Mariners’ Gamble on Majority Stake In ROOT Sports Northwest

In a deal announced on Tuesday, the Seattle Mariners will become the majority stakeholder in ROOT Sports Northwest, the regional sports network (RSN) owned by DirecTV. ROOT Sports NW currently broadcasts Mariners games under a 1o-year rights fee contract that pays the Mariners $45 million per year. That agreement gave the Mariners an opt-out clause after the 2015 season, which led many to speculate that the team would look to match the mega deals recently struck by their American League West rivals.

In 2011, the Angels inked a new local TV deal with regional sports network Fox Sports West, valued at $2.5 billion over 17 years, plus a 25% equity stake in the RSN. The Texas Rangers kicked off this new frenzy in late 2010 with its 20-year/$1.7 billion deal with Fox Sports Southwest. After the Angels’ new deal, the Houston Astros cashed in, joining with the Houston Rockets to create a new RSN with Comcast, called Comcast SportsNet Houston. The Astros will receive $80 million a year for the next 20 years, plus income generated from its 45% equity stake.

Instead, the Mariners are headed in a different and somewhat surprising direction. The new deal — estimated by Forbes at $2 billion over 17 years — will give the Mariners broader control over the RSN’s programming. But that control may come with some financial uncertainty.

At the moment, three MLB teams own majority stakes in their regional sports networks: New York Mets (SNY), Boston Red Sox (NESN), and Baltimore Orioles (MASN). The New York Yankees recently sold their majority stake in the YES Network to News Corporation. The Los Angeles Dodgers expect to join the group next season with the launch of SportsNet LA, an RSN operated by American Media Productions, a newly-formed subsidiary of the Dodgers’ ownership group.

The financial uncertainty arises, in part, from the way MLB treats the different revenue streams from a team-owned RSN for purposes of the league’s revenue-sharing program. For example, NESN pays the Red Sox $90 million each year for the exclusive right to broadcast Sox games. That $90 million is included in the Red Sox’ “net local revenue” and subject to revenue-sharing. But the Sox also receive revenue as a result of its majority stake in NESN. That investment income is not subject to revenue sharing because the Red Sox bear the risk of NESN’s overall financial performance. Only the guaranteed yearly payments are subject to revenue sharing. (If you haven’t read my earlier posts explaining the ins and outs of MLB’s revenue-sharing program, you can find them here and here.)

Contrast the Red Sox/NESN situation with the Angels’ new deal with FoxSports West. Under the Angels’ 17-year/$2.5 billion deal, the team is guaranteed $150 million in annual rights fees and investment income from their 25% equity stake in the RSN. That’s $60 million more in guaranteed money each year for the Angels compared to the Red Sox, but with a much smaller upside from the minority stake in FoxSports West.  The full $150 million rights fee is subject to revenue sharing.

The details of the Mariners-ROOT Sports NW deal have not been been made public. If Forbes’ numbers are correct, the team will likely receive an annual rights fee in neighborhood of $117 million. That would top the annual rights fees of the Red Sox and the other teams with majority control over their RSNs. But we’re awaiting details on the size of the Mariners’ equity stake in the RSN; all we know now is that it will be more than 50%.

And the equity stake isn’t the only uncertainty. There’s also all the question of what this new RSN will broadcast. All of the team-controlled RSNs have a wide variety of sports programming. NESN is home to not only the Red Sox, but also the Boston Bruins games and other New England sports programs. SNY covers the Mets, the New York Jets and Big East Conference football and basketball games. MASN broadcasts Orioles and Nationals games, and covers the Baltimore Ravens. The rich and diverse content on these RSNs drives up the network’s value; the MLB teams benefit from their majority share.

For now, ROOT Sports NW is the home of the Mariners and the Utah Jazz, plus the Seattle Sounders and Portland Timbers of Major League Soccer, and Gonzaga University’s men’s basketball team. The Mariners’ decision to take over control of the RSN now may be a calculated gamble that the Sacramento Kings will be sold to the Seattle-based investment group, moved to Seattle, and be looking for a new broadcast home. If that happens, the Mariners would be in a very good position to cash in. But that’s a very big if.

