12 May 2015

20 Questions About the MASN Dispute

On May 18th, MASN, the Nationals and MLB are expected to have a court hearing in which they offer their final arguments.  My understanding is that after this hearing the court will decide whether the RSDC decision should be vacated and another arbitral body should determine a judgement or whether the RSDC decision will be upheld. In the event that the court agrees to uphold the RSDC, the Orioles will still be allowed to challenge this decision at the American Arbitration Association (AAA) but it becomes highly likely that the RSDC decision will be the final decision.

I've written a number of previous blog posts attempting to discuss aspects of this dispute. This time, I'd like to share some of the questions that I keep in mind when I think about this case. It is worth noting that formulating these questions required reading hundreds of pages of court documentation. As an attempt to simplify things for the reader, at times I'll provide links that only have snippets of documents while providing another link that includes the entire document in question the first time that a given document is referenced. This way, the reader can view what I consider the relevant sections without having to read the equivalent of a book.

Questions about MASNs side of the dispute:

1)      The Arizona Diamondbacks reportedly signed a deal with Fox where they received $1.8 billion in return for their media rights from 2016-2035 and are one of a number of clubs (like the Rangers, Angels, Padres etc) that have received billion dollar media deals. How does MASNs’ proposal offer market value compared to these deals once the different terms (5 years vs 20 years, four resets versus zero resets, a 7.7% interest rate vs a 4% interest rate, demographic differences between markets, etc etc) are taken into account?

2)    MASNs expert has claimed (link to full document) that an 8.3% profit margin would leave it vulnerable to carriage disputes because it wouldn’t have enough money on hand to survive if an affiliate canceled its contract. However, MASN also claimed in August 2014 that they only had $3.5 million in the bank. Given that most of MASNs profits are distributed to the two clubs and not kept by MASN, why is it the case that a low profit margin will impact MASNs ability to function? (link to full document)

3)      Our understanding is that MASN wasn’t profitable until 2007 when its operating margin was roughly 6%. This is based partly on the fact that MASN wasn’t carried by Comcast until 2006 and wasn’t carried by Dish until 2007. If MASN was able to survive a two year period with no profits and a third year with only minimal profits then why would it go bankrupt if it was unable to come to future agreements with any of its affiliates for a short period of time?

4)      Former Commissioner Selig sent the Orioles and Nationals a letter stating his dismay that this case was taken to court and there has been conjecture that this lawsuit is one reason Baltimore wasn’t awarded the 2016 all-star game. Are the potential benefits from winning this lawsuit worth the risk of losing? 

5)      Allen and Co drafted at least three pro formas that have been released to the public that attempt to project future revenues, expenses and rights fees. Did MASN have any input in developing these pro formas and does MASN agree with Allen and Co’s assumptions?

6)      Time Warner has refused to carry MASN in North Carolina which has prevented MASN from taking full advantage of its broadcasting territory and therefore making it impossible to maximize total revenue. How can MASN turn this situation to its advantage? Is it possible for them to sell this territory to MLB or another MLB franchise like the Braves in order to gain some benefit?

7)      Despite the fact that MLB ranks the Orioles market as the 11th smallest and considers their revenue to be in the bottom ten, the Orioles have had a payroll in the top half of baseball for the past few years. How will a decision in this case impact the Orioles payroll?

Questions about MLBs side of the dispute:

8)      The RSDC decision asserted (full document here) that the margins of regional sports networks have decreased over the last few years. Yet the Nationals quoted an article by SNL Kagan in January 2015 that stated the average cash flow margin at cable networks has grown from less than 30% in 1995 to around 40% in 2014 (Note: To ensure the relevant section could be found easily, I bolded and underlined the relevant section on Page 3 and deleted a graph. You can find the original copy of the document here). How does MLB explain this discrepancy between the RSDC and SNL Kagan? 

9)      Allen and Co drafted a number of documents discussing the terms for either a possible sale or possible settlement. The final document created by Allen and Co. written in July 2013 contains a graph that contains projected total revenue, expenses, rights fees and pre-tax cash flow from 2012 to 2032 based on the RSDC Ruling Model. This document projects that MASNs average cash flow margin should increase from 8% in 2012 to roughly 23% in 2032. If an 8% average cash flow margin is reasonable for MASN now then why did MLB promote a pro forma that would increase MASNs operating margin to 23% in the future?

