The cord-cutting phenomenon has devastated regional sports networks (RSNs). Under the old cable model, where pretty much every household felt compelled to subscribe, RSNs were cash cows.
They provided a service — coverage of local NBA, NHL, and Major League Baseball franchises — that many customers wanted while being able to charge all customers. If you have a traditional cable package, you almost certainly pay a sports programming surcharge.
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That’s not a fee you can opt out of and at the height of cable it was essentially a license for RSNs, many of which were owned by the cable company in partnership with a team, to print money. That fountain of cash allowed the RSN owners to pay high rights fees for broadcast rights.
In many cases, like in Boston with NESN and the Red Sox and in New York with the MSG Networks and the Knicks and Rangers, the team’s owners were also the RSN owners. That created an incestuous situation where consumers got the raw end of the deal.
Cable company owners got cash to buy programming many (but not all) subscribers wanted, which led more people to subscribe. Team owners essentially got to pay themselves from those “sports programming fees, creating artificially high rights rates.
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As people began to cut the cord, however, the whole system has collapsed on itself. Cable companies have fewer subscribers, collect much less in fees, and can no longer afford to pay what they once did for rights.
That already led to the collapse of the Diamond Sports Group’s Bally’s sports networks, which filed for Chapter 11 bankruptcy. Now, an arguably bigger name is considering a filing of its own.
The Sphere itself has been a success but construction overruns drained the company’s coffers.
Image source: Sphere Entertainment.
MSG Networks has a huge debt
The Dolan family owns the New York Knicks, the New York Rangers, and a large piece of Sphere Entertainment (SPHR) , the company which houses the MSG Networks, regional sports networks that televise Knicks and Rangers games (among other events).
Building Sphere cost $2.3 billion.That’s $1 billion more than was originally planned. Those cost overruns forced the Sphere’s original parent, Madison Square Garden Entertainment, to lay off workers and eventually sell its stake in Tao Group Hospitality.
The new company, Sphere Entertainment, has been wildly successful staging events in the Las Vegas Sphere, but it still has a massive debt problem.
“Turning to our balance sheet. As of December 31, we had approximately $502 million of unrestricted cash and cash equivalents, including approximately $104 million at MSG Networks. Our debt balance was approximately $1.36 billion at quarter end. This reflected $259 million in convertible debt and a $275 million credit facility related to Sphere in Las Vegas,” CFO Robert Langer shared during the company’s second-quarter earnings call.
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Sphere, it should be noted, generated $169 million in revenue with an adjusted operating loss of $800,000.
Langer continued to comment on the company’s debt.
“It also reflected approximately $829 million outstanding on the MSG Networks term loan, which, as a reminder, a step that is recourse-only to MSG Networks. In February, MSG Networks made a principal repayment of $25 million using cash at MSG Networks, bringing total principal outstanding under the term loan to approximately $804 million. As you know, MSG Networks is pursuing a refinancing through a workout with its lenders,” he shared.
MSG Networks could file for Chapter 11 bankruptcy protection
CEO James Dolan admitted during the call that the RSN model no longer works.
“Clearly, the traditional methods which really did a great job of monetizing the product are no longer as viable as they used to be. So, we do have to find under way, but I don’t think that that path is clear yet,” he shared.
Dolan also made it clear that the problem was not unique to his company.
“I mean, obviously, there’s a reduction in cable subscribers, right? There’s the launch of the streaming product. But in the end, it comes down to monetization of product and what’s the best way to monetize the product,” he added.
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The company shared that a Chapter 11 bankruptcy filing, which would only impact MSG Networks, not the Las Vegas Sphere and other assets, remains a possi ability.
“If MSG Networks is not successful in negotiating a refinancing or work-out of its indebtedness, the Company believes it is probable that MSG Networks and/or its subsidiaries would seek bankruptcy protection or the lenders would foreclose on the MSG Networks collateral securing the credit facilities,” the company shared in its most recent earnings release.
