SBJ/April 9 - 15, 2007/This Weeks News

Going OT for Extra Innings

Waiting for the US Airways shuttle at Washington’s Ronald Reagan National Airport on Tuesday, March 27, senior MLB executives were doubtful that baseball could cut an Extra Innings deal with cable operators.

DirecTV CEO Chase Carey testifies before
a Senate committee on March 27.

They had just left a U.S. Senate Commerce Committee hearing at which Sen. John Kerry, D-Mass., demanded that they meet with cable executives at least one more time, but MLB executives thought the gulf between the two sides was too wide to bridge, especially with Opening Day just five days away.

Nevertheless, before boarding the plane, Tim Brosnan, the league’s executive vice president for business, pulled out his cell phone and called Comcast Chief Operating Officer Steve Burke, an influential executive Brosnan had gotten to know over the years. Brosnan, one of the most outspoken critics at MLB over the cable industry’s handling of negotiations, was under intense public pressure to meet again.

“I asked [Burke] if he was serious about doing a deal,” Brosnan said. “He told me he was.” The two men set up a meeting for the next day.

Comcast sent its primary deal maker, Matt Bond, to MLB’s New York headquarters, where he and Rob Jacobson, CEO of In Demand, met for two hours with Brosnan and MLB senior vice president Chris Tully and senior counsel Rob McGlarry. Once Bond was dispatched to New York, it became clear to all the parties that everyone — MLB, DirecTV and cable — wanted to cut a deal. What followed was a series of round-the-clock negotiations that saw the executives regularly put in 21-hour days.

Just getting all of those executives in the same room would have seemed impossible only a short time earlier. Cable and baseball had been squabbling publicly since December, when news of MLB’s pending DirecTV deal first broke. In the Senate hearing, MLB Chief Operating Officer Bob DuPuy and In Demand’s Jacobson admitted that they had met only once in the preceding months. But while Kerry and the other senators couldn’t force a deal, one thing they could do was turn up the heat, and, in fact, the hearing seemed to reinvigorate the parties. They all came out of it with the sense that a deal was possible, a stark change to cable’s initial reaction that baseball signed a “de facto exclusive deal” with DirecTV.

“You should not discount the importance of John Kerry and the Senate Commerce Committee,” said one senior-level cable executive. “All of the body language from everyone involved changed after that.”

The result is a deal that surprised many cable and sports industry veterans, given cable and baseball’s entrenched positions. In Demand agreed to pay about $385 million over seven years for Extra Innings. DirecTV will pay about $175 million over that same period. Cable wound up paying more than twice as much as DirecTV because baseball demanded that the distributors pay proportionally based on their digital subscriber base, rather than the number of Extra Innings subscribers they sign up. Cable has many more digital subscribers.

Cable, however, points out that the $385 million price tag is much less than the $700 million offer it made two months ago.

So, while MLB gets less cash in the deal, it got something it coveted: distribution for its Baseball Channel. In Demand has committed to launch the Baseball Channel when it debuts in 2009, and MLB gave In Demand about a 16 percent stake in the channel, the same amount as DirecTV.

MLB originally provided DirecTV 20 percent equity in the channel, and it hadn’t been thought baseball would cut further into its ownership stake to make room for cable. But the change of heart provided some crucial energy to make the agreement happen.

That concession, along with a 20 percent cut in its aggregate yearly rights fee for Extra Innings, will provide baseball with one of the most successful channel launches in TV history. The In Demand consortium and DirecTV will combine for more than 40 million households for the MLB Channel when it launches in 2009. By comparison, it took NFL Network four years to achieve the 40 million benchmark.

In the end, everybody ended up feeling like a winner, but right up until the deadline, it seemed there was no deal to get done.

On Saturday, March 31, with a midnight deadline looming for cable and Dish Network to match DirecTV’s terms for Extra Innings and the channel, the two sides were still far apart.

Complicating matters was Brosnan’s intent to wrap everything up by 5 p.m. Saturday. A 1980 graduate of Georgetown University, he was not going to miss the chance to watch his alma mater play in the Final Four. He had already passed up a chance to travel to Atlanta for the game in order to work on the deal. He was not going to miss watching it on TV. Brosnan watched the game at home with his family, and he said he did not take calls.

As the game’s tip-off approached, MLB executives realized that a deal wouldn’t be completed by the previously stated deadline of 11:59 p.m. that day. But they were encouraged enough by the progress that Commissioner Bud Selig, DuPuy and Brosnan decided to extend the deadline beyond the start of the season.

But several potential snags loomed.

One potential snag was with DirecTV, which held the right to approve any deal. CEO Chase Carey, however, made it clear to MLB that he would approve any deal making financial sense to the satellite operator.

“The tenor from our side was fine,” said Derek Chang, DirecTV’s executive vice president of strategy and development. “We could always walk away from the deal if we wanted to.”

DirecTV’s initial deal, announced a month ago, provided the satellite operator financial protection. If another carrier were to gain the programming, DirecTV’s payments to MLB would go down sharply. DirecTV can also still claim technical superiority on its version of Extra Innings, and will alone have the Strike Zone-enhanced channel it has developed. Now it’s paying far less in its annual rights fee and still gets a solid equity stake in the new channel.

The other potential negotiating hiccup came from Comcast’s In Demand partners, Time Warner Cable and Cox, who also would have to approve any deal. Comcast executives were optimistic they could talk their partners into accepting the deal.

The talks picked up steam Monday and Tuesday last week, with Bond visiting MLB’s New York office both days for all-day meetings. DirecTV’s Chang happened to be in New York, and he also was a regular visitor at MLB offices on Tuesday and Wednesday. MLB executives shuttled between Bond and Chang for most of Tuesday.

By Wednesday, a deal was imminent. Bond was back in Philadelphia. With Burke and Comcast CEO Brian Roberts in the background, Bond called MLB to talk out the final details. Finally, they agreed on the deal.

Bond then went to Time Warner and Cox. Time Warner, in particular, was tougher to convince, since it has been publicly speaking out on the rising costs of sports rights for years. Ultimately, they were convinced that the deal made financial sense, especially given its stake in the Baseball Channel.

By 3 p.m., Bond called Brosnan, saying that all operators were on board. Five hours later, In Demand sent out a statement announcing the deal.

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