Houston sports fans have grown used to good news around this time of the year. This year is no different.
After winning their division, the Astros are heading to baseball’s playoffs. Basketball’s Houston Rockets, one of the NBA’s hopeful teams, open their preseason on Oct. 10. And thanks to an M&A transaction that closed Sept. 30, fans of both will continue to be able to watch their teams live on a newly created network to be known as Space City Home Network — a change in something more than branding that began Tuesday.
Structurally, the deal is a joint venture between the two teams that acquired what was known as AT&T SportsNet Southwest from Warner Bros. Discovery, a tiny piece of the massive inheritance brought by AT&T’s $57 billion divestiture to the Discovery network in 2019.
Lawyers from the Texas offices of three law firms were involved — Weil, Vinson & Elkins and Latham & Watkins. Mark Kelly, Harry Perrin and Francisco Morales Barrón led V&E’s counsel of the Astros. At Latham, New York partner Ian Schuman and Houston partner Nick Dhesi led the team advising the Rockets. Weil Dallas partner James Griffin led the Weil team advising Warner Bros. Discovery.
For their high-profile owners, Tilman Fertitta (Rockets) and Jim Crane (Astros) that joint venture forestalls, for the moment, a lingering nightmare: How to anticipate the role of broadcasting in professional sports — a role that has traditionally provided a massive share of revenues now threatened both by streaming, “cord-cutting” and competition for fans from evermore exotic (and often cheaper) team sports.
The nightmare is not just Houston’s. Despite the raging popularity of sports in general, regional sports networks (RSNs) across the country are facing the same stark obstacles: declining advertising, fickle viewers, increased channel usage fees and an accompanying decline in cable and satellite viewers in general, who are switching in large numbers to free or low-cost antenna-based and streaming systems like Roku, Sling and Vudu.
In February, Warner Bros. Discovery informed the teams in Houston — along with teams in Pittsburgh, Colorado and Utah — that they would likely be unable to pay for the rights associated with their AT&T Sportsnet-branded channels. The letter from the unit’s president Patrick Crumb, as quoted in the Wall Street Journal, said that its new owners at Warner Bros. Discovery “will not fund our shortfalls.” The implication was that a filing for bankruptcy might be imminent.
The letter came as no particular surprise to James Crane, who along with Houston Baseball Partners purchased the Astros from Drayton McLane in 2011, along with a stake in what was then known as the Houston Regional Sports Network for $615 million. Two years later Crane sued McLane and Comcast claiming he had paid too much for what he had discovered was a failing network. Crane said he and HBP were misled about what affiliate rates the Houston Regional Sports Network would be able to charge distributors of its programming. Comcast has since been dropped from the $332 million lawsuit. But in August the Texas Supreme Court dismissed McLane’s challenge of the lawsuit under the Texas Citizens Participation Act, sending the case back to Houston pending trial.
Houston was not the only city affected, but it has also become the center of similar storms in other regions of the country.
In March, the Diamond Sports Network — a subsidiary of the ubiquitous Sinclair Broadcast Group — announced that it had been working on a restructuring support agreement to eliminate $8 billion in debt for its 19 RSNs and had filed for bankruptcy in the Southern District of Texas. With the case now before Bankruptcy Judge Christopher Lopez, Diamond is represented by Porter Hedges partner John Higgins in Houston; the creditors committee is advised by Dallas Akin partner Marty Brimmage.
Since March, the case has become a sprawling proceeding, involving not only the 5,000 local broadcasts for baseball, basketball and hockey teams in cities like Detroit, Chicago, Dallas and Phoenix, but for creditors ranging from employees and vendors to state and local taxing authorities for whom broadcast revenues are more than a rooting interest.
Francisco Morales, one of the V&E partners advising the Houston Astros, said the Houston joint venture is intended to be more than a stop-gap for the two teams, by absorbing the network the teams have averted what could have become an existential threat to their fan base.
“I don’t think it’s a secret that the RSNs haven’t been doing great,” said Morales. “The competition from streaming and slower advertising revenues meant that the networks weren’t generating (enough) revenue.”
But he said the joint venture structure of the two-team television partnership assures, at least for the current and upcoming seasons, the continuance of local sports telecasts.