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Hot-Take #6: Sinclair's OTT/DTC Ambitions - Implications of Shifting from Pay-TV Bundle to OTT

Editor's Note: This article has first been published on LinkedIn — as just like many others, I wanted to comment on the reported untethering of Sinclair's regional sports networks from the traditional pay-TV bundle. Reached LinkedIn's character limit for comments quickly, ended up in a LinkedIn article covering:

On the positive side, it ended up shorter than my usual blogs. 🤓 It is also less of a Hot-Take than just a Quick-Take. ✌🏼


Sinclair is raising more than $250M for an OTT/DTC streaming service that is supposed to be built around its 19x formerly Fox Sports, now Bally Sports - branded regional sports networks (RSNs; probably excluding their co-owned YES Network and Marquee Sports Network). [ 1️⃣ ]

Other articles have already extensively covered the legal practicality (see/listen to: Sports Business Journal): In the two-sided marketplace of sports broadcasting (= sports rights market + sports programming market), Sinclair is disliked by both the rights owners on the one side, at least by MLB which also bid for the Fox Sports RSNs, and TV distributors on the other side, by leveraging its multi-market footprint to drive notoriously tough bargains about carriage fees. While local streaming rights are generally included in any RSN deal (think: sports rights market), its OTT distribution outside of the traditional pay-TV bundle via (virtual) MVPDs would break most, if not all, carriage deals with TV operators (think: sports programming market) — the foremost source of revenues for RSNs.

A more probable scenario of any OTT programming by RSNs, which will more likely be an evolution rather than revolution in form of a complementary direct-to-consumer offering has also been laid out. (see: John Wall Street). Such offering, untethered and co-existing with RSN's traditional linear programming and distribution model, would inevitably be:

  1. focused on die-hard fans (think: direct-to-fan instead direct-to-consumer proposition with a limited addressable market),

  2. centered around incremental programming only such as highlights, editorial content, e-commerce opportunities, free-to-play games, and unsold/limited local live game inventory (if any) to protect the short-term value of and legal compliance with their deals with TV operators such as AT&T (DirecTV), Comcast (Xfinity), YouTube TV, Hulu, or Sling TV; and

  3. something many MLB/NBA/NHL franchises in form of owned and operated team apps are already doing which could complicate matters not only with distributors but rights owners.

Nonetheless, let's assume that Sinclair pulls off the improbable and indeed launches a true stand-alone OTT service for live-streaming local games and, thus, offers the same content as they are doing on their linear programming via the (virtual) MVPD system elsewhere (i.e. outside of the pay-TV bundle). In this context, raising additional capital and an expensive monthly price point encapsulate two major implications of shifting live sports content distribution from the traditional Pay-TV Bundle (Wholesale) to OTT (Retail).

📉 Bridge-financing Revenue Gap during Cable-to-Streaming Transition

Sinclair, or similar-sized media companies with OTT/DTC ambitions like ViacomCBS who also raised capital for the same purpose, have neither the size (think: market cap / revenues vs. Disney) nor availability (think: need to service comparatively high load of debt vs. Disney) of legacy cash flows like Disney to cross-subsidize any new OTT business. [ 2️⃣ ] It needs to raise additional cash to serve short-term rights (and debt) commitments. Whether Sinclair reaches the other side of the bridge (= profitability) is the fundamental question and will require the addition, or an entire ecosystem, of new revenue streams beyond subscription fees and advertising revenues to be built around live content. (think: betting, NFTs, e-commerce) [ 3️⃣ ] The long-term nature of local rights deals in the US is certainly a competitive advantage in this regard, compared to both US national deals and the European sports rights market: OTT streaming requires long-term thinking and a lot of time to re-establish the economic profits to which rights-holding broadcasters became used to in the pay-TV bundle. However, playing the long game is much easier to stomach for SVOD services such as Disney+, HBO Max, or Netflix due to the fundamentally different nature of live/sports and non-live/entertainment content (think: content shelf life, long-term value of library/IP, global allocation of content costs). Variablizing revenue streams (by going from wholesale to retail) while facing fixed costs in form of multi-year rights fees commitments towards rights owners such as the MLB, NHL, and NBA entails a lot of financial risks and makes bridge-financing a necessity. To pull of a live streaming service, investments in technology should be a minor cost position in the grand scheme of things. (think: commoditization of at least some modules of the technology stack) Instead, marketing and promotion to build up a customer base from scratch do not only require enormous financial investments but also a shift from a B2B- to B2C-centric mindset since the target market shifts from content distributors (= wholesaling) to content consumers (= retailing). Compared to the pay-TV bundle, OTT will not only have slower subscription ARPU growth due to lack of built-in annual escalators but aggressive pricing and promotion further reduce effective ARPUs in the short term. OTT-enabled upside exists in form of more effective ad monetization (which requires scale in the first place though and the inherent sub-scale nature of RSN's footprints might have an outsized negative impact on ad opportunities) and the opportunity for incremental revenue streams. (think: betting, NFTs, e-commerce) Closing the monetization gap between the pay-TV bundle and OTT economics by adding new revenue sources will be key in the long run, but short-term revenues would be driven by maximizing the direct monetization of consumers through subscription payments.

