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Extra Innings Deal Makes Poor Long-Term Business Sense Print
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Written by Maury Brown   
Wednesday, 28 March 2007 06:21

Maury BrownYesterday saw several principle players in the Extra Innings saga testify before the US Senate Committee on Commerce, Science, and Transportation at a hearing entitled Exclusive Sports Programming: Examining Competition and Consumer Choice. Rob Jacobson President and Chief Executive Officer for iN DEMAND Networks, Bob DuPuy President and Chief Operating Officer for Major League Baseball, Chase Carey Chief Executive Officer for DIRECTV Group, Inc., and Carl Vogel President & Vice Chairman EchoStar Satellite L.L.C. all had time at the microphone.

As the prepared statements provided here on The Biz of Baseball show, there are some key facets—namely the upcoming The Baseball Channel—that are creating the impasse on getting all the incumbents in a place to carry Extra Innings.

In a nutshell, DirecTV has offered to pay for the rights to show The Baseball Channel up-front, and now. Given the fact that ratings for NFL Network have not exactly been stellar (the heavily hyped debut game on the fledgling network pulled an averaged 4.2 million total viewers and a 2.3 household rating according to Nielsen, nearly one-third what Monday Night Football pulls on ESPN), you might understand why Robert Jacobson of iN Demand offered up a compromise deal in his opening statement. “If The Baseball Channel launches in 2009, we would give MLB the right to cancel the Extra Innings deal if it cannot reach a satisfactory agreement for carriage of the new channel with our owners,” Jacobson said. “This would put off the issue of The Baseball Channel until it actually launches and ensure that for the next two years at least, all baseball fans will have access to the Extra Innings package.”

After the statement was made, Sen. John Kerry (D-MA) asked Bob DuPuy, “"What's the matter with that?”

Well, here’s what’s the matter with that: If MLB re-negotiates with iN Demand, MLB has to renegotiate with DirecTV, and possibly EchoStar if they get onboard. The exclusive deal takes the risk off MLB and places it on DirecTV. As mentioned, if ratings for the NFL Network are not high by comparison to games shown on ESPN, how will MLB fair? After all, the NFL enjoys a vastly more popular product. Also, by DirecTV offering an up-front payment as opposed to iN Demand’s offer make The Baseball Channel available on a per subscriber basis, MLB has those funds available for any start-up costs involved in launching The Baseball Channel.

(Select Read More to view the rest of Maury Brown's article) 

Back to iN Demand, it seemed more than a bit ironic that they played themselves up as the “good guys” in this deal. After all, there are exclusive deals for cable that involve the Mets, White Sox, Padres and Phillies. As reported by Richard Sandomir of the NY Times in late February:

The owners will also have their own interests at heart. The Mets are partners in SNY with two cable operators, Time Warner and Comcast; the White Sox and Cubs are also partners with Comcast in Chicago. The Atlanta Braves are caught between being sold by Time Warner, which owns cable networks like TBS, to Liberty Media, which is taking over DirecTV.

The Padres' cable games are not licensed to satellite, so if their local fans switch to DirecTV to continue to watch Extra Innings, they will not get their own team's games unless they buy both services.

Comcast SportsNet in Philadelphia is not delivered by satellite as most regional sports networks like YES and SNY are, which leaves 300,000 or more DirecTV subscribers (at least 50 percent more than total national cable subscribership to Extra Innings) in that market without access to those cable games. Comcast's refusal to put its sports network on satellite has been challenged by DirecTV and EchoStar but affirmed by the federal government.

So, it’s not as if cable isn’t playing a roll in the exclusivity matter, as well. It should be interesting if you live in San Diego, have to watch the Padres on cable due to an exclusive deal with Cox, and you want to watch Extra Innings. In that instance, it appears you’ll have to have DirecTV, AND cable.

As for DirecTV, Chase Carey provided some analysis by dartboard. “DIRECTV estimates that there are relatively few viewers – no more than three percent of the cable segment (approximately 180,000 Extra Innings subscribers) – who cannot receive DIRECTV service,” Carey said in his opening statement. “This translates to roughly 5,000 subscribers – each of whom can access the games over the Internet.”

This is analogous to saying, “When a breeze blows through pile of leaves, 5,000 of them will be displaced.” It’s wholly arbitrary. How Carey and DirecTV came about this figure had to come with sticking their finger in the wind, but it did, none the less, create a case where the figure will be published and the myth will, in time, become engrained as revisionist history.

The other issue that got a lot of play regarded MLB’s willingness to offer a 20% ownership equity in The MLB Channel to DirecTV, while not giving this same offer to the incumbents. As Carl Vogel of EchoStar said, “However, in its entirety must be apples to apples, which will require EchoStar to acquire a pro-rata ownership of The MLB Channel,” Carey said in his opening statement. “In a letter dated March 22nd, from Major League Baseball, they state they are not in a position to offer any equity in connection with this ‘opt-in’ opportunity without DirecTV’s consent. It will be interesting to see whether that consent is forthcoming, and with what conditions, as DirecTV reconciles whether it wears its ownership hat for the MLB Channel or its hat as a competitive distributor.”

While DISH has seemed almost a secondary player in all of this, word came late yesterday by way of the Sports Business Journal, that EchoStar has offered up, what they feel, matches MLB’s terms as it pertains to financials, and distribution. For the deal to fly, EchoStar is asking for an ownership stake in The Baseball Channel, as well. The sides were reportedly mulling the offer over.

The biggest question is, what is MLB’s endgame in all of this?

As I’ve reported before, the exclusive deal does not make good long-term business sense. Limiting viewers is a poor growth model, beyond the ill-will that has been created in this process. No matter how many times you turn the deal over in your head, one asks if by not making the deal exclusive, if MLB would have come out financially in the long run.

iN Demand offered $70 million per-year in a non-exclusive arrangement. If DirecTV offered half of what they are offering in an exclusive arrangement ($50 million), MLB would come out $20 million a year ahead of where they are now, and that’s without DISH in play. Maybe it’s a matter of driving consumers to MLB.TV. After all Bob DuPuy said yesterday, “If iN Demand and Dish choose not to step up to the plate as DirecTV has done, fans will still have several options.  They can switch to DirecTV, they can subscribe to MLB.TV and watch the games on the Internet, and they can watch the roughly 400 games that every fan in every Major League market has available without the out-of-market package.” That’s convenient. MLB will pull in revenues from the displaced through their online offering. Still, is it going to be enough to offset the revenues that could have been pulled in by keeping all the incumbents in the fold?

Added to this, there is more of the “ill-will” factor as it pertains to the relationship that MLB needs to keep with cable. Is it simply not a matter of time before MLB comes to cable looking to get The MLB Channel carried?

So, to repeat, the deal makes poor long-term business sense, outside of fan ill-will.

Lastly, I should note (once again) that I’ve been a DirecTV subscriber for some time and chose to do so for reasons outside of Extra Innings. Still, I’ve subscribed to EI in the past, and will continue to do so in the future. With that, and the season on the cusp, I looked up the schedule. Sunday, there was a limited slate of games on tap. Now, DirecTV is showing a more complete slate of games to choose from. At least that’s one less matter to be critical of in what might be deemed “ExtraInningsGate”.

 Maury Brown is the founder and president of The Biz of Baseball and an author for Baseball Prospectus. He can be contacted here. 

 
 
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