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Pete Toms Article Archive
Written by Pete Toms   
Sunday, 05 July 2009 22:53

Last Week in Baseball by Pete Toms

This week in LWIB, opinion about the future of “in market” live streaming of MLB games and stadium financing news concerning the Yankees, Twins and Marlins.

MLB IN-MARKET LIVE STREAMING

LWIB the San Diego Padres became the second MLB club to announce that “in market” live streaming of their games will be available this season.  The Padres partnership with MLBAM and Cox Communications to stream in market live games copies the template announced the previous week in the Yankees /YES/Cablevision/MLBAM partnership.

The SportsBusiness Journal reported that all clubs received a June 19 memo from Commissioner Selig detailing the structure of the new business model for in market live streaming of games.

Major League Baseball believes it has broken through its self-described “logjam” for in-market live streaming of games by developing an economic model that pays MLB Advanced Media half of all related revenue.

The terms for local streaming deals,.....will send the other half of the related revenue to local interests, such as the participating team, its regional sports network and the local cable provider.

In April The Biz of Baseball reported on the challenges confronting professional sports leagues in adapting to the age of digital media and in particular whether digital media rights should be managed at the franchise or league level.  Within MLB, the franchises with interests in RSNs (i.e. Red Sox, Orioles) have been the greatest advocates for greater control of digital rights at the club level.

These owners have been lobbying for control of the local digital media rights of their own clubs, rights which are controlled by MLBAM. RSNs see great potential in these rights to supplement game broadcasts with shoulder programming, VOD and interactive TV in addition to boosting broadband offerings.

Meanwhile, MLB and the other “stick and ball” leagues are in different stages of launching live streaming of in-market games. This issue has generated much consternation within the leagues as they attempt to balance the rapidly changing viewing habits of consumers in the “new media” age while simultaneously protecting very profitable partnerships with cable and broadcast TV. Live streaming of in-market games could also have substantial impact on revenue sharing and competitive balance in MLB.

In an interview with Contentinople, Tracy Dolgin president and CEO of YES Network, explained why it has been so difficult to bring in market live streaming of MLB games to market.

Contentinople: Why haven't baseball fans in the New York area been able to watch games online in the past?

Tracy Dolgin: You have this logjam where each side [Major League Baseball (MLB) and teams/regional sports networks] has been blocking the other from exploiting the rights. We would not be allowed to just roll out an in-market streaming product without baseball's permission, while baseball would not be able to without BAM's [MLB Advanced Media] permission, while BAM would not able to do it without our permission. So we've been blocking each other. The net result has been that the rights have not been exploited.

Contentinople: Is it clear who owns the new media rights? Is it the leagues or the teams?

Tracy Dolgin: The league would say they own new media rights, subject to some restrictions. And the teams would say -- and the RSNs [regional sports networks] who have gotten those rights from the teams would say -- "that may be all well and good, but we should own all rights in-market, and you really should leave us alone in-market."

The announcements of the Padres and Yankees in market live streaming deals, combined with MLB President Bob DuPuy’s comments that he expects “a majority” of franchises to finalize the same sorts of deals by some point next season, have led to the perception that MLB has largely settled this issue.  John Ourand argued in The Sports Business Journal that the issue of control of local digital rights in MLB is far from resolved.

MLB officials were beaming last week, believing that they had broken through the logjam that has stalled local video streaming efforts.

By announcing a deal with the Yankees and YES Network — not to mention a second deal waiting in the wings — MLB officials believe they have a general template that will be used by the other MLB clubs. In fact, MLB President and COO Bob DuPuy told a conference call last week that most clubs would have a streaming deal in place by next season.

I don’t share that optimism.

In fact, I think the other regional sports networks will continue to reject MLB’s current video streaming terms. One other team is expected to roll out a service this season. But I don’t see any chance other teams will have local video streaming services up and running this season.

The biggest obstacle for these RSNs is a philosophical one that they’ve been battling for nearly a decade and don’t appear close to resolving. RSNs don’t think MLB Advanced Media should be so involved in local deals struck between teams, their RSNs and their local cable providers. If local TV deals are cut between the teams and RSNs, why should streaming rights be any different?

AND

RSNs are legitimately concerned that these streaming deals have the potential to devalue local rights. Even the most wildly optimistic revenue projections for video streaming represent a mere fraction of what MLB teams generate from TV rights. Why gamble a cash cow (local TV) on a small and unknown revenue stream (broadband)?