10)  Another pro forma written by Allen and Co. on behalf of MLB discussing a possible sale to a “MediaCo” presumes yearly cash flow margins between roughly 30 and 40%. In addition, Michael Haley (CFO of MASN) testified that he was told by MLB that MASN does deserve a 20% baseball profit margin and the RSDC was improperly instructed. Why do the MLB proposals presume that a fair cash flow margin for "MediaCo" should be between 30 and 40% while the RSDC argues that a fair cash flow margin for MASN is 10%? Did the RSDCs relationship with Proskauer Rose contribute to the possible confusion?

11)  Ed Cohen claimed in his affidavit on October 20th, 2014 (full document can be found here) that MLB told both parties that the RSDC Award would not be in their best interests. He further stated that he was given a presentation from MLB that claimed that the “RSDC decision is inefficient – hundreds of millions of lost value to both Clubs.” Does this mean that the MLB believes that the RSDC decision is not in the interest of either club?

12)  MLB receives revenue sharing money for media rights fees but not for equity distributions it seems fair to state that MLB has an interest in ensuring that MASN has to pay high media rights fees. In addition, MLB gave the Nationals $25 million before ultimately issuing the RSDCs position. How could the RSDC  write an impartial decision under those conditions? 

13)   Rob Manfred states in his affidavit (full document can be found here) that there was no question that MLB would be repaid its advance payments to the Nationals. He also states that given the lengthy tenure of Mr. Angelos’s ownership of the Orioles and his experience on the Executive Council, neither he, nor his Club, nor MASN could believe that MLB would simply give the Nationals $25 million and not expect any repayment. However, he also sent e-mails to MASN stating conditions in which MLB would agree to give up the $25 million. How should the reader reconcile these two facts?

14)  What happens next and how does MLB prevent this from happening again in 2017? 

Questions about the Nationals side of the dispute:

15)  The Nationals have consistently claimed that they will be at a disadvantage if they don’t receive the disputed amounts right away. However, they still have one of the highest payrolls in the majors and just signed Max Scherzer to a long term deal in free agency. Why do the Nationals claim that they need the money right away to sign players when they’ve shown that they’ve been able to do so without that money?

16)  The Nationals have claimed (full document can be found here) that the use of comparables is the best way to determine market value for their media rights. However, some of the deals that the Nationals felt were comparable were ultimately unsuccessful and not implemented. The Dodgers deal was never implemented and their current network is having trouble getting widespread carriage. The Astros network declared bankruptcy causing the Astros significant financial losses and forcing them to restructure the deal to their detriment. In fact, the amount that the Astros will actually receive in rights fees is less than the amount they were promised in 2012. How is it reasonable to use comparables to determine market value for media rights when their deals may fall through?

17)  The Nationals argue that the core DMAs of Baltimore and Washington DC should be combined to reflect the fact that the Orioles are based in one of the DMAs and the Nationals are based in the other DMA. How does the fact that the Nationals have lowratings in both Baltimore and Washington DC (the Nationals TV programming was only the fifth most popular in the Washington DC market) while the Orioles only having strong ratings in Baltimore impact this situation? Wouldn’t a cable provider take that into account when attempting to determine a reasonable subscriber’s fee?

18)  The contract between MASN, MLB and the Nationals states that every five years the parties involved can negotiate to establish the fair market value of their media rights and solely the fair market value of their media rights. The Nationals argue that "upfront cash considerations" should be considered in the same category as media rights fees and therefore included in these negotiations. Given that "upfront cash considerations" are not media rights fees and the contract makes no mention of an "aggregate cash consideration", what relevance do they have in these negotiations? 

19)   Chris Bevilacqua claims that the four comparable deals that he examined provided an average of $98.3 million in average annual value for the first five years of those deals in rights fees and signing bonuses alone. He claims that this average is itself conservative for amongst other reasons because it consisted of deals struck in 2010 and 2011. He also claims that MLB’s own expert, Ed Desser, testified in the Dodgers bankruptcy that the values of sports rights continue to escalate and that he expected that values would increase 10-20% from 2011 to 2013 and therefore argued that the Nationals rights should be worth 20% more than the $98.3 million annual value listed above. He further stated that he used the first five years of each of the recent deals regardless of when the new deal was scheduled to start because he was confident that he would receive the same values for the first five years of those deals regardless of whether they were available in 2012 as opposed to later years.

However, Mr. Bevilacqua was also the expert for the Texas Rangers when they negotiated their media deal in 2010 despite the fact that their previous deal didn’t expire until 2014. Is Mr. Bevilacqua stating that since he would have received the same amounts for year one of the Rangers deal regardless of whether it occurred in 2011 or 2015 AND that a team would have received at least 10-20% more by waiting to sign a deal that the Rangers (for whom he was the expert) lost hundreds of millions of dollars because they signed a deal in 2010 instead of 2014?