🧾 Over-Monetizing Niches with unprecedented Price Points for OTT Streaming Services

Traditional Pay-TV had unprecedented scale (think: highpoint at 100M households), stickiness (think: lock-in via long-term contracts + physical receiver), and pricing power (think: pass-on increase in rights fee outlay to distributors via built-in annual escalators of carriage fees as part of multi-year agreements). Indirect pricing in the pay-TV bundle resulted in over/under-earning of different channels: Non-sports fans cross-subsidized sports fans.

OTT, on the other hand, has much smaller scale and stickiness, but the willingness to pay of the addressable market (which is narrowed down to sports fans only) is much higher — an opportunity that sports programmers, in particular, must and can capture in form of significantly higher price points (= ARPUs) to make any unbundled, a-la-carte economics work: Similarly, when/if ESPN decides to untether its linear flagship channels from the traditional pay-TV distribution system, we should inevitably see a price point of $30+ per month to sustain/rebuild existing economics, that are driven by its still-enormous scale of approx. 80M TV households despite the undisputed secular decline of the pay-TV bundle. However, ESPN’s legacy business still generates so much cash that the "Worldwide Leader in Sports"​ is still (at least) a couple of years away from that inflection point that Sinclair has seemingly already reached.

Pay-TV exclusives (think: linear programming of ESPN 1/2, beIN SPORTS, Fox Sports 1/2) turning into platform-agnostic programmers, would also require a significant update of a previous graphic covering distribution and revenue models in the sports rights/broadcasting market:

  • Pay-TV linear channels (e.g. ESPN, beIN SPORTS, Fox Sports),

  • Digital-only/first OTT offerings from rights holders (e.g. DAZN, ESPN+, FloSports),

  • Digital-only/first OTT offerings from rights owners (e.g. NBA League Pass, NF Game Pass)

  • NEW: Platform-agnostic linear channels that go over-the-top of (virtual) MVPDs at much higher price points ($20-40/month)

ESPN, in particular, currently follows a dual-pronged content approach by sustaining two mostly distinct sets of programming with limited overlap for two different distribution systems, one for linear and one for streaming. Doing this (and fully financed by cash flows from its legacy business), ESPN maintains optionality for future decision-making (think: migrating content from ESPN's linear programming to ESPN+ or offering an untethered version of its linear programming at additional costs). Sinclair’s pre-emptive untethering of its RSNs to allow unauthenticated in-market streaming, instead, seems largely to be a function of (1) its distribution problems on both traditional and virtual MVPDs (think: no carriage on Dish, fubo TV, YouTube TV, or Hulu) and (2) the lure of new but unproven monetization opportunities. The only virtual MVPD option consumers currently have is pricey AT&T TV Now ($85/month). It would still be a step that, for example, beIN SPORTS, another live sports programmer with very limited distribution, never risked taking despite even more severe coverage problems. (think: less financial downside of breaching carriage agreements). [ 4️⃣ ] Granted, they went with the free-to-air proposition of beIN SPORTS XTRA as its go-to coping mechanism.

