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‘Governor's Call to Electric Chair’ Delays Diamond Sports’ Demise

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JohnWallStreet
January 25, 2024

‘Governor’s Call to Electric Chair’ Delays Diamond Sports’ Demise

Amazon reportedly agreed to make a $115 million investment in Diamond Sports Group (DSG) as part of a restructuring agreement that would bail it out of Chapter 11. A bankruptcy court still must approve the plan. 

Debt-laden DSG appeared headed toward extinction. The company came to an agreement with the NBA and NHL, and was closing in on a deal with MLB, to return club broadcast rights to the leagues at the conclusion of the season. A collapse of the RSN conglomerate would have resulted in a short-term revenue trough across thre three leagues and it could have ‘catastrophic’ downstream effects.

Now, hope exists that DSG can find a way to continue operating the 18 Bally’s branded RSNs and honor its existing local rights agreements with the 37 NBA, NHL, and MLB clubs that call its linear networks home.

It is “literally like getting a call from the Governor that you’re alive, you’re not headed to the electric chair,” one big four team president said.

At least not yet.

Skeptics note Diamond is still going to be a thinly capitalized business, even with Amazon’s 9-figure investment, and that the e-commerce giant has no intention of paying for (or subsidizing) linear rights. 

So, a reorg may “buy Diamond a little more time, but [the fundamentals of its linear business] are no different today than the day it filed bankruptcy,” one high-ranking big four league official said. 

And unless DSG can find a way to alter those fundamentals (think: longer-term deals with distributors), it remains unlikely that the company will be able to pay full value rights fees to all 37 of the teams as contracted.

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Much has been written about the shrinking pay TV universe and how it has/will continue to influence league-level media right deals. Much less is being said about local rights, in part, because it differs for every team, in every city, and with every distributor. 

But local rights comprise a significant portion of NBA, NHL, and MLB team revenues, and a large percentage of those dollars, tens of millions annually, are at risk of evaporating if DSG is unable to emerge from bankruptcy with a viable operating plan.

The amount would vary by team and city. A popular organization in a Top 10 TV market might be able to replace 60-70 cents on every RSN dollar lost.

But that may not be feasible for a club in a small market with fewer broadcast players (or for a less popular team in a larger market), and organizations with no choice but to go exclusively direct-to-consumer could experience a local rights haircut of 75-85%.  

Clubs forced to go over-the-top will need to add $4-5 million/year worth of expenses to the P&L too. Remember, DSG produces the games that air on its networks.

The fundamental challenges Diamond is experiencing are not unique (think: cord cutting, distributors excluding costly sports channels). 

“Every single RSN will experience them, maybe on slightly different timelines,” the league executive said. 

Its debt obligations are (see: ’21 filing showing $8.67 billion owed). 

Media rights have fueled the growth in sports over the last two decades. So, logic suggests truncated revenues within the category may negatively impact valuations in the years ahead. 

We wouldn’t bet on it. The valuation growth experienced has had more to do with scarcity than any one revenue stream, and those investing in sports tend to believe leagues and teams will eventually emerge from the ongoing media transition better off than before.

Competitive balance looks to be a bigger concern. Disruption in local media rights revenues is going to hit small market clubs harder than those in larger cities accelerating the revenue disparity.

“You have these outsized [and healthy RSN] deals with the Lakers and Dodgers, and then [small market] teams [that may] have to go out on their own,” the big four team president.

Look for leagues focused on long-term health to push for a more centralized –and national– media strategy.

No league is more vulnerable to lost local media rights revenues than MLB. More than 25% of club income comes from the revenue stream, and unlike within in the NHL and NBA, when baseball revenues soften, guaranteed player contracts do not. 

It’s safe to assume the MLBPA is not going to voluntarily agree to lower player costs. So, small market owners will likely need to do more with less until the new media landscape shakes out and/or the current CBA expires.

NHL clubs will have the hardest time replacing guaranteed RSN revenues. There’s simply not going to be much local TV money available for hockey in most markets. 

NHL clubs without an RSN could lose as much as 12% of their income. It’s not hard to envision the league, with few other levers to pull to offset the gap, exploring expansion (and expansion fees). Just last week, Smith Entertainment Group requested the league initiate the process to bring a team to Utah.

Amazon’s investment in DSG would give it the right to distribute content on the 18 Bally’s RSNs via Amazon channels (at least for the 15 NBA, 11 NHL and five MLB teams it has the streaming rights to). It will need to negotiate directly with MLB to stream the other six. The league has no intention of giving up those rights for free.

Of course, a reorg would mean the games would continue to air on local cable and satellite systems too–as long as Diamond continues to make its contractually obligated payments. 

It’s fair to wonder why Amazon would invest in DSG. The e-commerce giant could have waited for the Sinclair Broadcast Group subsidiary to return the rights to the leagues and then negotiated directly with them.

But doing it now enables the company to get jump on building out a robust advertising business. It also allows Amazon to lock up a large number of team rights at one time, at a steep discount.

And there’s no real downside to the investment. If it works out, then Amazon can earn a solid return on DSG. If it doesn’t, the e-commerce company will still learn how local rights fit in to their overall media strategy.

Amazon may not be done building out its local sports offering, either. Comcast is reportedly looking to exit the business, and the MLB, NBA and NHL teams who have pivoted from the pay TV landscape could consider Prime Video a preferable distribution platform too. 

“They’d be fools not to,” the big four team president said. “If the studios can’t make DTC work profitably. How is an independent local team going to do it? It’s impossible.”

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