Revenue-Sharing Flexibility Stretches With New TV Deals

Last week, I reported on local TV contracts for all 30 major-league teams. The article’s lede was the Dodgers’ potential $6 billion-to-$7 billion deal with Fox Sports West that was slated to start in 2014 and would run for 25 years. It turns out the Dodgers and Fox did not come to agreement by last Friday’s deadline. Under their existing contract, the Dodgers can make one final demand by this Friday, which Fox can either accept or reject outright. If that doesn’t lead to an agreement, the Dodgers are free to negotiate with others. Time Warner Cable is waiting in the wings.

Whomever the Dodgers ultimately cut a deal with to broadcast the team’s 162 games, expect the deal’s value to stay in the $6 billion-to-$7 billion range. But it may not be a straight-cash deal. As Bill Shaikin of the Los Angeles Times reported, the Dodgers may end up with a significant ownership interest in Fox Sports West or another broadcast partner, much like the Rangers’, Angels’, Astros’ and Padres’ new deals.

At first glance, a part-equity deal would seem to counter some of the outrage elicited by the all-cash deal, which was estimated to net the Dodgers $240 million to $280 million per year in broadcast-rights fees. But in reality, an all-cash deal is better for the league as a whole, because rights fees paid to the Dodgers (as opposed to profits from an equity stake in a regional sports network) would be included in a team’s “Net Local Revenue” — essentially the bundle of money subject to MLB’s Revenue Sharing Program.

Or would they?

Remember the Dodgers have something of a sweetheart provision when it comes to local TV fees and revenue sharing: As part of the former owner Frank McCourt’s bankruptcy proceedings, the court ruled the Dodgers’ new TV contract would be “valued” at $84 million for purposes of revenue sharing. In other words, if the Dodgers go with a straight-cash deal, only the first $84 million in yearly fees will be subject to revenue sharing; the rest can be pocketed for the team’s own use. The result will be the same if L.A. goes the partial-equity route, as long as the cash payments exceed $84 million per year.

But put aside the Dodgers’ $84 million revenue cap. The revenue-sharing program in the current collective bargaining agreement is designed to capture a significant portion of the additional cash teams will rake in with the new local television deals. In fact, the revenue-sharing language in the current CBA changed fairly dramatically from the CBA that was in place from 2007 through 2011. Remember that the first wave of new TV contracts came in late 2010, when the Rangers and Fox Sports West reached a 20-year, $1.7 billion deal to commence before the 2015 season. It appears that deal was very much on players’ and owners’ minds when the current CBA was negotiated in 2011.

A few weeks ago, I explained the current revenue-sharing program in this post. If you didn’t read that post, do it now, as I won’t repeat that detailed discussion here. Here’s the basic outline:

  • Teams share their “Net Local Revenue” — essentially all money made from baseball operations other than money earned through MLB’s Central Fund.
  • The Central Fund includes revenue generated by MLB’s national TV contracts, MLB Advanced Media (which operates MLB AtBat, MLB.tv), licensed merchandise and the All-Star Game.
  • Under the Base Plan, every team contributes 34% of its Net Local Revenue to the pool, which is then divided equally among all 30 teams.
  • The Supplemental Plan adds an additional 14%, putting the total percentage of Net Local Revenue shared at 48.
  • Teams do not contribute and receive revenue from the Supplemental Plan by equivalent percentages. Instead, each team pays into the pool or receives from the pool in accordance with its Performance Factor. For example, the Yankees’ Performance Factor in 2012 is 27.7%; the Royals’ is -8.2%. In other words, the wealthiest teams pay the most. The least wealthy teams receive the most.
  • Starting in 2013, big market teams (Yankees, Red Sox, Mets, Dodgers, Angels, Cubs, White Sox, Giants, Phillies, Blue Jays, Nationals, Braves, Rangers and Astros) will forfeit an increasing percentage of revenue-sharing proceeds, but those forfeited funds will be funneled back to most of those same teams according to the Performance Factors.
The concept of Performance Factors was first used in the CBA in effect from 2007 through 2011. Roughly speaking, a team’s Performance Factor is calculated by dividing the total Net Local Revenue (for all 30 teams) by the average of that team’s Net Local Revenue over the prior three seasons. The equation would look like this:
Total of MLB Net Local Revenue _
3-year average of team’s Net Local Revenue
But under the 2007-2011 CBA, the Performance Factors were used to reallocate money from MLB’s Central Revenue Fund – i.e., national TV contracts, MLB Advanced Media, licensing and the All-Star Game. Under the current CBA, revenue-sharing doesn’t touch MLB’s Central Revenue Fund at all. Each team shares equally in that money. Instead, the Performance Factors now are used to reallocate more of the wealthiest teams’ local revenue to the less wealthy teams. When a team’s Net Local Revenue skyrockets from one year to the next due to a new local TV contract, that additional money will be part of the revenue-sharing program.
In addition, a new local TV deal that increases a team’s local revenue by 10% or greater will lead to an increase in that team’s Performance Factor during the CBA’s life. So not only does the size of the revenue-sharing pie increase, but the team with the new TV deal will contribute more to that pie.
When I wrote about the Dodgers’ potential new TV deal and detailed the other 29 local TV contracts, I lamented what I called the “new revenue inequality” in Major League Baseball. And while that inequality very much exists, it’s not quite as stark as I had envisioned, thanks to the changes in the collective bargaining agreement.



