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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: The Regional Sports Network (RSN) model as we know it is collapsing. It’s time for the clubs to take a page out of Marty McFly’s book and go “back to the future.”

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: Coach Prime and Colorado mania, and could promotion/relegation come to college football?

• 💪 Weekly Reminders that Sports are Awesome: Billie Jean King made history 50 years ago this week, and the Pittsburgh Penguins continue a great tradition

Hey team,

The Phoenix Suns and their new owner, Mat Ishbia, made waves this offseason by opting to broadcast their games for free on over-the-air broadcast channels (and a free streaming service) instead of through the traditional regional sports network (RSN) paid cable model that is used by all clubs in the NBA, NHL, and MLB.

This old but new approach was then taken a step further last week when the Suns announced that the team would ship a free antenna to any fans who signed up via the team’s website so they could watch the 70 local broadcast games for free using old-school “bunny ears.”

This is an ingenious marketing move, and it’s a major part of Ishbia and team’s strategy to “win the press conference” early in his tenure and rehabilitate the club’s image after the Robert Sarver years.

This approach is gaining some traction, as the Utah Jazz and Vegas Golden Knights have also recently followed suit and implemented a similar over-the-air plan for their games this upcoming season.

The move portrays the clubs as forgoing millions of guaranteed dollars from RSNs in favor of reaching more fans — the Suns are expected to triple the potential reach of their games to ~2.8 million fans this year.

And this is true, but it’s important to note that it was not done for purely altruistic reasons.

As cable continues its rapid decline, the once lucrative RSN model is crumbling with it. The Suns, and almost every other club in these three leagues, are facing major uncertainty in the coming years about how they will be able to find a viable media partner and replace the lost revenue.

Ultimately, outside of the top 5% of teams with major followings and/or media markets, the most viable long-term path looks something like the Suns model. That’s a tough but necessary pill to swallow for the clubs counting on that revenue, and it’s a rare win for the consumers in today’s value extraction-focused environment.

This week, we talk about the current state of the RSN market and the various considerations for the clubs as they consider their path forward.

Un-RSN-able

First and foremost, what’s an RSN?

For most of the 20th century, sports events were aired over free broadcast channels, and there were only a select few games on each week. What was on was what you got.

Cable and RSNs changed the distribution model completely.

Cable gave users more optionality, and regional sports networks were formed in the mid-90’s by Fox Sports to capitalize on this new found power of choice. Since then, RSNs have become the standard operating model for all clubs in three of the four major US professional leagues (MLB, NBA, and NHL — note the NFL only uses national broadcasts).

These RSN cable channels hold exclusive media rights to broadcast professional games within specific geographic regions, known as designated market areas (DMAs), and they broadcast almost all of the regional teams’ games. Fans in these DMAs can subscribe to the channel through their cable package and watch their local teams play.

Clubs in well-established markets and with historically strong fanbases (i.e., the New York Knicks/Rangers — MSG Network, Boston Red Sox — NESN, Chicago Cubs — Marquee Sports Network), either fully own or own a large portion of the RSN that broadcasts their games.

Most others partner with a media partner like Bally Sports Networks or NBC Sports. The business model looks much like the value chain laid out in the Disney/Charter dispute:

Rightsholder —> Network (RSN) —> Cable company —> Viewer

The RSNs pay the rightsholders (teams) an annual fee and then charge the cable companies a carriage fee and sell advertising against their content.

The business model has been pretty great for rightsholders, who were getting 8-9 figure annual payouts from the RSNs. For example, MLB clubs were averaging between $40-$140 million per year in annual rights fees, accounting for almost 25% of the clubs’ revenues.

But, like Disney/Charter, the drastic reduction in cable users has strained this business model to its breaking point.

The cord cutting has put downward pressure on advertising revenue and the carriage fees the RSNs can charge to be a part of the cable package, particularly for those in smaller media markets where demand for the in-market teams isn’t as high. This throws the business model out of whack and makes profitability nearly impossible.

