The Padres and Diamond Sports Split Up

Earlier this year, Diamond Sports Group declared bankruptcy. That dry corporate action, precipitated by a huge debt burden, is starting to have real world consequences. This Tuesday, DSG missed a payment to the San Diego Padres, as Alden Gonzalez first reported for ESPN. That terminated the contract between Bally Sports (a Diamond subsidiary) and the Padres. By Wednesday, the Padres were off of Bally and broadcasting their own games via Major League Baseball.

That’s a pretty big escalation in what until now felt like a slow-moving situation. In fact, in bankruptcy court, Rob Manfred testified that the league received less than one day’s notice of this missed payment. “[They told us] less than 24 hours before they were going to go off the air that they were going to stop broadcasting Padres games,” he said. (Diamond’s lawyers have contested that timeline.) That led to the Padres terminating their contract with Bally Sports, naturally enough, and to MLB stepping in to broadcast games.

It’s no accident that the league was ready to wade into daily game production. They hired Billy Chambers, formerly a Fox Sports and Diamond Sports executive, as executive vice president of Local Media earlier this year. Hiring a regional sports network executive is a pretty good way to start building your own regional sports capabilities, and the league appears to have moved quickly here.

Last night, the Padres played the Marlins in Miami. The away broadcast was an MLB production, with the same graphic design as MLB network games. Per Gonzalez’s reporting, the team directly employs the on-air broadcasters, and the remainder of the broadcast group operates on a freelance basis, which means the league broadcast simply continued to use the same group. That game was available broadly, again likely thanks to contingency plans that the league had already prepared for. Again per Gonzalez, the league partnered with a variety of local cable providers to add an option to watch Padres games. It is also streaming the games on MLB.TV, its existing out-of-market streaming service.

In the short-term, the fallout from this bankruptcy is likely to be minimal for fans. The games are all still being broadcast, and can still be purchased as part of cable TV subscriptions. In fact, the broadcast can theoretically reach a larger portion of the San Diego market thanks to the streaming option. Previously, viewers without cable didn’t have any way to tune in thanks to local blackouts. As Ginny Searle noted, there were previously 2.2 million fans in Padres blackout territory who didn’t have the option to watch Bally Sports San Diego.

In practice, it won’t be that simple. The most invested Padres fans likely purchased cable specifically to watch the team. The remaining fans are unlikely to be as motivated to add Padres games. Regional sports networks have also historically benefited from huge carriage fees; cable companies paid them a fixed share of each subscription, and the RSN’s negotiated fixed contracts with teams. Some of those subscriptions were likely captive viewers, ones who wanted cable but not specifically a regional sports network, but who purchased a cable package that contained the RSN, thereby generating carriage fees. A direct-streaming option won’t capture those fees. There are also likely a good number of casual fans, ones who watched the occasional Padres game because it was available in their cable package, but who wouldn’t go out of their way to buy coverage specifically.

The league and the team certainly seem concerned about the near-term monetary impact. As Evan Drellich of The Athletic reported, the league central office is guaranteeing every team under the Diamond Sports Group rights umbrella at least 80% of its scheduled rights fee payments in 2023. That’s good news for the teams, of course – backstops are great to have if you can get them – but it’s certainly worrisome that there was some question of a more than 20% decline in rights fees.

Exactly how much money that 20% represents isn’t perfectly clear, but we can make some assumptions. The Padres signed a 20-year, $1.2 billion deal prior to the 2013 season. The deal was reportedly backloaded, and we’re entering the 11th year of its 20-year span, which means the fees this year are likely in the neighborhood of $60 million.

It’s no accident that baseball issued a guarantee to every team involved with DSG rather than specifically the Padres. DSG has already come up short by paying only half of its contracted rights fees to a four-team group: the Twins, Rangers, Diamondbacks, and Guardians. None of those teams have a share in their local network, while the Padres do, which explains why they’re being handled in a bundle while San Diego operates separately. But the ongoing bankruptcy hearings – the ones at which Manfred testified yesterday – could lead to those teams also leaving the Bally network and following the Padres’ direct-distribution route. A late-breaking update to the story: a bankruptcy judge ruled in MLB’s favor Thursday night and refused to reduce the rights fees payments DSG owes, which seems likely to lead to more defaults and more league-run broadcasts.

The Padres, and any other team that ends up joining them in this model, represent an experiment that the league has been flirting with. Manfred noted that the league itself bid $9.6 billion for the regional networks that Sinclair Media bought in 2019 and spun off into Diamond Sports, setting the current chain of events into motion.

They may yet get their wish. Direct streaming has been touted as a potential solution to the viewership bind caused by cable cord-cutting — the natural audience for regional sports broadcasts has been shrinking at a rapid rate over the past decade. In fact, streaming rights are a key point of contention between MLB and Diamond. Diamond reportedly offered to pay all its rights fees rather than selectively defaulting in exchange for streaming rights. The league quite reasonably turned them down, and I find it hard to disagree with them. “Give us your streaming rights or we won’t honor the deals we’ve already signed” isn’t a strong negotiating position, or one likely to make your partner predisposed to help you.

It’s too soon to tell how this direct streaming experiment will work out. The Padres are a unique case, not only the first team to try this new method but also a big-spending team with no sports competition in town. We may never know exactly how it works out, in fact: MLB is under no obligation to report how much money the direct streaming project makes. But the broad strokes make sense, and the league hardly has any choice in the matter, so we’re going to get a good idea of how this process works in the coming year.

As Joe Sheehan pointed out in his newsletter, the new landscape changes one significant detail: teams will now receive a variable amount of money for their broadcasts rather than a fixed amount. The A’s are making a reported $48 million this year in local TV rights; that probably wouldn’t happen in a direct-to-consumer world, because fans would simply unsubscribe. Even for teams that are less aggressively sacrificing the product on the field, a few down years never used to cut into their bottom line, and now it might. On the other hand, it’s now much easier to dip in and start watching a team’s games – you don’t have to purchase an entire cable plan to do so – which means that years of success might beget more broadcast revenue.

That’s a problem the league and its teams will have to reckon with over the coming years. It looks increasingly likely that Diamond’s piecemeal bankruptcy strategy – fighting over each individual team deal rather than selling off the entire package – is going to upend the RSN model. We’re not going back to a single entity owning half the broadcasts in the league – unless that entity is MLB.