When we last left off on Tuesday morning, Diamond Sports Group was headed for bankruptcy, and by the end of that day it had arrived there, filing for Chapter 11 in the midst of the NBA and NHL seasons and with MLB just about to start up. What, exactly, does bankruptcy mean in this case? To quote ESPN:
Diamond, which initially began its grace period after skipping a $140 million interest-only payment to creditors in the middle of February, announced Tuesday it will now separate its business from Sinclair and become a standalone company. During bankruptcy proceedings, Diamond’s debt will turn into equity for its secured creditors.
Translated into English, that means that Diamond — better known as Bally Sports thanks to a naming-rights deal involving a casino company — is losing so much money on the business of paying huge rights fees to sports teams and trying to make it back selling subscriptions to cable customers that its corporate parent, Sinclair Broadcast Group, is turning it into its own company, where it can lose money in peace far, far away from Sinclair’s books. Anyone owed money by Diamond — say, some undetermined number of the 42 baseball, basketball, and hockey teams that it may soon stop paying rights fees to — will instead get stock in this money-losing company. This may sound like a scam, but it’s in fact perfectly acceptable bankruptcy procedure, or maybe both.
Anyway, once Diamond starts missing this year’s payments to any sports team partners, it’ll be in breach of contract, at which point those teams can reclaim their TV rights and do whatever they want with them. The problem, of course, is that most teams won’t know what to do with them. The obvious response would be to sell them to another cable sports network, but cable TV is in freefall, and at least one other sports network, AT&T SportsNet, has already announced it wants out. Having a bunch of sporting events to sell TV rights to is only valuable if somebody wants to buy them, and right now there aren’t a lot of buyers.
Diamond’s proposed solution, as described by ESPN, is to have MLB hand over streaming rights to Diamond’s 14 baseball partners, possibly making the company, and not incidentally MLB’s stock in it, solvent. MLB, unsurprisingly, has seemed more interested in keeping for itself any TV rights that are dumped back in its lap, taking the games for any teams that Diamond defaults on — rumor is the Cincinnati Reds, Arizona Diamondbacks, Cleveland Guardians, and San Diego Padres would be first to go — and putting them on MLB.tv while charging viewers for them eventually somehow:
MLB’s plan is to take over the local TV broadcasts of those teams, as well as streaming them for free in those local markets as they negotiate lower deals with cable companies. It’s not yet clear if fans in blacked-out markets would be able to access those streams in the short-term. If deals are reached, the league plans to offer over-the-top service for around $15 per month. As Kosman notes, that’s lower than some other streaming deals, with the Red Sox charging $29.99 per month.
“Over-the-top” is industry jargon for streaming, so we have: MLB will put the games on MLB.tv for free in local markets, though maybe they won’t be available to watch in those local markets since they’ll be blacked out, and then eventually if the league gets good deals with cable companies (?) it can offer them as paid streaming services (??). I’ve read this three times, as well as the New York Post article it’s based on, and it still doesn’t make any more sense than that, but this is where we are.
If you’re a sports fan, rest assured that you’ll almost certainly still be able to watch games somewhere, or at least as able as you were under the old regional sports net system, which is to say maybe not that certainly. If you’re only reading this to see what all this means for the possibility that it will shift MLB’s finances to where teams may be more likely to move to smaller markets, read on:
As I wrote last month, folding half the league’s cable broadcasts into MLB.tv could shift baseball to an NFL-style model, where everybody gets the same cut of TV money and suddenly you can have a viable franchise in Green Bay. But that’s not the only way to divvy up the proceeds, and there’s been some discussion that MLB would prefer to have each home team on its own premium MLB.tv tier, so the Red Sox can keep charging $30 a month even if the Reds only charge $15. That would keep baseball’s revenue disparities between big-market and small-market teams in place — but would also mean it would continue to be a huge advantage for teams to play in big markets, meaning fewer NFL-style relocations to whatever two-bit burg coughs up for the shiniest stadium.
