Edit: In this article I made the mistaken assumption that the Nationals were requesting between $100 to $120 million per year from 2012 to 2031. In fact, the Nationals requested about $118 million on average from 2012 to 2016. Much of this article is inaccurate.
In my previous post, I explained that what the Nationals are receiving from their media deal compares to what the Astros, Phillies and Rangers are receiving from their media deals. In this post, I want to discuss the Nationals position about the media deal and why they’re unhappy with the status quo.
As the Washington Post explains, when MLB tried to move the Expos to Washington, the Orioles argued they should be compensated for having to share their territory. MLB brokered an arrangement where the Orioles would convert their existing television network into a larger one called MASN and buy the Nationals’ television rights. The deal stated that the Orioles would always own the majority of the network. However, the Nationals also received two concessions. They were guaranteed that the Orioles and Nationals are to be paid the same rights fees by MASN and that those rights fees can be revisited once every five years beginning in 2012.
In 2012, the Nationals took advantage of their right to revisit these rights fees. They asked MASN for between $100 million and $120 million per year, at least three times the $29 million they received in 2011. MASN proposed paying $34 million for 2012 with 7.7% annual increases. The Orioles argued that $34 million in 2012 is a fair amount based on the current contract while the Nationals argued that $100 to $120 million per year is a fair amount based on recent media deals.
On first glance, this is hard to understand. Over the twenty year period it has been established that what MASN is offering the Nationals is what other similar teams have received. Why are the Nationals asking for such a large amount? A closer look shows that things aren’t as they seem.
The Baltimore Sun wrote that,
the Nationals received $29 million in rights fees in 2011 and are seeking a
rights fees increase up to a reported $120 million annually. MASN says
Washington's amount should increase by far less — to more than $34 million in
the first year. Mike Ozanian wrote for Forbes
that Orioles owner Peter Angelos wants
to give the Nationals a 20% increase, to $35 million per year. But billionaire
Ted Lerner, who owns the Nationals, is looking for more like $100 million
annually. John Ourand wrote in Sports Business Daily
that the Nationals have told MLB that they should receive an average of more
than $100 million a year in media rights while MASN said the fee should average
about $35 million a year.
These sources do not state that the Nationals requested $100-$120 million in 2012. Rather, they state that the Nationals requested $100-$120 million per year or a sum between $2 and $2.4 billion over the twenty year period. As John Ourand wrote, the Nationals wanted an average amount of $100 million per year. Many sources are attempting to compare what MASN is offering the Nationals in 2012 or 2013 to the average amount that the Nationals want over the twenty year period. As shown in Part 3, this comparison is inaccurate.
It is worth noting that this happens often in the media. There have been many sources reporting that the Astros deal is worth $80 million per year in media right fees but far fewer reporting that the Astros were supposed to receive $55 million in 2013 for their media right fees. Likewise, there have been many sources reporting that the Phillies deal is worth $100 million per year in media right fees but neglect to mention that their deal pays considerably less in 2016.
It is possible to determine how much the Nationals will receive per year if they receive either $2 billion or $2.4 billion total with an annual increase of 7.7%. Once that has been determined, it is possible to compare the amount that the Nationals would receive in either of these deals to the deals listed in part 3. Here’s the table.
This next chart shows how the deals would look from 2012-2016, 2017-2021, 2022-2026, 2027-2031 and 2012-2031. Note that the Phillies deal doesn’t start until 2016, the Astros deal doesn’t start until 2013 and the Dodgers deal doesn’t start until 2014. This has the consequence of understating the amount that these teams are receiving in media fees from 2012-2016. Likewise, note that the Angels deal ends in 2028 and therefore the amount of money they receive from 2027-2031 is being understated by this chart.
If MASNs offer is accepted then the Nationals would receive only $31.5 million more than the Padres from 2012-2016 and only $70 million more from 2017-2021. From 2013-2016, the Astros are projected to receive $36 million more than the Nationals from 2012-2016 despite the fact that the Nationals receive an extra year of payments. MASNs offer doesn’t pay the Nationals a comparable amount to the Phillies or Astros until 2022-2026.
If MASN accepts the Nationals’ proposal for $2 Billion over 20 years then the Nationals will receive $100 million more than the Padres from 2012-2016 and $160 million more from 2017-2021. This seems reasonable given how much stronger the Nationals/Orioles market is than the Padres media market. Likewise, the Nationals will receive a comparable amount to the Phillies from 2016-2021 and to the Astros from 2013-2021. If MASN is forced to accept the Nationals’ proposal for $2.4 Billion over 20 years then the Nationals will receive an amount similar to what the Angels are receiving from 2012-2021. The Nationals will do considerably better than the Phillies, Astros and Padres.
If either of the Nationals’ proposals is accepted then the Nationals will receive an extremely high amount of media rights fees from 2022-2031. However, annual right fees can be revisited every five years and MASN could ask for a reset at that time. Of course, other teams will sign media deals between now and 2022 and it may be that the Nationals request will be comparable to those deals.
