Astros’ Regional Sports Network Awash In Losses And Lawsuits

Comcast SportsNet Houston went live Oct. 1, 2012, and has been in trouble ever since. Actually, the trouble may have started before the first broadcast signal beamed to homes in the Houston area. Now the network and its various constituent owners are fighting in federal bankruptcy court and in Texas state court. The situation may get worse before it gets better.

The Houston Astros own the largest equity stake in CSN Houston, at 46%. The Houston Rockets own 32% and Comcast has the remaining 22%. Comcast owns NBC Universal, which operates Comcast Sports Group — the network of regional sports networks that includes CSN Bay Area, CSN California, CSN Chicago, CSN Philadelphia, CSN Mid-Atlantic and CSN Northwest.

Not only do the Astros have a large stake in CSN Houston, but also a 20-year, rights-fee deal that was supposed to pay the team, on average, $80 million per season. That figure is in line with other recently-inked broadcast deals for MLB teams in medium-to-large television markets: the Rangers and Angels are on the high end, with deals averaging $150 million per year for 20 years. The Padres are on the low end, with a deal averaging $60 million per year for 20 years.

But what the Astros were scheduled to be paid for the broadcast rights to their games differs significantly from what they received. Forbes reported that the CSN Houston deal called for the Astros to be paid $56 million this year, but the network paid only $25 million because it didn’t have the revenue to meet its obligations.

There are several factors contributing to CSN Houston’s bleak financial situation, but biggest is the network’s inability to reach agreement on carriage fees with the non-Comcast cable and satellite operators in the viewing area. AT&T-Uverse, Time Warner Cable and DISH Network have, thus far, refused to pay the $3.40 per-subscriber-per-month fee that CSN Houston demanded to carry the network. As I wrote in July, cable and satellite companies are using more sophisticated rating data to determine who is and who isn’t watching local sports. AT&T-Uverse decided against carrying CSN Houston based on this new, detailed ratings information. Overall, 60% of the homes in the viewing area don’t have CSN Houston.

And so, in late September, Comcast/NBC Universal and several other creditors filed an involuntary bankruptcy petition against CSN Houston and asked U.S. Bankruptcy Judge Marvin Isgur to appoint an interim trustee to oversee operations at the network. The creditors allege that in the negotiations leading to the formation of CSN Houston in 2010, then-Astros-owner Drayton McLane agreed to the carriage fees the network would seek to charge the non-Comcast cable and satellite operators. But after McLane sold the team to current owner Jim Crane, the Astros sought a higher carriage fee, leading to the impasse. A link to the motion (with court-approved redactions) can be found here.

Judge Isgur held an evidentiary hearing on Oct. 28, and at the same time permitted the parties to participate in closed-door negotiations in an attempt to agree on a way forward. The outcome was a court order granting the Astros the authority to “investigate and negotiate the terms of carriage agreements, broadcast agreements, management agreements, lease agreements, equipment agreements, purchase and sale agreements and debt and equity investments and other matters pertaining to the formulation of a business plan.” A link to the court’s order is here.

With Crane in charge, CSN Houston offered its programming free-of-charge for 45 days to the cable and satellite operators that had balked at the $3.40-per-subscriber-per-month carriage fee. That would have made Houston Rockets games available throughout the city, as the NBA season got underway. All of the operators declined the offer, which is a bit curious because the operators might gain a better understanding of network demand if it were offered to subscribers.

Late last week, Crane filed suit in Texas state court against Drayon McLane. Crane alleges that McLane made material misrepresentations regarding the financial viability of CSN Houston during negotiations leading to the sale of the Astros. Crane told the press on Friday that the club has lost tens of millions of dollars — if not hundreds of millions — as a result of representations made by McLane about the business prospects of CSN Houston. McLane and Comcast deny the allegations.

The action returns to bankruptcy court on Dec. 12, when Isgur holds a hearing on the Astros’ efforts to buy, sell  or reorganize CSN Houston. If the Astros haven’t made sufficient progress, the court may still appoint an interim trustee to oversee the network’s operations. Other options are on the table, as well.

The question for Major League Baseball and the teams that have TV deals set to expire in the next few years — including the Phillies, Rockies and Diamondbacks — is whether the situation in Houston is particular to those teams (Astros and Rockets) and that market (Texas, Louisiana, Oklahoma, New Mexico and Arkansas) or a sign that the sports-rights fees bubble is losing air. Howard Megdal reported on Oct, 21 for Sports on Earth that a new, lucrative Phillies TV deal was expected to be announced within 30 days. We’re now five days past that window, and there’s been no such announcement. It’s a holiday week and all, so an announcement just before baseball’s Winter Meetings is still possible. It’s also possible the situation in Houston has given several parties pause.

