Earlier this year, the Arizona Diamondbacks signed a television contract with Fox Sports Arizona starting in 2016 for 20 years and $1.5 billion in rights fees including an equity stake. A month ago, the St. Louis Cardinals signed a television contract with Fox Sports Midwest starting in 2018 for 15 years and $1 billion in rights fees, an equity stake in Fox Sports Midwest of 30%, and an unknown signing bonus. According to the St. Louis Post-Dispatch, the deal starts at close to $55 million (up from $35 million) and increases at the rate of inflation. Forbes claims that the deal starts at $50 million (up from $30 million) and increases until it ends at nearly $86 million. One obvious question is how do these deals compare with what the Orioles and Nationals may earn from MASN?
As per all television contracts, the Diamondbacks' deal doesn’t pay $75 million per year but rather starts at a considerably lower figure and increases at a set rate per year. While a 3.5% interest rate is used on occasion, standard practice for media deals is a 4% increase per year.
The articles discussing the Cardinals' media deal provide an estimate for what the Cardinals will receive in media rights fees in 2018. If the St. Louis Post-Dispatch is correct that the deal starts at nearly $55 million in 2018, then the rate of increase will be 3%. If Forbes is correct that the deal starts at nearly $50 million in 2018 and ends at roughly $86 million in 2032, then the rate of increase will be 4%. Here’s what the deals look like.
Many of the parties involved have different thoughts about what MASN should pay based on their projections of future revenue as well as acceptable profit margins. Allen and Co. on behalf of Comcast provided proposed rights fees for the Nationals and Orioles until 2032 if MASN sold them the rights. MASN itself believes that rights fees should be based on the Bortz Methodology. The RSDC believes that rights fees should be based on its reasoning and the Nationals believe that rights fees should be based on a comparables analysis. It’s possible to go through each of these four scenarios to understand what future rights fees could look like.
The Allen and Co. scenarios are the easiest because they provide documents spelling out their offer. They also provide a document that projects what MASN would pay both clubs according to the RSDC decision based on their assumptions. Basically, Allen and Co. presumes that revenue as well as rights fees will increase by 4% per year after 2016 while expenses will increase by 2.5%. The sole exception to this is 2019 when revenues will increase by 18% as a result of MASN renegotiating with its affiliates.
If the Allen and Co. assumptions are accurate, it is simple to determine how much MASN would pay using the Bortz Methodology. This method calls for MASN to earn a net profit of one-third of revenue. Subtracting profit and expenses from revenue and dividing by two will determine the rights fee for each team per year. This chart shows how the deals compare.
The problem with the Allen and Co. projections is that they’re conservative. MASN projected its growth at 5.8% per year from 2012-2016 and has surpassed those projections mainly because of larger than expected advertising revenue growth due to the success of both ball clubs over this period and the lack of success of both ball clubs from 2005-2011. SNL Kagan and PWC both predicted that RSN revenue will continue to grow rapidly in the near future. Yet, Allen and Co. suggested that MASN's revenue growth would drop from 6% to 4%. This is an unlikely and strikingly self-serving projection that would have saved Comcast hundreds of millions of dollars in the event of a sale.
It is possible to project how much MASN would each using a more realistic CAGR of 5.8% for every year other than 2019 when MASN will renegotiate with its affiliates and earn a 20% increase in revenue. With that information, it is possible to determine how much MASN would pay the Nationals and Orioles in rights fees using the Bortz Methodology.
In addition, the RSDC argued in its decision that media rights fees should increase at the same rate as revenue. If this remains true and the RSDC doesn’t decide to reset media rights fees to ensure that MASN earns only a 5% gross margin, then it is possible to determine how much the RSDC would give the Nationals and Orioles in rights fees in this scenario as described in this chart.
Of course, this scenario presumes that the RSDC won’t decide that MASN deserves only a 5% margin at each reset. What if the RSDC follows the same reasoning it did in 2012 and decides that MASN deserves only a 5% margin in the first year of each five-year contract and that each following year's rights fee should increase at the same rate as revenue? This chart shows how that much MASN would pay the Orioles and Nationals in that scenario.
The Nationals believe that their media rights should have nothing to do with MASN's finances but rather based on comparable deals. The Nationals’ expert argued previously that a 20% increase should be used to adjust the deal for two years of inflation. If one takes the extremely conservative view that the Nationals will propose a 20% increase for each reset period and a 4% increase for every other year, then the amount that MASN would pay the Orioles and Nationals looks like the numbers in the chart below. These are very conservative assumptions and the Nationals will likely ask for considerably larger sums of money. This is how all the results would look in chart form and via table.
It’s not difficult to tell which request is the outlier as the Nationals' request would be easily $1.7 billion more than the other requests and would be more than three times larger than some of the other cases. This is how the results would look in a chart with the Nationals removed. Below is the relevant table.
With the exception of Allen and Co.’s settlement proposal that was rejected, all of the other projected cases pay the Orioles and Nationals more media rights fees than either the Cardinals or Diamondbacks would receive over the length of their deals. Given that both the Nationals and Orioles will end up having a larger stake in MASN than either the Cardinals or Diamondbacks will have in their RSN, if MASN is allowed to pay reasonable rights fees then both the Nationals and Orioles will receive a larger amount in equity than either the Cardinals or Diamondbacks.
A billion dollars sounds like a large amount and therefore it seems like the Cardinals and Diamondbacks are receiving considerably more money than either the Nationals or Orioles at first glance. But when the lengths of each deal are taken into account, the Nationals and Orioles will both earn more than both of these teams.