The Dark Side Of Booming Local TV Deals

Bud Selig has been giddy watching baseball teams attract bigger and bigger local television deals. More local TV revenue to a team means more money for the league to spread via revenue sharing and greater competitive balance. And Bug Selig sure loves competitive balance. On a recent visit to PNC Park, Major League Baseball’s commissioner told Pittsburgh Pirates broadcasters that he got “goosebumps” watching the Reds and Pirates square off in last year’s postseason.

But big local TV contracts aren’t all Skittles and puppies. Certainly not for fans who are forced to pay higher and higher cable and satellite TV bills to watch their home team. Nor for cable and satellite TV customers who don’t care about baseball but have to pay the higher prices as part of their bundled programming.

It turns out that big local TV contracts aren’t always good news for teams either. That has turned Selig’s mood quite sour.

When a regional sports network agrees to pay millions of dollars to an MLB team, that RSN has two principal ways to recoup that investment: (1) sell ads during the game broadcasts; (2) charge a carriage fee to the cable and satellite operators in the region who want to carry the RSN. But what happens when the cable and satellite companies balk at the carriage fees?

The San Diego Padres were the first to find out the answer to that question. When FoxSports San Diego launched before the 2012 season, the RSN was available in only 40% of the San Diego TV market because DISH, AT&T U-verse and Time Warner Cable hadn’t agreed the carriage fee FS San Diego sought to charge. DISH and AT&T came on board before the 2013 season, but TWC held out until this year.

The FS San Diego situation was irksome, but mostly to the Padres and their fans. It didn’t garner much attention from Selig or national baseball writers (although we covered the issue extensively) and it didn’t take long to resolve.

That hasn’t been the case in Houston. Comcast SportsNet Houston launched in October 2012 and, since then, has been seen only by Comcast cable customers. The new RSN  — a joint venture among the Houston Astros, Houston Rockets and Comcast Sports Group — couldn’t come to agreement on carriage fees with any other cable or satellite company in the region. With the RSN bleeding cash, Comcast forced the venture into bankruptcy court last September, where the parties have been fighting ever since. Astros owner Jim Crane also sued Comcast and former team owner Drayton McLane for fraud in the sale of the team. That did not make Bud Selig happy at all.

The bankruptcy process has dragged on, as they often do. The Astros and Rockets have worked feverishly to find a new broadcast partner to buy out Comcast’s interest, and there was news yesterday that such a deal could be close. When and if a deal gets done, though, the Astros will have played at least two seasons with little in the way of TV revenue and without anyone watching their games on TV. Sure, the Astros haven’t had much of a product worth watching the last few years, but their ratings are clearly a reflection of how few Houstonians have access to the games.

That brings us to the Los Angeles Dodgers. As I explained before the season started:

SportsNet LA launched in February with around-the-clock Dodgers programming, but only customers with TWC or Bright House can view the network in their homes.Every other cable and satellite operator in the Los Angeles market has balked at the network’s carriage fee demand. And TWC hardly counts as an arms-length agreement, as it is the Dodgers’ broadcast partner in SportsNet LA. Indeed, TWC will essentially pay itself the carriage fee for SportsNet LA, and then pay the Dodgers their monthly rights fee as part of the 25-year, $8.3 billion megadeal.

No deal’s been reached. A vast majority of Dodgers fans in LA missed Josh Beckett’s no-hitter, Clayton Kershaw’s no-hitter and every Yasiel Puig bat flip — unless they watched with a friend or at a bar with TWC. Even Vin Scully is without Dodgers’ broadcasts when he’s at home during the team’s long road trips.

Now members of Congress and the Federal Communications Commission have stepped in and urged the parties to reach a deal as quickly as possible. A local congressman suggested TWC and DirecTV agree to binding arbitration on the outstanding issues: the carriage fee; length of contract; and whether SportsNetLA would be bundled to every customer, or offered a la carte. TWC is prepared to take the dispute to arbitration and Bud Selig recently chimed in with his support for that plan.

DirecTV hasn’t budged and sports media experts don’t expect that it will. Which means the team in the second-largest TV market in the country, with the largest player payroll in the league, won’t be seen by its local fans as it battles for the National League West title. Bud Selig isn’t happy.

When it comes to Selig, though, these carriage fee disputes pale in comparison to fight between the Washington Nationals and the Baltimore Orioles over the money flowing into the Mid-Atlantic Sports Network. I explained the origins of the dispute in a November 2012 post:

[MASN] was created as part of the deal that moved the Expos from Montreal to Washington, D.C. to become the Nationals. Orioles owner Peter Angelos opposed the move as an encroachment on the Orioles’ exclusive broadcast and commercial region. [This is different from the dispute between the Giants and the A’s over the territorial rights to San Jose and Santa Clara County.] As part of the negotiated settlement between MLB (which then owned the Expos) and Angelos, MASN was created with the Orioles to own 90 percent and the Nationals to own ten percent. The deal also called for the Nationals to be paid $20 million/year in broadcast rights, although that figure would increase by $1 million every season. In 2011, MASN reportedly paid the Nationals $29 million in broadcast fees and $7 million for its now 13 percent share of the network.

