When A.J. Burnett—the Batman—retired after the 2015 season, it would have been reasonable to think that it was the last time that the Pittsburgh Pirates would be affected by a DC Comics entity. However, it turns out that Batgirl may be more closely tied to the team’s future than Burnett was to it’s past.
Before we can understand why, we need to have an origin story. Luckily, this one doesn’t involve slain parents in a theater alley.
A Brief History of Regional Sports Networks
Today, the economics of sports is largely centered on television. More fans are able to see their favorite teams, which leads to massive valuation increases for the teams and lucrative contracts for the players. It wasn’t always that way.
Teams were once weary of putting games on TV, lest they lose the revenue from ticket sales. However, it was Charles Dolan, founder of Home Box Office (HBO), who shifted the entire paradigm.
After selling HBO, Dolan founded and formed Cablevision in 1973, a cable network that he hoped would rival network TV. It was in 1976 that Cablevision Sports 3 hit the airwaves, a first of its kind in the RSN landscape. The network would change its name to SportsChannel in 1979.
The network aired games for several New York teams across different sports; however, it was its landmark deal with the New York Islanders of the National Hockey League (NHL) that would open the floodgates. Signed in 1978, the deal was so valuable that it accounted for more than half the team’s sale price when they hit the market in 1998—$100 million for the deal with SportsChannel and $95 for the team.
As success will do, the industry took notice and the rest is history.
For the longest time, the prosperity of sports on television was due to the exploitation of the cable bundle. Cable providers knew that some of their most prized possessions were live games—unscripted events that came with lots of built-in inventory—which allowed for the networks to charge providers high fees for the privilege of showing their content. Generally, ESPN charged upwards of $7 per month in fees, while other networks were lucky to get more than $1 per month. Of course, the providers passed that cost on to the consumer, but the genius of it was everyone was paying that price, whether they watched the games or not. Get your sports network on the basic cable tier and watch the money pour in.
That revenue was used to pay teams for their television rights. Again, sports provided automatic content that was sure to bring lots of eyes, and the investment was worth it. Viewers paid the provider, the provider paid the networks, the networks paid the teams, and all was well.
Until it wasn’t.
The Downfall of Cable
Much like housing in the mid-2000s, leagues and their deals with RSNs have been built on a bubble that was bound to burst eventually.
The irony is that the central tenet that Dolan built the entire enterprise around—the desire to “wean viewers from network TV” and “give the consumer more choice”—may ultimately be its downfall.
The proliferation of the internet has led to the rise of over-the-top, direct-to-consumer content that strives to provide an alternative to consumers, and streaming has steadily whittled away from the traditional cable landscape.
U.S. cable providers had 100.5 million subscribers at their zenith in 2013, while estimates are expected to fall around 70 million at the end of 2022. This trend certainly isn’t slowing down, and it’s what has culminated in the news of the day—Diamond Sports Group and AT&T SportsNet are missing payments and may be looking to get out of the sporting industry entirely.
What does that mean for the leagues and teams so indebted to the system, their golden goose?
Diamond Sports Group Headed for Bankruptcy
Within a United States economy where few companies seemingly own everything and superhero content drives all of entertainment, it’s not surprising that this whole ordeal started with one company controlling too much. And superheroes.
In March 2019, Disney finalized their acquisition of 21st Century Fox. While many Marvel fans were celebrating the possibility of the Fantastic Four and the X-Men joining the Marvel Cinematic Universe, they weren’t aware of some other pieces of the acquisition that needed to be worked out.
As part of the agreement, the Antitrust Division of the Department of Justice required Disney to divest its newly acquired interests in 22 RSN’s previously owned by 21st Century Fox. This was in an effort to “ensure that sports programming competition [was] preserved in the local markets where Disney and Fox compete[d] for cable and satellite distribution”.
Sinclair Broadcasting took the bold move of acquiring 21 of the 22 RSNs from Disney—all except the YES Network. Sinclair spun off a new subsidiary for the sports networks—Diamond Sports Group LLC—and took on $8.2 billion in debt as part of the $9.6 billion purchase. Diamond would broadcast these RSNs under the umbrella named Bally Sports.
