20 February 2014

What We Know About MASN

Jonah Keri of Grantland and Patrick Dougherty of Baltimore Sports and Life recently have written articles discussing the financials of MASN. Their work provides a foundational summary but I think it may be helpful to drill further into the details by focusing on what has been published in other news sources.

In the first post of a four-part series, I intend to sum up what we know about MASN's finances based on what has been published in the media. In the second post, I intend to use the facts that the media has published about MASN's finances to build a few models that might possibly give us a more complete understanding of MASN's financial situation. In the third post, I intend to compare what MASN is paying the Orioles and Nationals in media rights fees to what other teams are being paid in media rights fees. In the fourth post, I intend to look at the current situation between MASN and the Nationals and look at potential solutions.

There have been many media sources and blogs that have discussed this situation. I intend to focus on what has been published by the Washington Post, the Baltimore Sun, and Jonah Keri. This is partly because I’m partial to old media sources but also because they've done an excellent job of writing about this situation. There’s very little relevant information that I've been able to find that wasn't published by one of these three news sources. 

BACKGROUND

In this article, the Washington Post explained the background about why MASN was created:

When MLB, which owned the franchise known until 2004 as the Montreal Expos, was trying to arrange the team’s move to Washington, the Orioles argued that they should be compensated for having to share their territory. MLB brokered an arrangement in which the Orioles would convert their existing Orioles Television Network into a larger one, MASN, and buy the Nationals’ television rights. The contract has no termination date, according to someone familiar with the deal.

The deal also stated that the Orioles would own the majority of the network; the Orioles’ equity stake in MASN would begin at 90 percent, with the Nationals’ stake at 10 percent. After a two-year start-up period, the Nationals’ stake would increase by 1 percent each season until it reached a cap of 33 percent. Also guaranteed in the contract: The Orioles are to be paid the same rights fees by MASN as the Nationals. Those rights fees can be revisited once every five years beginning this year.

To sum up, MASN was created in order to compensate the Orioles for part of the loss of their media territory and to help ensure their ability to compete. The Orioles were given preferential treatment by being allowed a large equity stake in MASN and therefore a larger equity share of any profits as well as the same media rights fees as the Nationals despite being a smaller market. 

MASN helps the Orioles compete due to the revenue it generates for the club. The Orioles and Nationals sell their media rights to MASN for a specified sum that changes each year called a media rights fee. MASN broadcasts the baseball games on their network as well as other content. Some of this other content is advertisements in return for an advertising fee. MASN sells the media rights to broadcast their network to cable providers such as Comcast or RCN in an agreed upon region in exchange for a subscriber fee. Comcast or RCN agrees to pay a monthly fee for each subscriber of its network to view MASN. In order for Comcast or RCN to make a profit, they charge each subscriber of their network a larger fee in order to view MASN. If Comcast were to hypothetically agree to pay MASN $2.28 per month for the right to broadcast MASN then they may charge their customers a larger amount per month in order to raise enough money to pay MASN and other expenses.  

MASN's revenue is made up primarily from subscriber and advertising fees. From that revenue, they need to pay their operational expenses and media right fees back to the teams. If they have money left over after paying those bills then that profit goes back to the owners as equity stake payments. The Nationals and Orioles own MASN and therefore these profits go back to the owners of the teams in direct correlation to how much of MASN they own. If the Nationals owned 20% of MASN then they would get 20% of these equity stake payments. As stated above, the amount that the Nationals own changes yearly. 

These media rights fees and equity stake payments allow the Orioles and Nationals to theoretically spend more on the club than they would have been able to otherwise. Now that I’ve explained how MASN helps the teams compete, I’d like to look at some of the specifics that have been stated by news sources starting with the equity stake percentages. 

EQUITY STAKE

The article quoted above was written in August 2012 and states that the Nationals’ stake in MASN stood at 13 percent at that time. The following article in the Washington Post explained that the Nationals’ stake in MASN was 14 percent in July 2013. It would seem that the Nationals had a 12 percent stake in MASN during the 2011 season, an 11 percent stake in MASN during the 2010 season, and a 10 percent stake during the 2009 season.

