SBJ/April 1-7, 2013/Media

MLB clubs look to follow Dodgers

$8B Time Warner deal shakes media landscape

Call it the latest shot heard ’round the world.

When word emerged in late January that the Los Angeles Dodgers had reached a new $8 billion TV contract with Time Warner Cable to create a Dodgers-focused regional sports network, it sent shock waves through the sports and television industries.

Never mind that the 25-year deal still has yet to be formally submitted to Major League Baseball, much less receive a formal blessing from league Commissioner Bud Selig. The sheer size of the proposed pact — more than twice that of prior baseball standard-bearing deals for the Texas Rangers and Los Angeles Angels — holds the potential to alter the economic fabric of both MLB and TV sports at large.

“It was the perfect storm of alignment that the rights became available at the point in time where we had a very large system and with rights that we perceive were important to our customers and ones we would have bought in any event,” said Melinda Witmer, Time Warner Cable executive vice president and chief video and content officer.

The ripple effects of the Dodgers deal are quickly beginning to manifest themselves. In the wake of the pact and prior mega-deals for Fox Sports Net with the Angels, Rangers and San Diego Padres, several teams with soon-to-expire TV deals are eagerly anticipating their turn to cash in. Among the clubs with soon-expiring rights deals are the Chicago Cubs, Seattle Mariners, Philadelphia Phillies and Arizona Diamondbacks.

“We’re feeling very bullish about our future opportunities. And why not?” said Derrick Hall, Diamondbacks president and chief executive. The club’s existing deal with Fox Sports Arizona expires in 2015. “It’s obvious the market is very robust, and we’re now doing a lot of due diligence to see exactly where the Diamondbacks fit into that landscape. Among our questions is certainly whether we continue with FS Arizona, who’s been a great partner, or create some type of Diamondbacks vehicle of our own.”

Several media companies have identified Seattle as the next big sports rights battleground. The Mariners have an opt-out clause from their Root Sports contract after the 2015 season and the NBA’s Kings could be moving to the market from Sacramento, which would add a second property to a Seattle-based RSN and complement the Mariners’ summer programming with the Kings winter programming. Plus, Comcast is the dominant cable operator in the area and already operates a regional sports network out of Portland. The presence of at least two bidders — Comcast and Root Sports — could send rights fees in Seattle soaring.

But the Mariners are far from alone. The Cubs, playing in the nation’s third-largest media market, are busily evaluating what to do with their WGN-TV contract that expires after the 2014 season and have even begun to study options for when their Comcast cable deal expires five years later. The WGN-Cubs deal, worth an estimated $20 million annually for about 70 games a year, is unusually large for a team broadcast deal because of WGN’s superstation status and the simulcast of those games on WGN America. As a result, the status of the WGN deal will have a direct influence on what the Cubs later do with their cable rights.

Earlier this year, battle lines began to form when the Cubs said publicly that WGN parent the Tribune Co. could retain its broadcast rights if it paid “fair market value,” a clear reference to the Dodgers.

The Phillies, similarly, hold a bevy of options when their deal expires in two years playing in Comcast’s home market and boasting some of the largest audiences of any MLB team on regional cable.

The run of big-dollar baseball rights deals, however, holds some potentially dark sides. Pacts such as what the Dodgers are seeking threaten to re-expose economic polarities between high-revenue and low-revenue clubs. MLB spent much of the 1990s and 2000s at war with both itself and the MLB Players Association over how to create a more level playing field among clubs in markets of vastly different sizes.

Since then, revenue sharing has increased substantially, and vehicles owned equally by the clubs such as MLB Advanced Media and the MLB Network spin off more cash to improve competitive balance. On the field, nine teams have won the last 12 World Series, showing the fruits of those labors.

But many of those hard-won gains again stand vulnerable.

“I’ve watched this issue very closely,” Selig said. “We’ll need to make adjustments, and I’m confident we’ll do that. We will make the necessary adjustments because competitive balance is very important to me.”

And even when a team has forged a lucrative new future for its cable TV rights, problems can still surface. In Houston, the Astros launched a new regional sports network with Comcast and the NBA’s Rockets, but are preparing to begin the 2013 baseball season without carriage on most major distributors in the market. Similarly, Fox Sports launched a new RSN around the Padres but has had no luck persuading Time Warner Cable to carry it, with the saga beginning to involve local politicians.

The concept of “fair market value” has also been the subject of a largely private but highly intense battle for more than a year in the nation’s capital between two MLB teams. The Washington Nationals, the consensus media pick to win the World Series, want to more than triple the $29 million they received from the Mid-Atlantic Sports Network in rights fees last year, using the Angels and Rangers as comparables as part of their argument. But the Baltimore Orioles, majority owners of MASN, said the club remains bound to terms laid out in a 2005 relocation settlement agreement between the Orioles and MLB that followed the Montreal Expos’ move to Washington.

