The Rays' New Media Deal Won't Help Them Compete With The O's

According to the Sports Business Journal, the Rays are in discussions to sign a long-term extension with Fox Sports Sun. Fox is expected to offer roughly $50M in 2019, and offer an average of $82M per year. If this is accurate, and presuming a linear rate of increase, this would result in an increase of 6.5% per year.

Such a large annual increase would be odd. Normally, baseball media rights deals result in a yearly increase between 3% and 4%. It’s worth noting that a 3.5% linear yearly increase of a 15 year deal starting at $50M would result in the Rays receiving $82M in the last year. This makes me wonder if the deal doesn’t offer $82M per year, but rather $82M in its final year. If this is in fact the case, the Rays would receive $980 million for 15 years as opposed to the $1.2 billion over 15 years they’d receive if they did get an annual increase of 6.5%. Then again, the Rays received $15M in 2012 but the Sports Business Journal claims they received $35M in 2017.

In recent years, both the Diamondbacks and Cardinals have signed new media rights deals and details of these deals have made it into the media (the Reds also extended their media rights deals, but no one has been able to report the terms). Here’s how the Rays' deal (using both 3.5% annual increases and 6.5% annual increases) compare to the Cardinals' and Diamondbacks' deals.

Depending on which annual increase is used, the Rays' deal is either slightly better than the Cardinals' and Diamondbacks' deal or slightly worse, but either are in a similar category. In either case, the Rays would start out earning slightly less than the Diamondbacks or Cardinals, but could end up receiving slightly more depending on the final terms.

While it has been reported that the Rays aren’t allowed to broadcast their games in the Miami DMA, both MASN and the RSDC stated in the MASN case that the Rays media territory includes the Miami DMA. Presuming this is accurate, then the Rays' media territory has roughly 7.2 million cable and satellite subscribers, of which 1.7 million are in its core market of the St Petersburg DMA. Note that all of these subscribers may not have access to Fox Sports Sun. This is significantly larger than the Cardinals' media territory which has 5.1 million subscribers and a core market of 1.2 million as well as the Diamondbacks' territory which has 4.1 million subscribers and a core market of 1.6 million subscribers. However, the Cardinals always have high ratings and had an average of 94,000 viewers per game in their core media market in 2017. The Diamondbacks had above average ratings and on average 66,000 viewers per game. The Rays have below average ratings and only 52,000 viewers per game in their core market. Unlike the Cardinals and Diamondbacks, the Rays don’t have particularly good attendance, suggesting limited interest in the Rays. The Rays may have a stronger market than either the Diamondbacks or Cardinals, but both those teams have stronger fan interest.

The Orioles/Nationals shared media market is far larger than the Rays, Cardinals or Diamondbacks media market but includes two teams instead of just one. MASN's core DMAs of Washington and Baltimore are roughly the same size as Miami and Tampa Bay combined and has 9.5 million total cable and satellite subscribers as well as 3.2 million subscribers in its inner core. However, MASN has roughly 5.9 million subscribers compared to the Rays 5.6 million subscribers in part due to MASN's failure to gain carriage in North Carolina. Based on solely a market size analysis, it would be reasonable to expect the Nationals and Orioles combined to receive slightly higher media fees than the Rays and Marlins combined. That stated, the Nationals and Orioles have higher ratings than the Rays and Marlins and are in more valuable markets making them clearly more valuable properties.
It is hard to determine how much MASN will pay the Nationals and Orioles in media rights fees because the rates are set to change every five years based on network revenue. In addition, Allen and Co, MASN, the RSDC and the Nationals each have their own drastic ideas of how fair media rights should be determined.

Allen and Co, on behalf of Comcast, offered a deal in which Comcast would offer both teams starting in 2012 a media rights fee of $42.5M and increasing by 4% annually until 2032. This would result in both teams earning roughly $1 billion each over the fourteen years from 2019-2032, or roughly the same as what the other teams in this sample are receiving. Given that the Nationals and Orioles are in a stronger market than all of these teams, this offer would be disappointing. Unsurprisingly, MASN didn’t accept Allen and Co’s offer.