As far as the price point is concerned, subscription-based services like Netflix, Disney+ & Co. have redefined value-for-money expectations from consumers — which make those proposed price points for OTT-distributed linear channels (but also transaction-based services such as Disney Premium Access) almost seem subjectively cost-prohibitive and a perceived money grab in the eye of many consumers.

In contrast to top-tier live sports content, there is no lack of viable substitute products for video entertainment content though. Sports, instead, compete to a lesser extent purely on price as the basis of competition due to the scarcity of (perfect) substitutes. (think: lower price sensitivity) Nonetheless, consumers will still make the direct comparison between Bally Sports ($23/month) and lower-priced pure-sports streamers in the U.S. such as ESPN+ ($5.99/month) or even DAZN and its event-driven portfolio ($19.99/month).

🔀 Stand-alone Local OTTs vs. Premium Add-Ons or Migration to National Streamers

Bally Sports hasn’t been the only regional sports network tinkering with the future distribution model of local streaming rights though: Comcast-owned NBC Sports putting very selected local RSN content exclusively and for free onto Peacock — their multi-genre streaming service that is universally priced on the national level — seems to be a misfit and would lead to inconsistent value-for-money propositions depending on the consumer's location if done regularly. A buy-through approach (i.e. RSN as an optional streaming add-on to Peacock in markets, in which Comcast's subsidiary owns and operates an RSN) might make more sense long-term if/when they decide to untether any of their eight NBC Sports Regional Network from the traditional pay-TV bundle and pursue a platform-agnostic approach instead. A buy-through approach could be a balance between fully migrating local linear programming into national streaming services such as Peacock or ESPN+ (as seen with NBC Sports) and true stand-alone OTT service for live-streaming local games only (as reported for Bally Sports).

In this specific case though, it rather seems to be a one-off thing facilitated by NBC owning the regional networks in the local media market of both involved teams (Philadelphia Phillies vs. San Francisco Giants) and some willingness to experiment on behalf of the MLB and ESPN+. The former monetizes all out-of-market, non-nationally televised MLB games via MLB TV. The latter airs over 170 games of those games co-exclusively (with RSN and MLB TV) and had probably given its thumbs-up as well.

💡 Conclusion: Additive/Cannbilazing Nature and MVPD as Key Stakeholders

Ultimately, to which extent a stand-alone OTT streaming offering by RSNs would be of additive and/or cannibalizing nature to the existing (virtual) MVPD subscription base remains to be seen: As long as the introduction of a true stand-alone OTT service for live-streaming local games is the final nail in the coffin that makes the lowest-tier pay-TV subscribers (who do not subscribe to more premium channels such as their market's respective RSN) to cut the cord in order to free-up disposable income for re-allocation across several OTT streaming services including OTT-distributed RSN programming, most TV operators could buy into the idea of a mutually beneficial co-existence: Low-tier pay-TV subscribers are the least-profitable customers for (virtual) MVPDs given the nature of input cost of video programming, i.e. affiliate fees to content providers: On the other hand, many MVPDs also provide high-margin broadband services. Such services will only increase in importance/usage as content delivery migrates from cable/satellite/terrestrial to IP-based (video/audio) streaming. Put differently, telecommunications service providers might prefer broadband-only customers over the traditional dual-play of Broadband plus TV in some cases — positioning themselves as super-aggregators and leveraging their vast direct customer relationships instead: You don't need to own the content to provide the content. (see: Connectivity/Aggregation as USP)

Alternatively, the tribal nature of local sports has been the sole reason for many consumers to stick with the traditional pay-TV bundle. A full-fledged in-market streaming service by Bally Sports that significantly erodes the MVPD's most-profitable subscriber base (think: subscribers to premium-tiers including RSNs), while not participating in the economics of such streaming service, seems to be a no-go and should create a lot of pushback. (think: dropping RSNs due to breach of carriage agreements) On the other hand, every (and especially new) OTT streaming service that does not have the brand power, marketing budget, and/or unique IP like Netflix, Disney+, Spotify & Co. will rely on a set of distributors (including telecommunication service providers that also operate MVPDs) to reach critical size of its subscriber base. Those distributors will/want to be paid handsomely to intermediate the relationship to the end consumer. (see: Blog #46 - Content is King, Distribution is King-Kong) Whether this is considered sufficient "skin in the game"​ or participation in the economics by them will be seen. Bottom-line, any buy-in from the current RSN distributors would be first and foremost: Streaming might be the future, but consumers are still early in the adoption curve. Moving premium (sports) content (co-)exclusively from one (think: Cable/Satellite/Terrestrial) to another (think: Streaming) distribution system can accelerate adoption but moving on prematurely from the most profitable segment of the market (think: high-income, more affluent, older demographics) entails unbearable/unwanted financial risk. (see: Don’t leave behind your most profitable customers in pursuit of the incremental digital dollars.)

