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Sinclair RSNs – Potential Bankruptcy Implications & D2C Model Headwinds – 18 November 2021

  • Credit
  • Multi Sector
  • North America
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Specialist

Current SVP at Octagon Inc

Agenda

  • Bankruptcy scenario analysis for Sinclair’s (NASDAQ: SBGI) Diamond Sports RSNs (regional sports networks), highlighting potential rights claims and implications for teams
  • Likelihood of remaining 10 MLB teams offering streaming rights for slated April 2022 D2C product launch
  • Pushback potential from the MVPDs (multichannel video programming distributors), MLB, NHL or NBA – potentially necessary recourse and risk of removal from basic cable packages
  • Sinclair’s value proposition as a long-term strategic partner to teams, highlighting alternatives for popular franchises
  • Downside risks, focusing on potential delays to D2C product release, uptake obstacles and possibility of MLB launching its own product

Questions

Transcript

1.
How could a potential bankruptcy at Sinclair’s debt-laden and distressed Diamond Sports subsidiary affect team media rights, considering the credit vehicle there? Could Comcast SportsNet Houston and Dodgers going through bankruptcies be precedents here, where the rights were perceived as materially breached? How different is this situation given the scale of team rights involved? Could events play out differently in a hypothetical bankruptcy?

Specialist (SP): I can’t get into too much detail because I’m not a bankruptcy expert or bankruptcy lawyer, but I don’t think that this is an apples-to-apples comparison to Comcast SportsNet Houston, mostly because of the fact that, as you pointed out, the scale.

Back in 2013, I believe that’s when that went bust, you really had only an impact on the last three months of the Houston Astros, they didn’t get their rights fee payment for that last quarter, which, albeit significant, the Astros were able to navigate that because at the time they had really wellcontrolled costs, so while bumpy for a short term, they were able to overcome that, smooth it out. It’s entirely different when you’re talking about 42 professional sports teams being impacted across their potential rights fee payment interruption. I don’t think that there is an apples-to-apples there just because of the scale.

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2.
Many RSN [regional sports network] teams fund payroll and operations through the rights fees from players such as Sinclair. How could this affect how things play out? Would Diamond Sports likely shut off payments to the teams and reject contracts, putting them in dire straits? What workarounds could avoid the fallout if that were to occur?

SP: : I think that you have to look at each team independently in terms of the impact that it will have on their bottom line. Some teams generate 30% of their total gross income from their media rights fees, some teams are closer to 50%, even 55%, so the material impact that those other revenue drivers have on their business will play a role, sponsorship sales, ticket sales, hospitality, now even real estate and other forms of entertainment. When you think about what will happen should the rights fee payments get turned off, I think, first of all, you have credit loan facilities that are very well-managed by Major League Baseball, the NBA and the NHL that teams can, they do today, and probably would tap into. You have a bit of a safety net in that loan facility already being established, and I believe that all of the leagues over the last few years have increased that accessible debt load.

Second, I think that you will not see the professional sports leagues let Diamond Sports get to a point where rights fees are not being paid to teams for very long. Should that be the case, my assumption is the leagues will step in and, actually, that would be quite an opportunity for the leagues because they’d be able to buy back these rights from Diamond Sports at pennies on the dollar, and then that would help facilitate and accelerate their own direct-to-consumer league-controlled initiatives.

Third Bridge (TB): What could be the haircut on the leagues’ opportunity to scoop in when you say pennies on the dollar?

SP: I don’t know. In all honesty, I don’t know if, for example, a team is making USD 100m a year on their media rights fees, does that mean that MLB can step in and scoop them up for USD 10m a year? I don’t know. That would have to get played out through a negotiation that, personally, I have never been a part of, I don’t think many people probably have been a part of those.

If you think about other adjacent light entertainment bankruptcies, the IP usually ends up getting scooped up for a lot less than what was originally paid. If you were to go today and go buy these RSNs from Sinclair, they’re probably worth USD 4bn-5bn, not the USD 9.6bn, I believe, they paid for them. That’s what I mean in terms of a shave. It’s a significant shave, but I just don’t have enough window or personal experience in bankruptcy to guesstimate what that would be.

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3.
How much leverage could creditors have through making a claim for the team rights, in the sense that the collateral in the credit vehicle at Diamond Sports goes to creditors in a bankruptcy? Could this additional leverage in a court process raise the eventual payout closer to USD 100m on a team that generates this amount in media rights fees per year?