Fast forward to today and Diamond has reportedly skipped a $140 million February interest payment on the debt, opening a 30-day grace period that likely ends up with the company filing Chapter 11 bankruptcy. This move would turn the debt into equity of Diamond, which would in turn be owned by their creditors—Prudential Financial, Fidelity, Hein Park Capital Management, and Mudrick Capital Management. In danger are RSNs that include the broadcasting rights for 14 Major League Baseball (MLB) teams: the Arizona Diamondbacks, Atlanta Braves, Cincinnati Reds, Cleveland Guardians, Detroit Tigers, Kansas City Royals, Los Angeles Angels, Miami Marlins, Milwaukee Brewers, Minnesota Twins, St. Louis Cardinals, San Diego Padres, Tampa Bay Rays, and Texas Rangers. Diamond also owns part of the Marquee and YES Networks, broadcasters of the Chicago Cubs and New York Yankees, respectively.
It seems to be the massive debt that Sinclair took on as part of the purchase that doomed them from the start, not operations before interest.
Ben Clemens of FanGraphs does an excellent job of explaining it, but in short, the company is overleveraged and had little to no hope of ever fulfilling its debt obligations. However, as Clemens explains, that doesn’t mean the RSNs are totally worthless.
As stated, Diamond’s creditors would take control of the networks, but they obviously aren’t in the television business and would likely look to sell off the networks after the Chapter 11 restructuring process. If the new owners have any hope of being able to turn around and sell the rights, they will need to ensure there are still games to be shown, which means making the payments due to teams and keeping their end of the bargain.
Daniel Kaplan of The Athletic makes a very similar argument to Clemens, stating that “unless the point of Diamond’s prospective bankruptcy is to unwind its business rather than reorganize, it will not want to lose its relationships with the teams, which are the core of the operation”.
It seems that Diamond—or whatever Diamond looks like after its restructuring—holds more power than some may think right now.
As Kaplan explains, while Diamond has the right to walk away from these deals, it likely has no intention of doing so. Teams do not have the option to terminate their deals as part of the bankruptcy process unless payments are missed, and the option for Diamond of renegotiating in bankruptcy some of their existing deals with teams seems to be a possibility. In this case, Diamond would be able to negotiate from a position with the current media landscape in mind, as opposed to the more optimistic environment that existed at the time of the original deals. Would the league be open to this, as opposed to starting over with new entities that realize just the same that these rights may not be as valuable as they once were?
Diamond is apparently open to working with teams and including them as equity partners, so that possibility definitely exists. According to a press release recently issued by the company, they certainly don’t sound ready to roll-over, stating that it “intends to use the 30-day grace period to continue progressing its ongoing discussions with creditors and other key stakeholders regarding potential strategic alternatives and deleveraging transactions to best position Diamond Sports Group for the future.”
Based on recent statements, it’s possible that MLB Commissioner Rob Manfred seems to prefer this outcome and their current relationship with Diamond:
“Obviously, we want all of our broadcast partners to be successful,” Manfred said. “We don’t want them to have financial difficulties, and we have been spending a lot of time and effort trying to work with them, figure out where they are. Obviously, our first choice would be that Diamond pay the clubs what they’re contractually obligated to pay them, but because I guess I’m a contingency planner by nature, we are prepared no matter what happens with respect to Diamond to make sure that games are available to fans in their local markets.”
“We think it will be both linear in the traditional cable bundle and digitally on our own platforms, but that remains to be seen. As I said, our first hope is that Diamond figures out a way to pay the clubs and broadcast the games like they’re contractually obligated to do.”
Whatever the company looks like after the bankruptcy and subsequent restructuring—one that involves MLB or not—it still will be one that is facing the same external threats to the model that Diamond and others have been facing. As already discussed, cable subscriptions have been down, and in turn, providers were dropping Bally Sports left and right, as Sinclair continued to charge the same, or higher, fees despite drops in viewership.
Given those circumstances, it’s not surprising that further broadcasting turmoil broke not long after the Diamond news, with another RSN holder experiencing a similar plight.
AT&T SportsNet Reportedly Ready to File Bankruptcy
In a situation that went from bad to worse in zero to sixty, even more teams now face an uncertain future with their television rights.
Less than a month after the Diamond news broke, it was reported by Sportico that AT&T SportsNet was in financial trouble, with “outlets in Denver, Houston, and Pittsburgh” submitting payments that “were not commensurate with contract rates”. Teams affected by these light payments were the Colorado Rockies, Houston Astros, and the Pittsburgh Pirates.
While their situation didn’t initially seem as dire as Diamond Sports’, part of the speculation was that “Warner Bros. Discovery are eager to get out of the RSN business”—AT&T SportsNet is owed by WBD—which certainly was enough to raise some red flags.
