08 October 2014

The Reason Why the Nationals Asked for $590 Million

One of the things that bugged me about the MASN dispute is that I had found very little information discussing why the Nationals feel that their media rights are worth $590 million total from 2012 to 2016. This claim seemed particularly odd given that the Yankees media rights were valued at nearly $470 million from 2012 to 2016 or roughly $120 million less over the entire period. So I was glad to see in the latest round of articles released to the public that there was included a discussion of the Nationals’ rationale in the RSDCs final decision. Unfortunately, I do not have a copy of the Nationals submission statement but this at least gives considerable insight.

The Nationals based their reasoning on comparable local broadcast agreements provided by their expert, Mr. Bevilacqua. The RSDC’s final decision states on Pages 14 and 15 that:
The Nationals limit their comparable universe to contracts that “involved an MLB club in one of the top ten largest DMAs”, were “done under the new market paradigm in 2010 and 2011” and “involve markets that, like the Nationals’ market, feature the telecast distribution of two MLB clubs.” The Nationals' criteria yielded four comparables: the Rangers’ 2015-34 extension with Fox Sports Southwest; the Astros’ 2013-32 contract with Comcast Sports Net Houston; the Los Angeles Dodgers’ proposed 2011-27 contract with Fox Prime Ticket and the 2016-32 contract between the Los Angeles Angels of Anaheim and Fox Sports West. For each contract, the Nationals calculated the average annual value for the entire term, including rights fees, signing bonus and upfront cash. The Nationals then valued the first five years of each contract by multiplying the average annual value by 5. By that calculation, the comparable group averages $98.3 million annually in the first five years. The Nationals argue that this average would rise to at least $108 million beginning in 2012 because a consultant retained by MLB in another matter predicted ten to twenty percent inflation in rights fees by 2012 or 2013.
The Nationals decided that the Dodgers, Angels, Rangers and Astros were reasonable comparables and that they deserved a 20% bonus because they signed their deal after those teams.

MASN had a number of problems with the Nationals' argument. They noted that the Los Angeles (4.97 million) and Dallas/Houston DMAs (4.1 million) both have considerably more cable and satellite viewers than the Washington and Baltimore DMAs (3.3 million) and therefore are more valuable markets.

MASN noted that the period of the terms were totally different. The Nationals were negotiating for terms from 2012-2016 or a five year period while the other teams were negotiating for a 17-20 year period. A team is more willing to accept low margins at the beginning of a deal if it balances out over the length of the contract. A five year period simply isn’t long enough to recover from low margins. In addition, the only two deals that still are in existence start in 2015 or later despite being signed in 2011. This allows the RSN to increase rates in 2012 while not paying increased rights fees until 2015 and pocket the extra money as profit.

Along the same lines, MASN notes that a team would expect to receive larger rights fees in 2013 than in 2012. In order to properly compare contracts it is necessary to compare the same years or else the later years will have an inflated value. It is difficult to compare a contract that runs from 2012-2016 to one that runs from 2016-2032. The fact that the Nationals are using average annual value inflates their numbers significantly.

MASN notes that the Nationals’ experts didn’t rely on the actual agreements listed above as they weren’t provided to the parties but rather attempted to re-create the terms of these deals through a jumble of unverifiable sources that includes unnamed “reliable sources”, “friends of a friend” and public media reports. MLB only provided aggregated data for the Rangers, Astros and Angels deals.  MLB did not provide any data for the Dodgers deal as it didn’t actually happen.

MASN noted that the Orioles have considerably better Nielsen ratings than the Nationals. In July 2014, the Washington Post printed an article noting that Orioles games are averaging considerably more viewers than Nationals games despite Baltimore being a smaller market. Forbes printed an article showing that Orioles games had more viewers than Nationals games. That's why an 30-second advertising spot in 2011 cost on average $1292 in the Baltimore DMA and $956 in the Washington D.C DMA. One could argue that the Baltimore market is as valuable than the Washington DC market because fans in Baltimore actually watch their team.

MASN claims in their reply that even using the Nationals’ experts pro formas, the terms of the deals for the Dodgers, Angels and Rangers permit the RSN to earn an EDITBA margin between 38 to 50 percent while the Astros deal produces average EBITDA margins of more than 30 percent which is comparable to MASN’s right-fee submission that produces an EBITDA margin of 33 percent. They use this as proof that MASNs' requested margins are reasonable.

Michael Haley, the Executive Vice President of MASN, affirms under oath that MLB suggested that they allow Allen and Co. to develop offerings for selling MASN. He claims that Allen & Co., on behalf of MLB, claimed that media rights fees of $42.5 million beginning in 2012 and increasing at 4% per year would be fair market value by MLB. He claims that he was at meetings with high ranking officials from MLB that affirmed this statement and wonders why the RSDC decided on higher rates.

This is aside from the fact that the RSDC stated in the Sixteenth Report that "because each market is unique, the RSDC does not favor a market or Club comparability approach in assessing the fair market value of a Club's broadcasting rights." Bortz Media concurs and claims that there are no real “comparables” for the Nationals and Orioles and that this whole analysis is of limited value. These are some of the arguments that MASN made about why they disagreed with the Nationals' analysis.

