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Pete Toms Article Archive
Written by Pete Toms   
Monday, 23 August 2010 17:30

Last Week in Bizball by Pete Toms

This week in “Last Week in BizBall”, the growing importance of Regional Sports Networks (RSNs) in MLB.

National TV is important to MLB. The league reaps a combined $650 million plus annually from their national TV broadcast partners Fox, ESPN and Turner Sports. This is obviously an important source of revenue for MLB, representing approximately 10% of annual revenues. In addition, some pundits ascribe much importance to national TV ratings, using them as a barometer of the popularity of the game. This season’s flat national TV ratings combined with the lowest ratings in All Star Game history give some the impression that MLB is waning in popularity (see this column titled All-Star ratings symptom of greater MLB health woes). What is often overlooked when examining MLB’s place in the TV landscape is that local MLB television programming (ie. live games) has never been more valuable. While each MLB franchise takes in $20 million plus annually from national TV rights, local rights fees or revenues from franchise owned RSNs are often much greater. The vigorous competition amongst MSOs, telcos, sat providers and programmers for local TV rights has proven a cash windfall for many franchises with some potentially blockbuster deals on the horizon.

As more and more of us consume TV programming independent of cable or satellite, live sports programming is a must for MSOs fearful of “cord cutting”. In June, John Ourand, the Sports Media reporter for SportsBusiness Journal wrote an opinion piece titled Live sports may help keep TV viewers from cutting the cord.

People such as Richard Taylor, a 39-year-old graphic designer from Boston, are as responsible as anyone for giving sports channels extra leverage with cable and satellite operators.

That’s because Taylor is part of a growing trend of cord cutters: people who dump their cable subscriptions in favor of free video content on the Internet.

A survey by information technology research firm Yankee Group found that one in eight consumers could cut back their cable service this year. I believe it will be exclusive sports content — rather than entertainment programming — that will keep this migration from happening.

The country’s largest MSO, Comcast, shares ownership of a number of their RSNs with MLB franchises. (CSN Bay Area (Giants), CSN Chicago (White Sox, Cubs) CSN Philadelphia (Phillies) and SportsNet NY (Mets)) This strategy serves a dual purpose for Comcast. Locking up key sports programming makes it more difficult for a competitor to launch an RSN. MSOs favour fewer RSNs in a market because more RSNs results in both higher programming costs and subscriber fees. Plus, ensuring that the baseball franchises will remain part of the CSN stable provides an important hedge against the aforementioned practice of “cord cutting”

The recently concluded bankruptcy auction of the Texas Rangers serves as an example of the competition for local MLB rights. Mark Cuban’s interest in acquiring the baseball franchise led News Corporation (Fox Sports) to seriously consider the same. News Corp.’s motivation was in preventing Mr. Cuban from establishing a competing RSN to their Fox Sports Southwest. In January of this year, the SportsBusiness Journal reported that, “Earlier this year, Fox Sports Net tried to offer Texas Rangers owner Tom Hicks a cash advance to help him with financial troubles. According to local press reports at the time, MLB stepped in to block the move.” The week of the auction, Richard Sandomir reported for the New York Times.

For Cuban, buying all or part of the Rangers would give him the baseball team he has apparently coveted; he showed some early interest in the Chicago Cubs before they were acquired by the Ricketts family.

More than Cuban, News Corporation views the Rangers as a strategic asset. The team's games are carried on its Fox Sports Southwest regional sports network. If News Corporation buys the team, it would essentially own the television rights, and prevent Cuban from possibly starting a regional network with the Rangers and the Mavericks as linchpins.

Fox Sports’ interest in acquiring the Rangers was a surprise to many. After all, it is less than seven years since Fox concluded the sale of the Los Angeles Dodgers to the present owners. Fox was so eager to sell the franchise that they financed a portion of the sale themselves. But perhaps we shouldn’t have been surprised because the potential benefit of owning the Rangers for Fox is the same as was their ownership of the Dodgers. In January 03, Brian Dohn reported on Fox’s pending sale of the Dodgers.