This article from the Baltimore Sun claims that in July 2012 Washington held 13 percent of MASN which is in agreement with the Washington Post. But the following article in the Baltimore Sun claimed that the Orioles had an 86% stake in MASN in December 2012.

I believe that what this shows is that the Nationals gain a 1% increase in their equity stake at some point between August and December of each year. I would presume that they gain their increase after the baseball season is complete. In addition, the first year that their equity stake increased was 2009. This is conjecture on my part but the Washington Post reported that there was supposed to be a two-year startup period before the Nationals would gain any equity. The Baltimore Sun reported that even though the Nationals arrived in 2005, it was not until 2007 that MASN had rights for all Nationals and Orioles games except for those televised nationally. That's why 2012 — five years later — became the first year to "reset" the rights fees.

Given that the Orioles weren’t able to gain control of their media rights and broadcast their games on MASN until 2007, it seems possible that the two-year startup period began in 2007 instead of when the network was first created in 2005. Regardless of whether this explanation is correct, it seems clear when the Nationals receive an increase in their equity stake and therefore how much equity they have in MASN for any given season.

I found that creating a table helped me understand the data. In the interests of brevity, I will create a table at the end of this document showing how the data look after I’ve finished discussing the media rights fees, equity stake profits, revenues, and operating expenses.

MEDIA RIGHTS FEES

According to the Washington Post the Orioles and Nationals are to be paid the same amount in rights fees each year. Those rights fees can be revisited once every five years beginning in 2012. In the same article, the Washington Post states that MASN paid the Nationals $20 million in rights fees in the first two seasons of the deal, and increased the amount by about $1 million a year until it hit $29 million at the end of 2011. Starting in 2012, the Post states that extrapolated over the next 20 years, MASN and the Orioles have offered the Nationals a deal in which the rights fees would increase about 7.7% each year, according to the person familiar with the contract. The Washington Post stated in this article that the rights fee amount would increase to just under $37 million in 2013.

The Baltimore Sun reported that in 2008 MASN's rights fee was $26 million to each team. In this article, the Baltimore Sun claimed that each team received $29 million in 2011 and that using Bortz’s formula they would receive in excess of $34 million in 2012. In the same article, the Baltimore Sun also claimed that the rights fee would gradually increase to about $46 million in the fifth year of the deal or 2016.

Looking at both the Baltimore Sun and Washington Post, it appears that we can conclude that MASN offered each team slightly more than $34 million in 2012, slightly less than $37 million in 2013, and roughly $46 million in 2016 with about a 7.7 annual percent increase. Doing the math and multiplying $34 million by 1.077 is equal to $36.6 million. Likewise, multiplying $34 million by 1.077^4 equals $45.74 million. Therefore, if we assume that there is an annual 7.7% increase then we would end up with the same results suggested by these publications.

It’s worth noting that the Baltimore Sun claimed that the rights fees were more than $34 million in 2012. Any amount under $34.2 million would result in the teams receiving roughly $37 million in 2013 and roughly $46 million in 2016. These numbers are what we’d expect and therefore seem to verify that the average increase from 2012-2031 is projected to be 7.7%.

Also, in 2005 and 2006 MASN paid each team $20 million dollars in rights fees. In 2011, MASN paid each team nearly $29 million. If we were to assume a 7.7% increase from 2007-2011, this would result in each team making $28.98 million in media rights fees for 2011. Since we know that the team made $26 million in 2008, we know there wasn't an annual standard 7.7% increase from 2007-2011. However, the fact that on average there was a standard 7.7% increase from 2007-2011 seems to add credence to the argument that MASN decided to offer that for the current five-year deal and possibly longer.

An annual 7.7% increase from 2012-2031 means that MASN will pay both the Nationals and Orioles a sum of nearly $200 million (or $400 million total) from 2012-2016 and a total of slightly more than $1.5 billion (between $1.505 billion to $1.515 billion) each from 2012-2031 in media rights fees. This presumes that the 7.7% increase will remain in effect during the whole period and that there will be no increases in the media rights fees aside from the 7.7% increase.

