In December of 2017, Disney came to an agreement to purchase 21st Century Fox for $52.4 billion. While bolstering Disney to better compete with Netflix was central to that deal, a large part of the deal was Fox’s 21 RSN’s. At the time, the talk was that those RSNs would fold into ESPN’s national presence and possibly even set them up for a streaming future.
In the months and years to come during the lengthy approval process, Comcast got involved and bested Disney’s bid. That caused Disney to then raise their bid to the final sale price of $71.3 billion. The other big change was that the U.S. Department of Justice made an agreement with Disney where the larger Disney-Fox deal could only go through if Disney sold off the 21 Fox RSNs. The DOJ viewed ESPN’s control of the local channels to be a monopoly stranglehold on the industry. That was probably for the best and done with the right intentions, but one has to wonder in light of recent events if perhaps that government intervention may have actually signaled the beginning of the end of the RSNs stable presence as as a distribution vehicle for content to fans and cash to pro teams.
Disney didn’t really seem to care much about having to divest the RSNs, and likely thought they’d get about what they paid for them: $20 billion. However, when the smoke cleared, they only got $10 billion for them from Sinclair. Streaming companies, Comcast, and new Fox all showed minimal to no interest. At least Ice Cube made a bid.
What all the larger players who didn’t even kick the tires on the RSNS knew at the time was that even at a half-off discount, this wasn’t going to end well. Many analysts were skeptical even at that discounted valuation. And compounding things was that Sinclair borrowed a substantial amount of money to finance the deal.
“The purchase price will be funded with $1.0 billion of fully committed privately-placed preferred equity of a newly-formed indirect wholly-owned subsidiary of Sinclair and direct parent of RSN Holding Company. The remainder of the purchase price is being funded by $8.2 billion of fully committed secured and unsecured debt incurred by Diamond.
A year and a half later with the pandemic wreaking havoc on the sports calendar and multiple distributors dropping Sinclair as well as other RSNs, Sinclair wrote down the value of their RSNs by $4 billion. You’ve got to hand it to Fox, who got out at around $20 billon for assets that three years later were valued at just $6 billion. And it seems like we are still in freefall.
A little over a month ago, John Ourand took a deep dive into the RSN business in an article titled “As revenue for RSNs plummets, sports execs search for new local rights models with focus on streaming”. From that article:
“Interviews with more than a dozen high-placed executives paint a dire long-term picture for the RSN business, which for decades has been among the most profitable media assets around.
It’s not quite a sense of panic that is setting in at the team level. But because incoming revenue for RSNs is headed backward — and won’t turn around anytime soon — team executives more openly are contacting consultants to try to come up with new revenue streams.
“The house is on fire here,” one network executive said, referring to the RSN business.
That “house fire” is a function of the growth in streaming services combined with a shrinking number of consumers who subscribe to a pay-TV bundle.
The problem is especially concerning for teams that have depended on RSNs’ media rights fees to help fund everything from player salaries to marketing efforts. Local media rights can make up to 50% of an MLB team’s total revenue, sources said. Times will be tough if that dries up.”
This past weekend, Ourand painted a more optimistic picture because Fanatics was mulling getting into the RSN game and might have the connections and vision to reimagine the RSN business model. In that article, Ourand shared the following.
A potential RSN path for Fanatics: "Sources say NBCUniversal and AT&T have been trying to find buyers for their RSNs. And top executives from leagues and media companies share a common belief that the Sinclair subsidiary Diamond Sports Group…could be headed into bankruptcy." https://t.co/dhi3tPPC1j
— John Ourand (@Ourand_SBJ) October 11, 2021
To recap that tweet-
1- The Sinclair RSNs could be headed into bankruptcy. This is something I’m quite sure Ourand would not share if this wasn’t a very real possibility. And it’s entirely plausible when you borrow $8 billion dollars to pay for something that is worth somewhere around $5-$6 billion dollars now.
2- The second- and third-largest RSN owners are themselves trying to sell (these rumors have been out there for a bit).
So basically everyone wants to sell, and the last company to actually buy is perceived to be heading into bankruptcy for doing so. Could things get any worse?
Tuesday marked the first day of SBJ’s World Congress of Sports. And the comments about RSNs have been as pessimistic as you can imagine.
Adam Silver just now at SBJ conference: The bundle is “broken” …and with that… fair to say #NBA really rethinking how it’s TV/steaming distribution future will look as RSNs aren’t in great shape. #Sportsbiz
— Jabari Young (@JabariJYoung) October 12, 2021
More Manfred: "The negativity surrounding the RSNs has been increased exponentially as a result of the situation with the Sinclair subsidiary Diamond. Part of their problem is cord cutting. The other part of their problem is there's excessive leverage on that business."
— John Ourand (@Ourand_SBJ) October 12, 2021
— Brandon Ross (@BrandoLightShed) October 12, 2021
Back here at SBJ event… Rob Manfred just gut punched Sinclair… said they don’t have enough #MLB streaming rights to have a DTC product… and baseball rights will not be cheap…. Another hit to RSNs
— Jabari Young (@JabariJYoung) October 12, 2021
While none of this is really new, it’s just bad and getting worse quickly. The vast majority of viewership of RSNs come from NBA and MLB games. Here you have both of those commissioners being pretty brutally honest that the RSN model is in deep shit. That’s especially true around particularly Sinclair, who at this point is beginning to sound like a grenade with the pin pulled out given their debt situation.
At the heart of the matter is that RSNs are a beefy portion of your cable and satellite bill that everyone pays for but few people actually watch. Cable, satellite, and alternatives (including virtual MVPDs like of YouTube TV, Sling, and others) are much more willing to drop these channels as compared to ESPN, which has the bulk of Disney and the rest of the Disney cable channels behind it. This is an easier fight for cable and satellite providers to win, and one that drops customers’ cable bills while pissing off fewer customers.
That’s why Sinclair’s RSN subsidiary (Diamond) is potentially headed to bankruptcy, Comcast and AT&T are hoping someone else will buy their RSNs for some bargain price so it won’t be their problem to solve, and why commissioners are sounding the alarm now and doing it very publicly. The business model is broken and the money is going to start drying up. Urgency has arrived because everyone seems like they have a ticket on the Titanic on this one. That is, except for Fox, who must be loving seeing their former counterparts squirm while they sold at the apex.