To reach/address the entire market, different distribution systems will inevitably co-exist for the foreseeable future (think: no one-size-fits-all distribution system) because different demographics are at different points along the adoption curve or might never adopt in due time. (think: late majority, laggards)

Long-term, completely new revenue streams need to be attached to (sports) content to rebuild the economic profits in OTT that existed in trad. Pay-TV bundle. This (and not the short-term pushback from distributors) will make or break the long-term future of the RSN business, or many other pure-sports OTTs for that matter.


🔢 OTT ≠ DTC, Company Valuations, Distributors vs. Rights Holders, Reach vs. Revenue

1️⃣ Treating Direct-to-Consumer (DTC) and Over-the-Top (OTT) interchangeably does not account for the intricacies of the sports broadcasting value chain and the continued gatekeeper function of intermediaries in form of both traditional (i.e. IPTV platforms such as Comcast, AT&T, or BT) and new media distributors (i.e. TV operating systems from Amazon, Apple, Roku) which I already covered extensively elsewhere and don't want to go into details here: In a nutshell, OTT can be DTC (in case of the content provider having the direct customer relationship). Regardless of OTT or DTC, most of those streaming services remain Direct-to-Fan/Niche, especially compared to the scale of traditional pay-TV. (see: OTT ≠ DTC) [ ↩️ ]

2️⃣ Initially, legacy media companies such as WarnerMedia (HBO Max), Disney (Disney+, Hulu, ESPN+), or ViacomCBS (Paramount+) probably thought they have to meticulously manage the trade-off between protecting and leveraging cash flows from existing business for new business lines. Once they noticed that the stock market bought into OTT streaming, the long-term upside of establishing and multi-dimensionally monetizing direct customer relationships, and started to seemingly base any company valuation purely on subscriber growth while disregarding profitability or cash flow issues in the short term, they started to go all-in and no longer overly protected the past business (= Pay-TV Bundle) to detriment of the future business (= OTT). For now, everyone has jumped on the bandwagon of subscriptions: consistent, recurring revenue at increased prices over time. (see: Subscriber Growth = Company Valuation) [ ↩️ ]

3️⃣ In contrast to virtual MVPDs such as fubo TV which makes new revenue streams such as betting the core of their investment thesis, rights-holding broadcasters (instead of mere content distributors) should indeed be in the position to establish incremental revenue streams around live content that potentially close the monetization gap between OTT and pay-TV economics in terms of customer acquisition costs and customer lifetime values (as a function of ARPUs and churn). Virtual MVPDs, on the other hand, will serve mostly as pure distributors (think: simulcast). Value creation and capture will primarily happen on the level of the rights holder — which might be the reason why fuboTV decided to become a rights holder with the (very expensive) acquisition of exclusive streaming rights to the CONMEBOL WC Qualifiers 2022 (Link): It allows much more and the realization of new monetization opportunities. (see: OTT Unit Economics) [ ↩️ ]

4️⃣ Due to lack of carriage by both traditional and virtual MVPDs, distribution of beIN SPORTS in the United States dropped to such a degree (i.e. approx. 10-15M TV households) that LaLiga did not face the traditional/inherent trade-off between reach (traditional pay-TV bundle) and revenue (OTT streaming services) any longer and got the best of both worlds when recently switching in-cycle from beIN SPORTS to ESPN(+). The reality is that even the most-coveted content cannot overcome a lack of distribution: In Q1/2021, beIN SPORTS averaged 4,000 viewers per day, making it the second least-watched cable network despite attractive content such LaLiga, Serie A, and Ligue1. (listen to: The Bundle #11) [ ↩️ ]


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