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Wendy's baseball writing has also been published by Sports on Earth. ESPN.com, SB Nation, The Score, Bay Area Sports Guy, The Classical and San Francisco Magazine. Wendy practiced law for 18 years before beginning her writing career. You can find her work at wendythurm.pressfolios.com and follow her on Twitter @hangingsliders.


12 Responses to “Revenue-Sharing Flexibility Stretches With New TV Deals”

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  1. jensan says:

    Thanks for the clarification, so you confirm Loria, with his dump philosophy which we have determined as disingenuous.

    Are the owners of Toronto Blue Jays just as disingenuous by continuously low balling their Tv Revenue and therefore reducing the performance factor.

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    • Big Jgke says:

      Doesn’t matter. According to Wendy, Toronto is a small TV-deal team in a mid to small market so why even look at their numbers?

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  2. DonDraper says:

    “Starting in 2013, big market teams (Yankees, Red Sox, Mets, Dodgers, Angels, Cubs, White Sox, Giants, Phillies, Blue Jays, Nationals, Braves, Rangers and Astros)…”

    Wikipeda has a nice list of metro populations. Once you get past 1-4 (NY, LA, CHI), 4-10 are all about the same.

    1st time I’ve heard Atlanta, SF and Houston referred to as a big market, but they are in the top 10. http://en.wikipedia.org/wiki/List_of_Metropolitan_Statistical_Areas

    Houston is the 5th largest metro area (just behind tie with Dallas) with ~6M.

    ATL’s the metro area is 9th with just under 5.2M. However, the TV coverage area (“Braves Country”) is one of the largest, covering North Carolina, Louisiana, and down to central Florida.

    For SF, odd they are a large market but Oakland is not? They are both in the same MSA, which is 11th (about 4.5M).

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    • Chris says:

      Markets are not just the cities in which teams reside in, MLB’s constitution actually establishes ‘territory rights’ for each team, thus leaving the A’s with a small territory despite the fact that it shares the same metro area with San Francisco.

      San Francisco owns the rights to San Jose, a city which the A’s badly want to move to, but the Giants are blocking them left and right and Selig has been stalling on it. The way that the MLB economy is set up is such a cluster fuck that it’s hard for most people to truly grasp and I really wish they would try to streamline it, not only to simplify things, but to better define and try to bolster smaller markets.

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      • Baltar says:

        Yah, I think the rules on finances are so ridiculously complex so the fact that the high revenue teams don’t really contribute much to the common good is hidden.
        A simple positive/negative revenue tax (including all the teams revenues) would be so much simpler and better.

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    • Christina Hendricks says:

      nice.

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    • Bill says:

      Oakland is considered a big market (tied for 7th largest, with SF) in the revenue sharing market disqualification program, but they are exempt from the program until their stadium situation is resolved.

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  3. maqman says:

    Good stuff Wendy, thanks. Given the way in which mass communications and media have changed in the past 25 years it takes some nerve to enter into a contract involving billions of dollars that far into the future. The entity that the Dodgers make an agreement with when this new contract is finished may not even exist today.

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  4. True North says:

    I think this has been a very instructive series Wendy.
    Perhaps the next step is to correlate the respective RSN viewership numbers with what each team ” claims ” as to be their local TV revenue ( I believe these numbers are in the archive of the Business of Baseball site).

    One problem is that numbers in Canada are given on a per viewership basis. Last year ( excluding Quebec) the Jays averaged 552,000 ” viewers”. In the United States numbers are given on a per household basis. I believe the Yankee’s averaged 299,000 households and were the highest rated team in this measure. The Padres were at the bottom averaging 20,000 households.

    I’m not sure how you can correlate actual viewers with households?

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  5. Pat says:

    Wendy, you’ve been killing it on these articles lately. Keep up the good work!

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  6. jensan says:

    Response to Big Jgke and Wendy, please look what True North claims about Toronto who has almost twice the viewers of the Yankees and still considered a mid market team.
    How are owners of Blue Jays not being challenged for misrepresentation of Revenue when compared to teams like San Diego.

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  7. tbjfan says:

    Excellent work Wendy.

    I don’t think the average fan realizes how revenue sharing is important to the industry.

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