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Home Pete Toms Last Week in Bizball: MLB Teams are Media Companies.

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Last Week in Bizball: MLB Teams are Media Companies. PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Tuesday, 07 February 2012 10:11

Last Week in Bizball by Pete Toms

This week in “Last Week in Bizball”, MLB teams are media companies.

These past handful of seasons, MLB attendance and regular season national TV ratings have been pretty much flat. The overall ratings trends for MLB’s marquee TV events, the ASG and WS, are clearly downward. MLB’s fan base is easily the oldest amongst the “big 4”. The building boom of retro/Americana/baseball-only stadia, which contributed greatly to increased industry revenues and franchise values, is well past its peak. Nonetheless, industry revenues remain at a record high of $7 billion annually. In addition, in 09, the Ricketts family paid a record amount for an MLB franchise when they acquired the Cubs, Wrigley Field and a minority stake in CSN Chicago for $800 million plus. That record amount is soon to be obliterated with the auctioning off of the Dodgers. If the sports biz punditry is correct, the sale price of the Dodgers will be in the neighbourhood of $2 billion. The sale of the Dodgers includes no additional assets, other than a ballpark which reportedly requires $400 million plus in renovations to bring it up to contemporary industry standards. The purchase price includes no equity in an RSN nor any property development rights to real estate adjacent to the stadium (both common in today’s franchise sales). In fact, for $2 billion, the purchaser might not even acquire the parking lots surrounding the stadium. In 04, the McCourts purchased the Dodgers from Fox for a reported $430 million, with Fox financing most of the purchase. So, eight years later, why has the value of the Dodgers increased by multiples of four or five? The reason is the soaring value of media rights for live sports. The Dodgers current local TV deal with Fox’s Prime Ticket expires after the 13 season. The final season of the deal will reportedly garner the club $39 million. By comparison, the Angels just concluded a 20yr / $3 billion deal with Fox Sports West. LWIB, sports media dealmaker Chris Bevilacqua (check out his CV, VERY impressive) discussed the trend of soaring local TV rights fees in MLB on SportsMoney (video here).

According to Chris, the “tipping point” for the value of media rights for live sports occurred in 09/10 when the threat of the so-called OTT services became real to the $150 billion per year cable industry. The cable industry concluded that live sports programming was THE offering which would differentiate them from the OTT alternatives and, in turn, rights fees skyrocketed. Chris describes a transformation of the MLB ownership model with “..teams becoming media companies..”, maximizing on the value of media and IP rights. When asked how, given local TV ratings in the bottom 5 of MLB last season, the Angels managed to triple their annual TV rights fee to $150 million, Chris outlined how the cable industry functions. Ratings drive ad revenue, but the value of local MLB TV rights is in the distribution, or subscriber fees. Chris notes that the value of present and future deals will be based on market size and competition in that market amongst providers (MSOs, telcos, RSNs). Chris foresees all MLB franchises eventually benefiting from this trend, the “tonnage” of the 162 game sked also uniquely valuable, leading to eventual annual industry revenues of $9 - $10 billion.

SELECT READ MORE TO SEE THE REST OF THIS ARTICLE, INCLUDING COMMENTS FROM MARK CUBAN

LWIB, celebrity billionaire Mark Cuban dropped out of the bidding for the Dodgers. Cuban’s comments to Access Hollywood about the impending sale of the franchise described a media deal. “It just didn’t work out. I wanted to buy a baseball team; they were selling a media rights deal, It just wasn’t going to work out.” “The economics got so out of control because the Dodgers’ TV deal’s up for bid and so there’s a lot of groups coming in going, ‘This TV deal’s worth so much money that we’re gonna pay whatever it takes to get the Dodgers.’ And so they’re buying the TV rights deal first and the team second,”

Many have noted that the billions of dollars that Fox Sports Net (FSN) has recently committed to the Angels and Rangers will result in a fundamental shift of power in MLB. Fans of the A’s likely feel particularly hopeless and no doubt understand that these TV deals were a contributing factor in the recent trades of Gonzalez, Bailey and Cahill. As the model for operating a franchise shifts from maximizing in-stadium revenues to maximizing media rights, long-term, will there be a bifurcation within MLB along the divide of large and small TV markets? For instance, going forward, will the Brewers reap, in relative terms, less benefit from finishing 4th in NL attendance because Milwaukee ranks 34th in DMA? Buster Olney wrote recently about concerns amongst some franchises over growing revenue disparities resulting from newly concluded local TV deals:

….some rival executives with small-budget and middle-budget teams are privately lamenting what they consider the increasingly untenable position their teams occupy.

"I don't think the new labor agreement helps small-market teams enough," said one general manager. "I think it's really going to hurt us, because it doesn't address what's happening."

And what is happening, in the eyes of many team executives, is that the massive TV contracts that are either already in place or on the horizon for teams like the Texas Rangers, Los Angeles Angels, Los Angeles Dodgers and Seattle Mariners are helping to create two distinct classes of teams.

The A-listers and B-listers, you could call them.

Which clubs are next in line to cash in on the soaring value of local TV rights? In the aforementioned SportsMoney interview it was noted that deals negotiated in the middle of the previous decade are currently undervalued. A number of these deals were concluded with FSN channels. Within these contracts there is a standard clause which allows the club to renegotiate at the midpoint of the deals term. For instance, the Angels took advantage of this option to renegotiate their $3 billion deal with Fox Sports West. In December, Mike Ozanian wrote that the Diamondbacks, Tigers and Cardinals will soon be at that midpoint of their deals with their respective FSN partners. In addition, the Mariners should soon renegotiate their deal with Root Sports (originally negotiated by FSN Northwest) and the Padres are believed to be partners with FSN in the soon-to-launch Fox Sports San Diego.

If, at the local level, the “tipping point” was 09/10, at the league level it came earlier. In 00 the MLB owners collectively invested a reported $75 - $80 million to form MLBAM. BAM has been an enormous success for the owners, with annual revenues reportedly in excess of $500 million and a value of $2 - $3 billion. In 09, MLB launched their own TV channel, MLB Network. MLB Net is in over 67 million homes and earns a monthly subscriber fee of $0.26. The iN DEMAND cable consortium owns a minority stake in the channel.

So, why do I care that MLB is transforming from a butts in the seats business to a media business? I care because there is increasingly less financial incentive for franchise owners to field winning teams and that is bad for fans. Revenue sharing long ago decreased the financial benefit to winning and mitigated the financial downside to losing (see the “leaked financial docs“). Both Bob Simpson (Rangers) and Terry McQuirk (Braves) have stated in the press this off season that their teams don’t turn a profit but the payoff in their investment is in the growing valuation of the franchises. But the value of franchises is increasingly tied to league owned media ventures and local media rights, as opposed to winning and increasing in-stadium revenues. Team owners with equity in an RSN (Mets, Phillies, Astros, Cubs, White Sox, Indians, Giants, Red Sox, Yankees) benefit from dividend payouts and appreciation in the value of the channel. The on field performance of their teams is of little note there. Team owners with locked in long-term rights deals with RSNs are protected against fielding inferior teams. As Chris Bevilacqua noted, poor TV ratings for the baseball team don’t lower the monthly subscriber fee the channel collects. So, you better hope the obscenely wealthy owner of the team you root for wants his buddies at his club to admire his new WS ring. Because a winning team has never been less important to his bottom line.

You can follow me on Twitter @PeteToms


Pete Toms is senior writer for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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