How would MLB teams fare in a direct-to-consumer world?

It’s a time of upheaval in Major League Baseball — both on and off the field. While the league attempts to improve its television product through a series of rule changes this season, behind the scenes, television executives, distributors, and owners are trying to make sense of a regional sports network model teetering on the brink.

Forbes recently released its annual valuations for all 30 MLB teams, an inexact but nonetheless valuable exercise to contextualize the financial standing of each franchise. This year, Forbes has provided figures on the annual media rights fees that franchises collect from the regional sports networks broadcasting their games, along with the average household audience those games receive.

With the recent developments of Diamond Sports Group’s Chapter 11 bankruptcy and Warner Bros Discovery announcing their intention to cease operation of the AT&T SportsNet channels, 18 teams face immediate uncertainty regarding payment of media rights fees.

As franchises and owners contemplate how best to position themselves in a post-RSN world, some teams that own controlling shares of their RSN have introduced a direct-to-consumer alternative. Last year, the Red Sox owned and operated NESN introduced NESN 360 at a price point of $30/month, a DTC service that allows fans to stream Red Sox and Bruins regular season games.

Despite these alternatives being priced around two or three times what consumers pay for monthly streaming services like Netflix or Disney+, they will not provide teams nearly the same financial windfall they are accustomed to with traditional local rights deals, even at widespread adoption.

In this piece, we’ll explore the finances of the traditional RSN model and compare that to a hypothetical DTC model. Which teams have the most at stake should the RSN model collapse?

The Traditional Model

Most MLB fans are accustomed to watching their local team on a RSN that requires a cable subscription. The basic transfer of money happens as such: the viewer will pay a cable operator such as Comcast for a suite of television channels that includes a RSN. In turn, the cable operator pays a carriage fee to the RSN which grants them the right to air the channel. The RSN, with money they receive via carriage fees and sale of advertising inventory on their programming, will purchase the rights to broadcast games directly from the team.

Here are the local rights fees that each team collected compared to their total revenue in 2022, per Forbes.

It’s important to keep in mind, some franchises own a stake in the RSN that broadcasts their games. For our sake, this means the data is not always apples-to-apples since some teams are, in essence, paying themselves.

Generally speaking, local media rights account for a higher percentage of revenues for franchises in large media markets. The four teams that collected more than 30% of total revenue in 2022 from local media rights fees, the Los Angeles Dodgers, Los Angeles Angels, Philadelphia Phillies, and Texas Rangers, all fit that mold.

Conversely, smaller market teams collected a lower percentage of revenues from local media rights. Two small market teams, the Milwaukee Brewers (11.2%) and San Diego Padres (14.5%), earned the lowest percentage of total revenue from local media rights in 2022.

Intuitively, this makes sense. Teams in large media markets negotiate higher rights fees from the RSN than teams in small media markets since more people tune into their games – at least in theory. However, the viewership numbers do not bear this out.

Again, per Forbes, here is each team’s average household viewership for games shown on their local RSN, versus the revenue they collected via local media rights in 2022.

You’ll notice that it is not a direct 1:1 correlation between viewership and the local media rights fee that teams collect. For instance, the Texas Rangers only reached an average household audience of 21,000 in 2022 (tied for 5th lowest in MLB) yet collected $111m in rights fees (5th highest in MLB). It’s noteworthy that the Rangers do not own any of Bally Sports Southwest, the RSN that airs their games, meaning this is the value the Rangers received on the open market.

Part of what accounts for this discrepancy is the carriage fee. This is the fee that cable operators pay to the RSN in return for the right to air the channel to its subscribers. Historically, RSNs have commanded some of the highest carriage fees in all of cable. Why? Because for many, the ability to watch their local sports team is the primary reason to have a cable subscription at all. Both the RSN and cable operators acknowledge this leverage, and the RSNs are paid accordingly.

However, it’s not just those who watch local teams on their RSN shouldering the burden of a high carriage fee – it’s everybody with a cable subscription. That gives teams in large media markets a distinct advantage. Dallas, for instance, has just over 3 million television households while Milwaukee has around 900k. Since RSNs in large markets receive several times the carriage fees of those in smaller markets, teams in large markets can demand a higher rights fee, regardless of viewership.

But the advantage large market teams are enjoying now may no longer be the case in the near future.

The carriage fee model is at the crux of the collapsing RSN model, and the clock has struck midnight on sports television’s greatest con. For years, non-sports viewers have been subsidizing the cost of live sports simply by having a cable subscription. As more and more of these viewers cut the cord, and with the cost of live sports rights on the rise, RSNs are feeling the squeeze. As RSNs pay more for rights, they require a higher carriage fee. Higher carriage fees mean more expensive cable bundles. And more expensive cable bundles lead to more people cutting the cord.

So who stands to win and who stands to lose when all is set and done with RSNs?

The DTC Model

One likely scenario in a post-RSN world is that teams will take their games direct-to-consumer. We’ve already seen some experimentation on this with services like NESN 360.

The next chart will look at how each MLB team would fare with a hypothetical DTC streaming service. For the purposes of this article, let’s say that $30/month is the going rate for a DTC service that gives viewers access to all of their local MLB games. We’ll also assume this service receives widespread adoption, with 100% of current average household viewership subscribing to the service for 6 months (or around one full MLB season).

The chart below shows the revenue each team would collect in this hypothetical scenario, and the percentage of revenue as compared to the team’s current rights fee.

As you can see, on the high end teams could expect to receive 25-30% of their current media rights deal, while at the low end teams could expect to receive just 3-5% of what they currently make from local media rights. Mind you, this is with rather generous parameters, assuming that 100% of a team’s current audience purchases a $30/month streaming service for 6 months.

Clearly, teams should only expect to make a fraction of what they’re making on linear TV with a DTC service.

In this scenario, there aren’t so much winners and losers as there are losers and bigger losers. Teams that stand to lose the least as compared to the status quo are the teams with the most loyal followings. Not only does this include large market teams like the Yankees and Mets, but also smaller market teams like St Louis, Milwaukee, Minnesota, and Cleveland.

Likewise, the big losers are both large and small market teams without loyal followings. Teams like the Texas Rangers, a beneficiary of the traditional carriage fee model but lacking fan support, stand to lose the most in this scenario. It isn’t surprising to also see some of the least popular teams in baseball, such as the Miami Marlins and Oakland Athletics, would be hurting more than they already are.

Conclusion

In some ways, a DTC model could make the MLB more of a meritocracy. With revenue being less dependent on market size, there is a more even playing field for franchises in smaller markets. It may also encourage teams to spend on talent, as their revenue becomes ever more dependent on fan satisfaction.

Of course, none of this is really good for the MLB’s bottom line, or any individual franchise for that matter. That’s why we’ll see teams cling on to the RSN model until it is no longer feasible. But sooner or later, the RSN payments will stop, and it’ll be up to the teams to find ways to recoup the lost revenue. Direct-to-consumer might be part of that equation, but it surely will not be all of it.

Editor’s note: The Toronto Blue Jays are excluded from this piece as Nielsen does not collect data outside of the United States.