Instead, MASN proposed their own rights fee for 2012-2016, as did the Nationals. In addition, the RSDC made a decision about the appropriate rights fee for 2012-2016 that was ultimately overturned. Any attempt at guessing what any of these parties might request over 2019-2032 requires a lot of conjecture.

That stated, MASN offered $45.7M in 2016 with a 7.7% annual increase. That rate of increase projects to roughly $57M in 2019 -- or more than any other team in the sample received. This doesn’t take into account that MASN was likely to receive an increase in revenue as a result of renegotiating its contract deals with other cable providers.

The RSDC felt that $66.7M was fair value for 2016. This is significantly higher than what any other team in the sample received in 2019 -- and presumably the teams’ rights fees would go up from 2017-2019. It’s likely that such an amount would only be reasonable if the Nationals/Orioles shared media territory is significantly more valuable than any of the other teams in the sample.

Meanwhile, the Nationals requested $127.4 million in 2016. Such an amount would be larger than any of the teams in the sample received in 2032. It’s likely that the Nationals request for 2019 would be roughly the same as what the Cardinals, Rays and Diamondbacks receive all together. This seems to be an awfully optimistic request.

Based on my understanding of the economics, I project that MASN's offer was on pace to be worth $1.45 billion over the fourteen year period, the RSDC's offer was on pace to be worth $2.1 billion over the fourteen year period and the Nationals' offer to be worth $3.7 billion over the fourteen year period. If so, the deals look like this.

These graphs always look a bit weird when I include the Nationals' request. Here's how the chart looks without them.

It appears that the Rays' media deal appears to be fair value compared to what the Diamondbacks and Cardinals received. It is likely that the Rays will receive less in media rights fees than what the Nationals and Orioles will receive in rights fees from MASN, but that is because the Nationals'/Orioles' media territory is more valuable. This media deal isn’t going to change the Rays' financial situation and likely means they’re going to struggle to maintain a competitive payroll going forward.

An Update of MASN's Economics

On May 6th and 7th, MASN responded to the Nationals request to send the case back to the RSDC for a second arbitration. In support of this effort, Mr. Haley, the executive Vice President and CFO of MASN wrote an affidavit. He wrote that the Nationals have received fair market value as determined by Bortz Media, a longtime MLB consultant that developed the RSDCs established methodology.  He noted that the Nationals received over $9.6 million in 2015 from profit distributions and tens of millions more via rights fees ($42M). Finally, he stated that the Nationals partnership interest has increased from an initial 10% to its current 17%. As MASN’s EBITDA has grown, so too has the Nationals’ asset value in MASN.

The Nationals have received a considerable amount of cash via profit distributions. As stated above, they received over $9.6 million in 2015, from 2014 distributions. Alan Rifkin wrote an e-mail two years ago, which showed the Nationals received $6.76 million in 2012 (based on 2011 results), $7.56 million in 2013 (based on 2012 results) and $9 million in 2014 (based on 2013 results). In addition, the Nationals' received a distribution for non-resident tax withholding payments. Mr. Wyche, the Managing Director of Bortz, developed a table in 2012 with the Nationals’ Rights Fees as proposed by MASN and the Nationals projected profit distributions from 2012-2016. It makes sense to compare the Nationals projected and actual profit distributions. Here’s a chart that puts everything together, with (P) standing for projected and (A) standing for actual/derived.

MASN has had larger distributions than expected despite the ongoing lawsuit. This makes sense because the Orioles and Nationals weren’t particularly successful from 2005-2011 but were extremely successful from 2012-2016. This resulted in higher ratings and therefore likely higher advertising revenue. It was impossible to predict that this was going to happen and therefore MASN was unable to account for it back in 2012.