This also explains why the Nationals are possibly receiving money from MLB until their deal balances out. According to the current projections, MASN will eventually be offering market value for the Nationals media rights. That may not occur until sometime between 2020 and 2025. One can understand how the Nationals may want reasonable market value now as opposed to later.
In contrast, if the Nationals requested $100-$120 million in media rights fees in 2012, then they would be requesting an amount larger than what any other comparable team is receiving as well as an amount that would make MASN insolvent. The logic behind that is questionable and it is hard to understand why MLB or anyone would take such a request seriously.
It is clear that MASN can afford to pay the Nationals the media rights fees that they offered. It is clear that MASN can’t afford to pay the Nationals and Orioles $100 million starting in 2012. But can they afford to pay the Nationals and Orioles the $2 to $2.4 billion over twenty years that I believe the Nationals are requesting?
It is possible to answer that question by going back to the charts created in Part 2 that projected MASNs financial situations. By plugging these new media rights fees into the charts, it is possible to project the impacts. First, I’ll start with the chart created with my revenue numbers. This is how MASNs financials might look if the Nationals/Orioles did receive $2 billion over 20 years.
It appears plausible that MASN would be able to pay the Nationals/Orioles $2 billion over twenty years without going bankrupt. The Orioles would receive $500 million more in media rights fees while receiving $800 million less in equity stakes payments. Given that media rights fees are subject to revenue sharing while equity stakes payments are not, this would cost the Orioles about $433 million over the twenty year period. The Nationals would receive $500 million more in media rights fees while receiving $250 million less in equity stakes payments. This means that the Nationals would receive at least another $120 million more over the twenty year period.
This is how MASNs financials might look if the Nationals/Orioles did receive $2.4 billion over 20 years using my revenue numbers.
It appears that MASN could afford to pay the Nationals $2.4 billion over 20 years without going bankrupt. It would result in the Orioles receiving $900 million more in media rights fees while losing $1.35 billion in equity rights payments over twenty years or a potential loss of $750 million dollars over the period. The Nationals would receive $900 million more in media rights fees while losing $450 million in equity rights payments over twenty years. This would result in a gain of at least $150 million dollars over the period.
Now I’d like to show how the numbers look using the revenue numbers in Jonah Keri’s article presuming the Nationals receive $2 billion over 20 years.
It turns out that MASN would be solvent using the revenue numbers in Jonah
Keri’s article and that the difference between using his numbers and my numbers
would be about $3 million over twenty years. Using his numbers if the Nationals
receive $2.4 billion would result in a chart that looks like this.
MASN should be solvent even if they paid the Nationals and Orioles $2.4 billion over the twenty year period spanning from 2012-2031. This is an encouraging result. It makes sense that the Nationals would want as much money in rights fees as possible from MASN without making it bankrupt because their equity stake will be worth a considerable amount in the future.
The dispute between the Nationals and MASN is now much clearer. According to Biz Journals (http://www.bizjournals.com/washington/print-edition/2012/06/29/rights-fee-tv-formula-drive-masn.html?page=all ), MASN wants to continue paying the Nationals and Orioles media fee rights based on the formula that MLB standardly uses. This formula had been used for the past eighteen years by the MLB revenue sharing committee to determine the fair market value for media deals. MASN can also support its decision based on the fact that over a twenty year period, the Nationals will receive the fair market rate for their media fee rights.
In contrast, the Nationals want to be paid the fair market rate for their media fee rights. Even though the standard MLB formula calls for the Nationals to receive only $39 million in 2014, they feel justified asking for more money based on the current market conditions especially given that MASN can afford it. The Nationals proposals would allow the Orioles to remain competitive by ensuring that they receive a media rights fee comparable to large market baseball teams while allowing the Orioles owners to receive some compensation in the form of equity stake payments for the loss of value suffered by the club due to the Nationals moving to Washington.
The Nationals especially want to be paid the fair market rate for their media fee rights because they are considered a large market club. As of 2016, large market clubs will no longer be eligible to receive revenue sharing money. If the Nationals receive less than fair market value for their media rights and thus end up with less than average revenue then they won’t get a subsidy from MLB to make up for it. As a result, the Nationals want fair market value to ensure that they’re not leaving money on the table. In contrast, the Orioles will remain eligible for revenue sharing even after 2016. The more money they receive in equity payment distributions, the more money they’ll be able to keep.
All of this puts MLB into a bad situation. If the arbitration panel agrees to support the Nationals claim, then they will have ignored a formula used to determine fair media rights fees that has been used for twenty years. This will upset MASN and give them reasonable cause for a lawsuit. If the arbitration panel agrees to support the Orioles claim, then the Nationals will be annoyed because they’re not receiving a fair media rights fee. This will annoy the Nationals and give them reasonable cause for a lawsuit. Unfortunately for MLB, both teams have a strong case. At a cost of $10 million dollars a year or less for the next ten years, it makes sense for MLB to consider giving the Nationals the extra money and avoid the otherwise inevitable lawsuits.
When I originally wrote this series, I intended to write only four posts. Since then, I’ve realized that there was more ground that I wanted to cover. In the fifth and final post, I’ll discuss possible short-term solutions to this conflict, potential points to consider for the long term as well as summarizing my previous posts.