In 1998, Murdoch bought the Dodgers from Peter O'Malley for $311 million to build a cable network on the West Coast before competitor Disney could do the same. It worked; Disney, owner of the Angels and Mighty Ducks, canceled plans to form an ESPN West channel.

Murdoch's son, Lachlan, left little to be debated regarding News Corp.'s future with the Dodgers during an interview on ``Charlie Rose'' last week.

"With the Dodgers, strategically it was the right thing to own the Dodgers while we were building our cable (assets/sports channels),'' said Lachlan, News Corp.'s deputy chief operating officer . ``I think that strategic imperative has passed now.''

SELECT READ MORE TO SEE THE REST OF THIS ARTICLE ON THE GROWTH OF REGIONAL SPORTS NETWORKS (RSNs)

Also recently, Rogers Communications Inc. (RCI), owner of the Toronto Blue Jays, has leveraged ownership of their baseball franchise to launch a new sports channel (Sportsnet ONE), expanding their regional Sportsnet RSN to five channels from four. RCI, like Comcast, is both an MSO and a programmer. In February 09, the Biz of Baseball reported on the widespread speculation in the Toronto media that RCI no longer saw the benefit of MLB ownership within its telecommunications conglomerate. Is it coincidence that rumours of a sale of the Blue Jays have disappeared at the same time RCI needs Blue Jays games to launch a new channel? Similarly, in separate transactions, RCI purchased the baseball franchise and the Sportsnet RSN circa 2000. While RCI’s cable competitors carry the other Sportsnet channels, carriage deals have not yet been concluded for the new Sportsnet ONE channel which launched August 14. Denying the segment of Blue Jays fans who are non-Rogers cable subscribers access to twenty five of their remaining games (at the time of Sportsnet ONE launch) has predictably brought pressure on RCI’s cable competitors to come to a carriage agreement for the new channel.

The predictability and stability of revenues generated from RSNs are immensely beneficial to MLB franchises. Revenues generated at the stadium (primarily ticketing) are volatile, hostage to the unpredictable on the field fortunes of teams, but RSN revenue is money in the bank. In 2008, FSN Detroit committed more than $1 billion to lock up the local TV rights to Tigers, Pistons and Red Wings for 10 years. The Tigers share is reportedly $400 million. The Detroit teams benefited from being courted by AT&T and EchoStar, who had plans of launching their own RSN in the Detroit market. In 07, the Mariners reached a 12 year / $500 million deal with FSN Northwest. In 06, the Angels signed a 10 year / $500 million deal with FSN West. In Houston, the Astros reportedly earn upwards of $30 million annually from their deal with FS Houston. The Astros could exercise an out clause in their deal with FS Houston after the 12 season and according to numerous reports, competition amongst Fox, Comcast and AT&T/EchoStar to acquire the rights is fierce. Once again, the goal of both Comcast and the AT&T/EchoStar bids is to use the programming to establish an RSN.

Some clubs have foregone selling their TV rights in favour of establishing their own RSN. In 06 the Indians launched SportsTime Ohio, spurning an offer from FSN Ohio reportedly in excess of $30 million per season. Along with the Indians, the Yankees (YES), Red Sox (NESN) and Orioles/Nationals (MASN) own the RSN which broadcasts their games. Just as with rights fees, the affiliate fees which these RSNs collect from cable and sat are guaranteed whether the club excels or disappoints on the field. (subscription fees are collected by cable and sat, a portion of that fee, aka the affiliate fee, is shared back to the RSN) While “over the air” broadcasters struggle due to audience fragmentation and the recession, the “dual revenue stream” of cable (ads and subscriber fees) is clearly more viable. Illustrating the value of sports programming, SNL Kagan reported in June that RSNs outperformed other cable networks last year.

According to data from SNL Kagan, total revenue at regional sports networks (RSNs) increased 6.6% in 2009 to $4.6 billion, slightly outperforming the 4.8% total revenue growth of basic and HD cable networks.