MASN also appears to have distributed less cash in 2014 than in 2013. In all likelihood, this probably has little significance. For starters, MASN isn’t required to distribute all of its profits as distributions. Just because they distributed less cash doesn’t mean they earned lower profits. Also, the amount of cash in question is a few million dollars and therefore not a large sum. It’s probably worth keeping an eye on though.

Mr. Wyche also included a chart complied from the MLB Financial Information Questionnaires (FIQs) for media rights payments from 2005 through 2014 that compares the Nationals’ and Orioles’ relative media rights payments to all other MLB clubs. The CBA explains in Article XXIV that this questionnaire is completed by each of the Major League Clubs and submitted, together with audited financial statements, on an annual basis for each revenue sharing year to the Office of the Commissioner.  It appears that this chart shows the media rights payments as defined by the clubs themselves.

These rankings indicate that the Nationals were paid above average rights fees from 2005-2008, average rights fees from 2009-2012 and below average rights fees in 2014. The Nationals 2013 rights fees of $61.2 million were the third highest in baseball and are a combination of the rights fees received from MASN and a $25 million payment from MLB.

This $25 million payment corresponds to the difference between MASN’s calculated rights fees and the now-vacated RSDC Award for 2012 and 2013. MLB made this payment to the Nationals in order to buy more time to find a solution to the current dispute. This payment isn’t a loan and the Nationals are allowed to keep this $25 million regardless of the result of this case. However, the Nationals will be required to repay MLB from any extra revenue they may receive from a favorable RSDC decision. If the RSDC decision is reinstated then MLB receives $25 million from the extra MASN payments.

It’s worth noting that this methodology understates the actual amount that the Nationals received. MLB actually gave the Nationals $32.8 million, but deducted $7.8 million for revenue sharing. All other media rights revenue is determined before revenue sharing and therefore the Nationals’ accounting method understates the actual value of the money they received.

It’s worth remembering that in March 2012, the Nationals argued that fair market value for their media rights in 2013 was $113.3 million. It turns out that the $61 million they did receive trailed only the Yankees ($89 million) and another club. Unless that other club received a larger rights fee then the Yankees, it would have been the largest in the majors by roughly $25 million and at least $50 million more than the team that received the fourth largest amount. It is safe to say that the Nationals significantly overvalued the fair market value of their media rights fees.

At the same time, it’s concerning to note that the Orioles and Nationals ranked only 18th and 19th in total media rights fees for 2014. They’re probably closer to the average than it appears as the difference between 3rd and 20th in 2013 was roughly $24.6 million. It’s also worth noting that this chart doesn’t include profit distributions and that MASN will renegotiate its contracts with its major carriers in 2018.

To be clear, MASN believes that the Bortz Methodology should be used to determine fair market value and therefore what other teams receive is mostly irrelevant. Using this formula, MASN has an interest in maximizing its revenue in order to ensure the largest possible profit because it determines MASN's profit margins and therefore a reasonable rights fee for each team.

All in all, the new data provides an update on MASN's financial situation and each team’s rights fees. It suggests that MASN is distributing more money than originally projected. It suggests that the Nationals requested media rights fees in 2012 were unjustifiable. Finally, it makes it clear that MASN is paying the Nationals and Orioles rights fees lower than that of the median MLB team.

Possible Solutions to the MASN Conflict and a Summary

POSSIBLE SOLUTION

In the previous post, I discussed why there is a conflict between MASN and the Nationals. In this post, I wanted to discuss possible solutions to the current conflict.

First of all, one possible solution that will NOT work is suggesting that Comcast buys out MASN. In 2004, Allen and Company wrote a proposal (it can found starting on page 265) on behalf of Comcast to create an RSN for the Orioles and the Nationals. This proposal included ten years of financial projections.. They projected that in 2014 this new RSN would be making $232 million in revenue; more than MASN is projected to earn in 2014 currently. It also stated that each team would receive $28.5 million dollars in media rights fees in 2014. MASN is currently offering to give each team $39.5 million dollars in media rights fees in 2014. In addition, the MLB teams would receive at most 50% equity in the network. Not surprisingly, the RSN controlled by Comcast was projected to have about $20 million more in profits for 2014 than MASN. Without MASN, it seems likely that the Nationals and Orioles would be in a considerably worse position then they are at the current moment. They would have lower media rights fees, lower equity share payment and less equity in the network. Both teams would struggle to be competitive in such an environment.