So for now, we wait. We wait to see what happens in the bankruptcy court. We wait to see what happens in Texas state court. We wait to see what happens in Philadelphia.




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Wendy writes about sports and the business of sports. She's been published most recently by Vice Sports, Deadspin and NewYorker.com. You can find her work at wendythurm.pressfolios.com and follow her on Twitter @hangingsliders.


43 Responses to “Astros’ Regional Sports Network Awash In Losses And Lawsuits”

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  1. Nathan says:

    I’ve been waiting for your post on this. I can’t wait for work to finish so I can read it.

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  2. Excelsior says:

    With mlb.tv and the proliferation of smart tv’s, Rokus, etc., it’s time for MLB to cut out cable entirely and just start selling TV rights directly to the consumer (not gonna happen, I know, but a man can dream).

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    • Blasphemous says:

      By offering mlb.tv to customers ‘outside the viewing area’ of clubs it is now trivial to get mlb on demand in all areas. High speed VPN is cheap ($5/month) and users with the slightest technical knowledge can circumvent the rules with complete impunity.

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    • Evan says:

      You might be less thrilled about this plan when you find out what it costs to buy baseball broadcasts that aren’t being subsidized by people who have zero interest in watching the games or aren’t interested in watching the games if they have to pay a specific fee to do so.

      As you said, this is not going to happen because MLB will bring in a lot less money if it distributes its games in this manner.

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      • Slacker George says:

        If you take the total dollars spent on TV subscriptions as a baseline, and the providers converted to a la carte pricing, individuals could decide which content they wanted based on price and their personal budget. This becomes a muddier decision if some content is a la carte and some is bundled.

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  3. RC says:

    “The question for Major League Baseball and the teams that have TV deals set to expire in the next few years — including the Phillies, Rockies and Diamondbacks — is whether the situation in Houston is particular to those teams (Astros and Rockets) and that market (Texas, Louisiana, Oklahoma, New Mexico and Arkansas) or a sign that the sports-rights fees bubble is losing air.”

    Or it could be neither, and as simple as the fact that the Houston Astros are fucking terrible, and nobody wants to pay to broadcast that.

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    • Jonny's Bananas says:

      While that may be the case, as the article alludes to the network also broadcasts Rockets games. The Rockets are one of five teams with an actual chance to win the NBA title this year, a far cry from “fucking terrible” and definitely a product that some in the greater Houston area would probably have interest in watching on a nightly basis. With the inclusion of the Rockets as a part of CSN, I think the two questions Wendy poses are pretty much the only takeaways you can have from this situation.

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      • Plucky says:

        The Rockets are indeed good, but their inclusion with the Astros has its own set of headaches for cable providers. The Astros media base covers a wider area than the Rockets, since New Orleans and San Antonio have their own NBA franchises. I don’t know NBA broadcasting rules in detail, but I believe that the differeing market definitions have created some problems, especially for national-level carriers like DirecTV and DISH. Defining the relevant media market for CSN-H depends on what sport you are talking about

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    • tylersnotes says:

      if the astros could find a way to capitalize on the gif-worthiness of their team, suddenly they’d be in high demand

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    • BIP says:

      Your suggestion is not a case of “neither”, but being “particular to those teams and that market.” So, yeah.

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  4. odbsol says:

    Wendy, you really do a phenomenal job of reporting on these stories. Thank you for the work you do.

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  5. maqman says:

    Looks like Crane’s due diligence sucked.

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  6. Boris Chinchilla says:

    I didn’t even know CSN Northwest existed. Just checked out their programming..and it might as well not exist

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  7. This really seems like a perfect storm of sorts with the network not already in the cable plan negotiating just as the team is dreadful making for little demand. It’s not surprising carriers balked at 45 free days. It’s a whole lot easier to never give something than to to give it, then take it away. I suspect negotiations in other markets where the station is already in the package to go much better for the network.

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  8. Iron says:

    It may not be first, but the LA Dodgers is the deal that is going to burst the biggest. Nothing in that deal adds up, and the more you research it, the less it does so. If we’ve ever seen the signs of a bubble, that has to be it. They are printing money out there.

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  9. Brandon Firstname says:

    And then there’s the braves twenty-year TV deal, which is somewhere in between 10 and 20 million per year. And the Braves are only six years in to it.