SP: I like the thought process you’re putting in there and the path you’re going down. I think that makes sense for other industries, not this industry. The creditors here, they don’t want to hold these assets. These are not assets that can be monetised by most of the creditors. Strictly not speaking from a legal perspective, but from a commercial perspective, there’s no leverage that the creditors have with the teams or Major League Baseball or the NBA or the NHL. It’s not real estate where they can go out and then sell the property to another developer, for example, it’s IP that needs to be, in a way, created, filmed, produced and then distributed and then put in part of a bundle or a direct-to-consumer distribution mechanism.

It’s too complicated for an institutional fund or an individual who bought Sinclair’s debt or Diamond Sports’s debt to want to take on that asset. That’s why I think it’s a pretty quick conversation between the creditors, the courts, the teams and the leagues to come to a quick decision.

The lack of competition, I think, will play a big role in a hypothetical bankruptcy. AT&T has been trying for the better part of three years now to sell their RSNs very publicly and can’t even fetch USD 1bn for them on the market. Comcast has not been shy about tipping their hand, the fact that they’re not all-in on the RSN business if they had a choice, if it was up to them. It makes you then scratch your head and say, “If the existing competition are not interested in acquiring more RSNs…” And maybe you play the card of an Amazon or a digital, what we would call, new media entrant into the space. With the exception of Amazon taking a little slice of the Yes Network, there hasn’t been a massive land move in that area.

You’ve had seven teams’ media rights come up just within the last year and Amazon has not bid on any of them. I don’t know if you’re going to see a Google or a Netflix or a Verizon or an Amazon really be active in the RSN space in the time horizon that many analysts suggest Sinclair has to figure out a solution to their debt load, which is really just in the next 12 months.

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4.
Is it a conflict of interest for the leagues to place a haircut on the media rights payments that provide 30- 55% of the teams’ incomes? Would this be detrimental to the teams? Could the creditors get a claim and sell it as a JV to the leagues at current rights payment parity, meaning the creditors retain an upside and the leagues don’t have to pay out full price and get an upside in the future?

SP:I don’t see it. I think it’s a clever approach to the leagues, but as in any industry and any business in the world, without any competition, there’s no reason the leagues should bend. If there’s no other buyer, the leagues will wait and sit back and let this play out as it’s going to play out. I think it’s pretty telling when the commissioner of Major League Baseball stands up in a public forum just a couple of weeks ago and says, “We’re aware of the problems that Sinclair is having and it’s not our responsibility to help Sinclair.” They’ve also said that the direct-to-consumer path forward, they view, Major League Baseball views is through them as the GP in whatever sort of mechanism or product that will be a D2C player.

He did point to the fact that he’d be happy to bring on partners in the distribution of that content, and that’s where Sinclair could maybe play a role moving forward. He did not mince any words about the fact that he views Major League Baseball in the driving seat (a) because of where the rights sit, currently, Sinclair only has four Major League Baseball teams’ D2C rights, and (b) because they have an existing platform of products, as do the other leagues, that does fairly well. It’s essentially plug and play for these rights should they fall back to the league. For those reasons, I just don’t see the creditors having a ton of leverage due to the lack of competition for these assets.

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5.
Are the leagues quality broadcast partners? Could the leagues want to take the burden on, given Diamond Sports pays USD 800m per year to televise the games? Is it feasible for the leagues to produce the games as profitably or more so without a broadcasting partner such as Sinclair?

SP: I think the leagues have proven, especially these three leagues, Major League Baseball, the NBA and the NHL, have proven that they are professional broadcasters. They have very successful linear networks, each of them, they produce a ton of content every year, both linear and streaming, and I think that if you look at, I’m just trying to pull up some of the research that we have done, total nut, I think out of Major League Baseball’s USD 10bn, I want to say about 40% of that comes from the media deals, of which about 25% of that comes from the national deals, so the majority being made up from Sinclair.

To that point, producing the content, not an issue for these leagues. They are producers already of live games. Distribution of content, also not a massive issue. All three have direct-to-consumers, all three have networks, so they can ride that linear and digital wave for as long as needed. The question mark though is the commercial upside, is matching that revenue that I just talked about, that 75%, roughly, of that USD 4bn a year that comes from Sinclair. In a D2C space, I don’t see them reaching USD 3bn of revenue, at least not any time soon, that’s where that pay-TV bundle really does win out over D2C. You’re moving from a wholesale business to an entirely dependent retail business, and it’s really difficult to knock on every baseball fan’s front door or e-mail inbox and get them to take out a credit card and get them to enter their credit card information into the website or the app and then to purchase. I haven’t run the numbers, but I’m assuming MLB At Bat is probably around USD 200 a year, and to match that USD 3bn of RSN money that flows around, that’s a lot of individuals signing up for MLB At Bat.