EQUITY STAKE PROFITS

As we mentioned earlier, MASN makes a certain amount of revenue each year. From that revenue, they pay operating expenses and media rights fees. Remaining money goes back to the owners of MASN in equity stake profits. The owners receive the same percentage of equity stakes profits as the percentage of equity they have in MASN. For example, in 2012, the Nationals would have received 13% of the equity stakes profits while the Orioles would receive 87% whereas in 2019 the Nationals will receive 20% of the equity stakes profits while the Orioles will receive 80%.

The Baltimore Sun reported that the Nationals received over $6 million for their equity stakes in 2011. The Washington Post reported that the Nationals 2011 equity stake profits were close to $7 million in 2011. According to these sources, this means that the Nationals received an equity stake profit between $6.5 and $7 million in 2011. Since the Nationals had a 12% stake and the Orioles had an 88% stake in 2011 then this would indicate that the Orioles received an equity stake profit between $47.6 and $51.3 million in 2011.

I was unable to find an article in the Washington Post that stated the amount of equity stake profit that the Nationals received in 2012. However, the Baltimore Sun claimed that the Nationals received more than $7 million in 2012. Since the Orioles had an 87% stake in 2012 this implies that the Orioles received an equity stake profit between $48.5 and $50 million in 2012 and that the amount went down from 2011 to 2012. The reason for this is because MASN offered each team a roughly 17% increase in their media rights fees. This was larger than the increase in revenue and operational expenses and therefore caused the Orioles to receive roughly $2 million less in 2012 than they did in 2011.

The Washington Post claimed that the Nationals received an equity stake payment of $8 million in 2013. The Baltimore Sun stated that the Nationals will receive a total of $45 million or so in media rights fees and their percentage of the MASN rights profits in 2013. Given that the Nationals received less than $37 million in media rights fees in 2013 that would mean the Nationals received an equity stake payment slightly greater than $8 million in 2013 possibly between $8.1 and $8.4 million. Given that the Orioles had an 86% stake in MASN in 2013 this would imply that the Orioles received roughly between $49.5 million and $52 million in equity stake payments in 2013.

The Baltimore Sun reported that the Nationals would receive slightly less than $12 million in profit distributions in 2016. To the best of my knowledge, the Washington Post has not written an article about the Nationals equity stake payment in 2016. However, I have seen other news sources confirm this number. As the Orioles will have a 17% stake in 2016, then they should be projected to receive roughly between $56.6 million to $58.6 million in 2016.

Finally, the Washington Post stated that MASN and the Orioles argued that their proposal extrapolated over the next 20 years totaled over $2 billion including the increasing equity stakes. The Baltimore Sun quoted Bortz Media & Sports Group saying that if the Nationals' five-year deal was extrapolated over 20 years, it would provide more than $2.1 billion in rights fees and profit distributions. I am inclined to believe that the Washington Post was simply rounding when it claimed the deal would provide over $2 billion and that there is no difference between the Washington Post’s and Baltimore Sun’s numbers. If this is correct, then since the media rights deal is expected to provide the Nationals $1.5 billion over 20 years, then the Nationals should be expected to receive roughly $600 million in equity stakes payments over the 20-year period. Again, this presumes that the deal will not change in any way over that 20-year period.


REVENUE AND OPERATING EXPENSES

I was unable to find any articles in either the Washington Post or the Baltimore Sun discussing MASN's revenue. The New York Times claimed that according to SNL Kagan, in 2010 MASN earned $158.7 million in revenue. Jonah Keri’s article in Grantland states that SNL Kagan says that MASN earned $167.8 million in revenue in 2012 and was projected to earn roughly $179 million in 2013. I was unable to find anything from him stating what SNL Kagan said MASN made in 2010 or 2011. My understanding was that MASN made $167.8 million in revenue in 2011 and was expected to make roughly $179 million in 2012.

Jonah Keri stated that in 2009 MASN had $128 million in revenue. However, in 2009 MASN and Comcast reached a settlement in their legal fight over carriage of the sports net. As a result, certain unspecified Comcast markets but possibly including Harrisburg, Pennsylvania, the Tri-Cities region of southwestern Virginia, and Roanoke and Lynchburg, Virginia, as well as "in various cable systems in smaller communities where Comcast has cable systems within MASN's territory" began carrying MASN in the 2010 season. For the sake of completeness I wanted to include the 2009 revenue numbers, but I believe that this had an impact on MASN's revenue and makes a comparison between 2009 and 2010 revenue difficult.

