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Last Week in Bizball: The RSN Windfall and MLB's Luxury Tax, Plus Tidbits PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Tuesday, 14 February 2012 00:00

Last Week in Bizball by Pete Toms

This week in “Last Week in Bizball”, the RSN windfall and competitive balance, plus tidbits.

THE RSN WINDFALL AND COMPETITIVE BALANCE

Commissioner Selig often trumpets the healthy state of competitive balance in MLB. Amongst other facts, he would cite the 9 different World Series champions in the last 11 seasons. Commissioner Selig would also argue that, under his guidance, MLB has achieved greater competitive balance by narrowing the revenue gap separating the largest and smallest markets. This has been accomplished with increased sharing of local revenues and the Competitive Balance Tax (CBT), or as it’s more commonly know, the Luxury Tax. In the recently concluded CBA negotiations, Selig successfully bargained for the implementation of a soft cap, similar to the CBT, in the Rule 4 draft. As well, the new CBA provides greater incentive for clubs to keep big league payroll at, or below, the CBT threshold. Cynics argue that redistributing revenues and taxing “overspending” isn’t about competitive balance but rather limiting player compensation. Since 10, I’ve been blogging about The Importance of Regional Sports Networks in MLB. A few weeks ago I noted a very prominent sports media consultant’s prediction that the windfall of RSN money flowing to MLB will soon see industry revenues increase from $7 billion annually to $9 - $10 billion. So, the inevitable questions is, will this windfall of billions of dollars in RSN revenue work against MLB’s efforts to “level the playing field”?

Some believe that the impact on competitive balance of soaring local media rights will be negligible. After all, each team’s current deal will eventually be up for renewal, and when it is, each will benefit from the same factors driving up rights fees (competition amongst MSOs & telcos for live sports, plus threat of OTT alternatives) which exist in every market. For instance, LWIB Bob Nightengale reported that, “…even the San Diego Padres— playing in the 26th largest market in baseball — are, pending MLB approval, poised to sign a new deal with Fox Sports that will guarantee them $75 million a year for the next 20 years.” The Padres current deal with Cox reportedly earns them $15 million annually. (For more on the Padres new partnership with FSN, see here) But, while each team will eventually “cash in”, the value of an RSN, or a rights fee, is not based on viewers or ratings but on the number of subscribers. And the number of subscribers is determined by carriage deals and, perhaps more critically for MLB, market size. Again from Nightengale, "It does have the potential to hurt competitive balance," said White Sox chairman Jerry Reinsdorf, MLB's longest-tenured owner. "The big TV deals are basically a function of market-size and competition. There's no way that Kansas City can get a deal comparable to what the Angels did."

In recent years there has been talk about an “emerging middle class” in MLB. In December 10, Eric Fisher noted that during that calendar year, a record number 7 nine-figure player deals had been concluded (a number matched last year). Of those deals he wrote, “…nowhere in that list are the New York Yankees and Mets, Chicago Cubs or Los Angeles Dodgers — four clubs typically among the highest earners in MLB. That quartet of teams was involved in nine of the prior 19 $100 million-plus contracts. Just as in the standings this past season, and the San Francisco Giants-Texas Rangers World Series matchup, MLB’s economic middle class continues to grow more assertive.” If we assume that there is a growing middle class in MLB (I’m not so sure), is it largely due to the annual redistribution of approximately $400 million from big revenue to small revenue franchises? And, with local media revenues soaring, will MLB and the MLBPA need to be more vigilant in ensuring that those revenues are being reported and redistributed? You can read my previous posts for more details, but an ever increasing number of team owners also own stakes in RSNs, or the club itself has equity in an RSN. (Comcast initiated the trend of offering clubs equity in their RSNs and FSN has followed) In such relationships, there are, inevitably, lies, damn lies, and related party transactions. In other words, how much local media revenue is being underreported to both limit club’s exposure to revenue sharing and boost the profitability of their RSN investment? For instance, if the Padres are set to earn $75 million annually for their local TV rights, how much are the NYC teams taking in? SNY, the RSN controlled by Mets owners Sterling Equities, reportedly paid the Mets a $68 million rights fee last year. That will reportedly rise to $83 million by 15. Again, according to Nightengale’s report, “The Yankees say their TV rights are worth about $85 million to $90 million a year from YES, while the Red Sox insist their TV rights from NESN are worth less.” To state the obvious, if these reports are accurate, there are hundreds of millions of dollars that are not being accounted for in calculating revenue sharing payments.

Underreporting of local TV rights is nothing new in MLB. The sale of the Cubs to Tom Ricketts was reportedly delayed over a dispute of the value of the rights fee paid to the club by broadcaster WGN (both entities owned by Tribune Co. at the time). In 10, sports economist Andrew Zimbalist wrote, “In 2008, approximately $400 million was transferred from the high- to the low-revenue teams. The higher a team’s revenue, the more it has to contribute. The lower the revenue, the more it receives. The principal terrain of disputation is related party transactions, where team owners also own the regional sports network (RSN) that broadcasts the team’s games. It appears that several teams underreport the market value of the RSN revenue received by tens of millions of dollars and, in one case at least, this underreporting appears to exceed $100 million by a substantial margin.”

