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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:

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.