Tidal wave of rights fees

The reason behind this escalation in baseball rights fees is the same as it is for other major sports: Live sports pulls ratings and attracts advertisers better than other TV programming genres.

Baseball is in a particularly strong position, since it offers unparalleled volume given its schedule of 162 games per team and summertime placement, when scripted entertainment is typically on hiatus and competition from indoor sports does not exist.

“What we’re seeing also shows how good the game is, that people are willing to pay that kind of money for our content,” Selig said.

Regional sports networks are already buttressed by a dual-revenue stream of subscriber fees and advertising. But for diversified communications companies such as Comcast and Time Warner Cable, overall investments in sports benefit the entire operation, rippling into video, high-speed data and telephony divisions.

Increasingly, distributors find those halo effects from sports more powerful than for many forms of programming.

The Dodgers celebrated a record RSN deal, though it awaits MLB approval.
Photo: GETTY IMAGES
“We aren’t under the same kind of pressure to make our money or earn our keep by large margins on regional sports networks,” Witmer said. “In that regard, we’re able to better afford economics to a team than we would if we were on top of that going to have to add a large margin in order to be successful.”

The dollars involved in the latest baseball rights deals inevitably make headlines. But Witmer says the focus on an overall number is misguided. The money, yes, is big. But beyond the tonnage of programming, what the contracts also represent is long-term security. The Dodgers deal grew as big as it did, in part, because it lasts for a quarter-century, well beyond the 10- to 20-year terms often seen for other teams. As future deals continue to grow in size, Time Warner now has a locked-in number with one of the major brands in all of sports.

“These deals all sound really expensive when they’re made,” Witmer said. “But it’s never going to be the case that someone’s going to take the Los Angeles Lakers away from us, or the Mets here in New York. We will have access to the content at economics that we know and understand for a very long time. That simply makes it more affordable and manageable for us.”

Distributors like Time Warner Cable and Comcast have pitched teams on the benefit of cutting out the middleman, like a regional sports network, and in theory makes available more money for the team. Such was the notion in the Dodgers deal.

“It’s not hard to figure out that when you take out the middleman, there is a chunk of economics that can be shared with the team,” Witmer said. “In our business, a regional sports network is one of 300 channels of programming that we carry.”

Fox Sports Net is, in essence, a middleman. But baseball was a major factor in its recent acquisitions of controlling interests in SportsTime Ohio and the YES Network, channels dominated by their coverage of the Cleveland Indians and New York Yankees, respectively. The deals added to the company’s base of rights deals with 14 teams. The company was near a deal with the Dodgers last fall during exclusive negotiating period between the two entities. But the window expired without a contract, and Time Warner swooped in with its bid.

Still, baseball is fundamental to Fox Sports Net’s operation, even at the mushrooming prices.

“The other word for middleman is aggregator,” said Jeff Krolik, Fox Sports Networks executive vice president. “Certainly, we make a margin. On the other hand, we provide scale. It costs money to run a regional sports network. If you have four regional sports networks, that’s going to be four overheads in one market. Yes, in one sense you cut out a middleman. But you’ve added a lot of overhead to the equation.”

Fox says it tries to be opportunistic with its RSN strategy. In addition to its Indians and Yankees deals, its executives talked with MASN officials briefly more than a year ago about possibly picking up one of those Mid-Atlantic RSNs. Those talks ended, and the two sides have not met in a year.

“Wherever there are teams, we’d certainly like to have a conversation about having an RSN,” Krolik said. “There certainly are some markets that are more attractive than others.”

Balancing act

The primary reason the Dodgers deal has yet to be formally submitted to MLB stems from a lack of consensus around how much of the deal is subject to revenue sharing. Already the topic of intensive discussion between Dodgers Chairman Mark Walter and Rob Manfred, MLB executive vice president for economics and league affairs, the deal still faces a wide gulf in terms of the Time Warner riches due to be shared with the other clubs.

A bankruptcy court settlement between MLB and the Dodgers last year established the club’s fair market TV rights to be worth $84 million a year, with 4 percent annual escalators beyond that. The annual average value of the deal of more than $300 million, leaves, in theory, a great deal of money not subject to revenue sharing.

Some of the revenue sharing discussion is also centered on how the money in the Dodgers deal is defined. Normal rights fees are subject to revenue sharing on a 34 percent basis, with that money designed to improve the entire sport and smooth out differences between large-market clubs and small-market ones.

Teams that own equity in their own networks, such as the Yankees, Boston Red Sox, Toronto Blue Jays and others, are subject to revenue sharing based on a formula derived by the Bortz Media & Sports Group, a consultant to the league, that estimates a fair-market value for the broadcast rights of those clubs.

