Sinclair's ($SBGI) surprisingly optimistic future for its Regional Sports Networks (RSNs)
Guideposts for Sinclair's future for its RSNs mirror those guiding the NBA and Microsoft partnership announced last month
Sinclair Broadcast Group has a surprisingly optimistic future for its RSNs despite COVID. Back in March, I wrote about how the sports broadcast market and regional sports networks were impacted by COVID:
At this moment, we live in a sports telecast world with zero supply of live sports broadcasts, unmet demand for live broadcasts, and niche demand for sports content other than live sports.
However, we do not live in a world with zero revenues in sports broadcasting. Long-term broadcast rights deals provide annual revenues to leagues and teams, and RSNs still are receiving affiliate fees from MVPD and vMVPD bundles. To the extent ads are being sold, those ads run against the content being broadcast to capture of audiences (at this point old games and content for die-hard fans).
This zero audiences outcome is certainly a short-term version of the worst nightmare for sports leagues, teams, and their players/staff: a supply of broadcast sports events not meeting demand for that content at scale, and in turn those broadcasts being monetized at lower ad rates and lower rights packages than previously.
What we are witnessing in the market, today, is a real-time experiment: In an effectively zero audiences, zero revenues, post-cord-cutting, and digital consumption-mostly world, where will the audiences and revenues come from?
I missed that Sinclair Broadcast Group offered some answers to this question in its quarterly earnings call four weeks ago. The call presented a surprisingly optimistic future for its RSNs, even under COVID.
Sinclair's Optimistic Future For Regional Sports Networks
First, one unexpected benefit/externality of a zero audiences, zero revenues, post-cord-cutting, and digital consumption-mostly world is lower sales, general, and administrative expenses. That in turn generates higher operating income.CEO Christopher Ripley noted a loss in advertising revenue would be "offset in part by the absence of the costs associated with producing those games". CFO Lucy A. Rutishauser added, "EBITDA exceeded our guidance as lower-than-forecasted expenses more than offset the lower revenues." So, there was no implication or suggestion of this being a longer term trend - rather, it revealed how RSNs are surviving.
Second, for RSNs the revenue side of the equation is thriving despite the postponement, continued rights fees, and resulting loss of ad revenues: "we continue to make payments to the teams and our distribution partners continue to pay us." Sports rights and the distribution agreements represent 75% of Sinclair's sports media expenses and 90% of the Sports segment's revenues, and Sinclair's acquisition of 21 RSNs last September resulted in higher net distribution revenue [NOTE: sports rights payments are typically highest in the first and fourth quarters, and were $221 million higher than the sports rights amortization for the quarter].
Third, a focus on sports betting implies digital will drive both audiences and revenues. But Ripley's statement on that point offers a lot of uncertainty about audience and advertiser demand for digital. It is a weird quote so I am including it here:
Despite COVID-19, we are still hard at work on initiatives to ensure our success in the years ahead. Top of mind are the digital reboot and rebranding of our RSNs. As part of these efforts, we are developing a more robust and dynamic app that will enhance the user experience, allowing the viewers to interact with live sports in ways that have not been previously available. This eventually is expected to include legalized sports betting capabilities. We've been talks with numerous companies about how we can best partner to deliver consumers a compelling betting experience within the viewing app. We expect to announce more on this front later in the year.
I found this statement odd because there are no guarantees audiences will want the enhanced user experience Sinclair is building:
no guarantee that Sinclair can built a compelling user experience,
no guarantee advertisers will have their needs met this new user experience; and
no guarantee legalized sports betting companies believe Sinclair can deliver consumers a compelling betting experience
Put simply, it is a statement filled with a lot of sales-y"what ifs". That said, these "what ifs" are the guideposts for the business future of RSNs, and that is what makes the statement important.
Mirroring the NBA and Microsoft
If we look past the salesmanship what we get is a sense of how regional sports networks will evolve in the next couple of years:
sports betting component
some form of interactivity
"enhanced" user experiences
These bullets mirror what I wrote about the NBA's recent partnership announcement with Microsoft, as there are three similar problems the partnership aims to solve for:
lag (or time delay) in streaming, particularly for sports betting with “a unique paid-TV feed that’s geared toward prop bets, gambling”;
"aggregate audience", or audiences streaming via different portals and media, some of which may be interactive; and,
streaming experiences that can be personalized and customized to the user
So, from Sinclair and the NBA, we are getting guideposts for where the future of RSNs and sports broadcasting is headed.
The notable missing guidepost in all this is advertising, which declined 45% YoY, and will continue to decrease until sports events return. I think advertising is a red flag for Sinclair given growing advertiser demand for programmatic ad targeting to Connected TVs, which inevitably will be an important part of the future sports consumer experience. Why? Because Roku, Amazon and even Pluto TV are way ahead of the Connected TV marketplace in terms of serving targeted campaigns, offering granularity to the local level that will compete with anything Sinclair builds.
Which implies Sinclair's road ahead for its RSNs risks the very outcome that they walked us through in this earnings call: distributing sports content without any advertising revenues, but also without the production costs.
And, that is the very outcome for which the NBA and Microsoft have their eye on winning.