I think what baseball will have to do is probably bring on additional partners that will share in some of that cost, that will help to de-risk or de-lever that. I think that that’s where you could see a newer digital player or a betting operator come in and help to create a bit of a safety blanket, if you will, on the revenue side. The rights will have to be carved up differently and they’ll have to bring on additional players. I don’t see it just being a standalone league-operated substitute for Sinclair, if we’re talking straight revenue-to-revenue numbers.

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6.
The MGM bankruptcy may suggest the creditors have a very streamlined way to maintain claims. How does this play into the risk of a Diamond Sports bankruptcy becoming much more lengthy and contentious than one might think, pushing back on the idea that the process will be expedient for the leagues?

SP: Let me get to that in one second. I just want to correct one thing. I just pulled up my notes. I just want to make everyone aware that the RSN fees to Major League Baseball are actually around USD 2bn, not USD 3bn, and that’s compared to the USD 1.74bn that ESPN, Fox and Turner pay on the national side, so it’s about a USD 3.74bn-3.75bn of that overall USD 10bn number from the media deals, again, of which just about USD 2bn comes from Sinclair.

With regards to how a process would play out, again, I’ve never dealt with bankruptcy and media rights to the extent that this would potentially undergo, so I don’t want to be over my skis, but I do know Sinclair well and they will not go down easily should that be the path that eventually unfolds. They’re not looking to, they never have, they’re very tough negotiators when it comes to their carriage disputes, gosh, we looked at the Dish deal that just got done, it took almost three years to get done, and they hold out. I don’t see this being a fast or expedient process, should it go down that path.

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7.
What could be the fallout for future RSN rights payments from a bankruptcy filing? How could this affect deal negotiations, appreciating the uncertainty around how events play out?

SP: I think you are seeing what I would term as a bubble-up. I think until there is a new commercial model, we’re reaching the top of regional sports rights across the board. There are going to be exceptions to the rules. There are still some teams that have rights coming up in the next few years that are over-delivering when you look at some of the metrics that we analyse in terms of rights valuations. I don’t want to be the doomsayer that local media rights are going to be going down or flat, but I think that the next two or three years, you’ll continue to see select teams have rights go up, you’ll continue to see newer forms of rights agreements take place. What I mean by that is much more of the risk and upside being shared by both parties.

What was thought as innovative 5-6 years ago with the Arizona Diamondbacks taking up a pretty large equity stake in their RSN is now going to become the norm going forward, especially with Sinclair in the driver’s seat for a lot of these negotiations. You’re going to see teams take rights fee renewals, you’re going to see them flat to up a little bit, again, it depends per market per team, also depends per sport, baseball is the king, RSNs can’t really survive without baseball just because of the tonnage and volume of content, and you’re going to see the terms be shorter. We’re used to seeing 15-, 20-, even 25-year RSN terms, I think that’s going to change and it’s begun to change already to shorter duration.

As I mentioned before, you’re going to see more equity, either true equity be taken by the club or something called phantom equity. “We’ll pay you USD 50m in rights fees and you have a path to USD 75m,” but that’s all dependent upon revenue shares off of phantom equity that you’re granted every year and different success metrics and milestones that get baked in. I think that’s the immediate short-term to mid-term outlook for RSN rights deals. I think you’re also going to see baseball teams continue to separate their fees and fee growth from that of NHL teams.

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8.
CEO Chris Ripley was thought to have said Sinclair had the majority of MLB [Major League Baseball] team rights secured in the Q1 2021 earnings call ahead of a D2C product rollout in April 2022, but this may have been misconstrued, with the statement having included NHL [National Hockey League] and NBA [National Basketball Association] deals. He said rights had only been secured with the Marlins, Brewers, Royals and Tigers in the Q3 2021 earnings call. How valuable would a service with all the NBA and NHL D2C rights plus those four baseball teams be at the USD 23 price point floated, or a more reasonable price point? Is enough going on with the MLB teams secured vs more popular ones to generate an uptick with an April 2022 launch?

SP: I think it’s all in how you present it, and I don’t think that Chris Ripley has done himself or his company a service, to be honest with you, coming out and saying that they feel they have massive reach or that they’ve got mass to go launch this come April. They don’t. If you talk about the product launch as being a milestonebased, more of a pragmatic approach to, “We’re going to be launching in early April. We’re going to have four teams. The goal is to grow that to 14,” if they can, that’s how many MLB teams they have, but, “10-14 teams over the next three years, and we’re phasing it in. Pricing will be reflective of a product that’s in growth and not an established product,” if he talks that way to the fan in the street then I think you’re going to have a lot less conflict and consternation between the leagues, teams and Sinclair, and I think you’re going to see fans react accordingly, consumers.