Given that the parties will likely have to come to a compromise between themselves, I find it highly unlikely that MASN or that the MLB arbitration panel will agree to give the Nationals the two billion over twenty years that media reports say that they are requesting. If the Nationals want an increase that large then they’ll need to go to court. In the short team, one possibility to end the conflict may be for the Nationals to agree what MASN is currently offering but demand that the increase is locked in until 2031. The Nationals still will not receive an amount comparable to other similar teams in the short term but will receive the certainty of knowing that MASN will make up for it in the long term.

Another possibility is for MASN to offer the Nationals and Orioles a larger media rights fee in 2014 with lower annual increases. An increase to $55 million in 2014 with annual 4.8% increases would result in something that looks like this.

A deal like this would allow the Nationals to receive a similar amount of media rights fees as the Phillies and Astros starting in 2014. The reason why MASN may consider such a deal is because even though it would result in higher payments at present, it would also result in lower payments in the future. Under this proposal, the Orioles would lose $140 million in equity fee payments, the Nationals would lose $30 million in equity fee payments and each team would receive $85 million more total in media fee rights over a twenty year period.

There would have to be other parameters instituted as well. MASN would be considerably less profitable in the short ter. In order to cushion MASN from the blow, it seems reasonable that MLB offer the network a line of credit to cover the extra amount that they’ll spend on increase media rights fees to be paid back at a future date. Letting MASN borrow $10 million a year for the next ten years would allow them to recover those losses. Given that Keri has reported that the Nationals are receiving money from MLB not to sue the Orioles I believe this request is reasonable.

In addition, while it’s fair to update the rights fees every five years, I would base these updates solely on MASNs revenue/profit. If MASNs revenue/profit increases at a rate higher than expected then the amount that MASN owes each team in rights fees would increase. If MASNs revenue/profit increases at a rate lower than expected than the amount that MASN owes each teams in rights fees would decrease. The deals that other baseball teams receive would have no impact on this deal. Having these criteria will help avoid future conflicts about the media fee payments that MASN pays to each team.

I think this would be the fairest compromise. MASN simply has a very strong legal position and has no reason to pay the Nationals and Orioles a substantially larger media rights fees then it is at the current time.

OTHER POSSIBILITIES

There are other possibilities to increase the revenue received by MASN and therefore increase the amount it can pay via media rights fees. In 2013, MASN received an average of $2.28 per subscriber. Comcast Sports Net Mid-Atlantic received an average of $4.33 per subscriber in roughly the same region. In 2016, MASN will be able to renegotiate its rights fees with Comcast. If MASN can receive a similar amount to what CSN Mid-Atlantic is charging its subscribers, then that will strongly strengthen MASN and allow it to pay the Nationals and Orioles a considerably larger media rights fee without going bankrupt.

MASN has an excellent case to receive a subscriber’s fee than CSN Mid-Atlantic. When Comcast offered to create an RSN with the Orioles and Nationals, they envisioned that such a network would charge a $3.95 subscriber fee per month in the core regions and a $1.97 subscriber fee per month in the outer regions for 2012. In 2012, MASN received a monthly subscription fee similar to what subscribers in the outer region fees were projected to pay while CSN Mid-Atlantic received a monthly subscriber fee larger than the inner regions subscription fee.

In addition, CSN Mid-Atlantic controls the media rights to the Washington Wizards and Washington Capitals while MASN controls the media rights to the Baltimore Orioles and Washington Nationals. Each network controls the media rights for other teams as well but these teams are considered the main ones in the area. The Orioles and Nationals each averaged more viewers than the Wizards and Capitals combined in 2013. The baseball season is also longer than both the hockey and basketball season meaning that MASN broadcasts more sporting events. MASN seemingly has more must-see television programming and should merit a higher monthly subscriber fee than CSN Mid-Atlantic.

