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Good Thursday Morning. It is great to be to back with you following the wedding hiatus. Everything went smoothly, and I am honored to now be Mr. and Mrs. SBP with my lovely bride. I truly have never felt such pure elation and love from our community. Thanks to those who sent warm wishes!

With that out of the way, let’s get into it. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: MLB has a major challenge on its hands in the wake of Diamond Sports Group’s decision to not renew 11 of its clubs’ local media contracts. We look at why it matters and how the league can turn to a somewhat familiar face — a bundle — to help make the most of a tough situation.

• 🍸️ 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”: Women’s basketball flexing its muscles

• 💪 Weekly Reminders that Sports are Awesome: A fitting tribute to an NHL player gone too soon.spor

Hey team,

Major League Baseball is in the midst of a historic resurgence.

Year two of new rule changes to make the game faster and more exciting, plus (finally) a greater emphasis on marketing its stars, have led the league to draw its highest attendance in seven years (71.3 million) and the first time it has posted attendance growth in back-to-back years since 2011-12. Plus, fan sentiment is rising and there is a lot of positive momentum around the game.

This feel good story has continued in the playoffs, as the league has averaged 3.33 million viewers (+18% YoY) through the division series, and Sunday’s NLCS Game 1 between the Dodgers and Mets averaged 8.26 million viewers across FOX platforms.

Amidst the positive news, though, are major questions next year about a key revenue driver for MLB clubs — local media rights revenue.

Diamond Sports Group, the embattled owner of the Bally Sports-branded (soon to be FanDuel) regional sports networks, has informed MLB that part of its plan to exit Chapter 11 bankruptcy (subject to court approval in mid-November) is that it will renew its existing MLB contracts with only one club — the Atlanta Braves — and get out of the contracts with the other 11 teams that it had partnerships with.

Those clubs are:

• Cincinnati Reds

• Cleveland Guardians

• Detroit Tigers

• Kansas City Royals

• Los Angeles Angels

• Miami Marlins

• Milwaukee Brewers

• Minnesota Twins

• St. Louis Cardinals

• Tampa Bay Rays

• Texas Rangers

This plan leaves the clubs scrambling to develop solutions ahead of the fast-approaching 2025 season, and one of their largest revenue sources — 23% of the $10.9 billion overall revenue in 2023, per Sportico — is expected to be significantly reduced regardless of what path they choose.

In addition to the acute headache for the clubs, it creates a much broader challenge for MLB over the long run. The legacy RSN model is in bad shape, and it could affect even more clubs in the future.

In a league with no true salary cap and a growing gap between the have’s and have not’s, how do you prevent these impacted clubs from falling behind the big market clubs that have lucrative RSN contracts and/or have wealthier owners that can still pay to compete even further.

There is not a silver bullet solution here that will make these clubs financially whole in this category given how inflated the legacy RSN model was, but I believe there is a next best thing — returning to a bundle.

The difference? It’s likely going to come from a streamer — ESPN+ or Amazon Prime — instead of the traditional cable package.

In today’s SBP, we’re talking all things MLB media. You’ll learn:

• The possible solutions for the clubs without a RSN

• The economics behind local media (and potential opportunity amidst the chaos? 🤔)

• Why a streaming bundle makes the most sense for these teams and MLB in the long run

Check out my primer on regional sports networks and local media if you need a refresher as well!

So what?

Here’s why this matters so much and, in my opinion, it is an existential issue for MLB.

First, MLB clubs have a larger reliance on local revenues than other leagues, which creates wide disparities between the well-established, major market clubs and the smaller ones.

Lower-compensated clubs like the Guardians ($48 million annual legacy RSN deal) and Brewers ($33 million) have had much more ground to make up than a team like the Angels, which was getting over $100 million annually. And that does not even cover the major clubs like the Yankees, Dodgers, Red Sox, and Cubs that own their RSN and drive significant revenue from it.

Second, while the league has the luxury tax and a few other deterrents from overspending, MLB is the only professional league that does not have a true salary cap. This can lead to large divides in general success. The highest salary cap teams don’t always win, but there have been just three clubs — the Royals (2015), the Marlins (2003), and the Diamondbacks (2001) — ranked outside of the top half of the league in the revenue chart above that have won a World Series in the last two decades.

Plus, operating a professional sports franchise that plays from March to September is also not cheap.

So, the money to both pay players and keep the lights on has to come from somewhere.

In some instances, the clubs revenues can cover everything and the team generates an operating income surplus. In other situations (i.e., the Mets last year), there is a significant loss that has to be covered.