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  10. Hrmm says:

    I assume they turned down the 45-day free trial because people might’ve gotten upset when it was yanked and others would’ve gotten upset at the cable bill increase if it wasn’t.

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    • Mike G says:

      Cable bill shouldn’t have gone up if the channel is free, though I do agree that the fact that Comcast would likely yank it after 45 days which would lead to a lot of complaining is probably the reason they said no. It’s still a bit strange since people would get to see Rockets games as well, and the Rockets are one of the most entertaining teams in the NBA.

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  11. Plucky says:

    The key detail in all of this is Comcast’s “Most Favored Nation” clause, which changes their (Comcast the cable provider’s that is) rate to be the lowest of any carriage deal they sign. This makes it essentially impossible for CSN-H to sign a short-term, lower-$ deal with any other provider since any such deal would on net reduce rather than add to cashflow.

    The clause is also responsible for creating a fundamental clash of interests between Crane/Astros and Comcast- in a situation with low equity value (bankruptcy or near-bankrupcty being exactly that), Comcast (parent co) is better off kneecapping CSN-H by exercising the MFN-clause, since it would reduce the parent co’s liabilities more than it would cost them in foregone profits.

    Lastly, the clause is (I’m pretty sure) the key to the lawsuit betwene Crain and McLane- Crain is alleging ‘failure to disclose’ and if the MFN clause was not disclosed his case will have a lot of merit.

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    • Peter Litman says:

      If Comcast is the largest pay TV provider (i.e., cable, satellite or telco) in CSN-Houston’s operating area, then having a “Most Favored Nation” clause is pretty typical. Usually, if the big guy signs on to high rates, the smaller players will accept them as well. In the event the market rate (set by the others) is less, then it would be unusual for the big guy to still be paying more. An MFN provision gives the early signers an incentive to jump in, rather than string out the negotiation. In this case, with Comcast as an owner, it had plenty of incentive already, but the logic isn’t any different. It seems the real problem is that $3.40 per sub per month is really more than the market will bear. Even with the strong performance of the Rockets, the Astros still represent significantly more games on the service and their very poor performance on the field is probably the top factor pushing the other distributors to hold out. The Twins tried to start their own regional sports network many years ago (2004) and failed, despite coming off a division winning season.

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  12. JP says:

    Noooooooooooo. The rights fees bubble can’t burst yet. My Cardinals have yet to cash in. Man we can’t catch a break.

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    • Plucky says:

      A key lesson to draw from this case is that *if* this is a bubble (of which I am not at all convinced), teams who cashed in at the top are not safe and can still get burned. Each regional network is its own seperately capitalized entity, with the parent co’s having their liabilities limited to their equity stake. The payments to each team are economically equivalent to no-recourse loans. If the RSN goes bust, teams will not be made whole on their promised $.

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      • JP says:

        Right. Well, let’s hope this spreads like wildfire then. Cardinals get paid $14 million per year; the Dodgers make $14 million per three game series. Chaps my ass – how are we supposed to compete???

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        • Jason B says:

          They seem to be doing fine; sometimes smarts can get you further than cash.

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        • Iron says:

          Fox paid the Dodgers $39 million this year. How much they will get next year in the new deal is very much up in the air… as Houston’s guaranteed $80M this year has shown. LA’s deal is built on funny numbers, and should not be believed until it happens.

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    • Plucky says:

      Also, quit your bitching. Start talking about the Cards “not catching breaks” when they stop winning WS’s with 83 regular-season wins or when every player stops turning into Ty Cobb with RISP

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  13. Ruki Motomiya says:

    When you’re the Houston Astros, nothing goes right.

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  14. O's Fan says:

    “With Crane in charge, CSN Houston offered its programming free-of-charge for 45 days to the cable and satellite operators that had balked at the $3.40-per-subscriber-per-month carriage fee. That would have made Houston Rockets games available throughout the city, as the NBA season got underway. All of the operators declined the offer, which is a bit curious because the operators might gain a better understanding of network demand if it were offered to subscribers.”

    Not that curious: it’s hard to miss what you never had. But if the Rockets were playing well, and a large number of fans had their access cut two months into the season, there may have been an outcry, and the operators would have been under pressure to switch or lose customers – the issue would have gained a lot of visibility.

    You’d turn down a free sample from a drug dealer, too.

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    • Plucky says:

      Yes it’s pretty obvious why the providers aren’t taking the 45-day freebie, I don’t think Wendy is seriously suggesting that it’s genuinely mysterious. What I think she is suggesting is that their unwillingess to do the 45-day free look does not jive with their publicly stated rationales and valuations in the negotiating process.

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