I found no articles stating how much MASN's average monthly operating expenses were for any year. However, there was recently an article in the Houston Chronicle that stated the average monthly operating expenses for CSN Houston were roughly $3 million not counting media rights fees. I would presume that this means that the yearly average operating expenses for CSN Houston in 2013 was roughly between $32 and $39 million. While this does not mean that the operating expenses for MASN are $32 to $39 million a year, it does give us some context. This is conjecture but I would expect MASN's operating expenses to be higher because the Maryland/DC region is more expensive than the Houston region and because Comcast probably knows how to control its operating expenses better than MASN. 

SUMMING UP WHAT WE KNOW

Now that I've gone through everything I can find in print about the situation, it may help to see it in visual form. Below is a table with all of the information that we've determined from 2010 to 2016. All numbers are in millions.


In this post, we've established what the media has reported about MASN and have collated it into something more user-friendly. In the next post, I want to look at things that media hasn't reported about MASN but that can be derived from what we already know such as equity payments. 

17 comments:

Bill Kennick said...

Interesting analysis. Thanks
It will be interesting to see the final figures.

Scott Wheeler said...

Thanks, this is a great analysis.

Positively Half St. said...

The disadvantage to the Nationals is criminal, and not surprising.

Nick said...

I am not sure how it is criminal or why the Nats keep complaining. This was the DEAL that they agreed to in order to get a team. They can't agree to a deal to get a team, then after getting the team complain it is not fair. That would be like the Orioles now coming back and complaining that it is not fair there is a team in DC and they don't get 100% of this revenue. Don't forget that prior to the Nats moving to DC the O's owned 100% of this market.

Dews said...

Excellent work on this! I've struggled to find an in-depth look at how this all breaks down, but you've done a great job putting all the facts down in one place.

DaveB said...

Nick ... if you read the article, for all media rights fees after 2012, it says "the Orioles offered", as opposed to "the DEAL stipulates". Everything else I have read says that from 2012 on, the DEAL stipulates that the Nats are supposed to be paid fair market value as the media rights fees, and most things I have seen estimate that at $70-$100M/yr. (i.e, significantly more than "the Orioles offer"). So it certainly seems to me that it is Angelos that is refusing to honor the DEAL. Now I get that paying both the Nats and the Orioles at a rate equal to the Nats' fair market value would probably bankrupt MASN, so it is complicated, but I think the reality is that the Orioles already received their 5 years of premium for allowing the Nats to move, and it is time now (per "the DEAL") to move on and let each team get a fair deal.

Anonymous said...

Actually DaveB, the article states that as part of the DEAL, the Nats and O's were to receive the same media rights fees. The deal is fair IMO because the Nats took a huge chunk of O's territory away and should therefore have to pay for it.

Anonymous said...

DaveB, I believe you will find the estimates that the Nationals media rights should be between $70 - $100 million come from the Nationals. There is not set valuation on rights fees. They are saying someone else would give them this, so...

Also Nick saying "MASN and the Orioles" is not entirely correct. The Orioles franchise has no equity in the RSN. The owners are Angelos and his limited partners individually along with Lerner and his limited partners individually. While it appears the money goes back to the respective teams, I do not believe this is a requirement. Angelos could sell the team and keep the RSN or sell the RSN and keep the team, but neither team is anything but a client.

The significance, of this, however is that the Orioles do not set the rate for anyone. Neither, do I believe, does Angelos. I believe this is done by the management of the network.

As Nick points out, Lerner signed the TV deal when he bought the team. One would assume a smart guy like read it and had his lawyers read it.

Pretending to just discover what the deal involved is inane. A contract is a contract. The time to object would have been before signing.

Then, as you can see from the numbers in the article, if the Nationals claim is correct it will bankrupt MASN. This is an absurd proposition but I believe is their actual motive.

While they base their claim on being in the 7th largest media market in the US, the Nationals are one of the least watched sports teams not just nationally but in the region.

Given that revenue is a byproduct of actual viewers the Nationals should be happy they are get what they do.

Matt Perez said...

