The Television Elephant (Telephant? Elevision?) in the Room

No one likes to talk about baseball as a business. Heck, I don’t like to talk about it, and I’m what passes for an expert in the subject around here. It’s tedious, the creeping financialization of everything in life. Baseball should be the crack of the bat and the glint of sunglasses as an outfielder charges across the grass towards a smashed line drive, not an accounting ledger filled with contracts and receipts. But inevitably Major League Baseball, which often gets shortened to “baseball” as though it embodies the entire sport, is about profit, which means it’s about money.

There’s a storm brewing on that front. As Travis Sawchik deftly reported over at The Score, the old way of doing business is standing on wobbly legs. Local TV deals make up a sizable portion of the league’s overall revenue. That makes perfect sense – baseball is a regional game, and its biggest draw, from an entertainment standpoint, is the sheer size of its inventory. Teams play 162 games a year, all through the hardest times to fill programming – the dog days of summer, Saturday evenings, national holidays, you name it. Sportico estimated that teams were paid roughly $2.25 billion for local broadcast rights in 2023.

Until recently, those fees were exclusively paid by regional sports networks and their equivalents. Those RSNs then turned around and sold the rights to cable companies, which in turn charged consumers for bundles of channels. They used sports as an anchor, and reasonably enough. Who would buy a cable package in Milwaukee that didn’t include the Brewers, or a Padres-less San Diego offering? Surely some folks would, but plenty wouldn’t, and that meant that cable networks with no sports networks weren’t viable.

Things worked that way for a very long time. But two forces upset that cart: media consolidation and cord-cutting. In 2019, Sinclair Broadcast Group bought the Fox Sports Networks brand and its associated networks for $9.6 billion. They funded that purchase with a staggering amount of debt – $8.2 billion, to be precise.

Meanwhile, the foundation of that RSN business was shifting uneasily. RSNs negotiate fixed-rate contracts with teams, but they receive money from cable companies based on the number of subscribers receiving their content. In good times, that meant a wonderful business. But as streaming services started to put a dent into cable subscription numbers, RSNs took in less and less money while continuing to pay the same fees – and often increasing fees, as they’d negotiated deals that increased over time with their team partners.

Last year, things came to a head. Diamond Sports Group, the subsidiary Sinclair split out, declared bankruptcy when it couldn’t make the payments on that massive debt burden I mentioned earlier. The ramifications of that bankruptcy are still unfolding, but they hit the Padres and Diamondbacks immediately; DSG broke contracts with both teams by not paying them their agreed-upon rights fees. The league stepped in to broadcast both teams’ games, both on existing cable networks and via a new streaming option. The Guardians and Rangers will likely follow suit soon. In fact, everyone might follow suit soon – DSG will likely stop broadcasting games entirely after 2024, with the remaining rights sold off or relinquished, per Sinclair’s lawyers.

The league isn’t saying a lot about what that might mean for team finances, as is its right. But we know MLB agreed to guarantee that the Diamondbacks and Padres would receive at least 80% of what DSG owed them. That’s not the kind of guarantee you need to make if the situation is normal. The Padres were in the midst of a 20-year, $1 billion contract that also gave them 20% ownership in the RSN. That works out to something like $75 million worth of revenues in 2023, allowing for some uncertainty both in their ownership stake and in the structure of payments in the deal. The Diamondbacks signed a 20-year, $1.5 billion deal, but they signed it later, which means they’re probably receiving a similar amount in TV money at the moment. If carriage fees and streaming packages each work out to something like $80 per year in revenue for the team per household, the teams would each need 950,000 viewers to break even.

That math is going to be tough to square. Viewership reportedly started around 60,000 households per game. No one’s watching every game, so that’s not even close to a good representation of how many people are paying to watch games. But my best estimate, based on this San Diego Union-Tribune article, is that the old Bally Sports San Diego label had something like 650,000 subscribers (assuming $80 or so in annual carriage fees). That number is surely headed downwards, too. Comcast reported a 12.5% decline in cable subscribers over the past year this fall. Total cable subscriptions across the country have declined massively, from a peak of over 100 million to roughly 60 million in 2023. The Padres are hoping to buck that trend by reaching a wider potential audience, though, which might help the team stabilize or increase its television footprint in the long run.