But carriage fees generated by team-owned regional sports networks are not subject to revenue sharing, generating additional questions from the deal. Among them: How much of that deal actually represents carriage fees, or the promise of carriage fees?

“We’re spending a lot of time on this entire issue,” Selig said.

It’s not a new thought for the commissioner. Nearly 13 years ago, he released the results of a special research panel he formed to look at fiscal balance in the game, the Blue Ribbon Commission on Baseball Economics. The group concluded that “the growing gap between the ‘have’ and ‘have-not’ clubs … is a serious and imminent threat to the popularity, health, stability and growth of the game.” And the report formed part of the basis of management’s negotiating platform during the 2002 labor negotiations with the MLB Players Association.

Revenue sharing reached about $400 million last year, more than twice the total from when the Blue Ribbon report was published. The question, as Selig said, is whether the current mechanisms in the collective-bargaining agreement with the players are sufficient to keep up with the fast-changing TV landscape.

“It does concern me that competitive balance may be beginning to fall out of whack a bit,” Hall said. “Our [average annual value] from TV is quite a bit behind some of our competitors, and probably still will be after the next deal. But we can’t overly worry about our competitors. We still have to be the best we can be. We’ve seen tons of mid-market teams go deep into October. If you do what you’re supposed to do, it is possible to compete.”

Other clubs are maintaining a wait-and-see attitude with regard to competitive balance. There are potentially troubling signs perhaps ahead as even before the Time Warner deal closes, the Dodgers’ 2013 payroll of about $230 million is a league record and nearly 10 times the $25 million that the rebuilding Houston Astros are expected to spend. But with competitive balance at a historical high point, signified in part by a crop of new teams such as the Orioles and Nationals in last year’s postseason, owners are showing faith in the league’s ability to correct course.

“We’re not afraid of what’s out there,” said Lew Wolff, Oakland A’s owner. The club won the AL West crown last year with the league’s second-smallest Opening Day payroll of $55 million. “Competitive balance is working right now. If that changes, I think we’ll be quick to get on it.”

MLB teams’ RSN deals

Team RSN Avg. annual rights fee (million) Team’s equity in the network Total deal (million) Years
Arizona Diamondbacks FS Arizona $31.0 $250 2008-15
Atlanta Braves FS Sports South/SportSouth $20-$30 $400-$600 2007-26
Baltimore Orioles MASN/MASN2 $29.0 86% NA 2006*-NA**
Boston Red Sox NESN $60.0 80% NA 1984*-NA**
Chicago Cubs CSN Chicago $40.0 20% NA 2004*-19
Chicago White Sox CSN Chicago $45.5 40% NA 2004*-NA*
Cincinnati Reds FS Ohio $30.0 $300 2007-16
Cleveland Indians FS Ohio $40.0 $400 2013-22
Colorado Rockies Root Rocky Mountain $20.0 $200 2005-14
Detroit Tigers FS Detroit $40.0 $400 2008-17
Houston Astros CSN Houston $80.0 45% $3,200 2013-32
Kansas City Royals FS Kansas City $20.0 $200 2008-19
Los Angeles Angels FS West $150.0 25% $3,000 2013-32
Los Angeles Dodgers SportsNet LA $320.0 $8,000 2014-38***
Miami Marlins FS Florida $18.0 NA NA
Milwaukee Brewers FS Wisconsin $20.0 NA 2010-19
Minnesota Twins FS North $29.0 NA 2011-NA
New York Mets SportsNet New York $52.0 65% $1,300 2006-30
New York Yankees YES $90.0 25% NA 2002*-42
Oakland A’s CSN California $43-$48 $900-$1,000 2009-2029 (with opt-out after 2023 season)
Philadelphia Phillies CSN Philadelphia $35.0 NA NA-2015
Pittsburgh Pirates Root Pittsburgh $18.0 $180 2010-19
San Diego Padres FS San Diego $60.0 20% $1,200 2012-31
San Francisco Giants CSN Bay Area $30.0 35% $750 2008-32
Seattle Mariners Root Northwest $45.0 $450 2011-20 (with opt-out after 2015 season)
St. Louis Cardinals FS Midwest $25-$28 $250-$280 2008-17
Tampa Bay Rays Sun Sports $20.0 NA NA-2016
Texas Rangers FS Southwest $150.0 10% $3,000 2015-34
Toronto Blue Jays Rogers Sportsnet $36.0 10% NA 2001*-NA**
Washington Nationals MASN/MASN2 $29.0 13% NA 2006*-NA**

NA: Not available or not applicable
* Start date of current contract is unknown; date listed is the year that the RSN launched.
** Not available/Team owner has ownership stake in the RSN
*** Subject to MLB approval
Source: SBJ research and media reports

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