They’re going to take to that product much more than they would if it’s four teams and that’s critical mass and, “We’re good and we’re great and we’re going to keep moving on.” It’s just all in the way that you communicate it, the way you price it.

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9.
Why haven’t the remaining teams signed on to D2C rights with Diamond Sports? Is it that the rights aren’t up for renewal yet so it’s a wait-and-see situation or will this never happen? What is driving the hesitation for those teams relative to the four that have signed on?

SP: I think there’s a lot going on there. I think, one, as you correctly pointed out, that on the baseball side, there’s not a ton of teams that have rights coming up. A lot of these deals that got done 10 years ago, got done for 10, 15, 20 years, more like 20 years, and they’re not up for another five, six, seven, eight years. I think the Chicago White Sox are one of the next baseball teams to come up and that’s not for two or three more years.

To your point, one reason for the status quo is that the rights are just not up. The second reason, and this is all just my experience telling me, this isn’t any inside information, but I’m sure that the commissioners of all the leagues have told teams that, “If you don’t have your rights currently up, stand down. Do not start engaging on selling off your D2C rights to Sinclair, or anyone for that matter, until we, as a league, see how this plays out.

We don’t need you wrapping up your D2C rights with a company that’s got a debt load and is feeling the pressure like Sinclair is feeling right now.” I think that there’s certainly a top-down league-commissionerdriven message that, “If you’re not in a position where you have to renew with Sinclair right now, then there’s no need for you or we kindly ask that you do not engage in a D2C negotiation with them until we figure out what’s our plan as a league, what’s our plan as leagues,” there’s been a lot of talk about whether Major League Baseball, the NBA and the NHL partner up together with their own D2C offering, “and also see how it plays out over the next 6-12 months with Sinclair.”

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10.
Is there an incremental amount Diamond Sports could pay to convince more teams to come on? How much more would be necessary to generate buy-in?

SP: I don’t see another way forward for Sinclair to grab more D2C rights unless they’re offering incremental rights fees. It’s a highly valuable asset. They’re locked into the contracts that either they negotiated or they inherited from Fox that don’t include direct-to-consumer rights, they include streaming rights for authentication. The question then becomes, on the Sinclair side, where are they going to get this funding to go buy more rights, buy these D2C rights? On the property side, as I said earlier, I know for a fact that Sinclair has approached many teams and said, “We’ll pay you incremental for your D2C rights,” and that the teams are just standing pat for now because they’ve got an existing contract in place that’s paying them well, Sinclair has to live up to that, and they have, and they continue to make their rights fee payments, but Sinclair doesn’t have any leverage here.

There’s no real impetus for these teams, especially if there’s a unified league office type of soft mandate, if you will, again, I don’t know if there is, but I just assume, that would make sense, to not engage in any D2C new rights deals unless you absolutely have to.

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11.
How much do you think Sinclair should offer for further MLB D2C streaming rights? What range of payments would make teams consider it further? How could this differ between the most popular franchise in the country and less popular ones?

SP: I think that how much the rights are worth today vs how much the rights are worth in three years is very different. If you’re doing a fair market value of those rights, they’re probably worth 10% of what the linear rights fee payments are, but that’s not how much they’re going to go for because every passing year, streaming numbers go up, cord-cutting continues to happen, cable continues to erode and we all know and accept the fact that streaming is the future. We also know that in the RSN space, even though some of these terms are getting shorter, these are long-term engagements.

Even if they’re seven-year deals, like some of the newer ones are, that’s still seven years, and we know that streaming is going to be much more important, in fact, streaming revenues in the US will overtake that of pay-TV by 2024, I think about USD 76bn to USD 74bn. We know where the future is headed and we know that these rights will only incrementally grow in value. I would probably peg them at 30-40% of a total of the linear value today on each independent team’s rights. We’re talking about a lot of money for these D2C rights.

TB: Sub-USD 100m? More than USD 100m per year per team?

SP: I think if you look at baseball, for example, and you use that rough estimate that Sinclair pays out across all of its teams around USD 2bn, then I think you’re looking at a, minimum, USD 600m incremental spend to get the D2C rights.