20)   The Nationals would have been recipients of revenue sharing in both 2012 and 2013 if the RSDC agreed that the Bortz numbers were fair value for their media rights. My understand is that the Nationals would have been recipients of revenue sharing in 2014 if the Bortz numbers were deemed to be fair value for their media rights. Yet despite earning about average revenue even if the RSDC decision is upheld, the Nationals payroll was roughly $20 million larger than the median in 2013, $30 million larger than the median in 2014 and $50 million larger than the median so far this year. 

If MASN does win this court case and the Bortz numbers are deemed to be fair then how will this impact their payroll?

These questions aren't necessarily the ones that the court will address. Rather, these questions are meant to look at some of the possible implications of this lawsuit and how any given decision could impact MASN, the Orioles, the Nationals and MLB.


None Listed said...

Thank you for this excellent and unbiased examination of what we can all agree is a complicated situation.

Matt Perez said...

You're welcome. Thanks for the kind words.

Brett Larter said...

Regarding question number 6, about how Time Warner doesn't want to carry MASN in North Carolina:

I currently live in NC and I'm blacked out of the Reds, Nationals, Orioles, and the Braves. How exactly could MASN sell this territory to the Braves? Is there precedent for this?

Matt Perez said...

There's no precedent for this of which I'm aware.

The MLB Executive Council has the rights to amend a teams' home television areas. In theory, the Nationals and Orioles could request (it wouldn't be MASN) that their broadcast area be changed to exclude North Carolina. I see no reason why the Executive Council would refuse their request.

It's a long shot. But the point is that the Orioles and Nationals own a large territory from which they're gaining minimal benefit and it's unlikely that they'll gain significant benefit in the reasonable future. There's got to be a way to turn that to their advantage.

None Listed said...

Care to speculate what happens if MLB wins this case?

Matt Perez said...

If MLB wins then MASN will be forced to pay the Nationals the extra $10.6 million in rights fees for 2014 right away or agree to an acceptable payment plan with MLB and the Nationals.

The Orioles will then bring this case to the American Arbitration Association (AAA) and ask them for a legal opinion. Depending on what happens there (probably nothing), MASN will then be forced to pay the Nationals and Orioles the extra money for 2012, 2013 and 2015 and the Orioles the extra money for 2014.

However, given that MASN would owe the clubs/MLB over $100 million at that point, I expect that the arbitrator would get all sides to agree to some sort of payment plan over a number of years. I don't think it's reasonable to ask MASN to pay that much money in one shot nor do I think MLB would demand it.

But if I had to guess, I'd say that Justice Marks is waiting to announce his opinion because he wants the sides to reach a settlement. He's probably given them a hint of how he'll rule and is hoping that will give them an incentive to work something out.

Matt Perez said...

MASN will also have to pay the Nationals the extra money for 2015. Another $8.5 million or so (depending on when the ruling is tendered) of which at least a part will go to MLB.

None Listed said...

It sure doesn't seem like the Lerners would be in any mood to cut MASN any slack on meeting its payments to them. I doubt if they would be open to any renegotiation, even to delay payments. They've already been made to wait two years, they won't want to wait any longer. I'll bet that the Lerners will hold MASN to the terms of the agreement, i.e. pay up on time or lose the rights.

Matt Perez said...

I agree that the Lerners' won't want to give MASN slack but I wouldn't be surprised if MLB made them. It's also possible that the court could force them as well. This is total conjecture on my part and I could be wrong.

After reading the final testimony though, I'm expecting the two sides to settle.

BaltoMedia said...

The goal of the Lerner's all along has been to crush MASN and break it, so that they can get offers from Comcast's CSN or FOX Sports, etc. They think they're worth the money, but in reality MASN TV ratings for Nats games are far below the Orioles. I've read the ratings numbers. The Orioles are #4 in RSN TV ratings according to Sports Business Daily and other sources right now and the Nats are #22. Sure, it's a huge bigger market, but if no one is watching, what is it worth? I think far less than the Lerner's claim.

Anonymous said...

First, let's be clear that the annual rights fee numbers are not just for the Nationals. MASN is contractually obligated to pay the O's the same amount, so in essence this dispute should also benefit the Baltimore team as much as the Washington team. It is a fact that Peter Angelos has been shifting little if any of his MASN profits back into the O's player budget. Instead, he has been putting those BILLIONS directly into his pockets. So why doesn't he pass the windfall on to the team? Because doing so would increase how much the team would be taxed by MLB in revenue sharing. Profits from RSNs, however, are not.

Everyone knows that Angelos has alienated DC baseball fans but what puzzles me is why O's fans aren't as angry. MASN isn't helping the O's, it's hurting them!!!