In the immediate future, how popular (lucrative) will the offerings of live in market games online be?  MLBAM has been streaming live “out of market” games at MLB.com since 2002.  The MLB.TV subscription service has been a great success for BAM.  The Biz of Baseball reported in April, “Over 400,000 subscribers have signed up for MLB.com’s premier live game products, MLB.TV and Gameday Audio, through April 26, a 45.7 percent increase of sales over the comparable time period in 2008.” But the appeal of MLB.TV (as well as MLB’s other “out of market” offering, Extra Innings) is full access to games for displaced fans.  Unlike MLB.TV, the “in market” online offering is a companion (or competitor?) to broadcasts of games distributed on cable and over the air channels.  In the aforementioned Contentinople interview, Tracy Dolgin addressed the same question.

Contentinople: How much demand do you think there will be for the product since people can already see it on TV?

Tracy Dolgin: First of all, if people aren't willing to pay for the portability and the convenience and the feature set that we're offering them for the Yankees, they won't pay for anything.

The word "fan" is short for fanatic. Given the love and attachment they have for the Yankees, I think there will be great demand. And I think if you asked Major League Baseball what percentage of its out-of-market [subscription package] is driven by Yankees fans who are displaced -- who also by the way can get Yankees games on MLB Network, TBS, ESPN, Fox -- I think that its experience is that there is a huge demand for it.

And so, given the relative price and value relationship where what it costs you for half a season is less than what it costs to go to a movie with your kids, it's all price value.

In the aforementioned SportsBusiness Journal report, MLB acknowledges that the demand for online “in market” games is an unknown.

Selig’s memo, however, shows the uncertainty that MLB has in determining how big the local streaming market will be. Similarly, MLB Advanced Media President and Chief Executive Bob Bowman last week acknowledged that part of the effort involves creating a new market.

In the Selig memo, the commissioner describes three years of “agonizing” over the issue, and how the league hired Allen & Co. to determine the value of local streaming rights. That research effort “provided guidance, but not certainty,” he wrote.

“Only one thing is in fact certain — there is some set of revenues that we are not currently generating,” Selig writes. “At the outset, I am convinced the revenues are likely to be quite modest and I am convinced it is in the interest of the game to begin an assessment of how our fans will react to this offering.”

Earlier this year, John Ourand interviewed 163 students at the University of Pennsylvania’s Wharton School of Business concerning their appetite for, and consumption of, live sports online.  Mr. Ourand’s findings surprised himself.

It’s no secret that sports TV executives these days are fixated on broadband applications, believing that a smart online video strategy of live games is the surest way to attract the young male demo that advertisers want to reach.

But are young people accessing live online video the same way network executives believe they are?

AND

That younger demo isn’t streaming live sports nearly as frequently as some TV executives would have you believe. They certainly are more adept with broadband video than their elders, but few of them admit to watching live games online with any regularity

AND

Sports’ place on TV seems safe. Young men and women still like television, almost as much as their parents. Given a choice between the passive television experience and the interactive online one, every person from each of those three classes would opt for TV.

Out of three classes of college students, I was surprised that the online video environment didn’t have more supporters. The students have no problem watching entertainment programs online, from sites such as hulu.com. But sports is different. Networks have made the TV experience so good — with high-def feeds and cameras at every angle — that even the most technically literate generation does not want to give that up.

Again, from Contentinople, Tracy Dolgin on the choice between viewing live sports on a computer versus TV.

Contentinople: What do you think of the experience compared to watching a game on TV?

Tracy Dolgin: There is no human being I have ever met, when given a choice to watch a game on his or her laptop versus on a 50-inch plasma with surround sound, who would choose to watch it on a computer.

That's why, from an advertiser's standpoint, while it's a positive experience, it's not a substitutive experience, because everybody would rather watch it with all of the data coming through that fat pipe to your big TV set.

So I've watched it. It's a really good experience, and it's certainly a better experience than missing the Yankees game, and maybe it's an even better experience than having my wife reprimanding me because I'm not watching the kids in the backyard. So it's a good experience, but it's not a substitute experience for watching it on television, and I don't believe it will ever be.

We think what's going to happen is it's going to increase the number of viewing occasions where I'm not able to watch it on my big television set because I'm in the office or on the beach or in my backyard.

Select Read more to see the rest of this article by Pete Toms

Ultimately, is the PC vs. TV debate irrelevant?  Is the marriage of internet and TV (IPTV) inevitable and if yes, will that be the end of live sports on cable and over the air TV?  Would this be positive for pro sports leagues, particularly for MLB with MLBAM long at the forefront of streaming technology?  Shawn Hoffman, both at Baseball Prospectus and on his Squawking Baseball blog, has presented this model as the future of sports broadcasting.