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12.
How much muddiness could come from additional team rights acquisition vs getting the leagues themselves onboard? Whether the leagues have be-all veto power is another question, particularly with MLB – the SEC [Securities and Exchange Commission] filings for Sinclair suggest there’s a clause that would allow the MLB to claw back payments if there were a change in league policy or rules.

SP: I don’t have that SEC filing in front of me, but at the end of the day, all the IP is created and ultimately owned by Major League Baseball and its teams. That said, I do not see Major League Baseball or the NBA or the NHL mid-agreement with any of these teams having a position of strength to argue for a rule change, if you will. That’s why you have a rights holder and a rights owner. The rights owner is the properties, is the leagues and the teams. The rights holder, the licensee is Sinclair. When there’s an agreement between those two, I don’t think you can infringe upon that or make any massive changes until there’s a reset, and there’s really not because all these rights deals are up at different times.

There has to be an inorganic action, such as a potential bankruptcy, or just an agreement, a solution reached between the parties, being the leagues and Sinclair, for there to be a massive change in that underlying agreement. Even though the rules say we can do whatever we want with our rights, it doesn’t say we can do what we want with our rights whenever we want it when there’s an agreement or when there are agreements already in place.

TB: Does this also apply nationally? It’s been floated to me that MLB will prioritise national broadcast vs local in the future, which would chip into Sinclair’s 150-game slate per year per team. Is this impossible given the MLB-ESPN rights deals float until 2028, so it can’t do anything on that front mid-agreement?

SP: That is correct. The only package of rights that remains available on the national level right now is the, what I would call, co-exclusive package that ESPN elected not to renew. It’s worth about USD 150m, and these are week-night mid-week games that are exclusive on the local front, so Sinclair, Comcast, AT&T, the independents, they have these rights in their markets, but they are available nationally out-of-market as well.

ESPN ultimately said, “Having co-exclusivity in these games really doesn’t move the needle for us and doesn’t line up with our own content acquisition strategy and distribution strategy,” so that package of rights remains available.

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13.
The other stakeholder involved is the MVPDs [multichannel video programming distributors], and to my knowledge, the carriage deals are structured so as to prevent D2C distribution. Could this mean Sinclair lacks the ability to broadcast games in April 2022 regardless of having the D2C rights, at least pending any negotiation or recourse they have to offer the distributors?

SP: That’s a very good point. My understanding is that they are prohibited, without any further negotiation or allowance, to go D2C. We know how Sinclair gets along with their carriage partners. That’s going to cause some monster conflict. That conflict, though, I’m less concerned about because that conflict gets resolved with money, either relief on their affiliate fees or revenue share in the upside, or you bring the MVPDs in as partners in this, potentially maybe even investors.

They’re still in the market looking to raise between USD 500m and USD 600m of outside capital to help fund this D2C business. I think there are probably two or three paths that I just mentioned that they can go down to remove that hurdle, but as it stands today, it still remains a hurdle.

TB: Is one of those three options more likely than the others?

SP: I don’t know. I honestly don’t know. I don’t know if MVPDs have interest in riding the wave and getting preferred equity or preferred terms and becoming an investor in this D2C. I’m not sure what the appetite is. It probably varies. Verizon might have more of an appetite than Charter, who might have less of an appetite than Comcast, etc. I think it is probably individually dependent on each MVPD. It might just come down to, “We don’t want to put new money in, but we want relief on some of our sub fees for these RSNs,” and that feels to me like that would be the simplest path forward.

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14.
You suggested a retrans fee reduction would be the most risk-averse path forward for the MVPDs. What magnitude of recourse could they seek? What moving pieces may they consider if it’s a 30-40% cut on a hypothetical USD 6 per month retrans fee for any given RSN? Is it the subsequent pay-TV churn acceleration that would come with making programming non-exclusive? What could play out on the recourse that has to be given?

SP: I don’t know. We haven’t done any modelling on that. I would imagine it’s not going to be much more than 10% or 15%. If you look at just what the channel hikes have been recently, they range between 5% and 15%. I think Yes Network just announced that they’re going to go up 12% in monthly sub costs. I think it’s sub15% in terms of relief.

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15.
Carriage has been a an issue for Sinclair. I’m sure it’s trying to negotiate for maximum retrans fees, but this has led to VMVPD [virtual MVPD] drops from players including Dish. How do you assess re-carriage prospects? Is there anything Sinclair may consider to bring stakeholders back to the table and find a happy middle ground if it wants to maximise reach?

