MLB

Why One Floundering Company Might Change The Economics Of Baseball Forever

By Neil Paine

Feb. 21, 2023, at 6:00 AM

Generally speaking, buying a Major League Baseball team is one of the best investments you can make. Franchise valuations have skyrocketed over the past few decades, even relative to other growing financial assets. But baseball’s fast economic growth has depended heavily on a source of money — local cable TV revenues — that has suddenly been thrown into flux. Just in the past week, Diamond Sports Group (which operates the Bally Sports regional networks that televise 14 teams’ games), missed an interest payment that could be the precursor to a bankruptcy filing — and to MLB having to find an alternative broadcasting solution.

For baseball, this could be a crisis or an opportunity. And either way, it has the potential to reshape the sport’s financial landscape as we know it.

Despite what commissioner Rob Manfred might have you believe, MLB owners have recently gotten a lot of bang for their teams’ resale buck. If you bought a team at the average valuation a decade ago ($605 million) and sold for the average now ($2.07 billion) — using numbers from Forbes’s 2022 team value rankings — you’d get a nice 173 percent return on your original investment after adjusting for inflation. Go back even further, and the returns get even more eye-popping: 246 percent over 15 years, 341 percent over 20 years and a whopping 802 percent over 25 years. (For comparison, the S&P 500 “only” offered a total inflation-adjusted return of 209 percent over that span.)³⁷

It’s no accident that this growth has coincided with the TV revenue bonanza for pro sports in general, as pretty much every league has benefited from media-rights bidding wars since the late 1990s. But unlike national-TV-focused outfits such as the NFL, MLB has gotten a particular boost from local-media-rights contracts, which have enabled regional sports networks (or RSNs) to dominate baseball’s financial outlook throughout the 2000s and into the 2010s. The RSNs have traditionally been cash cows for everyone involved — whether it was teams extracting huge rights fees to air their games, or RSNs and cable operators passing those costs along to consumers whether they watch sports or not. And for teams who own their RSNs (such as the Yankees with the YES Network), the earnings can compound upon themselves.

The rise of RSNs is why local TV is so much more important to MLB teams now than a few decades ago. In “Baseball Between the Numbers,” FiveThirtyEight editor-in-chief Nate Silver noted that local media made up about 13 percent of the then-named Cleveland Indians’ total revenue when the team made filings with the Securities and Exchange Commission after the 1997 season. (How typical was Cleveland then? It’s hard to say, but they weren’t too far from the middle of the financial pack overall that season, with a Forbes valuation within 30 percent of average.)³⁸ When we ran a similar exercise for the 2019 season, estimating MLB team revenues by source, we found that local TV deals made up 22 percent of all leaguewide revenues — nearly double that Cleveland figure from 1997, making it the average team’s second-largest source of income after ticket sales.

But if baseball uniquely benefited from the era of increasingly lucrative local-TV rights deals, the sport could also find its financial situation uniquely disrupted by current trends in the industry. As Kevin Draper of The New York Times noted in his excellent summary of the Diamond Sports situation, cord-cutting has taken a major bite out of RSNs’ profitability, with the number of U.S. households subscribing to a cable or satellite TV package dipping from 100 million to 70 million over the past 10 years — meaning less revenue to offset the costs of those massive rights contracts. Together with the debt load Diamond Sports was saddled with by parent company Sinclair Broadcast Group, after Sinclair agreed to buy the formerly Fox-owned RSNs from Disney in 2017,³⁹ the shifting economics of cable sports have left nearly half of MLB teams with a broadcast partner that is on the verge of falling into bankruptcy.

Manfred has vowed that Diamond’s struggles will not cause fans to miss games. “[B]ecause I guess I'm a contingency planner by nature, we are prepared no matter what happens with respect to Diamond to make sure that games are available to fans in their local markets,” he said. "We think it will be both linear in the traditional cable bundle and digitally on our own platforms, but that remains to be seen.” Some have speculated that Manfred might even use the crisis as an excuse to pivot the sport away from tying its financial fate to RSNs, which are beginning to outlive their usefulness. (Side benefits could also include the end of MLB’s much-maligned local blackout rules on its streaming platform.) But whatever baseball’s media future holds, it seems likely that we will look back on the collapse of Diamond Sports as a turning point that upended the same financial model that drove much of the sport’s growth over the previous few decades.