These market concerns became reality earlier this year, when the RSN model suffered two major blows that set its future on shaky ground:

• Sinclair’s Diamond Sports Group (owner of Bally’s Sports Networks) filed for bankruptcy and is attempting to restructure all of its contracts with the 40+ teams it partners with. This is an attempt to get out from under the $8 billion debt pile taken on when Sinclair acquired the RSNs from Disney (via the Fox 21st Century merger) back in 2019.

• Warner Bros. Discovery is shutting down its three AT&T SportsNet channels in Pittsburgh, Denver, and Houston and handing the rights back to either leagues or teams. This is primarily due to WBD’s belief that there is no long-term future in the RSN model and they’d rather be done with it.

With Bally’s collapse in particular, many of the clubs have been thrown into a really tight spot. A number of the teams are still under contract, and while Bally’s will retain and pay the full amounts owed to some of its more profitable contracts, the less profitable ones and/or those that are up for renewal will either intentionally lapse or be negotiated down to much lower levels.

So, the millions of dollars that was essentially considered “mailbox money” just a few years ago is now gone or expected to be drastically reduced in the coming years.

What do the teams do?

Every Club for Itself

The RSN model is essentially splintering into tiers based upon size of market and fanbase.

Premium tier groups (i.e., YES, NESN, Monumental Sports Network) that are fully or partially owned by the clubs themselves and will continue to operate as is for the most part.

The remaining clubs are then faced with a dilemma. They are reliant on that RSN money, but they do not have the market and fanbase size to develop their own.

They can limp along with the current RSN contracts and take the “bird in the hand” despite knowing that bird is diseased and will die soon.

Or, they can return to a model from the olden days with the “reach over revenue” strategy. They will sacrifice upfront money by going with a free over-the-air channel but make some of it back in advertising dollars and ancillary revenue streams (i.e., merchandise, sponsorships) that come with attracting more fans and earning goodwill.

The question for what they do becomes more personal then:

• How wealthy is the owner?

• What are their revenue goals for the team?

• When is their contract with the current RSN partner up?

The three teams mentioned in the intro (Suns, Jazz, and Golden Knights) have opted for “reach over revenue,” but it’s important to note that all of them were on expiring contracts with their RSNs — Jazz and VGK were a part of the AT&T SportsNet “giveback” and the Suns won a prolonged court fight against Bally to get their rights back — and who their owners are.

Mat Ishbia (Suns)

• Estimated net worth: $6.8 billion

• Made his money as founder of United Wholesale Mortgage. Fun fact: he is mortal enemies with Cleveland Cavaliers owner (and Rocket Mortgage founder) Dan Gilbert because of their business competition.

Ryan Smith (Jazz)

• Estimated net worth: $1.6 billion

• Made his money through Qualtrics, a customer experience tech company.

Bill Foley (Golden Knights)

• Estimated net worth: $1.6 billion

• Made his money through Fidelity National Financial, a title insurance company for the real estate and mortgage industries.

The point being: these guys obviously want to run a good business, but they are not motivated by short-term revenues and profits. It’s not a coincidence that all of them became owners within the last decade, which is during the time that team valuations have truly skyrocketed and caught the attention of high net worth individuals.

These owners have plenty of money and can afford to turn the RSN model into a loss leader if it means they can slowly build up the overall brand, incremental revenue streams, and general fandom/affinity for their respective clubs.

Plus, the salary caps in the NBA and the NHL mean the player expenses are accounted for and keep most clubs, big or small, on a reasonably level playing field.

This approach does get a bit trickier if the owner inherited the team and/or the owner’s personal wealth is predominantly tied to the club. Opting for reach is a much tougher proposition if those upfront losses cannot be comfortably covered.

And finally, you’re in the toughest position if you’re a baseball team. You’re not only losing out on at least $40 million in revenue, but, due to the lack of salary cap in the MLB, it also sets you back that much further in putting together a competitive team against the major market clubs.

Granted, the Mets had the highest payroll ever this year and have been a dumpster fire, but there is a general rule of thumb that you need to have a certain payroll threshold to win and compete for championships.

Where Do We Go From Here?