SP: I know I just said the simplest way forward to resolve any dispute between Sinclair and affiliates or cable providers on the D2C front is financial relief. Flip it on its head, however, and what’s the best way to get the most reach? Bring your partners on board. That way, you lock in for at least a short- to mid-term type of arrangement where you can reach full distribution because you are resolving one problem, the hurdle of being able to go D2C and getting approval for that, by solving their problem, which is cost. If you do that and you go across the VMVPD space and the MVPD space and you rewrite some of those most favoured nations clauses and you rewrite some of those carriage fee costs, then everybody is collectively on board with trying to make this be successful. It’s easier said than done, but I think that is Sinclair’s path forward. They just expanded their loan facility, they talk about a lot of ways to solve the immediate, but from a long-term perspective, because the industry is under so much pressure in the way that consumption is changing and where people are spending their time and their money, you need to bring all the players to the table. The leagues have to have a role in this, a large role, that then trickles down to the teams. The MVPDs and VMVPDs have to be on board and incentivised to give you best tiering and reach. Sinclair needs to have the ability to ride the linear wave for as long as it can, and it’s going to be around for a lot longer than a lot of these analysts talk about, and that digital streaming D2C play.

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16.
How detrimental would it be to Sinclair if distributors moved it out of the base package, especially given this would probably trigger MFN [most-favoured nation] clauses? Do you think the distributors are interested in this? How likely is it given how damaging it would be to Sinclair’s linear business?

SP: It would be crushing for Sinclair, absolutely crushing. We know that as it stands today, it would be preferred by many cable distributors to tier them. They’ve talked about it publicly. This is no secret that you’ve got 30%, some markets 40%, but usually around 30% of your pay-TV respondents to a recent survey saying, “We actually do watch the RSNs.” You have 30% of your local market sub base. 70% saying, “I don’t watch it.” That sort of data.

Pausing there for a second, I can’t help but recall just a month ago when I think it was Comcast that publicly came out with all the data around how many people actually watch MSG, watch a Knicks game and watch MSGNet, and it was scary if you’re Jim Dolan. For that reason, and for those reasons, if you’re an MVPD, you want to drop them to a tier because you want to be able to offer your cable bundle for USD 20- 30 less a month because that’s what the RSNs usually make up, around there, depending on the market, sometimes a little bit more, sometimes a little bit less. That is definitely the direction and the threat that MVPDs have been making about tiering them, and Sinclair knows that if they get tiered, that’s going to be a massive blow to their business.

Look at some of the other sports channels. Look what’s happened to BeIn, for example. BeIn used to be in 25 million homes not too long ago, now they float somewhere between 10 million and 12 million homes. They’ve lost rights because of it. They just lost LaLiga to ESPN, they lost Serie A to CBS and they didn’t lose because they couldn’t pay for the rights, they lost because these leagues said, “There’s no reach there.” You’re getting hammered on a revenue side from being tiered and then, eventually, that catches up to you from the property side that says, “Shoot, you’ve lost 50% of your reach? I’m out of here.”

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17.
How quickly could the 49.4 million or so linear subscribers to Diamond fall 70-80% in a move to à la carte? The cancellations wouldn’t be immediate.

SP: We look at the average decline when there’s massive carriage drop-off. It usually happens somewhere between four and six years.

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18.
The New York Post reported that MLB may consider a go-it-alone strategy where it offers locally streamed games through MLB.tv. It talks about a USD 10-20 per month price point depending on geography. How possible is this given a lot of the rights are already under contractual arrangements? How disruptive would this be to what Sinclair is trying to accomplish?

SP: You can’t have two streaming products that offer the same content and expect them to generate a ton of revenue. I do think it has to be one or the other, and it depends on how you carve up the rights. If MLB TV continues to be an out-of-market product, while Sinclair can offer D2C, but it’s only local, that can exist, it somewhat exists today, without the D2C component, but the authenticated streaming component for Sinclair, but you cannot have MLB offering local in-market D2C, out-of-market D2C and Sinclair offering the same package, that won’t work.

TB: Can the MLB launch this platform given the contractual arrangements it has?

SP: I don’t see why they couldn’t because they’d be the ones granting exclusivity in the terms, so they could go back to Sinclair and say, “We’ll offer you these remaining 10 MLB teams that you don’t have as non-exclusive,” but if I’m Sinclair, that’s a non-starter for me.

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19.
How likely is it that Diamond will launch a D2C product in April 2022? Would it be worth delaying the launch if only four MLB teams are signed up, isolating the potential bankruptcy complications?

