The rocky start to the Major League Baseball season is raising questions about the business model of the largest owner of US regional sports networks, Sinclair Broadcast Group, at a time when the coronavirus pandemic has scrambled television scheduling.
The drastic reduction in the length of the baseball season, coupled with the rescheduling of games due to coronavirus outbreaks among two teams, has prompted questions from Wall Street about the financial impact on Sinclair, according to chief executive Chris Ripley.
“There’s a lot of fear in the marketplace that we are going to have to pay out more to the distributors than we were going to get back from the teams,” he said.
The length of the MLB season was slashed from 162 games to just 60 this year due to the pandemic, of which more than 20 have already been postponed due to Covid-19 outbreaks among teams.
That means less product for media companies such as Sinclair, which bought 21 regional sports networks (RSNs) from Walt Disney last year for $10.6bn to establish itself as a regional television empire.
The business model for RSNs is effectively one of a middleman: they buy media rights from local sports teams to produce their games, and in turn sell those games to programming distributors.
No matter how many baseball games are played this year, Mr Ripley said he anticipated earning more in lost media rights from teams than Sinclair expected to pay to distributors for lost games.
Contracts between the teams, the RSNs and the distributors are private and variable, making exact financial impact difficult to assess.
One person with direct knowledge of RSN contracts estimated that networks could expect to incur a hit of between $250,000 and $2m to earnings before interest, tax, depreciation and amortisation for each game under contractual minimums not played this year.
Mr Ripley declined to comment on assessments of financial impact, but said Sinclair’s contracts require its RSNs to produce between 145 and 155 games a year.
As of Saturday, all but three of the postponed MLB games have been either made up or rescheduled.
Managing RSNs means weighing several risks, including the potential for labour stoppages, as well as the chance that distributors — the primary source of revenue for the networks — might decline to renew their contracts.
The latter was the case for Sinclair earlier this year, after Dish Network Corp halted its renegotiation conversations due to the onset of the pandemic, according to Mr Ripley. He anticipates those conversations may resume for the 2021 baseball season.
The lapse of the Dish contract prompted credit analysts at Moody’s to downgrade in May their rating of Diamond Sports Group, Sinclair’s vehicle for its RSN properties.
Shares of Sinclair are down nearly 40 per cent this year through close of business on Friday.
Mr Ripley said Sinclair has other strengths. Nearly 85 per cent of subscribers to its RSNs are locked into contracts for the next two years. The company’s portfolio includes not only contracts with baseball teams but National Basketball Association and National Hockey League teams, both of which have resumed play in controlled “bubble” environments and have not had coronavirus outbreaks in their first weeks of competition.
Beyond its sports holdings, Sinclair operates a vast network of local news stations, expected to be beneficiaries of record advertising spending in the coming months around the looming US elections.
Mr Ripley said that while the vast majority of that ad spending will go to Sinclair’s local news stations, the company has brought its RSN network “into the flow” of the market for political ad dollars.
“Part of our thesis when we bought RSNs is we could improve their ad yield, and one of the specific [areas] was in political advertising”, he said, adding that political ads currently make up “a very small percentage” of revenues for the sports networks.
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