If indeed, MLB Teams are Media Companies, and you believe that revenue sharing contributes to competitive balance, how MLB calculates RSN revenues is about to become much more important and contentious. The MLBPA will also be closely scrutinizing the reporting of these revenues because underreporting obviously reduces the amount of money available to players.

SELECT READ MORE TO SEE THIS WEEK'S TIDBITS

TIDBITS

  • LWIB Dave van Dyck reported that Cubs owner Tom Ricketts visited the Dominican Republic to tour the site of their proposed new player academy. To state the obvious, the Cubs think their player development efforts in the DR are lacking. More interestingly, the report brought to mind the discussions taking place involving the possible geographic expansion of the Rule 4 draft. Critics of expanding the draft to the DR cite the experience in Puerto Rico where, they believe, the introduction of the Rule 4 in 1990 resulted in clubs investing greatly fewer resources there. Put another way, why bother training, instructing and feeding a kid if he can be drafted by one of your competitors? But…Ricketts, Epstein & co. obviously don’t share those concerns or they wouldn’t be building a 50 acre facility on the island. Also notable to me in the report was the comment that the Cubs plan to use this facility to develop kids from Mexico and Venezuela. This is a continuation of a trend I blogged about in November, which is the exodus of MLB from Venezuela over safety concerns. In 1994, 19 Venezuelans appeared in MLB games. Last year that number had grown to 90. In 02, 21 MLB teams operated baseball academies in Venezuela. This year, 5 teams will operate academies.
  • Twenty years ago, Camden Yards spawned the retro/Americana ballpark building boom in professional baseball, which greatly boosted in-stadium revenues. Just as that new revenue model was maxed out, the fragmentation of mass culture and the challenge of the OTT services to the cable industry resulted in soaring rights fees for live sports. And now, has MLB, along with the other pro leagues, come full circle? Today, is the bigger challenge facing leagues and teams not maxing out the value of media rights, but rather, overhauling the in-stadium experience? When Camden Yards opened in 1992 the Orioles weren’t competing with big HD screens in their fans rec rooms. Nor had anyone even imagined today’s fans, particularly younger ones, watching games on TV while simultaneously interacting via 2nd and 3rd screens on social media platforms. Calling up statistics and monitoring your fantasy team, in real time, (particularly for NFL) is also essential for today’s fans. Attending a game where you can’t view the replays, access Facebook, Twitter or the web, or send a text, is an increasingly less appealing proposition for fans. The leagues and clubs understand all this, and as a result, a lot of money is being invested in upgrading wireless capacities in stadia across the country. LWIB, Don Muret reported that the Padres, in partnership with Verizon, are bringing Petco Park (which opened in 04) into the 21st century. “The agreement is one of the first deals for Verizon Wireless in Major League Baseball….the installation of a new distributed antenna system to meet 4G needs and a separate Wi-Fi platform will greatly improve mobile phone service for Padres fans…Both systems provide the foundation for a larger program using the in-park technology that MLB Advanced Media has developed.”
  • Padres owner Jeff Moorad (is he the owner?) bought a Triple-A franchise with the plan that the San Diego suburb of Escondido would build a new ballpark for it to play in. The CA state government pretty much killed the public funding for the ballpark. So, Moorad is likely to sell the franchise, currently located in Tucson. LWIB, Ballpark Digest reported that there is interest in acquiring the franchise from groups in El Paso and Boise.
  • I was very happy that LWIB, City of Ottawa staff (I live there) announced that they are recommending council agree to a lease agreement for Ottawa Stadium with Beacon Sports Capital Partners. The reporters at our “paper of record” believe that, beginning in 13, Ottawa will be home to the Double A Eastern League franchise currently located in Binghamton. Again reportedly, the Blue Jays are expected to be the franchise’s major league affiliate. Josh Leventhal wrote in Baseball America that nobody associated with the Binghamton franchise, the Eastern League, or the Blue Jays is confirming any of these reports. However, EL president Joe McEacharn did state, "It's fair to say that the league is involved in an exploratory process to make a determination on whether Ottawa is a good fit for the Eastern League..”. If the Binghamton franchise is moving after this season, their owners can’t admit it now because it would alienate their fans. And many have pointed out that the Blue Jays denials are expected because the PDCs between minor league teams and their major league affiliates don’t expire until the end of this season, and, until then, any discussion of a move is forbidden by those rules.
  • Alliance Bank Stadium, home to the Triple-A Syracuse Chiefs, was built for $28 million (I‘m guessing that doesn‘t include borrowing costs). Onondaga County paid for the ballpark. LWIB, Ballpark Digest reported that the county will likely sell the stadium to their Triple A tenant for about $3 million. The reason? Stadia are money pits.

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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