In reality, MASN will have a tough time receiving a fair monthly subscriber fee because Comcast is the primary media provider in much of the Nationals/Orioles territory and is incentivized to pay a large amount to its own RSN while having a disincentive to do so for a rival RSN. Without being broadcast on Comcast, MASN will struggle to make enough revenue to cover its expenses. Therefore, MASN will likely be forced to accept a lower subscriber fee than they deserve.

In addition, MASN has struggled to come to an agreement with Times Warner in North Carolina. As stated in part 3, the FCC ruled in 2012 that Time Warner doesn’t have to carry MASN because it would cause them an exorbitant financial loss. This has a huge impact on MASN because Time Warner has 1.5 million cable subscribers in North Carolina. If MASN is unable to get carriage on Times Warner then its footprint in North Carolina will be limited. Even worse, in 2012 MASN was asking for a subscriber fee of only .60 cents per subscriber or about $10 million a year. Even if MASN was able to get carriage on Times Warner, this would still be a relatively small amount of revenue. It seems clear that MASN will struggle to reap substantial benefit from its media territory in North Carolina.

Being as this is the case, one might wonder whether it would be possible to make a deal with the Braves when their media deal expires. If MASN could trade its territory in North Carolina to the Braves in exchange for perhaps a share in a future RSN controlled by the Braves then this would be a way to leverage an asset that is currently providing limited value.

FINAL SUMMARY

The media deal signed between MASN, the Orioles and the Nationals will result in three types of payment; media rights fees, equity stake payments and equity stake. Media rights fees are what an RSN pays a baseball team for the right to broadcast their games. An equity stake is the amount of MASN that each team owns. Equity Stake Payments are the amount each team receives from MASNs profits.

The Nationals Equity Stake in MASN started at 10%. At the end of 2009, which is the conclusion of the fifth full year of operation of MASN, the Nationals began to receive an annual 1% equity stake increase and will continue until the end of 2031 when they will own 33% of MASN. I do not know what the projected value of MASN will be at the end of 2031.

As part of the deal, the Nationals were given the right after 2011 to negotiate over the fair market value of the media rights. MASN has offered to pay the Orioles and Nationals an amount that extrapolated over 20 years (2012-2031) that will be worth $1.5 billion in media rights fees. As part of this offer, each team would receive $35 million in 2012 with an annual 7.7% increase. The Nationals have countered with a request to be paid an amount between $2 and $2.4 billion over 20 years in media rights fees.

The Orioles are likely to receive three times the amount that the Nationals will from equity stake payments. If the Nationals are receiving $600 Million then the Orioles will receive $1.8 Billion over the twenty year period in question.

According to the Baltimore Sun, the deal offered by MASN will result in the Nationals receiving roughly $2.1 billion in media right fees and equity stake payments. If the Nationals request is accepted then I project that they will receive an amount between $2.3 billion and $2.8 billion. Neither request will bankrupt MASN.

The amount that the Nationals and Orioles are projected to receive from MASN from 2016-2031 is reasonably similar to what the Phillies and Astros are receiving from their media deals. The Nationals are currently receiving less than market value for their media fees rights and would like the deal to be amended so that they receive fair market value in the present.

I believe a potential solution is to increase the amount offered via media rights payments while lowering the annual increase rate. This will allow the Nationals to receive fair market value for their media fees rights without forcing MASN to pay considerably more over the length of the deal. This will help the Nationals and Orioles stay competitive now while allowing for reasonable payments in the future.

Explaining the Nationals/MASN Dispute

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.

