Amazon+Diamond, TV Sports Advertising and The Benefits of Reach
Beginning in January 2024, most Madison and Wall research and related data published on this Substack will primarily be available to consulting or advisory clients, or otherwise as part of a paid corporate subscription. Please reach out to brian@madisonandwall.com if you would like to discuss these services or for more information about the new offering.
Yesterday, the Wall Street Journal reported that Amazon “is in talks to invest” in Diamond Sports Group, which owns and operates 19 former Fox Regional Sports Networks, including broadcast rights for 42 different NBA, MLB and NHL teams across the United States. The RSNs were sold by Fox to Disney in 2018 and then divested as part of that transaction in 2019 to a JV controlled by broadcaster Sinclair and Byron Allen, and then rebranded as Bally Sports.
Diamond filed for bankruptcy protection earlier in 2023 under the weight of $8 billion of debt and weakening conditions for RSNs. In 2018, the business generated $3.8 billion in revenue, but for 2022 the equivalent figure was $2.8 billion, with distribution revenues of approximately $2.4 billion and advertising of just under $400 million. Over the same period, according to my estimates, US pay TV subscription revenue fell from $106 billion to $103 billion. Pay TV households fell from 95 million to 79 million, although “cord-shaving” especially around sports networks in general – and regional sports networks in particular – has evidently been much more pronounced. Disney’s ESPN, for example, saw approximately 20% fewer subscribers over the same period, but Diamond saw a decline from 74 million (according to a Sinclair investor presentation at the time of the transaction’s announcement) to 40 million (according to a recent bankruptcy filing).
As reported, “if an agreement is reached, Amazon’s Prime Video platform would eventually become the streaming home for Diamond’s games,” subject to securing an agreement with Diamond and the leagues. It’s not clear what shape any agreement will take, and what the product will look like in terms of incremental costs to consumers, or numbers of games that could be available on Prime.
However, the news reminded me of something I’ve been contemplating in context of the future of deals that leagues and teams make with networks and distributors: leagues and teams will benefit if they focus their agreements around the same things that advertisers need - reach - even if it comes at the expense of near-term gains from the other, more dominant sources of media-related revenue streams.
In recent years, sports has become increasingly important to marketers who rely on TV advertising because top-tier properties continue to reach relatively broad audiences with ad-supported programming while general entertainment content viewing has become more and more fragmented, with substantial shares of consumption occurring in ad-free environments. In other words, sports is disproportionately important so long as TV advertisers optimize their budgets against audience reach as well as frequency.
By contrast, advertising has not been quite as important to sports – or at least not as important as other sources of revenues, such as subscription and distribution fees. As Sinclair noted at the time of the Diamond transaction in 2018, “advertising has been under-monetized historically by RSNs” and consequently represented a low share of its revenues. But it’s not just Diamond: it’s generally true that advertising represents a small share of revenues for all sports properties on television at this point in time. At ESPN we similarly can see how advertising represented “only” $3.9 billion of its $17.1 billion in total revenue during the most recent fiscal year. For the domestic TV operations, the figure is a slightly higher share, although not so different with $3.4 billion of advertising and $9.3 billion in affiliate fees. It’s true for newer players, too: on Thursday, DAZN reported its 2022 results showing $2.2 billion in global revenue, but I don’t think that advertising likely represented a huge share of its revenue either (Digiday reported earlier this year that ad sales recently hit the “nine figure mark”).
While it’s possible that sports networks generate ad revenue shares that exceed their audience shares because of their relative reach advantage vs. other content, I note that advertising could be even higher, despite the weak market for television advertising.
This is because as sports networks focus more on maximizing revenue they have successfully raised subscription costs, whether charged directly on an a la carte basis (increasingly true for RSNs) or as part of a bundle with other pay TV networks. With every passing year, this likely leads to fewer subscribers to sports networks than there might otherwise be. One can presume those who pay for and watch these channels will be an increasingly narrow group of hardcore fans while casual fans would watch less. In a world where advertisers are already poised to spend less on TV in the first place, sports programming’s appeal to advertisers may fall disproportionately if revenue-maximizing strategies leads to disproportionately fewer people with access to these services.
I don’t doubt that in the near-term, dedicated fans of teams will find the money they need to pay to watch their favorite teams. As I’ve written previously, I think that consumers have a much higher tolerance for content price increases than is widely believed, as home-based video content continues to offer relatively high value vs. alternative forms of entertainment, and as consumers have increasing flexibility in shifting where they deploy their content budgets. Further, I’ve argued that as TV advertising budgets are going to decline anyways, it’s better for most of the industry to focus on subscription fees, as that’s likely to be a better source of long-term growth relative to advertising.
Unlike general entertainment and news, which can thrive when they produce content for niches, sports is slightly different. For the biggests sports to work as businesses, they need to retain broad appeal. In the long-run, teams need casual fans as well as hardcore ones, as any league focused only on the latter group risks becoming as culturally irrelevant as boxing has become (arguably owing to its focus on pay-per-view after the 1980s). They also benefit from government subsidies which help to support many of their real estate-related initiatives, and that’s harder to realize in a world where teams only have niche followings. As luck would have it for the advertising industry, a common need for broad reach means that the interests of teams and leagues should coincide with those of marketers.
Towards those ends, if sports teams and leagues keep their eyes on the prize of “reach” and optimize their own businesses - and the agreements they make with newer distributors - on those metrics even at the expense of near-term revenue gains, their businesses will be better positioned to win, and the advertisers and the consumers who support them will be as well.