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Friends,

MSG Networks, the regional cable, satellite, and radio service owned by the Madison Square Garden Company, reported earnings yesterday for the first quarter of their 2021 fiscal year — matching analyst exceptions with $157M in revenue, which represented just a 2% drop from last year.

Here are the details:

• Revenue of $157.4M vs. $160.9M in Q1 2020

• Quarterly earnings of $0.61 per share vs. $0.57 per share last year

• Affiliation fee revenue decreased by $7.2M but was offset by higher pricing

• Advertising revenue increased $3.6M due to the NHL restart

Despite presenting financial results that were much better than expected—considering the lack of live sporting events during the pandemic—MSG Networks stock is still down almost 50% this year, compared to a 2% gain for the S&P 500 Index.

Today we’ll run through an overview of MSG Networks, check in on how the pandemic has impacted the business, and discuss the future for regional sports networks (RSNs).

MSG Networks, a publicly traded company that owns regional sports networks, was spun out of the Madison Square Garden company in 2015.

In addition to original content centered around sports, MSG Networks hold exclusive local live broadcasting rights for the New York Knicks, New York Rangers, New York Islanders, New Jersey Devils, and have a significant presence for the New York Giants and Buffalo Bills.

The majority of advertising revenue and consumer viewership for MSG Networks comes through their live broadcast of local sporting events — the rest of the time you’ll find the channel filled with recreational programming like “Giants 1st & 10” and “Unfiltered Knicks.”

From a revenue perspective—similar to other regional sports networks—their business has faced challenges.

• 2020 Revenue: $686M

• 2019 Revenue: $721M

• 2018 Revenue: $697M

• 2017 Revenue: $675M

• 2016 Revenue: $658M

• 2015 Revenue: $631M

• 2014 Revenue: $715M

• 2013 Revenue: $1.3B

• 2012 Revenue: $1.3B

Speaking of other regional sports networks, here’s a great chart by Sportico which breaks down the top 20 RSNs by affiliate fees.

Similar to national sports media companies like ESPN, regional sports networks are increasingly becoming expendable as live broadcasting rights continue to march north, while cord cutting drives cable subscriptions south.

Think about it this way — the continued increase in live broadcast rights have driven MSG Networks monthly subscription fee up to $4.65 month, yet only around 5-10% of paying subscribers tune in for even their most popular games.

Why would television distributors continue to pay for carriage when the cost-benefit analysis doesn’t make sense for the majority of their customers anymore?

The answer — they won’t.

Within the last year we have already seen 5 television distributors—including Hulu, YouTube TV, fuboTV, Sling TV, and DISH Network—drop Sinclair Broadcast Groups portfolio of over 20 regional sports networks (Source).

Some say it’s just negotiating tactics but the real reason is even more obvious.

The majority of regional sports networks continue to offer no differentiating factor outside of live sports.

Simply put, if there isn’t a game on — no one is watching.

I continue to believe the only thing consumers of the future will demand a live broadcast for are sporting events and news—everything else will be streamed. This might create a floor for cable subs, but there is just one large issue — with over 80M Americans still tied into cable packages, we aren’t even close to that yet.

Even worse, the pace of cord-cutting continues to accelerate. For example, in 2014 there were -125,000 net subscriber losses for the largest pay-TV providers in the United States — compared to -2,875,000 in 2018.

What about 2020 and beyond?

As more streaming options create increased price sensitivity, it will be even worse.

While households across the country accelerate the pace of cord cutting and major sports leagues like the NBA, NFL, and MLB continue to demand an increase in the price of broadcasting rights, regional sports networks need to build out a compelling content library to decelerate the pace of their decline.

My guess?

MSG Networks ability to offset the loss of millions of dollars in subscription related revenue by increasing the price of their affiliate fee—which they did last quarter—won’t last much longer.

P.S. Consider this a primer on RSNs, I plan to do a deeper dive on the structural issues and possible solutions next week.

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