SBJ/20100301/Opinion

Team ownership could fade with Comcast-NBC Universal deal

It seems that the trend toward corporate ownership in professional team sports is waning, with many of the media, entertainment and communications companies that have owned teams because the programming has significant content value selling these holdings in recent years.

Indeed, corporations own a majority share of a dozen teams in the NBA, MLB and NHL and a minority in 15 to 20 more. Rogers Communications, Liberty Media, Comcast and Cablevision are among the few remaining media companies that are majority owners.

Viewing sports franchises as entertainment assets, corporations have attempted to use them to garner additional revenue through the teams’ respective playing facilities and media rights. In theory, the ownership of all three assets allows the corporate owner to enhance its value through the exploitation of a wide range of synergies. For this reason, as revenues and costs grow larger and values keep increasing, theoretically, the number of corporate owners should have increased.

Nonetheless, this strategy has not been successful for every corporation. Some notable flame-outs include Disney, News Corp. and Time Warner. All have abandoned their “sports strategies,” at least partially because they were unable to capitalize on their team ownership.

Disney’s failure is likely attributable to its inability to effectively capture the media-related revenue available through its teams. It had no RSN, which contributed to the company losing $100 million during its ownership of the Anaheim Angels and Mighty Ducks.

To Time Warner, the value of owning professional sports franchises was in its ability to charge national advertising rates for the broad cable distribution of local team broadcasts via its TBS Superstation. When this value diminished as the local company grew into a global venture and investor pressure grew for the company to reduce its debt load, Time Warner sold its teams. Ironically, the Atlanta Braves were sold to another media company, Liberty Media, as part of a larger transaction between the companies. Liberty Media is expected to sell the team after the tax requirements associated with the acquisition are satisfied.

Will the NBC merger and a regulatory change
make Comcast’s team ownership less valuable?

News Corp. acquired the Los Angeles Dodgers from the O’Malley family in 1998. In doing so, the company was able to secure the team’s future broadcasting rights. Beyond that, however, the Dodgers were never a great fit for the Fox Entertainment Group, the News Corp. subsidiary that operated the team. The team was never part of its parent company’s core business, and the managerial skill of the parent company’s executives was misplaced when focused on the team side. The Dodgers became lost within the larger entity, and as the team struggled to make the playoffs and began to incur substantial operating losses, News Corp. tired of owning the team. When the parent company made the additional acquisition of DirecTV for more than $6 billion, the Dodgers and its related properties were sold to Frank McCourt in part to help finance the purchase.

There is a final hurdle facing large corporate entities that own sports teams: investor and analyst pressure. When the parent company is facing financial difficulties, investors and analysts often place pressure on the company to return to its core businesses. The team is rarely part of that core. In addition, the revenues that are generated by sports franchises create highly seasonal, irregular quarterly EBITDA (earnings before interest, taxation, depreciation and amortization). Public companies are under regular, quarterly pressure to report EBITDA growth. Thus, sports teams are not necessarily a good fit for publicly traded corporations.

With the exception of a handful of teams, local sports franchises do not have much impact on a national or international level, where audience loyalty is unlikely to be strong and cross-promotional opportunities limited. Locally focused corporations avoid these problems and can retain the additional revenues that are available through team ownership. This is especially true if the corporation is the dominant cable provider in the local marketplace.

Companies like Comcast and Cablevision can realize the benefits of vertical integration. By owning the team, playing facility and local media distribution channel, the company captures the lion’s share of revenue generated by the team. It dominates the local marketplace, where fans are most passionate about the local team and can be most effectively monetized. Corporate owners with a local or regional focus are more successful than those with a national or global focus. Politician Tip O’Neill’s statement that “all politics is local” seems to apply to corporate ownership of teams, as well.

However, based on two recent developments — one regulatory, one transactional — even Comcast’s continued ownership likely soon will be the subject of internal discussion. Comcast’s ability to monetize the entire distribution chain in the Philadelphia market is in part a product of its ability to exploit the terrestrial loophole to the 1992 Cable Act. This allowed Comcast to refuse its competitors access to its Comcast SportsNet Philadelphia RSN. If Philadelphia-area fans wanted to watch televised Flyers, 76ers and Phillies games, they long had no choice but to subscribe to Comcast cable. The competition’s market share was paltry.

However, the FCC recently took a dramatic step toward removing the terrestrial loophole, and if Comcast’s appeals efforts fail, then the competition will likely gain access to CSN. Dollars will leak out of the distribution chain, and the value of team ownership will decrease.

In addition, the Comcast-NBC Universal deal will result in a corporate behemoth with tentacles in a number of different aspects of the entertainment industry. The prior experiences of large corporate owners are instructive here. Time Warner, News Corp. and Disney struggled to integrate their team sports holdings into their corporate portfolios. These non-core businesses can be operational, managerial and public-relations headaches and are easily shed when a short-term infusion of capital is needed to reduce debt, acquire another company or for any other reason.

Will the Flyers and 76ers get lost in the new, much larger entity? Will they become so non-core that the company will jettison them to raise capital?

Time will tell, but history dictates that, when combined with the likely loss of the terrestrial loophole, team sports ownership will play a diminished role in the new Comcast-NBC Universal entity.

Scott Rosner (srosner@wharton.upenn.edu) is the associate director of the Wharton Sports Business Initiative and a lecturer at the Wharton School of the University of Pennsylvania.

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