And then there’s the issue of whether we are in a sport rights “bubble” and whether that bubble is about to burst. When an RSN guarantees a sports team millions and millions of dollars each year, the RSN has two main avenues for raise the cash to pay those fees: advertising during the sporting events and carriage fees charged to cable and satellite operators to carry the RSN on their network. Sometimes, negotiations between the RSN and the cable/satellite operators break down. That’s happened with the FoxSports San Diego, the new RSN in Southern California that’s agreed to pay the Padres $60 million per year for 20 years, and with Comcast SportsNet Houston, the new RSN that’s agreed to pay the Astros $80 million per year. Several cable/satellite companies in those cities have refused to pay the fees the RSNs have demanded; customers of those companies can’t watch the Padres and Astros, respectively, on their home TVs.

In other instances, cable and satellite companies try to pass on the carriage fee — or a portion of it — to the customers by including a local sports programming surcharge on the monthly bill. For now, a customer’s only choice is to either cancel his service or pay for the sports programming and the extra fees. A DirecTV executive told the New York Times in January:

When a team sees their rights fees, and therefore the costs to consumers, rise more than sixfold, as is rumored, for the exact same games that they got last season, that’s an unsustainable model.

Remember, DirecTV is the parent company of ROOT Sports.

What we know for sure is that the Mariners have more than doubled their local TV broadcast revenue for the next 17 years. That keeps them within striking distance — financially — of the Angels and Rangers. What we don’t know — what the Mariners don’t know — is whether their gamble of a majority ownership of ROOT Sports NW will pay off.




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Wendy also writes for Sports on Earth and Bay Area Sports Guy. She's written for ESPN.com, Baseball Nation and The Wall Street Journal. Wendy practiced law for 18 years before pursuing her passion for baseball. You can follow her writings and ravings on Twitter @hangingsliders.

28 Responses to “Mariners’ Gamble on Majority Stake In ROOT Sports Northwest”

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  1. Pr says:

    i would think it makes sense to keep more equity if your team isnt as good now, no? As your team improves the next few years (which i bet the Mariners believe). Seems dumb for the Astros to sign a long-term deal now given their ratings probably arent great. Wendy, am I thinking about this wrong?

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  2. philosofool says:

    Prediction: The Mariners will be the first MLB team to distribute their content for a fee over the internet.

    They are now poised to do so with no conflict of interest regarding the value of their RSN deal. Welcome to the 21st century in sports media, about 15 years too late.

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    • Pablo Fanque says:

      Except for that minor detail of MLB not wanting them to coompete with MLB.tv, sounds like an intelligent prediction!

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      • Daven says:

        The smarter business move would be to make a deal with MLB.TV to remove the blackout restriction in Mariners territory.

        MLB.tv’s already got the system in place, so no need to start from scratch or maintain a separate system.

        In the end, though, it would come down to whether they thought they could make as much money, or more, on online streaming as they do via cable/sat. If they can, someone will do it and everyone else will follow. But right now there just isn’t the same money there in advertising from online eyeballs as traditional, even in video. In the last few years that’s started to change markedly, but it’s still not even close.

        Subscriber monthly fees could make up for that though, but if the price needs to be too high, most won’t sign on.

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        • B N says:

          Right now at least, you can’t make as much money as cable or satellite will pay you. The broadcast networks are relying on sports to keep people from cutting their cable and fleeing to internet broadcasting. It’s one of the few things people insist on seeing live. As such, networks are probably paying more than market rate for sports just to keep the rest of their business model afloat.

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      • philosofool says:

        I think the M’s would probably work this through MLB.tv, paying some amount of money to the league per subscriber. It makes sense because then it can be streamed over the host of MLB.tv devices, through the MLB.tv apps for them, and so one.

        I didn’t mean to suggest any specific model for the internet distribution, just that the Mariners will figure out how to make a team specific subscription happen.

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    • cass says:

      I thought the Padres already did this? I remember seeing the option a few years ago, though I don’t know if they still do it.

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    • cass says:

      There’s also still a huge conflict of interest. Cable companies will not want to carry their RSN if the RSN also makes the games available separately. The Cable companies pay to be a monopoly. They’re the ones ensuring the blackouts, not the RSNs.