The MASN agreement also includes a re-set provision by which the Nationals can re-negotiate the broadcast fee structure every five years. Early in 2012, the Nationals proposed that MASN pay between $100 million and $120 million per year in broadcast fees. The Orioles countered at $34 million per year. The two sides have been in protracted negotiations ever since. Commissioner Selig asked representatives from the Pirates, Rays, and Mets to mediate the dispute. A resolution was expected over the summer but never materialized and the parties reportedly remain far apart.

No resolution came and parties remained far apart, through 2013 and the first half of 2014.

On Wednesday, The Hollywood Reporter published detailed of a secret arbitration overseen by the representatives of the Pirates, Rays and Mets which ruled in favor of the Nationals at the end of June. That sent the Orioles to court in New York in an effort to undo the arbitration. The Nationals countered with their own suit to confirm the decision. Both cases were filed under seal.

Selig was furious.

According to The Hollywood Reporter, Selig sent a letter to the Nationals and the Orioles that included this passage:

“Both the Orioles and the Nationals have at various times made threats to institute litigation in connection with this dispute, despite my office’s extended, good-faith efforts to have this matter resolved by agreement. On a personal note, I owned a Club for decades and I can honestly say that under no circumstances would I have threatened, let alone commenced, litigation against Baseball. Please be advised that nothing in the Agreement authorizes the parties to file any lawsuit. … I want there to be no doubt that, if any party initiates any lawsuit, or fails to act in strict compliance with the procedures set forth in the Agreement concerning the [Revenue Sharing Definitions Committee of Major League Baseball]’s decision, I will not hesitate to impose the strongest sanctions available to me under the Major League Constitution.”

No matter. Attorneys for the two teams and MASN have continued to launch attacks and counter-attacks. The Orioles think the MLB-sponsored panel was predisposed to rule for the Nationals because the league stands to gain financially the more the Nationals receive as a rights fee. For their part, the Nationals have threatened to terminate MASN’s license to broadcast their games if the panel’s ruling isn’t confirmed.

The MASN mess may shed some light on Selig’s unwillingness to make a final decision on the Oakland Athletics’ proposal to move to San Jose. He may fear that any resolution of the territory dispute between the A’s and the San Francisco Giants that involves the A’s compensating the Giants could lead to in-fighting for years down the road.

All these TV deal disputes bring to mind the adage “Be careful what you wish for.”

We hoped you liked reading The Dark Side Of Booming Local TV Deals by Wendy Thurm!

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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.

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Phillies113
Member

What if all the local broadcasts were handled through MLB? MLB could license TV operators to broadcast their games traditionally, and they have all games (even local games) available online if they can’t come to any deals.

Pirates Hurdles
Guest
Pirates Hurdles

Yeah and then you could have equitable revenue sharing like the NFL. Stop treating each team as its own entity and advance the league as a whole.

james
Guest
james

There is a major up front cost here, if now would need to start planning now to change it in 20 years.

Teams have been around, and popular long enough that there are billion dollar deals in place that span decades. Breeching these contracts would be silly.

This also ignores the fact that a hand full of teams either own their own RSN (like the Os in the article), or the owner also owns the RSN (like Steinbrenner owning the yankees and YES network). Every one of those groups stand to lose a lot of money doing this

david
Guest
david

Exactly correct. The Yankees are the most valuable american franchise by a wide margin based on the value of the broadcast rights they alone own. Stepping those rights would cost mlb and by extension, all other owners literally billions of dollars.

Mr baseball
Guest
Mr baseball

MLB and the NFL have nearly the same revenue sharing structure. The difference is local revenues are a much larger share of total revenue in mlb than the NFL. Both leagues share national revenue the same, both share similar percentages of gate. The NFL has had more disputes than mlb over the past 30 years, as a NFL franchise has moved no less than 8 times in the NFL, where it happened once in mlb.

joser
Guest
joser

That sounds great in theory, at least for the consumers. Unfortunately, there are a whole raft of implementation details that make it virtually impossible for us to get from where we are now to that beautiful future.

Right now each of the teams is in some sort of local TV deal, many of them extending years into the future. Since it’s unlikely any of those would get voided, they’d have to wait until those expire to join this new system. But what’s the incentive for the first team or two to join a broadcast consortium that only consists of themselves, and not the other 28 or 29 teams? And what weight does the early version of that consortium bring to negotiations with the cable providers? Once all the teams are involved, sure, MLB would have a strong negotiating position; but as each team’s local deal expires it’s going to look better to them to go it alone than to defer to a nascent MLB consortium. You somehow have to get each team to forgo (real) short-term benefit for (presumed) longer-term gain, and since that’s happening on a different schedule for each team and TV money is what makes them completive and profitable, how do you get the first teams to handcuff themselves like that?

But to even get there, you’d have to persuade each of the team owners that allowing MLB to negotiate on their behalf, vs doing deals themselves, would result in higher net income to them. Even setting aside ego (the kind of people who end up owning baseball teams tend to be the kind of people who think they can negotiate a more profitable deal for themselves than letting someone else do it), you’ve got the competitive balance / luxury tax issue writ large. How does the money get split up in a way that most teams can agree on?

And then there’s the cable systems who will be on the other side of these negotiations. They’re already balking at the costs of local deals; how happy are they going to be having to negotiate with a monopoly? Especially one that also (as you suggest) offers a way to go around the cable providers and get the content directly? So you know what the cableco’s first move is going to be? Taking MLB to court over the anti-trust exemption. Which is the last thing MLB wants.