All such decisions, it appears, will be left to MLB’s new economic reform committee, which is supposed to figure out how to disburse the proceeds from any glorious blackout-free streaming future, not to mention little matters like what to do about owners like Steve Cohen who, by being more concerned about winning than making money, are threatening to ruin the whole making-money thing for everybody. In the end, it will probably mean about the same amount of cash coming out of baseball fans’ pockets and going into team owners’ pockets, but how much into which particular pockets could make an important difference.
Green Bay is frequently described as a small market, but Packers draw embiggened support from Milwaukee.
Glad you are back Neil!
Not glad this article gave me a headache…..
I have a big jar of Advil next to me if you want some.
Thanks but I’m good on that!
Hey, Steve Cohen has said his reckless but not reckless spending is just a short term fix and that he plans to be on board with reigning in payrolls any day now and if there’s one thing we know about Steve Cohen it’s that you can count on him to tell the truth all the time to everybody everywhere.
Ganis’ quote (if, in fact, it was a firm quote) from the Athletic article has me chuckling… something like “well, RSNs used to get $5 from every cable subscriber… now only 1/4 of the people who want the service are willing to pay for the sports RSN on it’s own… so they will have to pay $20…”
That’s a nice succinct example of one theory of economics… but I would suggest that what the broader market is telling the RSNs (and to lesser extent MLB and all it’s sports partners) is that it is no longer willing to pay the price asked. It isn’t a matter of bundled service customers just cutting the cord and RSNs losing their enforced subsidy from sports fans. Even sports fans are no longer comfortable with the money being charged.
At one time, you could splurge on your favourite superstation or dedicated sports channel and get virtually all of your favourite team’s games. In many markets, that is no longer the case and you have the market split between multiple channels or services. MLB itself is doing this with it’s Apple TV deal – meaning that a handful of times a year I cannot watch my local team no matter what because I don’t have access to their service. Nowhere is this clearer than with NBC’s continued fleecing of it’s streaming customers… how many special tiers do they have now? four? five?
You can only squeeze most customers so far. Many of these services (and this is true in hockey and other sports as well) have already squeezed baseball fans to the limit. Rogers is losing more than $100m a year on it’s Canadian NHL deal (some say closer to $200m)… that’s a 20% negative return on the $400m annual investment. Rights fees for most of MLB’s franchises are no different… if the Yankees were still selling their cable rights locally to third party broadcasters, I’m sure they would still be generating more revenue from their local contracts than most other teams generate from all sources. That’s the way it was in the 1980s… but not many of MLBs 30 franchises have that sort of drawing/earning power.
RSNs simply bid the price for these rights up far too high (especially with the bottom 15 franchises). There is no “answer” to this other than for rights fees to drop, and with it the end price to consumers.
When MLB is willing to offer me a “your team” package that gives me all the games for my ball club (home and road), with the possible exception of network games on Saturdays – are those still a thing? – for a reasonable price I would take it. They don’t currently do that and I don’t necessarily see any energy going toward making that happen.
Streaming a months worth of games for one team in my own living room on hardware and an internet connection I pay for myself should not cost me more than 1 cheap ticket to the ballpark. If it does the model is broken.
Would you rather have 50,000 customers streaming at $10/m or 8,000 paying $25/mo?
And once you’ve got the fans streaming their own team for $10/mo you might find they are more willing to pay for add-ons than they will be if you are sticking them with a higher price (and then taking some games away because dynamic pricing is fun!).
Think of it like the all you can eat buffet but for actual baseball rather than crap ballpark food… oh wait, isn’t that what all this is about?
Right, or put even more simply: Sports leagues have been taking advantage of cable companies’ desperation to hold onto sports telecasts, for fear that viewers will cut the cord otherwise, to charge way more than they could normally. Now that viewers are cutting the cord anyway, they can no longer get cable companies to treat sports as a loss leader. Will they be able to get individual fans to overpay in a way that will generate the same total revenue? I don’t pretend to know, b ut it’s going to be real interesting to find out.