In its final decision the RSDC disagreed with the Nationals reasoning. The RSDC states in their decision on Page 16 that:
The Nationals failed to report verifiable terms for any of their cited comparables. Even assuming the accuracy of their estimates, the Nationals inflate their proposed 2012-16 rights fees before the comparable Clubs receive corresponding value. They do this in at least two respects. First, although each comparable contract begins after 2012, the Nationals pull corresponding value forward to 2012. Second, although each comparable contract extends well beyond 2016, the Nationals recognize portions of the comparables’ terminal value that stem from 2017 and beyond. Mr. Bevilacqua’s only justification for the first assumption is that he is “confident that the same values agreed to for the first five years … would have been obtained if the rights had been available in 2012." His only justification for the second assumption is a non sequitur – that “the risk that market conditions will evolve in a way that is adverse to the deal” does not attach to the “consideration that the RSN has contractually agreed to provide in the first five years of each deal. Thus, even though the rights fee agreements that the Nationals cite are not comparable in duration or scope, the Nationals ask the Committee to assume that they are comparable simply because their expert says so without providing an empirical basis for his opinion. We are unprepared to rely on the unsupported assertions of the Nationals’ expert, particularly since his opinion is contrary to the Committee’s understanding, based on its significant expertise in this area, of how regional sports networks value rights fees.
MASN (through its expert, Bortz Media), on the other hand, attempts to use actual numbers to justify its selection of comparable agreements, but, like the Nationals’ analysis, we find its comparable analysis to be results-oriented rather than realistic.
They rejected the argument advanced by Mr. Bevilacqua because he used unverifiable assertions and not actual numbers to make his argument that are contrary to the RSDC’s understanding. They also note that he inflated the Nationals proposed fees.

The RSDC document does a good job explaining the Nationals argument. The Nationals believe that they deserve $590 million from 2012-2016 based on unreasonable comparisons to the Dodgers, Astros, Angels and Rangers deals, unsupported assertions, specious logic and inflated numbers. The method that the Nationals used is never the sole determinant of media rights fees. This explains why the RSDCs decision was closer to MASNs request than the Nationals request and why this is of little comfort to MASN.

I find that seeing the data helps me understand what's happening. Mr. Bevilacqua claims that the Astros media rights fees increase on average by 3.5% per year and that the rights for the other teams fees increase by 4% per year. This chart shows the projected rights fees for the Nationals Request, the RSDCs decision, MASNs request, the Allen and Co numbers, the Yankees deal, the Angels deal, the Rangers deal, the Astros deal and the Dodgers deal from 2012-2016. If a deal doesn't start in 2012 then I project the amounts for 2012 by dividing by the annual increase suggested by Mr Bevilacqua. For example, he claims that the Astros deal increases by 3.5% each year (on average) and starts in 2013. For the 2012 numbers I use the 2013 numbers divided by 3.5%. 


David said...

So I have to ask, is this dispute officially settled now? And what happens in 2016 when the current deal expires?

Thanks for the excellent write up.

Matt Perez said...

This dispute has really just started. The RSDC made a decision for how much the teams should be paid. MASN didn't agree with this decision and ultimately is challenging that decision in court. The court has agreed to hear the case. It could take years before the dispute is settled.

And when 2016 comes around then the parties will do this same process again.

David said...

Seems like the RSDC decision was mostly in MASN's favor. If it does indeed take years to decide and the case carries on past 2016, what happens with regards to the 2017 season?

Matt Perez said...

I plan on discussing the two main differences between MASN and the RSDC in a later post. The RSDC didn't agree with MASNs comparables either (and rightfully so) but I was focusing on the Nationals in this post.

Even though the final number was closer to MASNs request than the Nationals, MASN isn't happy with the RSDCs decision.

Suppose I wanted to charge you $10 for a Hershey's normal sized candy bar and you only wanted to pay $1. If we got someone to arbitrate the case and they stated $3 was the fair price then the final number is mostly definitely in your favor. But you probably wouldn't be happy with the decision. And you'd probably think I'm negotiating in bad faith for insisting on $10.

Regardless of whether there's a deal on the amount of rights fees paid from 2012-2016 what will likely happen is that MASN will use Bortz Media to determine fair value. The Nationals will use their expert to determine fair value and the difference in value will be hundreds of millions in dollars. I don't see how the sides could come to an agreement because MASN is renegotiating its rates with affiliates in 2016. Until that's complete it's impossible to know how much revenue MASN will be earning per year.

If MASN wins this court case then the AAA (American Arbitration Association) may arbitrate the case from 2017-2021. Otherwise the RSDC will likely arbitrate the case and determine fair value.

It probably won't be decided until 2019 or 2020 though.

Anonymous said...

They should just move the Expos to the Carolinas and be done with all of this. Why they thought that cannibalizing the Orioles' fan base was a good idea in the first place is something I'll never understand.