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Bally Sports heading towards bankruptcy?

I feel partially responsible, somehow...

Cincinnati Reds v Cleveland Guardians Photo by George Kubas/Diamond Images via Getty Images

America’s largest owner of local sports channels is heading toward a complex $8.6 billion debt restructuring in bankruptcy court as it stakes its future on a new direct-to-consumer streaming service. After leveraging up to buy regional sports networks from Walt Disney Co. in 2019, Diamond Sports Group LLC is suffering from a decline in cable-TV subscribers, spurring negotiations with creditors and major sports leagues about its viability as a going concern. The outcome will have serious implications for the $55 billion world of sports-media rights: the company’s channels showcase Major League Baseball, National Basketball Association and National Hockey League games to fans from Detroit and Phoenix to San Diego.

I cannot say I am particularly surprised by the news. Diamond Sports, operators of the various Bally Sports channels including Bally Sports Arizona, appears to have got into the live sports cable broadcast business at just the wrong time, as viewers began to leave such services in floods. Even I, a loyal cable subscriber since I moved out to Arizona, have cut the cord - and don’t miss it. The $150 a month in savings covers the dinners out at Islands to watch the D-backs games I need to recap. Though my waistline hasn’t been helped. But there are both short- and long-term ramifications for this news, and the situation may potentially impact the Diamondbacks more than most teams in the league.

I’m no expert in the financial situation, so I will largely defer to the Bloomberg and other articles on the topic. But there were some parts which definitely stood out. Emphasis added: “In a bankruptcy, Diamond would have the option of ending contracts with teams, potentially cutting off crucial industry revenue while also allowing teams to reclaim their media rights. The company could also halt payments to the teams while keeping the contracts in place. If a deal is not reached, both MLB and creditors are preparing for baseball teams not to be paid, according to two people.” While the article then “downplayed [that] prospect”, it is something which remains an option at this point.

This matters, because we’re talking a significant revenue stream for teams, which have grown less reliant on game-day factors like ticket sales, in favor of broadcast rights, both local and national. But these deals are no longer profitable for Diamond/Bally. They own the rights to almost half the major-league teams, fourteen in all, and an article in December stated, “Most of Diamond’s MLB contracts are unprofitable,” citing in particular the $60 million a year they are contracted to pay the Padres through 2032. If that’s the case, then the D-backs deal, a twenty-year contract valued at $1.5 billion, or $75 million a year, would seem likely to be in the same category.

Complicating matters, however, is the uncertain nature of what the D-backs are actually getting. At the time the original deal with what was then Fox Sports Arizona was announced in 2015, the team gained a stake in the broadcaster. The terms of that were never made public, and nor do we know what happened when the rights were then sold on to Diamond in 2019. [Disney bought Fox, but were required as a condition of the takeover, to divest the Fox Sports part of the business] So we basically have no idea, a) how much cash the team gets per year from Diamond, b) what the effects of Diamond’s looming bankruptcy might be, if the team are on both the owner and creditor side of the equation.

The D-backs’ deal is one of the longest ones out there, running through 2035. An analysis in April 2020 had only three of the other 29 major-league teams with packages that long. though several will have signed new deals since then. If the bubble for local rights has since burst, being locked in long-term at a higher rate is a good thing... But only if you get paid. According to Bloomberg, Diamond “has about $585 million in cash on hand, as of September 30, but owes about $2 billion in fees to teams this year.” In the event payments can’t be made, it’s possible creditors would end up with ownership. Whether that would include the Diamondbacks is unclear.

The font of local TV money being abruptly disconnected might also affect things at a higher level. For cord-cutting has not stopped ever bigger deals from being signed for national broadcast rights. In May last year, ESPN signed a deal with MLB for 30 regular-season games plus the Home-Run Derby, which will cost them $550 million per year. Add in FOX and TBS, and you’re at $1.5 billion annually. Then there are the new players, like YouTube, Apple TV, Peacock and Amazon Prime, who are all interested in getting in on the action. It becomes a bit of a nightmare for consumers, who have to hunt for their team’s games across this increasingly fragmented media landscape.

One positive is that the demise of the regional sports networks, could accelerate the end of blackouts, long a thorn in the side of many viewers. If you buy the MLB.TV package here in Arizona, for example, you can basically watch every team except the Diamondbacks, in order to guard Bally Sports’s monopoly. MLB would not mind that going away, if it meant they could sell MLB.TV packages to local consumers here. It’s something I’d certainly be interested in. Would that mean MLB taking over the production of games, if Bally Sports were to go under? That’s yet another unanswered question. But it’s definitely a story worth keeping an eye on, because the impact might be felt both by fans and the team.