Comparing The Nationals/Orioles Media Deal To Other Teams' Media Deals

In my previous two blog posts, I discussed MASN’s financial situation and the amounts that the Orioles and Nationals are projected to receive from MASN in media rights fees and equity stake payments from 2012-2031. In this post, I want to compare what the Nationals and Orioles are projected to receive to what the Phillies, Astros, Rangers, Dodgers, Angels and Padres are projected to receive in media rights fees and equity stake payments from their deals.

The value of media rights are not the same for each team. The value of media rights for teams that control large media markets is higher than the value of media rights for teams that control small media markets. In order to make valid comparisons, it is necessary to understand each team’s media market.

Nielsen Media Research is one of the authorities when it comes to determining media market size. Nielsen divided the United States into 210 unequal parts and called each one a designated media area (DMA).  Nielsen then estimates how many standard, cable and satellite TV subscribers are in each DMA.

The Business of Baseball blog posted a map showing where each team has broadcasting rights. Media Street Smarts produced a map that shows the locations and sizes of all DMAs. Using the two maps mentioned above, it is possible to determine which DMAs are in which media markets. Finally, Dave Warner from the blog “What you pay for sports” put together a spreadsheet that shows the number of cable and satellite TV subscribers in any given DMA. With this information, it is possible to quantify each team’s media market.

 ORIOLES AND NATIONALS MEDIA MARKET 

As this Washington Post article states; the Orioles/Nationals media market encompasses all of Maryland; Virginia; the District; Delaware; seven counties in West Virginia; 13 counties and three cities — York, Lancaster and Harrisburg — in central Pennsylvania; and most of central and eastern North Carolina. In addition, Comcast does not license CSN Philadelphia to satellite TV providers. My understanding is that satellite viewers in the Philadelphia DMA receive MASN as their home sports station. Therefore, the Orioles/Nationals media market consists of the following DMAs.

At first glance, MASNs media market looks large with 9.5 million potential cable and satellite subscribers. The Orioles media market, which covers the Baltimore, Salisbury, Harrisburg and Philadelphia DMAs, consists of nearly 2.3 million potential viewers. The Nationals media market covers the rest of the region and consists of roughly 7.2 million potential viewers. It’s not that simple.

Many potential subscribers in the Orioles/Nationals media market do not have access to MASN. As shown in this article, Times Warner, the primary cable provider in North Carolina, has refused to provide MASN to its subscribers. Times Warner has taken the position that there is little interest in the Orioles or Nationals in North Carolina and therefore showing MASN on basic cable would cause them to lose money. After years of lawsuits, the Fourth Circuit Court agreed with Times Warner and MASN has conceded legal defeat. Negotiations are ongoing but have been unsuccessful.

Likewise, MASN has been unable to convince Comcast to provide MASN to subscribers in the Norfolk/Portsmouth DMA partly due to lack of subscriber interest. While Cox and Verizon do provide MASN to subscribers in the Norfolk/Portsmouth DMA, it is my understanding that Comcast is the major provider. In contrast, Comcast does provide MASN to its subscribers in the other DMAs listed above.

As a result, according to Grantland, MASN has 5.4 million subscribers instead of the 9.5 million available in their market area. My understanding is that slightly more than 60% of the subscribers are in the Nationals territory while 40% are in the Orioles territory.

PHILLIES MEDIA MARKET AND MEDIA DEAL

Philadelphia’s media market consists of the Philadelphia, Harrisburg and Wilkes-Barre DMAs. Here are the numbers.

2014 Rank	DMA Name	State	TV Homes 2014	Cable Homes
4	Philadelphia	PA	2,963,500	2,347,092
43	Harrisburg-Lncstr-Leb-York	PA	725,340	468,569
54	Wilkes Barre-Scranton-Hztn	PA	584,870	343,318
	Total		4,273,710	3,158,979

As stated above, satellite TV providers are not offered access to CSN Philadelphia. Therefore, about 900,000 people who could be paying subscription fees to CSN Philadelphia are not. Comcast sacrifices this potential revenue to convince households in the Philadelphia region to be customers of Comcast. According to CSN Philadelphia’s website, CSN Philadelphia has over 3 million viewers so I assume that all of the cable TV subscribers in these DMAs receive CSN Philadelphia.