A follow up from the Pittsburgh Post-Gazette seemed to quell fears even more, as they reported that no payments or partial payments were missed because they weren’t due until the start of the season, so it was possible that the Pirates at least may not have been missing out on any expected revenue just yet.
Only a few days later, Pirates owner Bob Nutting spoke with Jason Mackey of the Pittsburgh Post-Gazette, and while he didn’t address the paper’s previous report on the status of the payment, he certainly didn’t sound like someone who thought all was well-and-good:
“It’s a significant and real risk,” Nutting said. “Have no idea where it’s going to end up. It’s actively being reviewed. It’s an issue not just for the Pirates but for every team. The RSN ecosystem is significantly challenged.”
Then, later Friday evening—the very same day—news broke that the initial speculation was true—WBD has full intent on dropping out of the RSN business over the next few weeks.
According to the report, MLB shouldn’t be totally blindsided by this, as WBD and AT&T SportsNet have been working closely with them to “come up with a plan that would enable the company to get out of the RSN business”. Additionally, letters were sent out Friday afternoon informing teams of WBDs’ plans, meaning Nutting may have already known the company’s fate before speaking with Mackey.
This was confirmed Saturday, as Nutting spoke to the situation with several local reporters, including Kevin Gorman of the Tribune-Review:
“It’s definitely a topic we’ve spent a lot of time on over the past 18 months,” Nutting said. “It’s not a surprise. Nothing changed last night. We all have a good, clear sense of what the overall RSN system is moving. Within that, it’s going to be hard. It’s a real challenge.”
This situation involving AT&T SportsNet seems even worse for the teams involved, as they are getting “until March 31 to reach an agreement to take their rights back”. Otherwise, “the channels eventually plan to move forward with Chapter 7 liquidation”.
In opposition to the Diamond Chapter 11 bankruptcy, which is filed with an eye towards resuming operations after restructuring, a Chapter 7 filing means a liquidation of assets in order to pay creditors—anyone they owe money. That means that the teams either come to an agreement to secure their rights or the RSNs are liquidated, where a “Chapter 7 Trustee is appointed to convert the debtor’s assets into cash for distribution among creditors”. These purchases are expected to come at “steep discounts”, so it would likely be prudent for the teams to come to agreements before that happens, lest another entity own their in-market rights at said steep discount.
Unfortunately for the teams, further reporting by The Wall Street Journal states that AT&T doesn’t plan on paying the teams any portion of their remaining deals, instead proposing to “transfer ownership of the networks and programming rights to the teams for no purchase price consideration beyond a release by the teams of any future claims against the networks”. This would leave at least three more teams without a network to broadcast their games and no long-term guaranteed television revenue.
“The business will not have sufficient cash to pay the upcoming rights fees,” the letter to teams warned, as WBD “will not fund our shortfalls”.
It turns out the initial reports were true, and partial payments may be the last these teams see of their “guaranteed” TV deals.
This cost-cutting maneuver is just one in a long line of many for WBD.
In a similar story to Disney and 21st Century Fox and the consolidation of massive companies, this may have all started when AT&T’s WarnerMedia merged with Discovery in April 2022.
Discovery’s CEO at the time of the merger, David Zaslav, has since enacted a massive cost-cutting undertaking after reportedly finding what he determined to be “a mess”.
“Canceling unprofitable ventures, combining duplicate teams across the organization, and cutting staff” have all been part of Zaslav’s plan in reducing costs for WBD. The company drew ire in the entertainment industry for dropping many titles from both its HBO Max and Discovery+ streaming services in an effort to save on residual payments and canning a nearly complete Batgirl movie to be able to take it as a tax write-off.
Combine that with the fact that AT&T has been looking to get out from under these RSNs as far back as 2019—interestingly enough, Sinclair could have been losing a few more RSNs, as they were the top bidder, but were offering half of what AT&T was hoping for—and is it a surprise that this is where Warner Bros. Discovery ended up with the RSN business?
No matter the reason, over half the league are now potentially experiencing extreme revenue uncertainties, with local TV deals being the main source of income for most every MLB franchise.
If this is the case, what does it mean for Major League Baseball, and what do they plan to do about it?
Moving Forward
While making statements that at least allude to hope for some kind of resolution with Diamond—his quotes didn’t include AT&T Sports because that news had yet to break—Rob Manfred has not shied away from talking about this as an opportunity for the league.