In the short run, however, it’s bad news for the Padres – it may or may not be a coincidence that they took out a short-term loan at the conclusion of the season, but it certainly seems suspicious. Depending on how things play out, it might be bad news for everyone who can’t increase their distribution in a similar way. The magic of cable as a distribution channel for sports was its exclusivity. If you wanted TV, you had to have cable – and cable companies had to have sports to attract local viewers, which meant RSNs could count on huge paying audiences, many of whom didn’t even watch sports. If you replace cable with a smorgasbord of streaming services, that means you have to go out and purposefully pay for your local baseball. I’d do that. If you’re reading this article, you’d likely do that. But many cable subscribers wouldn’t seek out RSNs if they didn’t get them automatically, so the population of people paying for sports channels will undoubtedly shrink.

The way cable worked, with its broad subscriber base and relatively low carriage fees per channel, led to windfall profits for a great number of interested parties. RSNs collected huge fees for their broadcasts. In turn, they paid teams increasingly astronomical sums to secure those broadcast rights. That enriched both owners and players. Cable companies did well enough by this deal, obviously, as did the RSNs. Baseball-watching viewers got a bargain, too: The cost of watching baseball was subsidized by plenty of unsuspecting TV audiences.

That arrangement works because of the power of those non-watching subscribers. As more and more consumers opt out of the system and instead pay for their programming à la carte, things might go differently. Those non-watching subscribers are no longer paying RSNs, because they aren’t paying for cable at all. That’s a problem for the rights holders now, but plenty of those rights will revert back to teams sooner rather than later thanks to DSG’s bankruptcy. That means that teams are going to need to work out how to get the same amount of money from a smaller slice of consumers.

A little back-of-the-envelope math should make the cord-cutting problem clear. Let’s assume that cable disappears tomorrow, and all baseball viewing purchases are now made directly. Per the league, regular season games averaged roughly 100,000 nightly viewers in 2022. That’s nightly viewers, not overall viewers; not everyone is watching every game, of course. To convert nightly viewership into total subscribers, we’ll need to make a few assumptions. If the average fan buys a year-long package but only watches, say, 20% of their team’s games, that works out to 500,000 subscribers per team, with 20% of them or 100,000 watching every game. If the average fan watches 10%, that’s one million subscribers. Let’s split the difference and call it 750,000.

750,000 fans for each of 30 teams works out to 22.5 million fans in total. The math is so easy! As you’ll recall from up above, the 30 teams received an aggregate of roughly $2.25 billion in local broadcast rights in 2023. That works out to $100 per household for everything to break even, or as much as $150 per household if the average fan is watching 20% of games. That’s just to keep revenue static; the rights deals that teams signed in the past decade or so mostly increased over time.

That $100 doesn’t need to come exclusively from subscription fees. RSNs sell advertising, and the league can do the same. Sinclair reported that roughly 20% of DSG’s revenue comes from advertising. That’s less threatened by cord-cutting than the standard carriage fee model, because it relies on viewership rather than subscriptions. The Padres and Diamondbacks were charging $75 for full-season packages; that, plus $20 in advertising, gets pretty close to that $100 estimate up above. If teams instead need to generate $150 total per subscriber to keep revenue constant, the math gets substantially tougher, of course.

Will the league be able to drum up enough subscribers to make that model work? I don’t know. They won’t be doing exactly that, at least not in the short-term; the Padres and Diamondbacks continued to broadcast on cable after MLB took over their rights, and more than half of the teams in baseball sold their rights to RSNs unaffiliated with the Bally/Diamond disaster, with some owning part or all of those RSNs. But you can see how the economic reality of the situation could become challenging in a hurry should current trends continue.

As Joe Sheehan pointed out this spring in his excellent newsletter, one possible result of this bifurcation is a war between the haves and have-nots, more specifically between the teams with stable and lucrative broadcast deals and the ones fending for themselves. The current economic system relies on a steady stream of local broadcast revenue to grease the wheels of commerce. If half of the teams in the league move from that wonderful setup to a less certain future, it’s easy to imagine rich and poor teams clashing over how to re-divide the economic pie.

That’s merely one possible complication. Even if teams keep the peace between themselves, the uncertainty surrounding rights fees and total revenue will create payroll uncertainty. In the scenario I outlined above where teams receive uncertain revenue based on the number of subscribers they attract to specifically tailored in-market packages, they’ll come into each year not knowing how much money they stand to make. A 10% shortfall in subscribers – hardly outside of the question – would cost the average team $7.5 million. A 20% shortfall is $15 million. If you assume that half the teams in the league face this reality and that roughly half of revenue goes to player salaries, that’s somewhere between $55 million and $110 million of league-wide salary uncertainty every year under normal conditions.