CSN Philadelphia has nearly 60% of the subscribers that MASN has but supports only one baseball team while MASN supports two.  In addition, unlike the Orioles/Nationals market which is geographically large, the Philadelphia market is geographically smaller. Most people in the Philadelphia media market are interested in watching the Phillies while the same may not be as true in the Orioles/Nationals market. Therefore, CSN Philadelphia charges more money to broadcast the Phillies than MASN does to broadcast the Nationals. Despite bringing in less revenue, the Phillies market is more lucrative because CSN Philadelphia only needs to support one team while MASN supports two teams.

The Philadelphia Inquirer states the new deal with Comcast is a 25 year deal starting in 2016 worth 2.5 billion in media rights fees although the annual fee will start at a lower number and increase over the length of the deal. The Sports Business Daily states that Philadelphia will increase its ownership stake in CSN Philadelphia to 25% and that the annual media rights fee will grow 3-4% each year.

Dave Warner proposes that if the escalator clause is 3.5% then Comcast will start paying the Phillies $64.14 million in media rights fees in 2016, $107.54 million in media rights fees in 2031 and $146.63 million in media rights fees in 2040. I will create a table with all the media rights fees information after I’ve discussed all of the deals listed above.

ASTROS AND RANGERS MEDIA MARKET

The Houston Astros and Texas Rangers share a media market of nearly 12 million potential subscribers from Texas, Oklahoma, New Mexico, Louisiana and Arizona. The DMAs in this region consist of the following:

According to this article, the Astros’s original media provider reached 9 million households and earned $300 million in revenue in 2012. Forbes claims that the original media provider only reached 8.1 million households. This is larger than the Nationals/Orioles media market and therefore their rights should be more valuable.

ASTROS MEDIA DEAL

The first thing to keep in mind when discussing CSN Houston is that CSN Houston is applying for bankruptcy. Dave Warner explains the reasons for that in this article. Houston failed to be competitive last year and by doing so angered their fans. Many fans felt that if Houston was unwilling to spend money on the team that they were unwilling to spend money on the team as well. This emboldened other carriers to not carry CSN Houston at the requested rates because of limited demand by their customers and therefore limited customer pressure. Indeed, some customers pressured their cable providers not to carry CSN Houston. As a result, CSN Houston didn’t receive as much revenue as they were projecting and therefore declared bankruptcy.

The Astros and CSN Houston agreed to a twenty year media deal, in which the Astros were to receive $1.6 billion in media rights fees starting in 2013 in addition to a 45% equity stake in CSN Houston. Forbes claims that the deal was valued at $3.2 billion and the Astros would collect $1.6 billion in media rights fees over the twenty year period thereby implying that the equity in CSN Houston as well as the equity rights fees would be worth $1.6 billion over the twenty year period. According to this article from the Houston Chronicle the Astros were supposed to earn media rights fees of $55,572,454 in the first year which was 2013. These rights were supposed to adjust upwards in subsequent years.

Based on these numbers, it would appear that the upward adjustment was by roughly 3.75% per year. The first year payment and the total payment are known. All that is necessary to determine the annual rate of increase is to determine which standard rate of increase results in the sum equaling $1.6 billion. According to these numbers, the Astros were expected to receive $62 million in media rights fees in 2016 and $107.67 million in 2031.

RANGERS MEDIA DEAL

As stated earlier, the Rangers share the same media market as the Astros. According to the Dallas News, the Rangers signed a deal for twenty years and $1.6 billion in media rights fees. Forbes notes that the total value of the deal is $3 billion and begins in 2015. Not only does it have $1.6 billion in media rights fees but it also offers an upright payment of $100 million and gives the team a 10% equity stake in Fox Sports Southwest. I am unable to determine how much the Rangers are expected to make in media rights fees in 2015 and therefore am unable to determine how their deal might look. Given that the deal starts in 2015 and pays a similar amount as the Astros deal, then it stands to reason that the deal is similar to but less lucrative than the Astros deal. This is because media deals pay more in future years than current years.