 

Even if the internet cannibalizes broadcast and cable television over the next ten years (as it has music and newspapers over the last ten), MLB may actually stand to benefit.

Think about a world where there are no more regular television stations; everything is broadcast through the internet, and you can watch it either on your PC or on your television (which, at that point, is basically just another PC). We'll call this a Murdochian dystopia. In this new world, it'll be almost impossible to advertise for more than 15 seconds at a time on a sitcom or drama; competition will inevitably drive ad-time down, almost to the point of irrelevance. With sports, however, ad-time is built in since games naturally have breaks, and since sports games are time-sensitive and almost always watched live, the advertising surrounding them really won't change much.

That's a pretty amazing thing in itself, but it doesn't end there. It's true that if television stations and cable networks cease to exist, MLB and the other leagues won't be getting those fat rights fees anymore, but if all content was distributed via IPTV, the leagues could actually distribute the games themselves, and they would therefore control all of the advertising revenue. Given how few mass-distribution methods there would be in this new world, the leagues would probably make even more than they do under the current system.

Is the recent announcement that MLB has partnered with Boxee (Boxee is online TV) evidence that MLB shares Mr. Hoffman’s vision for the future of live sports broadcasting?  On June 23 Boxee announced that MLB’s “out of market” online offering MLB.TV will be made available to Boxee.  From the “boxee blog”:

We are excited to announce a partnership with Major League Baseball (MLB.com) to offer MLB.TV Premium to boxee users.

MLB.TV Premium on boxee means you can now watch thousands of baseball games, live and on-demand in HD (where available). on top of that, MLB.TV Premium offers DVR functionality to pause and rewind a live game. MLB.com represents a big step for boxee as we hope this is the first of many different live sports offerings we can bring to you. We hope other sports follow MLB.com’s lead of giving fans a choice of how they enjoy watching their favorite teams….

From Contentinople:

Major League Baseball will become the first premium content provider to stream live video on Boxee 's online video platform, the company announced tonight.

Boxee is showing off its new MLB.tv application, which is designed to allow subscribers of the service to view live Major League Baseball video in an environment that was built for the television, at a gathering of its San Francisco faithful at Mezzanine tonight.

The MLB.tv application will be the first to take live, premium subscription-based video programming onto the Boxee platform. MLB.tv users pay $89.95 yearly for access to stream all out-of-market games on their PCs.

For Boxee, the MLB deal is significant because -- unlike other premium video applications that the company has built without the content owners' help -- the companies had to work together to build the MLB.tv application.

AND

Boxee hopes that the deal with MLB.tv could provoke other premium content owners to create applications on its platform. "We hope it opens the door for more sports content on Boxee," says Boxee CEO Avner Ronen. "It shows that Boxee is a friendly service for content owners."

Shawn Hoffman commented on the Boxee/MLB.TV announcement.

.... this is a very significant move for MLB, in that it’s clearly saying it doesn’t care if you watch baseball through MLB.tv or MLB Extra Innings. That may not go over so well with cable providers, who agreed to put MLB Network on their basic tiers, in exchange for some equity and an agreement that MLB wouldn’t give DirecTV the exclusive rights to EI. Now, MLB has taken the first step toward making EI obsolete, leaving the providers behind.

This is obviously the right business decision, since MLB doesn’t need to share profits from MLB.tv like it does with EI. And it’s another step toward the inevitable future of sports broadcasting, where the leagues broadcast the games themselves and distribute them over the internet. But it’s still interesting, since most old media companies tend to stick together, and MLB is doing the exact opposite.

Note that Hulu, which is owned by Fox, NBC, and ABC, still refuses to make itself available on Boxee — its owners / content providers are clearly uncomfortable with the idea of you watching TV programming on your TV, if it’s distributed over the web. After all, if you had the option of watching their programs on demand, and on your TV instead of your PC, why would anybody buy cable?

But the cable providers should probably be more concerned about people watching sports on the web than scripted programs. A lot of people will keep cable as long as its the sole provider of live sporting events, even if every single episode of every scripted show is on the web on demand.

AND

....For now, it seems like MLB really gets it, at least on this issue, and they’ll be much better off for it in ten years.

STADIUM FINANCING UPDATE

LWIB saw reports on the state of financing for two new MLB ballparks currently under construction (one barely) and another which debuted this season amidst much controversy.

Aaron Kuriloff reported that Moody’s Investor Service is confident that the New York Yankees “can cover the debt service” on their new stadium.  This despite widespread media coverage concerning the consistently large number of vacant premium seats, lack of sellouts and fan backlash over pricing at the new Yankee Stadium.  From Mr. Kuriloff’s report:

Revenue from the new Yankee Stadium is almost five times the amount needed to cover debt service, even with slower-than-expected sales of its most expensive seats and skyboxes, according to a report by Moody’s Investors Service.