Um…. It is not clear to me that Diamond/Bally can – at it’s sole discretion – convert the debt it owes to MLB or it’s member clubs to equity in a newly formed corporation.
From Manfred’s recent quotes, it sounds like this is not at all clear to him (and I assume MLB’s many lawyers…) either.
They could certainly offer to allow their creditors to take equity in a newly formed independent company, but their creditors are under no obligation to accept such an arrangement (or $0.20 on the dollar, for that matter). I guess the Bankruptcy court judge could decide this is reasonable and in ‘everyones’ best interest, but that seems unlikely to me. If you have 30 creditors (that hold the vast majority of the debt or other obligations you are carrying) and 14 of them are vehemently opposed to being forced to accept stock in a company that is likely insolvent rather than the money they are owed, well, that doesn’t seem like a harmonious settlement.
If Diamond can convince the holders of more than 50% of the debt then this might satisfy the court, but is that possible?
And if the 14 rights holders who ‘want their rights back’ hold more than 50% of the debt anyway, they could just impose debtor in possession rules/laws and own their own MegaRSN.
I find Diamond’s approach here a little confusing, frankly. Perhaps there are several more shoes to drop, but it seems to me they are asking the court to force their customers to pay for their mistakes. And since the BK process is designed to obtain the best value for the creditors (which I assume include both banks and MLB teams), I am struggling to understand why it would even consider such an outcome.
It really depends on to whom the majority of the outstanding debts are owed, I guess, but it seems weird.
If the courts allow them to spin off Diamond, then the worst-case scenario for Sinclair is that Diamond disintegrates entirely and nobody gets paid anything, right?
I still don’t understand how the kind of debt financing where you buy a company with money that the company itself borrowed is legal, but there are lots of things I don’t understand why they’re legal that are now considered integral to our economy, so.
Maybe…. I guess the concern for the sellers of the rights would be that they might somehow be forced to convert their future rights payments into equity in a business that Diamond has spun off that is likely to fail. It makes them investors rather than creditors and that isn’t necessarily a good place to be.
I pay a municipality to provide me with clean water.
Whether I do so as a business or an individual, if I am unable to pay for the water, can I simply convert
my water usage into a new age business – or a futures contract! – and issue the municipality shares in the company “valued” (by me, naturally) at the same amount I would pay for water over the next 30 years?
This is why I say the creditors must not be forced into being partners with Diamond. They need to be able to walk away if they don’t like the deal, and there’s no way that Diamond (or it’s designate) can hold rights they are no longer paying for as agreed.
My understanding of Chapter 11 (or 7) is limited. Nevertheless, the courts can certainly quash contracts they feel are obstacles to the survival of a company… but a quashed contract does not exist anymore… you can’t rinse the obligation but keep the benefit.
In this case it’s not Diamond sports vs an elected body or municipal government (as it was in Glendale v Coyotes), it’s Diamond v MLB. I have faith that MLBs lawyers are at least as on the ball as their rightsholder’s are.
My only direct experience with bankruptcy court was when the extremely ironically named Success magazine filed for Chapter 11 while owing me $2000. At the bankruptcy hearing I was told that if I wanted to pursue it, I could maybe be approved to get ten cents on the dollar, at which point I decided to let some other poor creditor get my two Benjamins.
So yeah, I doubt MLB would accept equity in place of actual cash. But if the alternative is ending up with neither, then maybe?
Similar to mine… sadly.
Only yours was way more ironic so you clearly win there.
I would think MLB sees getting their cash as promised first. And if not, then getting their rights back to resell to the next biggest idiot would be their only interest. At least that has some tangible value… shares in a doomed streaming company that even it’s owner doesn’t want anymore would be some way down the list.
I guess we need a bankruptcy lawyer to
comment?
Or do bankruptcy lawyers not like sports LOL.
I guess they get their fill of winners and losers in bankruptcy court…..