those teams staying put are at an economic advantage.
“One of the things about Diamond is as it emerges, much like the Comcast Spinco and everything else, they are part of re-bundling,” Crakes said. “I’m more and more convinced, this is shifting these assets around to people who can own them that are satisfied with the kind of returns they can maximize out of them, which are probably not related to what they got 10 years ago.”
So in this re-bundling, cable companies, or channels, are sold to those who did not own in the space when 50 percent margins were a God given right bestowed by a 100 million universe of cable homes. Instead these newer companies are fine at half those figures. Diamond in fact projects a continued fall in its cable homes from 23 to 17 million over the next few years, but a boost in streaming subs and slimming rights fees leading to modest profitability.
Much of the narrative around Diamond’s bankruptcy was misplaced, Crakes argued. Yes, cord cutting hurt the bottom line. But what caused the Chapter 11 was the $8 billion of debt incurred by parent Sinclair in its 2019 acquisition. Another company that bought with more equity, or had more synergies, likely would have avoided Chapter 11, he said.
“Their problem was a bad deal concerning their debt, and that’s what bankruptcy is designed to facilitate and it did,” Crakes said. “Now what the leadership of Diamond used the process for was exactly what it’s supposed to do, to restructure the company to reflect current situations, right?”
Those that saw the Chapter 11 as a cord cutting death sentence missed the narrative, he said. “But that was a result of people not seeing 18 (months) to two years in the future; the unsecured $8 billion.”