As mentioned, the RSN model as we know it is not long for this world. Three solutions, albeit flawed, have come to the forefront:

1. Team-owned channels

Many of the clubs do not have the scale and are not liquid enough to stand up their own networks like a YES Network for the Yankees. But there is the potential that the teams in a particular city could band together to try to create something that they then take to market.

The issue with this approach is primarily the overhead, but also the competing interests. Which teams would get priority on which nights, how does the revenue share work, and what happens if there is a contract dispute? These are all questions that the teams would need to wrestle with, and it’s enough for me to mark it as unrealistic.

2. A league-wide streaming option

It would feel appropriate to have this type of service in place so that each region can tap into it and have a similar experience. But, this model is wholly reliant on the major clubs also opting in to it in order to drive interest. This ins unlikely but could work in the NBA and the NHL where there are not as many dominant RSNs co-owned by the clubs (outside of the MSG Network with the Knicks/Rangers and Monumental — Caps/Wizards), but it is going to be a much steeper climb in the MLB. The Yankees, Red Sox, and Mets all make over $100 million annually in their deals, for example, so it’s hard to see them forgoing that in the league’s best interest.

Yes, there are revenue share considerations — 48% of all MLB club revenue gets pooled and evenly distributed, so if the small clubs make less money, it’s technically impacting the big clubs’ top lines, too. But, I don’t believe that the shortfall there is enough to make them move off the owned model. Therefore, hard to see how this gets legs in the MLB because of the larger clubs’ self interest.

3. A streaming provider steps in

There may be a streaming provider (i.e., Apple, Amazon) that decides to create a local streaming option for people to gain access. In fact, Amazon has already done this for a small number of Yankees games and Seattle Sounders matches (pre-MLS/Apple deal).

But again, the same problem about getting full support remains, and the tech companies have proven to be stingy negotiators in the past (see: Apple and the Pac-2), so they could make a deal cost-prohibitive.

The realistic suggestion

None of the above options are great, and the RSN’s demise is coming whether they like it or not. So, the most viable long-term solution then for non-premium tier clubs, in my opinion, is to eventually join the Suns/Jazz/VGK, go “back to the future,” and partner with one of these over-the-air broadcast channels. It guarantees reach, provides good PR with the fanbase, and the clubs can generate some money via revenue sharing on ads and ancillary revenue streams. Plus, the kinks in the model will hopefully have been worked out by the first movers by then.

This will occur in a staggered fashion over the next several years as the clubs’ contracts come up, but one thing is certain: the RSN-model is on life support, and clubs are best suited to begin preparing now for an impending switch.

The silver lining: this is the first time in a long time we as the consumers will actually win.

Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: The Phoenix Suns, Utah Jazz, and Vegas Golden Knights are setting a new precedent by forgoing the guaranteed millions of dollars that comes from partnering with a regional sports network (RSN) and going “back to the future” and broadcasting games on free, over-the-air channels.

• Opener: RSNs have been around for almost 30 years and are the standard model for MLB, NBA, and NHL teams. The RSNs pay the club a significant rights fee and then charge cable companies a carriage fee and sell advertising against their content.

• Shot: The RSN model is collapsing due to the compression of the cable bundle, and many RSNs are not economically viable at this point. The largest provider, Bally’s, filed for bankruptcy earlier this year and has put a number of teams in limbo.

• Chaser: Some, like the three clubs mentioned above, are going to this “reach over revenue” model with the free channels. This benefits the fans and increases the clubs’ reach in their local markets, but it’s also one of the only viable options out there at this point for non-premium tier clubs in major markets. There are possible alternative solutions out there, but each has critical flaws. The over-the-air solution creates a revenue shortfall in the short term but has the least friction for actually being implemented and could lead to success down the road.

“Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. I have a lot of questions about how long this run can be sustained, but right now there is no hotter place in the sports world than Boulder, Colorado.

2. Chances are near zero that this happens, but a fun thought exercise nonetheless

Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. 50 years ago, Billie Jean King changed the trajectory of women’s sports for forever

2. This is an awesome tradition by the Pittsburgh Penguins. What a treat for fans when Sidney Crosby shows up to deliver your season tickets.

Thanks for reading! Let me know what feedback you have.

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Until next time, sports fans!

-Alex