AND

SNL Kagan data shows that all 36 RSNs posted positive revenue growth, illustrating the power of dual revenue streams. Although ad revenue for RSNs was down 6.0% to $608.8 million in 2009, affiliate revenue was up 9.0% to nearly $4 billion.

According to the same report, the #1 RSN in terms of revenue in 09 was the Yankees owned YES Network which took in more than $400 million. It has been widely reported that the New York Yankees do not turn a profit, that their greatest value is the content they provide to YES. Does the near future in MLB include more franchises launching their own RSNs? Recent reports had Pittsburgh Penguins owners Mario Lemieux and Ron Burkle interested in purchasing the Pirates in order to establish their own RSN. The Padres and Astros are reportedly both considering establishing an RSN. And speculation won’t go away that two of MLB’s crown jewels, the Cubs and Dodgers, have plans to establish their own cable channels. Bruce Levine reported in February that despite the Cubs receiving approximately $30 million per season from CSN Chicago (the Cubs also have a rights deal with WGN) they still have plans to launch their own channel.

The Cubs’ future on television will find them venturing out with their own Cubs cable network at some point. The historic National League team has long agreements with Comcast, as well as WGN television and radio. However, the new ownership group, led by Tom Ricketts and his family, are looking into a new 24-hour Cubs station in the future.

The New York Yankees make hundreds of millions of dollars off of their YES Network that they formed 10 years ago. The Yankees show most of their games and have Yankees’ programming 24 hours a day, 365 days a year on their station. The Cubs’ following and their legions of fans across the country indicate a total access cable station of their own would be a huge success.

The divorce trial of Dodgers owners Frank and Jamie McCourt has revealed that their long-term plans for the baseball club include(d?) establishing a Dodgers centred RSN. Whether or not one of the McCourts eventually retains ownership of the club remains to be seen but a new owner could well attempt the same. Bill Shaikin wrote earlier this month, “The Dodgers are pinching pennies until 2013, when their contract with Fox expires and they can start their own cable channel, one that the team hopes might add $100 million per year to the bottom line.”

As local TV revenues outpace national TV revenues, what sort of challenges does this pose to MLB and the MLBPA? It is believed that already several franchises underreport the market value of their RSN revenue by tens of millions of dollars, and in one case maybe substantially more. Increasing disparities in local TV revenues, particularly if they are not counted as “baseball related” revenue and therefore exempt from revenue sharing, could lead to more competitive imbalance.

Last week John Ourand wrote in the SportsBusiness Journal on the recent proliferation of, and plans for more, sports channels. (The trend is by no means restricted to RSNs featuring MLB) Teams, leagues and college conferences, everybody seems to want their own channel. Mr. Ourand cautions that this isn’t new and sometimes fails.

It seems that everywhere distributors look, someone is trying to launch a sports channel. The most activity seems to be with college sports, but several professional sports teams, like the Astros and Rockets in Houston and the Padres in San Diego, also are looking into setting up TV channels rather than renewing rights deals with existing regional sports networks.

Distributors have seen this kind of frenzy before. In 2002, when the New York Yankees launched YES Network, several MLB teams tried to follow suit.

The Kansas City Royals tried to launch their own RSN before the 2003 season; the Minnesota Twins tried to launch just after the 2003 season.

Neither succeeded. Cable operators in Minnesota and Missouri largely refused to cut carriage deals for either network. Both were in much smaller markets than the Yankees, and the teams had a harder time whipping up public support to pressure multisystem operators to carry the channel.

The final word to blogger Bill Gurley.

Affiliate fees are driving an endless supply of channels for anyone that has “must see” content. The NFL has a channel, and had some high profile disagreements with the carriers over the “need” for its affiliate fee. You also see an NBA channel, an MLB channel, and pro wrestling is vying for one as well. If you own exclusive content, you might as well build a channel around it. This endless proliferation of channels will one day reach a limit, but for now it’s the game on the field.

“Last Week in BizBall” will return September 5.


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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