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      • philosofool says:

        The cable companies aren’t going to turn down the RSN because they don’t get a monopoly on it. It might depress the value of their per subscriber payment from cable, but it won’t actually cause cable companies to drop anything. The last thing cable companies need is to give you another reason that it’s not worth $80 a month.

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        • marc w says:

          But their revenue comes from carriage fees, and we’ve already seen carriers start to balk at these spiraling rate increases.

          I actually think the group that could/probably will break the cable/carrier-only model is HBO. MLB isn’t going to want to go first on the pay-as-you-go model, not when they’re benefiting from the huge national tv rights agreements that depend on people being tied to cable/dish for in-market baseball.

          HBO isn’t tied to anyone. They’ve got an awesome subscription package in HBOGO, you just have to subscribe to the network already (which eats into the utility of HBOGO). They’ve already broken off HBOGO as a standalone service in Scandinavia. It seems like it’s only a matter of time.

          Once HBO (or showtime or whoever) does it, then the sports people may look into it, but this would be a huge blow to cable carriers, so it won’t happen without a major fight and lawsuits galore.

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  3. Pablo Fanque says:

    Well, it’s the Mariners ownership we’re talking about. When they spend, they spend wisely. Only they could bungle up situation that has made several other teams very rich. So, of course, they will.

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    • Nathaniel Dawson says:

      So they spend wisely, but they don’t spend wisely? You’re confusing me.

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      • Brent says:

        Unfortunately, the sarcasm font is invisible. I believe his second sentence is not just dripping but completely engulfed in it.

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        • Michael says:

          But then his third sentence came along and blew it up. While I fully expect bad writing from the average forum commenter, I also expect that such writing must face the consequences of its existence; i.e., confusion and mockery.

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  4. Zachary says:

    Consider how similar the Astros’ deal is to the Rangers’ deal though. It seems that the Astros utilized some sort or leverage, given how poorly they have been performing lately.

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  5. Jason says:

    How will the Mariners ownership of a RSN effect their profit sharing agreement with Washington State? (Which hasn’t actually started yet as they still have $37M worth of debt left from playing in the Kingdome)

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    • Michael says:

      The Mariners organization carries no debt. What the Mariners are doing prior to profit sharing is recuperating the $200 million lost BY (not from) playing in the Kingdome, and once the club has recuperated that cost, will share 10% of their profit with the public.

      The reality is, it won’t affect much, because whereas they now are getting way more revenue from the RSN, they also have the expense of buying that majority stake.

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  6. darrylzero says:

    I wouldn’t underestimate the importance of the Sounders and the Timber here. I don’t know if it’s still true, but when I was growing up, Seattle’s eastside suburbs had more soccer players per capita than any other part of the country (although, to be fair, I’m not exactly sure what the precise boundaries of that geographical area were or how similar the areas it was being compared against were). Today, I don’t think it’s fully translated to TV, but the enthusiasm around the Sounders is incredibly evident to me, despite living on the other side of the country (and having done so for 10 years). Many of you probably know this, but check this quote out:

    “Seattle set an MLS record for attendance with an average of 30,897 during their inaugural season in 2009, only to surpass that mark in 2010 with an average of 36,173 and again in 2011 with an average of 38,498. This season, Sounders FC has continued to set the standard by averaging 41,480. Seattle’s current mark would rank fourth in Italian Serie A, and fifth in Spanish La Liga, sixth in the English Premier League, 13th in German Bundesliga. Seattle’s 2012 attendance average would also currently rank fifth in MLB and first in the NBA and NHL. Last season, Sounders FC drew 654,431 fans for MLS matches and is on pace for more than 700,000 fans this season.” (That comes from the Sounders own website, but I assume the numbers are legit).

    That’s pretty good. Sounders’ TV ratings, according to the same article, “[rank] first in the league, and would rank in the top third in the NHL and top half in the NBA.” So, while the Kings cum Sonics might be a big part of the deal, the Sounders are probably a much bigger part of it than people who don’t follow the MLS or don’t have personal connections to the Pacific Northwest generally realize. And I say this as someone who has trouble connecting with the American game and doesn’t himself much care about the Sounders (though I think the whole thing is pretty cool).