SP: : I think it’s more realistic that you’re going to see a resolution between Major League Baseball, the NBA and the NHL and Sinclair before April. That will then facilitate an update from Sinclair and that may result in a communicated delay of the product, but in a good way. What I mean in a good way is some sort of communication that, “We now do have the lion’s share of rights,” or, “Now we’re going to have eight teams,” or there’s going to a be a new product of which Sinclair is going to be an investor in or vice versa. I think that’s the most likely outcome. I think if Sinclair goes to market with four Major League Baseball teams in April and doesn’t change its roll-out strategy in terms of how it’s communicating, how it’s pricing, it’s going to be absolutely detrimental to the future growth of that product.

There’s an air of arrogance that Chris Ripley has taken on of late, talking about, “We have critical mass,” and talking about the rights that they have that they don’t, and it’s misleading. I think general consumers, forget Wall Street because they can read that, but consumers are going to look at this product and say, “USD 23 a month for four teams that I live 4,000 miles away from? It’s not worth it.” I think it goes in one of two directions. One, they release it as discussed, but they change the communication, they talk about a timeline of more teams coming on or what they think it’s going to be, and that coincides with a very different price point than USD 20 or USD 23 a month.

The second option is that there is a resolution reached, albeit it could be in the short term or a long-term solution, but a resolution is reached between Major League Baseball, the NBA and the NHL and Sinclair, and to go with that, also the MVPDs. I don’t see a third option. The third option then is continue as is, they release the product in an arrogant fashion as it is told to us today how it would be, and as I mentioned, if it comes out that way, rolls out that way as it’s being described today, I think it falls flat, and I think Sinclair continues to find itself spiralling down and not clawing out of the hole that it finds itself in.

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20.
Is there a counterargument on the MFN dynamic that Sinclair breaking these clauses with the MVPDs would bring the VMVPDs and Dish back to the table in a reverse way? Could a lower price point but wider distribution expand the pie for Sinclair?

SP: Really good question. They can’t do anything unilateral. Breaking MFNs, they can’t just break the MFNs, you can’t do that. To that point, actually, let me stay on that for a second, I wouldn’t be surprised if you heard from Chris Ripley that that’s what they’re doing, because he’s pretty brash in his approach and he says they can do things they can’t. I just want to put a disclaimer on that, that they might say they can do that, but they can’t do that. To your point though, if they’re able to renegotiate the MFNs and reduce the price, I do think that does bring in YouTube TV and Hulu Live again, Sling, Dish, etc.

You can talk to fans in New Orleans right now, they were just in an uproar a couple of weeks ago about how hard it is to get Pelicans games over the top, and YouTube TV and Hulu Live have decent penetration in that market and that’s not the only market, many markets are similar to that. The only read, if you were to talk to the heads of YouTube TV or Hulu Live, they’ll tell you, “We absolutely want the RSNs on board, we just don’t want them at the price that they’re asking.” It’s not a matter of is the content worth it for the VMVPDs to come on board, it’s not a matter of if the VMVPDs think that the content has value, it’s just it’s incongruent for them at where they are in the arc of their business to be paying the same types of carriage fees that Charter pays or Verizon or Comcast, etc.

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21.
What metrics could a Diamond D2C product achieve if it had three leagues with the teams’ rights allinclusive? Could it have 4.4 million subscribers and USD 2bn in revenue, so a USD 38 ARPU in a five-year time frame?

SP: I think those are aggressive. I think that that’s a mature, fully developed product with all the content of all the RSNs we talked about, of all the 42 teams that we talked about. I think you probably cut that in half by year three, maybe even by year five. I think that number is probably a more mature product around year seven.

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22.
What do you think about a USD 23 price point with all teams inclusive given the other streaming on demand products available? Could this price point need to decrease given going to market is of the utmost importance?

SP: I do think USD 23 is high. I think their price point on a mature product is going to be somewhere between USD 15 and USD 20, which was what was originally discussed and, again, that’s a mature price point. I think that you need to come into the market with a product that’s priced around USD 5 or USD 6 a month with the assumption that you’ve got 20-30% of the total content that you think you’re going to have. Then, as we’ve seen, and we will continue to see, price hikes go up as you acquire, costs go up because you acquire more content, and content acquisition costs go up. As you bring more team content on board, you raise the price. Again, on a fully mature product, I think you’re in the USD 15-20 range a month, which I think is definitely possible. I think the other thing that’s unique to a D2C product from Sinclair, which is where you can’t necessarily look at ARPU the same way that you look at Netflix or Apple TV, is the other revenue drivers and the ways you can be creative with incremental revenue. Sports betting, we’ve spent the last 50 or so minutes talking, we haven’t covered the impact of sports betting.