Those are reasonable estimates of what might happen as cord-cutting increases. But there are unreasonable estimates too. I can imagine a world where a team like the Royals, which recently signed a deal with DSG that pays them in the neighborhood of $50 million per year, see their revenues decline by $40 million or so. I don’t think it’s even remotely likely, but they don’t have a huge TV audience and haven’t been competitive in years. If they struggle to find a cable distribution network, the results might not be pretty. We’re talking about a disaster scenario here – it’s highly likely that the Royals will distribute their games on cable just like the Padres did, and given that Diamond seems intent on exiting other deals before giving up on Kansas City, they’re clearly doing at least acceptably well at collecting carriage fees in the market. But if you’re talking worst-case scenarios, the harshest blows would likely fall on small-market teams.

Likewise, the Guardians, Tigers, and Brewers are in small markets with tenuous Bally deals, and the Guardians are likely to lose their deal before 2024. The other two at least look likely to get through the year before things go south. I don’t think an 80% decline in local TV revenue is in the cards for any of these teams – I don’t think it’s even 10% likely for the Royals, to be clear – but the business sides of those organizations are likely scrambling to figure out worst case scenarios and risk factors.

The list doesn’t end there, of course. Every single team involved in this bankruptcy mess is surely weighing their risks for 2025 and beyond. Teams that thought that the issue of cord-cutting would be settled before their rights deals came back on the market now need to consider what their budgets will look like if they do worse in local TV markets than they’re hoping to. The Angels might look at their $150 million or so in annual Bally revenues, gulp, and think more seriously about trading Mike Trout. Teams hate uncertainty, particularly the financial variety, and this is perhaps the biggest upheaval in team finances since the inception of revenue sharing.

The magnitude of this impending crisis is far from certain, but teams are likely to take action to mitigate the possible consequences. For teams with unsteady television revenue, that probably means fewer long-term contracts. It’s one thing to face an unexpected $20 million shortfall for one year, and quite another to face one for a decade. Payroll flexibility, always a key goal for teams, is only going to get more important. Everyone will feel the probabilistic squeeze, whether the worst-case scenario comes to pass or not.

In a few years, the industry might look back on this panic and chuckle at their past selves. It’s hardly a given that the worst will occur. The scary part of next year isn’t what will happen, but what might happen. Revenues might level off smoothly. The league might succeed in finding new distribution channels for their huge inventory of games. Live sports is still the biggest ticket in town, even for streamers; Apple, Google, Hulu, and Amazon have all entered the live sports rights game in the past several years.

What’s more, baseball viewership isn’t stuck in the same interminable downward spiral as cable subscriptions. While subscriptions have declined, RSNs continue to boast strong viewer numbers. Cord-cutting hurts overall cable subscriptions, but the people leaving cable were mostly paying for baseball and not watching it. It’s clear that the sport has a strong base of fans interested in watching local broadcasts; the real question facing teams is how they plan on making money by broadcasting the games.

There’s even more reason for optimism: the league might be able to expand viewership in markets where it reclaims broadcast rights. Carriage fee disputes and pre-existing deals limited the available number of subscribers, a problem that direct team ownership of broadcasts could possibly solve. The league’s openness to relaxing blackout restrictions for in-market streaming will also allow it to reach more viewers. The streaming technology is there already courtesy of MLB.TV, and the league is already building out a local broadcast arm, headed by former DSG executive Billy Chambers, to manage the continued rollout.

The shrinking cable market probably means that local television revenues won’t explode in the next few years, but a collapse is not my base case outcome. Heck, the bad scenario isn’t even that bad. If local broadcast revenues decline by 10% across the board, that’s $225 million dollars for the league as a whole. If that works out to $115 million or so in decreased player payroll, a 2.5% decrease. That’s hardly an earthshaking number.

That’s all well and good, but none of those questions will be settled this winter, which is what matters for players currently going through free agency. Expect to hear a lot about revenue uncertainty and fiscal responsibility this offseason. Teams have been telling us they value certainty for a long time. This year, I’m beginning to worry that roughly a third of the league will start to show it with their actions.