Sinclair Broadcast Group reported its Q3 ’20 results this morning, including a $4.2 billion write-down on goodwill associated with its regional sports networks (RSNs), which a Sinclair subsidiary acquired just 18 months ago, at a valuation of $10.6 billion. $8.2 billion, or 85% of the $9.6 billion RSNs’ purchase, was financed with debt.

The move means a stunning 40% of the deal’s value has been erased in very short order. The 21 RSNs were originally owned by Fox, but were assumed by Disney as part of the larger Disney-Fox takeover deal. Sinclair’s RSN devaluation is further proof of the shifting of the pay-TV industry and audience preferences.

The pandemic has of course racked sports and the sports TV business, leading to huge audience declines. And cord-cutting has reduced total pay-TV subscribers, impacting all TV networks, including RSNs. But Sinclair’s RSN issues are exacerbated by the fact that a key future growth opportunity the company identified in its deal overview was “exploiting digital rights.” This was to be done through driving streaming viewership on to new platforms and penetrating virtual pay-TV operators for new growth.

The opposite has happened with the virtual operators. YouTube TV, Hulu and fuboTV have all dropped Sinclair’s RSNs this year, eliminating millions of subscribers. PlayStation Vue was also identified by Sinclair as an emerging distributor; it closed down earlier this year. Sinclair said YouTube TV and Hulu accounted for 10% of its gross distribution revenue in September. Sinclair has had better luck renewing traditional operators like Comcast and AT&T but the latter is trying to unload DirecTV and its pay-TV business, which could ultimately impact the Sinclair relationship. And Sinclair said churn was up due to cord-cutting.

The virtual operators forging ahead without the RSNs reflects their desire to keep underlying programming costs under control as their own services become incrementally less appealing due to their rapid rate increases. Not long ago, virtual operators clearly distinguished themselves with low monthly rates, while they sacrificed profitability. These savings are harder for consumers to realize now as rates have spiraled up. Although YouTube TV added a million subscribers this year, future growth is likely to be suppressed.

RSNs find themselves competing in a far more fragmented landscape, where entertainment, social media and gaming alternatives are more compelling than ever. Staying up to date on game scores and watching post-game highlights are easily accomplished these days, detracting from the motivation to watch the game live. Then throw in the pandemic, the reduction in live sports and consumers’ belt-tightening and Sinclair’s RSNs are facing stiff challenges.

Sinclair’s write-down follows Disney’s own write-down of $5 billion in August, related to closing various international TV networks, as it prepares to release its Star branded international streaming service. More write-downs throughout the pay-TV industry are inevitable as the industry evolves.