Accounting losses are different than cash losses, but there is still the need to pay expenses from cash reserves and/or the deep pocketed owner.

The challenge is that each club is in a different financial situation and has ownership groups of varying levels of wealth, which can lead to disparities in what they spend their money on and, therefore, how conservative they are with their payroll.

Now add in the fact that a significant portion of the revenue stream that drives nearly a quarter of the clubs’ annual turnover is at risk, and you can understand why many of them are antsy.

What now?

The 11 affected clubs have a few options for where they go from here. To be clear, none of these solutions are going to make them whole when compared to the legacy model given how inflated it was, but they have to do something.

Re-negotiate

DSG has left the door open for this. It would provide stability and allow teams to operate as is, but it could come at a significantly lowered rate — some insiders suggest it could be by as much as 40%. No bueno.

Plus, it’s not a guarantee that the bankruptcy judge approves DSG’s plan in November. If that scenario were to unfold, this option is either severely diminished or wiped away entirely.

Build something new

The clubs could try to stand up their own RSN by themselves (unlikely) or with other local in-market teams that are in a similar predicament. The White Sox are doing this with the new Chicago Sports Network, which a JV between them, the Bulls, and the Blackhawks.

The challenge here is getting alignment on ownership deal points, distribution deals with cable and streaming providers, and prioritization across different clubs. And that’s before you start figuring out how to operate the thing. Much harder road to hoe.

There could be some who look hard at the over-the-air broadcast/FAST channel combo that has begun to emerge in the NHL and NBA, and is the second best solution, in my opinion. The challenge is that it will require a longer ramp-up time to generate meaningful revenue and comes with risk on adoption.

Let the MLB handle it

When the trouble began to brew last year with DSG and a few clubs — the Diamondback, Rockies, and Padres — the MLB stepped in and handled the production/distribution for the clubs.

The league set up deals with local cable distributors and sold advertising against those games. Those teams’ games were also available DTC and out-of-market (as they had been for years before) through MLB.tv.

While these out-of-market subscriptions are collected at the league level (as is standard), the in-market advertising revenue and streaming subscriptions are given back to the club. Plus, the league will subsidize some of the incremental lost revenue from the RSNs (up to 80% last year according to some sources).

It was announced a few days ago that the Guardians, Brewers, and Twins are opting for this route, and it’s understandable why — namely stability and reach. According to MLB, Guardians’ games were available to 1.45 million households this year; next year that would grow to 4.86 million. In a similar vein, the Twins will expand from 1.08 million homes to 4.4 million.

The issues here are that:

1. The MLB is not going to subsidize the lost revenues at the same rate as last year, and that amount will likely continue to decrease in the future

2. The increased reach could lead to increased revenues, but it’s not a guarantee. It’s also much harder to get an American consumer already inundated with subscriptions to fork over more money for a straight 1:1 package instead of a bundle.

3. This is the least important, but there is an underlying tension between the clubs and MLB league office that dates back years to when MLB was running all digital marketing and media for clubs. The clubs like to call the shots and don’t necessarily want to have to defer to the league for everything.

More national package games

This strategy would involve taking more games from the local rights deal and moving them up to a national package.

While counterintuitive at first, there is alpha here.

It’s understood that the broader cable landscape is a mess. At the current cord cutting rate, cable operators could be down to 42.3 million bundled homes next year, meaning the RSN cable bundle overall penetration would sit around 33% of all U.S. TV homes. For reference, ten years ago, nearly 90% of all American households subscribed to a bundle.

All of that being said, there are still fans tuning in. RSNs accounted for 82% of all in-season MLB impressions in 2023.

To look at what that means financially, Arctos, one of the preeminent private equity firms in the sports space, released an interesting article last week in its “Chart of the Week” series. Based upon its analysts’ fair market value, they estimate local rights to be worth between $300-$800k per game.

Given the volume of games in an MLB season and the current challenges with getting viewers to tune into live TV, this is not insignificant, and it would catch the attention of broadcast partners.

MLB Commissioner Rob Manfred, speaking at a recent CNBC conference, signaled this is where the league is hoping to go, as well.

The biggest friction point with this strategy is the group of major market teams — i.e., New York, Boston, Chicago, LA — that have lucrative RSNs that they have a stake in.

Moving more games from the RSNs to national TV means the revenue gets moved from local (team takes all of it) to national (split amongst the teams in a revenue sharing agreement). In the big clubs’ minds, this is taking money out of their pocket in order to prop up the smaller market teams.