As already stated, Manfred said the league would have every intent of reclaiming local rights in the event Diamond doesn’t pay, and according to Manfred, would lead to the league broadcasting games through their existing platform, MLB.TV, at least in the short-term. Apparently, their hope would also include attempting to keep the cable model afloat by coming to agreements with providers:
“In the event that MLB stepped in, what we would do is we would produce the games,” Manfred said. “We would make use of our asset, the MLB Network, to do that. We would go directly to distributors — meaning Comcast, Charter, the big distributors — and make an agreement to have those games distributed on cable networks. My expectations is that as part of the negotiation, there would be a negotiation over price. And that probably gets back to the question about, you know, what the economics would look like, but we would also be seeking flexibility on the digital side.”
Being able to broadcast local rights directly to fans would finally solve a long-held hang-up for many of them—blackouts. With no RSN owning those in-market rights, the league would be able to show fans those games directly, which is something even the league has been wanting to address as of late, according to Manfred:
“The blackout issue has been a concern for a number of years…“I think our aggressiveness with respect to stepping in, in the event that Bally can’t broadcast, was driven in part by the fact that we saw it as an opportunity to fix this blackout problem.”
Unfortunately for the league, it wouldn’t be as profitable as the RSN model, which as covered already, was so successful because all in-market cable consumers were paying for the product, not just those watching the games. What kind of revenue can be made strictly from only those watching? Would fans be comfortable making up the difference for the lack of total subscribers in their subscription price? Any product marketed to a much smaller portion of a fanbase would have to be significantly more expensive to even make a dent in the difference once afforded by RSN deals.
If streamers such as Disney+ and Peacock—among others—that are hemorrhaging money are any indication, this gambit is certainly financially unstable, at least in the short-term. What about the long-term though?
Travis Sawchik of theScore seems to think there’s hope, as he advocates for a setup that Manfred seems to be laying the groundwork for. Sawchik points out the continued decline of cable, while simultaneously making the argument that tech giants like Amazon are going all-in on the National Football League (NFL) while being “lukewarm” on MLB.
That simply may leave MLB no choice.
Sawchik lists the league being able to better capitalize on revenue from advertising, being able to reach a younger audience, and being able to end blackouts as opportunities for the league to capitalize on with a direct-to-consumer streaming product.
Also, they certainly have the experience. They led the way in streaming in the early 2000s with MLB Advanced Media and BAMTech, which was subsequently sold to Disney and in turn was used to build the companies many streamers—Disney+, Hulu, ESPN+—today.
The question really is—would the league own enough rights to make it worthwhile?
In October 2021, Manfred stated explicitly that “Sinclair does not have enough digital rights from enough clubs in order to have a viable direct-to-consumer product.”
Sinclair attempted to prove him wrong, launching Bally Sports+ in September—if you have no idea this existed, I don’t blame you.
The network has talked about wanting to use the platform as a way to make-up some of the losses from their RSNs, but one would imagine that’s not the most realistic of goals.
As far as Manfred’s point goes, Diamond hasn’t added any RSNs since October 2021, so why would he think that the rights of 14 teams would be enough to launch their own service now?
He likely doesn’t, which may be why he speaks so freely about wanting the relationship with Diamond to survive; however, the rights to 14 teams would certainly be a good start, with AT&T SportNet’s three an even better one, pushing them over half the league, with minority shares in several others. The issue is, however, that the rest of the rights may not be so easy to come by, with some deals going into the 2040s. The league can’t very well hope for the other half of the rights to fall into their laps the same way.
While I’m sure in a perfect world it’s likely the league would much prefer a more centralized version of their broadcasting rights—something more akin to the NFL—with Manfred making as much clear:
“I hope we get to the point where on the digital side, when you go MLB.tv, you can buy whatever the heck you want. You can buy the out-of-market package. You can buy the local games, you can buy two sets of local games—whatever you want. I mean, that is, to me, the definition of what is going to be a valuable digital offering going forward.”
Unfortunately, it just may not be realistic right now. Sure, acquiring Diamonds’ and AT&T SportNet’s rights may be a good start and a short-term fix for the teams losing their broadcasting partners, but the league’s long-term broadcasting outlook is a much more interesting one to follow and watch play out.
What Does This All Mean for the Pirates
Even though an entire 1,000 foot view of the situation is certainly important in understanding the macro RSN ordeal, this is a site covering the Pittsburgh Pirates, and I’m sure that’s what most readers are concerned about and how it affects them.