Thanks for the kind words. I also found this situation confusing so I figured something like this would be helpful.

The deal allows the Nationals to request a reset in the amount of media right fees every five years.
The problem is that both sides are offering a reasonable determination of value.

The Orioles are using Bortz's formula to determine fair value. This formula has been used since 2000 to determine fair media rights values and is a perfectly legitimate way of determining fair value.

The Nationals are arguing that current deals have surpassed expected values and therefore the formula needs to be tweaked. If they can prove this, then that strengthens their case for the formula to be tweaked and for them to get an increase.

These arguments should be expected to take years.

Anonymous said...

I want to know what is keeping TWC and MASN from getting a deal together because I am Braves fan and order the baseball package and cant watch Braves game when they play the Nationals or Orioles. SO how come I live in Wilmington NC why the Nationals games blacked out?

Matt Perez said...

The Orioles and Nationals do own MASN.
http://www.masnsports.com/masn_news_information/about-masn.html

Anonymous for NC. I talk about why you can't receive Nationals games in Part III but Grantland has written some excellent articles on the topic. This is one of them.

http://grantland.com/the-triangle/the-baseball-blackout-in-north-carolina-continues/

Jon Shepherd said...

To be clear, MASN can be separated from team ownership.

Scott said...

To all the people saying Lerner agreed to this, you have to remember that the MLB negotiated this deal, not the Lerners. The Learners didn't own the team yet. So basically MLB gave the O's an amazing deal to keep them happy. The O's never had any "rights" over the Washington DC market. And to say DC was 100% O's is a little extreme.

But aside from that, the issue comes from the fact that the O's have incentives to pay themselves below market value, along with the Nats, so that the profits are higher where they get a much larger percentage of that. It also means that the O's don't have to pay nearly as much to the competitive balance fund (or whatever its called) which is a percentage of every team's media rights redistributed to the teams.

There is clearly a case for the Nats considering MLB is writing them a check every year to "make them whole", in order to keep them from publicly taking this to court.

Jon Shepherd said...

Lerners went in understanding the deal, so, in a way, they certainly agreed to the deal.

Matt Perez said...

"But its roots go deeper. When the Senators left Washington for Texas in 1972, leaving only the Orioles in the region, baseball awarded Baltimore exclusive rights for much of the mid-Atlantic. Back in cable’s infancy, few paid attention to the issue. Today, however, cable TV broadcasts are one of the biggest revenue engines for sports franchises, worth tens if not hundreds of millions of dollars.

The Orioles’ territory, as spelled out in the 2005 agreement between MLB and the Orioles, encompasses all of Maryland; Virginia; the District; Delaware; seven counties in West Virginia; 13 counties and three cities — York, Lancaster and Harrisburg — in central Pennsylvania; and most of central and eastern North Carolina.

So when MLB, which owned the franchise known until 2004 as the Montreal Expos, was trying to arrange the team’s move to Washington, the Orioles argued that they should be compensated for having to share their territory. MLB brokered an arrangement in which the Orioles would convert their existing Orioles Television Network into a larger one, MASN, and buy the Nationals’ television rights. The contract has no termination date, according to someone familiar with the deal."

http://www.washingtonpost.com/sports/nationals/washington-nationals-baltimore-orioles-split-over-masn-cable-tv-rights-fee/2012/08/14/2e91845e-d810-11e1-b8ce-16e9caa8b86a_story.html

The Orioles had exclusive rights over what is now the Nationals media market from 1972 to 2005. My understanding is that these boundaries were put into writing. I know that the current boundaries can found in the MLB constitution.

In Part 3 and 4 I'll go into this question in greater detail.

Andrew R said...

The challenge is that the Lerners believed they would get "fair market value" after 5 years and now there is no mechanism to arbitrate what fair market value is.

To say the Lerners knew what the deal was, that is ok for the first 5 years... now it's incumbent upon both sides to arbitrate fair market value and get to a conclusion

Jon Shepherd said...

Part of the not meeting "fair market value" was a product of how the tv market has played out. The Lerners having issues with this contract is like a whole host of other teams who have issues with long term contracts they agreed to during the mid-aughts.

There is not really a decent legal foot to stand on here for the Nationals.