    I don’t know as much about Portland, but the enthusiasm around the Timber is clearly also pretty durn high. See:

    http://www.grantland.com/blog/the-triangle/post/_/id/37140/the-portland-timbers-reserve-league-is-sort-of-insane

    It’s hard to know how much those numbers might grow or what TV viewership might look like in the long run, but having both sides of the biggest rivalry in MLS can’t hurt.

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    • Andrew says:

      The problem is that Root only shows re-runs of Timbers and Sounders games. The live games are almost all broadcast free OTA and then replayed on Root later.

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      • Michael says:

        The point is may be that Root may also put itself in competition for live Sounders rights. However, because MLB and MLS seasons run during spring/summer/fall, that would require the Sounders to schedule their match start times around the M’s, which is a tradeoff they may not want to make. (Free TV is also a savvy move to gain casual fans.)

        Root already does broadcast some live Timbers matches, and at least one 2012 match start time was rescheduled to resolve a conflict after an M’s game was rescheduled.

        And that’s (another reason) why the Sonics/NHL team would be more lucrative: much of their seasons occur outside of baseball season.

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    • Soledad says:

      The problem I see for soccer is that there seems to be very few opportunities to advertise. For the English Premier League I am sure it is very profitable to have Barclays as a title sponsor considering that the UK economy is heavily dependent on the banking industry. The US has a consumer economy which is heavily dependent on branding.

      Of course this is an over simplification of a very complex issue but I think one only needs to observe the quality of soccer broadcasts and coverage to get an idea of what the value of soccer media is in the US.

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  7. Jimmy says:

    While SNY does technically have Jets and Big East coverage in addition to the Mets, I don’t think that they’re huge draws. The Jets coverage is limited to post-game pressers and weekly magazine shows. While those are nice, most fans on football Sunday are more apt to turn to the next game than watch post-game interviews that say very little. Big East basketball has some juice to it but I think 70+ Jazz games a year should do better than that. Maybe the market size difference is such that the 130+ Mets games a year is enough on its own to carry the station but it doesn’t seem like Root NW is carrying that much more content than SNY.

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    • Ron says:

      Jazz games on ROOT? I haven’t even noticed. If the Sonics don’t come back NBA interest in Seattle will completely evaporate. Now if ROOT could come up with a deal to broadcast the Canucks or if an NHL teams comes to Seattle I could see that being successful.

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  8. Wade8813 says:

    I remember reading something a little while ago about the Mariners saying the deal to acquire an NBA team would be bad. When we announced the Root deal, there was a comment subtly slipped in along the lines of “Now we have an interest in other Seattle sports teams”

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  9. maqman says:

    NBC signed a deal a few days ago to broadcast the English Premier League games in the US. They are going to air a lot of this content on a variety of platforms, which will help further establish the game in the US. NBC Universal, Time Warner, Fox, ESPN and Comcast are paying big bucks for sports content because of its perceived value. If they don’t see a clear path to profit from these deals they would not make them. It’s interesting that Fox’s British sister company Sky Broadcasting, which is the largest holder of Premier League game broadcasting rights in the UK, couldn’t help them with the US rights package.
    ROOT Sports parent Direct TV doesn’t appear to be competitive financially with these other media mammoths and probably sees partnerships like it now has with the Mariners as the best way to compete with them.
    I’m pretty sure these team rights agreements in regional markets will include language covering all possible platforms for the content for the lengthy periods they cover.
    Given each teams market area is blacked out on MLB-TV I can see the teams being allowed to stream their regional content on the internet in their blacked out area. Cable operators will probably pay something like $2 to $3 per household per month for the Mariners content, the Dodgers are expected to get something like $5 but their market population is much larger. Teams streaming directly to regional internet households could probably get twice that as customers don’t have to pay for all the other cable content. The threat to do so gives them clout in negotiations with cable providers.

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  10. True North says:

    Make that 5 groups that own and control their own RSN network, that being the Blue Jays which are owned by Rogers communication ( they also own the primary cable distribution and cell phone company in Canada ).

    Carriage fees are essentially set by a government agency.

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