I think that there’s a massive opportunity for e-commerce for sports betting that will add to the average revenue per user. They’re going to take a percentage of every bet made on that D2C. They’re going to be able to, they should be able to sell tickets, sell merchandise, and I don’t know if they’re necessarily going to take their Apple Store type of cut, but they’re going to take a cut of that. When you’re looking at ARPU straight line like you would a Netflix or an ESPN+, even, I think ESPN+’s ARPU is around USD 4 right now, USD 4.20, but that’s a straight Netflix comparison, that’s a sub-based, revenuebased type of comparison.

The product has to be more than just a direct-to-consumer streaming platform, and betting and e-commerce are going to be the other two legs, and advertising. You’ve got four legs to a stool on a mature product that will help to justify some of those revenue numbers that we just talked about.

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23.
Is there much room for teams to replicate the Cubs, Yankees, Dodgers, Orioles and Red Sox and stand up their own networks profitably? If so, is there a popularity factor that would disallow the model working for anyone else? Could outsourcing broadcasting to a player such as Sinclair be unnecessary? Can teams just seek to regionalise?

SP: : I do think that there are select teams that can do this on their own, that can be profitable on their own, at least over the next seven years. I say that because the pay-TV universe, the Yes Network is just such a cash cow, and it is a very important channel to any pay-TV, cable subscriber. I don’t think it carries the same type of weight as the Cubs do. I think you have to look at it on a case-by-case basis. Over the next seven years, there’s still going to be a massive amount of cash coming into the pay-TV, cable universe. It’s going to be smaller, but it’s still going to be big.

As that decreases, but still throws off a ton of cash, you’re going to continue to see a rise in streaming, so you’re going to have to have a D2C offering from the Yes Network. I also think you’re going to see consolidation in that space. I think that that would be a very smart move. Whether that be the Yes Network buying MSGNet, MSG 1, MSG 2, whether that be the Yes Network buying SNY or merging with SNY or SNY buying MSGNet, I do think when you’re looking specifically at the DMA of New York, four regional sports networks, they don’t all survive seven years from now, something has got to change there, there has to be some consolidation. In the streaming space, like many other sectors, but especially in the streaming space, it is all about scale.

That’s why I worry for the Cubs, for example, that just the DMA is smaller and they’re not as nationally relevant as a Yankees. I think you will start to see a little bit of consolidation. You see it with what Ted Leonsis has done in Washington with the launch of Monumental Sports Network, I thought that was very clever. He takes a 30% stake in Comcast DC and they take a 30% stake in Monumental Sports Network. That’s another path forward that I think Sinclair should be looking at, where they’re partnering up with teams on D2C plans and sharing in cost and sharing in revenues and sharing in content and sharing in production and also, very importantly, sharing in data so that they can be targeted to offer not just content, but services and products to fans and consumers in the region. I think there’s some precedent that you’ve seen in the consolidation and partnership space for these independents.

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24.
What is your percentage probability of a bankruptcy occurring at Diamond Sports? What liquidity profile is needed to avoid this over the next three years? Is it possible for Sinclair to inject more capital into Diamond or to rally interest from PE or strategics such as Amazon or ESPN to get to a point where bankruptcy is unnecessary?

SP: I can’t put a percentage or a likelihood on it because I’m not a fortune teller and, as we said at the top, I’m not a bankruptcy expert, but just as a common-sense numbers person, someone who’s consulted a lot of properties in the media space, it’s not good. It’s certainly not good to have the debt load they have, it’s never a great sign when you have your debt rating go down, consistently be downgraded and that you have to expand your funding facility. That said, I do know that Sinclair has stepped up recently to cover some of Diamond’s payments, recently, I think they reported paying around USD 184.4m to Diamond lenders, and that they are up to date on all their rights fee payments to teams.

The fact that Sinclair, the mothership, is stepping in to help support Diamond and its debt is hopeful, but it can’t go on forever. I think that we’re going to see some sort of traction be made in one direction or another before April, before opening day, and then if that’s not something that offers some long-term relief, mid-term safety for all parties involved, then certainly by the end of 2022, because you just can’t keep carrying on that debt with the revenues that they’re generating much past the end of next year.

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25.
Do you have any closing remarks on Sinclair and Diamond Sports?

SP: I think this has been a great conversation. It’s challenging, it’s fascinating, it touches on a lot of bigger themes across media in general, and not just in the US, but what we’re seeing in Europe and Asia as well. I’d be happy to chat with you and your clients and colleagues again, because we know in one week or in one
month, things are going to change again. I appreciate the opportunity. Thank you.

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