Most immediately, it appears that fans should feel no fear as far as being able to watch games this upcoming season, according to Nutting, which obviously starts in just a few weeks:
“[W]e are 100% committed to make sure that every game is available to our fans in a convenient spot where they’re used to looking for it, with the crew they have produce the games. I don’t see any risk for the fans or the broadcast for 2023.”
While that solves the current issue of simply broadcasting the games, it speaks to nothing concerning what will be done to replace the lost revenue moving forward.
While initial reports indicated that the Pirates may not be in any kind of financial trouble at all, given Friday’s news, it’s clear now that they are on unstable ground from a revenue perspective, losing out on their guaranteed television deal. According to the Sports Business Journal’s report, it was around $60 million per year, and with payrolls hovering around that level for the last several years, it’s obvious that the team could experience some financial pain, at least in the short-term.
If it turns out the Pirates are left with their rights from WBD and nothing else to show from them, it’s more likely that such revenue uncertainty would affect the team’s spending even further, as they already claim to be significantly behind their competitors financially.
As Daniel R. Epstein lays out in his breakdown for Baseball Prospectus on the Sinclair situation, it could certainly lead to issues of cashflow and accompanying reactions—necessary or not—that Pirates’ fans know about all too well.
As many teams are wont to do, the first sign of financial trouble will likely lead to cutting expenditures—probably in the form of payroll—or passing those financial troubles on to fans.
Whether it be used as an excuse to raise ticket prices, or worse yet, as a way to manipulate taxpayers into more public funding—Epstein uses the Tampa Bay Rays and their mission for a new stadium—there’s a very good chance that fans don’t come out unscathed if this goes too far.
If it’s any consolation, at least the Pirates could be in the same boat with as many as 16 other teams, but that’s not likely to give fans much comfort.
Now that the RSN model is falling apart and causing such a storm, how does that end up getting weathered by these affected teams and the league? Sawchik did a great job of illustrating what a more direct-to-consumer, unbundled landscape would like for teams, and more importantly, fans as the consumer.
Until now, teams were able to sit back and let their guaranteed cable money flow in, without much care of the product they were fielding. We have certainly seen that kind of attitude from the Pirates in the past few years, but what if they now actually have to compete for their viewers?
With the worst-case scenario now a reality, where AT&T SportsNet falls apart and the Pirates’ and Pittsburgh Penguins’ in-market rights likely aren’t held by the same entity, they may now have to vie for viewers’ disposable income. Not only do the Pirates lose the revenue from Penguin fans that couldn’t care less about the Pirates, but now they must convince fans of both teams to pick and choose between whatever services the rights end up on.
As Ashutosh Gangwar, a general manager in advertising at The Trade Desk, explained to Sawchik, this is why competition can be so important to costumers:
“This is the great thing about media: competition is good. It usually works in the favor of the consumer. If your product is [crappy] and you are relying just on the distribution to cut you a check every month, you need to look at your product….it will provide the incentive for these guys to have better consumer experiences, a better connection to the consumer and understand what they want versus what they have produced.”
Of course, such concerns could be assuaged if the teams were able to start their own shared network, as has been discussed in the past. With the teams now having no network to call home, maybe those talks will now be revisited.
The outcome many fans would probably want to see is the more centralized vision that the league hopes for in the future that was already discussed. As stated, this is more of a model the NFL uses, where local rights aren’t existent and rights are sold on a national level, with funds being shared equally.
That’s obviously not the case right now in baseball, where local rights are king and some markets do better—or much better—than others. If MLB was able to package local and national rights together on one platform—MLB.TV—not only do they get rid of their pesky blackout problem, but they now have a more centralized revenue system that, in theory, could more equally distribute revenue and equally fund every team—if the Revenue Sharing system in place isn’t doing that already.
Of course, we’re talking about at least 17 teams that are currently on uncertain terms, none of which are in the biggest markets that may balk at the idea of doing away with lucrative local rights in lieu of more equally shared national ones. It’s at least a possibility that seems more viable now than it may have ever before.
No matter the case, this is a problem that likely wasn’t expected to come to bear for a while, but is now barreling down on the league, and fast. How they respond is paramount to their continued financial success, now and in the future.
As the entire paradigm shifted in the 1980’s with the rise of regional sports networks, the same appears certain with their fall.
Offseason Calendar Update
—No updates here as of this week
Pirates Payroll Updates
— No updates here as of this week
—For 2023, the Pirates payroll estimate stands at $73,202,372 for the Labor Relations Department, while it’s $89,619,039 for CBT purposes.
