Sinclair Broadcast Group (NASDAQ:SBGI) made some sizable sports bets last year, and it's not looking like they'll pay out very well.
The media company partnered with the Chicago Cubs to develop the Marquee Sports Network, which just launched earlier in February. It bought a minority stake in YES Network, the home of the Yankees, Nets, and other New York sports teams. And its biggest deal was the acquisition of 21 regional sports networks from Disney last summer for about $10 billion.
Even though Sinclair ended up paying just around half the original estimated value of the regional sports networks (RSNs) when all its various purchases were said and done, it still might've gotten a bad deal. It's having a hard time getting distributors to renew their contracts for the high-priced cable networks, which means a steep decline in profits.
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Contract disputes
Several distributors have completely dropped Sinclair's regional sports networks from their channel lineups. The challenge is primarily coming from virtual multichannel video programming distributors (MVPDs), which have tried to keep their pricing simple and low compared to traditional pay-TV providers. Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube recently announced its 2 million YouTube TV subscribers will no longer receive their regional sports network after Feb. 29. FuboTV also dropped the networks earlier this year.
DISH Network (NASDAQ:DISH) also dropped the RSNs from both its satellite TV service and its over-the-top Sling TV service between the time Sinclair announced the deal last May and closed it in August last year. Chairman Charlie Ergen said it's unlikely to bring the channels back during the company's fourth-quarter earnings call. "Once somebody leaves the network, there's no reason to put something back and tax the rest of people," he said. "The people who really watch the channel leave us because they have alternatives."
Meanwhile, Comcast (NASDAQ:CMCSA) -- which boasts 21 million video subscribers -- is threatening to drop the RSNs as well. It already refused to carry the Marquee Sports Network, which will cost Sinclair and the Cubs about $100 million in foregone annual revenue. Comcast also dropped Denver-based Altitude Sports last year, indicating it's willing to sacrifice regional sports networks to keep its content costs low.
Profits are tanking
When Sinclair agreed to acquire the regional sports networks, it estimated they'd generate about $1.6 billion in EBITDA during 2019. If its outlook was accurate, it paid a fair price for the RSNs. It might've even gotten a deal.
But the revenue cut from lost contracts has a substantial impact on its bottom line because it still has to pay the expensive sports rights regardless of whether it can sell its networks or not. Management expects to spend over $2 billion this year on sports rights.
Basically, every contract Sinclair fails to renew drops straight to the bottom line because its fixed content costs make up such a high percentage of sales. So losing 2 million YouTube TV subscribers might not sound like a big deal, but the $4 or so per month they each paid on average (call it $100 million per year) has an outsize impact on that $1.6 billion EBITDA estimate.
Analysts expect profits to keep falling. Wells Fargo analyst Steve Cahall thinks the RSNs will generate about $1.2 billion in EBITDA this year and just $1 billion in 2022. Lightshed's Rich Greenfield is even more pessimistic, and thinks EBITDA for 2020 will fall to $715 million after YouTube dropped the networks.
Reviving the RSN business will require a complete overhaul. Sinclair can't rely on non-sports-viewing pay-TV subscribers to subsidize sports viewers any longer now that consumers have more ways to consume video. It'll see a continued drop in revenue, and it can't sustain paying the high prices for sports league rights, which means it needs to go back and renegotiate those contracts as well. Otherwise, Sinclair's sports bet will turn out to be a big loser.