We’re already seeing this friction in the NBA, where New York Knicks owner James Dolan has been sending angry letters regularly to the NBA league office about the new TV rights deal that has significantly increased the number of national games.

These clubs will likely handle it better than arguably the worst owner in sports, but it’s still going to piss them off and potentially cause challenges for the commissioner’s office.

What’s best?

In my opinion, the best solution is a combination of the third and fourth concepts.

There needs to be some way to get the more than 33% of clubs looking for a home into a more stable, uniform position so the league doesn’t have even more extreme fragmentation/revenue disparities and is not on the hook for subsidizing revenues.

Plus, it would be great if the clubs could get a fresh start from the legacy RSN model while embracing the bundling concept that while the distribution vehicle has changed (cable —> streaming), has resonated with consumers for decades.

Enter: your streaming bundles.

In this Goldilocks scenario, the league could roll up a set of opted-in teams’ rights into a package similar to what ESPN+ does with the NHL for out-of-market games. There may still be some local over-the-air options if needed, but the main path for consuming the content would be via a streaming service.

Both Amazon and ESPN are existing MLB partners that have robust platforms with various packages of content and are trusted by consumers. In addition, they are always looking for new content to stay ahead of the justification curve in consumers’ minds, and this idea has occurred to them both. Amazon had been in deep discussions about investing in DSG until pulling its $115 million investment offer last month, and ESPN chair Jimmy Pitaro has said point blank that he would be interested in a national MLB package.

It’s not perfect and there are plenty of things that would have to get hammered out (i.e., what do you do with MLB.tv, who would get what in the revenue sharing, how do you placate the big clubs, etc.), but the league/clubs win with this “whole is greater than the sum of its parts” strategy in the following ways:

1. It stabilizes over a third of the league by going through one partner and puts them on somewhat equal footing revenue-wise

2. It achieves the emphasized national strategy by allowing more people all over the country to get access to more games

3. It provides an enticing package to the fans who are more likely to pay for a bundled offering instead of a 1:1, which would hopefully boost the overall user base compared to the Frankenstein RSN model that the teams are currently limping along with.

4. Bonus: It also doesn’t hurt that since there are two streaming bundle contenders (maybe three if you count Apple, but they’re the outsider here), it could lead to a back-and-forth in negotiations that raises the total revenue.

In closing, no other league has undergone more transformation on the field in the last few years to try to secure its future than the MLB. Now, it’s time for it to step up in the boardroom and do the same.

🍸️ 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: While MLB is enjoying a renaissance thanks to rule changes and a greater emphasis on its stars (highest attendance in seven years and attendance grew in back-to-back years for the first time since 2011), there is much uncertainty with nearly a third of the league over what it will do with its local media rights next year now that Diamond Sports Group (DSG) has informed 11 of the clubs it will not renew their contracts next year.

• Shot: This matters because local revenue represents nearly a quarter of MLB team revenues. There is already a large revenue disparity between the big and small market clubs, and the league’s lack of a true salary cap means there is a sharp divide between clubs that can contend and clubs that cannot. Further revenue hits could lead to this fragmentation increasing and even create a more existential divide within the league.

• Shot: Clubs have a choice to make on where they go next. Four potential scenarios:

  • Renegotiate with DSG at a significantly reduced rate

  • Build something new alone or with other in-market teams

  • Let MLB step in and handle it at the league level

  • Move more of the games into a national package

• Shot: It’s understood that no solution will likely make up the revenue from the legacy RSN system, but the larger challenge is that each option has a series of major risks for both the club and league.

• Chaser: In my opinion, the best solution on the table is a combination of scenarios 3 and 4 — partnering with a streaming bundle like ESPN or Amazon. Both entities are looking for additional content to add to their platforms, and they have specifically voiced interest in this area before. The league/clubs win for the following reasons:

  • It stabilizes over a third of the league by going through one partner and puts them on somewhat equal footing revenue-wise

  • It achieves the emphasized national strategy by allowing more people all over the country to get access to more games

  • It provides a more enticing package to the fans who are more likely to pay for a bundled offering instead of a 1:1, which would hopefully boost the overall user base compared to the Frankenstein RSN model that the teams are limping along with.

  • Bonus: It also doesn’t hurt that since there are two (maybe three if you count Apple, but they’re the outsider here) streaming bundle contenders, which helps in negotiations.

🤯 “Whoa” of the Week

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

1. Two big wins in women’s basketball this week

💪 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. A fitting tribute to NHL star Johnny Gaudreau from start to finish

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

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Until next time, sports fans!

-Alex