The Yankees sold an average of 45,000 tickets in each of the first 35 games in the Major League Baseball season, leaving the team on pace to sell 3.6 million this year, down from a record 4.3 million in 2008, Moody’s said. The Yankees projected generating $331.5 million in stadium revenue this season, based on an expected attendance of 3 million.

AND

“Revenues generated by ticket sales and suite-license fees are expected to be robust through the term of the financing,” the report said, adding that the team is projected to take in about 4.8 times the amount needed to make its payments now and 14 times the amount needed by 2049. “Therefore, if the Yankees are sill playing in the new stadium, it seems unlikely that Yankees Stadium LLC will be unable to cover the debt service.”

AND

Revenue from premium seats accounts for about 40 percent of the money pledged to paying debt service, the report said.

“The share of projected revenues that is dependent on luxury suites could be a credit weakness in the current economic environment,” the report said. “However, Moody’s understands that only seven of the suites that were available are unsold as of June 2009.”

In a separate Bloomberg piece, Mr. Kuriloff reported that the Minnesota Twins have encountered borrowing costs significantly greater than initially forecast in financing their share of the construction of Target Field (opening next season).  From Mr. Kuriloff’s report:

The Minnesota Twins transferred $4 million to a debt-service fund for their new stadium after high interest rates caused by 2008’s credit-market turmoil drained an account devoted to paying off the bonds.

The account originally contained enough to pay debt service on the bonds until one month before the Major League Baseball team’s ballpark is schedule to open in April 2010, according to a report by Standard & Poor’s Rating Services. The credit-market squeeze drove interest rates up, and a hedge wasn’t enough to make up the difference.

After the transfer, the account “will likely be sufficient to pay debt service approximately until the projected opening date,” the report said. The rating service affirmed BBB- ratings on $40 million in bonds due in 2021 and $20 million in bonds due 2023, one level above high-yield, high-risk junk bond status.

AND

The team has sold about 80 percent of the stadium’s luxury seats and about half of its corporate sponsorships, though selling the remaining inventory may be difficult, the rating service said.

“The project has additional funds from deposits for suites and club seats and from owner capital contributions to fund the interest payments until the project opens, ensuring there is no cash-flow shortfall caused by the increased interest costs,” the report said. “However, overall interest costs will be higher than the pro forma.”

The Twins were not the only MLB club last week to be impacted by rising borrowing costs in financing new ballpark construction.  The Florida Marlins agreed to cover a potential shortfall of $6 million plus caused by a higher than anticipated interest rate on some of the bonds sold by Miami – Dade County  to finance the bulk of the anticipated $515 million cost of a new stadium.  (It is expected that the County will attempt to raise another $150 of bond financing later this year)  The sale of the bonds, originally scheduled for June 17 and 18, was not approved by county commissioners until after midnight the morning of July 02, a handful of hours before construction workers arrived at the Little Havana site of the new ballpark (scheduled to open in 2012).

Matthew Haggman reported in the Miami Herald:

The final piece of the Florida Marlins' 15-year quest for a permanent South Florida home came down to $6.2 million, last-minute political confusion and, finally, a 1 a.m. vote at County Hall.

AND

...the initial $300 million bond deal appeared much less certain Tuesday night when Burgess told commissioners a portion of the bonds came in at a higher interest rate than expected (more than 8 percent), leaving the county $6.2 million short of $306 million.

The two problems: The gap had to be plugged, and the stadium construction agreement had to be changed because commissioners previously voted to cap the bond interest rates at 7.5 percent.

That prompted Samson to pledge that the team will cover the $6.2 million shortfall.

AND

Then, after several hours of confused debate by commissioners -- followed by more hours for county lawyers to craft changes -- the county decided to lift the interest rate ceiling on a portion of the bonds so they could be sold at a rate up to 8.2 percent. The one caveat: The blended rate for all the bonds had to still be below 7.5 percent. The final vote was cast after 1 a.m.

Sarah Talalay reported for the South Florida Sun-Sentinel:

Not to get too technical here, but while the bonds backed by the professional sports franchise facilities tax portion of the hotel tax were sold at a lower interest rate than anticipated, those backed by the Convention Development portion of the hotel tax were set at a higher rate. The “blended rate” of the two taxes fell within the county’s 7.5 percent cap, but the commission needed to sign off on the higher cap of 8.2 percent for the CDT-backed bonds


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