How The Garber Case Could Hurt The Orioles

Nathaniel Grow wrote an article in Fangraphs discussing a court case that could change the future of televised baseball and absolutely wreck MASN and the Orioles. As he explains in his article, the plaintiffs in this case — Garber v. Office of the Commissioner of Baseball —, claim that MLB shouldn’t be allowed to assign its teams exclusive local broadcast territories and that every team should be able to broadcast its games anywhere they please via both the internet and cable in the United States.

The Orioles and Nationals would be significantly hurt if MLB loses this case. Currently, both of these teams are able to broadcast their games throughout a territory that reaches nearly more than 9.5 million pay television households and has 5.9 million paying subscribers. This territory includes not only Maryland, Washington D.C, Delaware, Northern Virginia and Southern Pennsylvania, where there is significant interest in the Orioles or Nationals, but also areas such as most of Virginia, a significant part of North Carolina and a bit of West Virginia where there is minimal interest. Indeed, when the New York Times printed a map of baseball fandom based on Facebook likes, they discovered that neither the Nationals nor Orioles were one of the three most popular teams in much of Central/Southern Virginia or North Carolina. In addition, MASN has been unable to gain carriage by Time Warner in North Carolina because the provider successfully argued in court that there simply isn’t enough interest in either of these two teams. It seems likely that if given a choice, pay television subscribers in these areas would rather receive the ball games of the Yankees, Red Sox and/or Braves.

It is true that MASN charges higher prices for its programming to subscribers in their core regions of Baltimore and Washington D.C then to subscribers in North Carolina and Virginia. However, over half of MASNs total pay television households albeit not subscribers reside in areas where there is little interest in the Orioles or Nationals and therefore losing those regions could cost MASN some $40-45 million in revenue.

MASN would face adverse consequences in their core regions as well. There is significant interest for Orioles and Nationals games in Maryland, Washington D.C, Delaware, Northern Virginia and Southern Pennsylvania. However, the Yankees, Red Sox and Phillies are also popular in parts of this region and pay television providers may consider them an adequate replacement for MASN. While the Orioles are extremely popular in Baltimore and are unquestionably must-see television, the Nationals have limited popularity everywhere and didn’t have over 35% popularity in even their home county in 2014 when the New York Times baseball map was created. Nationals’ games usually had only the fourth highest ratings in their time slot. Due to the Nationals’ weakness and faced with competition from YES and NESN, it seems likely that MASN would have to accept significantly reduced rates to maintain carriage even in their core regions.

Advertising revenue would take a huge hit due to the reduced viewership and increased competition. There would be more supply for baseball programming and therefore companies could buy ads on other stations which would reduce the price for ads on MASN.

MASN would potentially receive increased television revenues because they could broadcast their games to other markets. However, neither the Orioles nor the Nationals have significant national popularity and therefore would struggle to compete with all 28 other teams. The Orioles are ranked 23rd and the Nationals are ranked 29th in MLB in Facebook likes. Regardless of one’s feelings about Facebook and whether this data makes up a scientific poll, it is a fact that this data is typically used and given weight in court cases.

There are many games occurring at a given time, so it is unclear what significant advantage a cable broadcaster would gain by purchasing the rights for every team and it is impossible to broadcast all games on basic cable due to channel limitations. It is far more likely that broadcasters would be interested primarily in teams with a strong brand like the Yankees, Red Sox and Giants and therefore unlikely that MASN, the Orioles or the Nationals would earn minimal extra revenues from other markets.

The Orioles would likely be in a superior position than the Nationals due to the fact that the Yankees and Red Sox are in their division and therefore play the Orioles often. In addition, the Orioles and Nationals could potentially team up with other teams in an attempt to increase the value of their rights.

MASN is currently projected to earn roughly $200M in revenue. With this extra competition, one shouldn’t be surprised if MASN saw its revenue drop by over 50% and thus saw its annual profits and equity value drop significantly. Such a scenario would force MASN to reduce its media rights payments to the clubs and thus have an adverse effect on the Orioles and Nationals.

This isn’t the only problem that the Orioles and Nationals would face. If teams are allowed to broadcast their games nationwide, then it is questionable whether MLBs national TV contracts would be enforceable. It seems from documentation in this lawsuit that these agreements would be null and void. The revenue from the MLBs national TV contract is split evenly between all thirty teams at the present time. If each team can sell their national rights, then there can be no question that popular teams will receive a majority of national TV money and less popular teams will suffer significant losses of revenue.  Fangraphs claims that the current national TV contracts pay $1.5 billion per season on average from 2014 to 2021. If so, it wouldn’t be surprising if an adverse decision caused the Orioles and Nationals to lose $33 million per year just from the national TV contract.

Additionally, this could allow teams like the Yankees and Red Sox to create their own internet streaming services and sell these broadcasts to the public. At the present time, interested consumers can only buy packages for MLB teams via MLB.TV and this revenue is split evenly among all teams. While some fans would remain interested in packages that let them watch all teams, others would prefer packages that allowed them to watch their favorite team which is unlikely to be either the Orioles or Nationals. This would have an impact on the Orioles’ current revenue and would inflict a huge blow in the future. MLBAM earned roughly $900 million in 2015 or about $30 million per club. The Orioles would receive considerably less if the Yankees and Red Sox were able to sell their own streaming rights.

The Orioles would be one of the worst off teams if MLB lost this case, but they probably wouldn’t suffer the most. The Dodgers signed an extremely lucrative TV contract that has turned into a disaster for Time Warner. If this contract was cancelled, then the Dodgers would lose billions of dollars.  Likewise, the Mariners control an extensive television territory and would suffer significant losses if it was opened up for competition. However, teams like the Yankees, Red Sox, Giants, Cubs, Cardinals, Tigers and Braves would receive significant benefits due to their strong national popularity and due to the fact that many of their rivals would be weakened.

All in all, it wouldn’t be surprising if the Orioles lost up to $100 million per year if MLB loses this court case while MASN profit and equity value would drop significantly. This would have a drastic and significant impact on the Orioles operations – far larger than a bad outcome in the MASN case. On the other hand, the Orioles would receive considerably more cash via revenue sharing, which would make up for some of the losses. The Nationals aren’t eligible for revenue sharing and would therefore suffer significantly more. In such a scenario, I would expect payroll to drop by $30-40 million or to about $90-100 million total. Revenue sharing would need to be severely restructured in order to allow mid-market teams to support competitive payrolls.

Of course, this is a worst case scenario that presumes that court will completely agree with the plaintiffs. If the court only agrees with some of their claims then an adverse decision would do less damage to the Orioles especially if MLB could retain its rights to exclusively be able to sell a package of exclusive games including playoff games and if they would remain the sole party that could offer internet streaming.

It is probably true that fans would have more flexibility to watch their teams via either television or the internet. It is also likely that the price of such services would decrease, although it isn’t clear whether this would help media consumers or simply improve the profit margins for media providers. However, it is also the case that such a change would have a drastic impact on the industry and make it harder for MLB teams to remain competitive. It may be good news for fans but would probably be terrible news for small mid-market teams like the Orioles.