ANGELS AND DODGERS MEDIA MARKET

The Angels and Dodgers both share the Los Angeles media market which consists of the Los Angeles, Santa Barbara, Bakersfield, Las Vegas and Honolulu (shared by all West Coast teams) DMAs. Here are the numbers.

The Angels and the Dodgers share a media market consisting of nearly 6.5 million cable and satellite subscribers. Like the Philadelphia market, the reason why this market is so strong is because so many people live in the Los Angeles DMA proper. Those fans are more likely to be fans of the Dodgers or Angels and have more interest in watching Dodgers or Angels games than a person living in Virginia would in watching an Orioles game. As a result, while there are a similar amount of potential subscribers in the Los Angeles and Nationals/Orioles market, the Los Angeles market is considerably more lucrative. 

DODGERS MEDIA DEAL

Currently, the Times Warner and SportsNet LA only have 1.55 million Los Angeles subscribers. According to the Review Journal, no providers in Southern Nevada have agreed to carry the channel. It isn’t clear whether any providers in Southern Nevada are expected to agree to provide the channel. Times Warner is hoping that when other carriers in California are shut out of the market that their customers will either subscribe to Times Warner or that these carriers will give in and pay between $4.50 and $5 per month to subscribe to SportsNet LA.

The Bloomberg article above claims that the Dodgers and Time Warner Cable agreed upon a 25 year deal that pays the Dodgers $8.35 billion in media rights fees. According to the LA Times, the annual fee that Time Warner Cable will pay to the Dodgers starts at $210 million in 2014 and increases dramatically through the life of the contract. If the fee increases by a standard rate then the increase is about 3.625% per year. This means the Dodgers are projected to receive $225.5 million in 2016, $384 million in 2031 and $493 million in 2038. Given that MLB and the Dodgers have agreed that fair value for the deal is $140 million for 2014 the Dodgers will only have to contribute $47.6 million into revenue sharing for 2014. They will be able to keep $162.4 million from their media rights deal in 2014. If Times Warner is able to convince other providers to pay the carriage fee for SportsNet LA, then the Dodgers will be in an advantageous position for the next twenty five years.

ANGELS MEDIA DEAL

The LA Times reported that the Angels deal was worth $2.5 billion over 17 years starting in 2012. Forbes reported that they signed a 17-year, $2.5 billion deal that pays an average $95 million rights fee with a 25% equity stake in Fox Sports West. If so then they would receive $1.615 billion over a 17 year period in media rights fees. I do not know how much they made in 2012. If they receive a 5.5% annual increase then they will receive $60 million in 2012, $74 million in 2016 and $141 million in 2028. If they receive a 3.7% standard increase per year then they will receive $70 million in 2012, $81 million in 2016 and $125 million in 2028.

PADRES MEDIA MARKET AND MEDIA DEAL

The Padres media market covers the San Diego, Yuma-El Centro, Las Vegas, Tucson, Albuquerque and Honolulu DMAs. Here are the numbers.

The Padres media market consists of nearly 3.2 million possible subscribers. However, there are no providers in Albuquerque that carry Fox Sports San Diego. In addition, Cox Cable is the only cable provider that offers Fox Sports San Diego in Tucson or Las Vegas. It is unclear whether Times Warner will start providing Fox Sports San Diego in either Tucson or Las Vegas as a result of their recent agreement. As a result, their media market is the smallest of the ones we’ve discussed and therefore their deal is the least lucrative. 

Forbes claims that the deal is worth $1.4 billion and that the Padres will receive $1 billion in media rights fees. According to Inside the Padres, the deal pays the Padres $30 million for media rights fees in 2013 and grows to a number between 65 and 70 million in its final year. The percentage increase in rights fees will not be the same each year.

If the deal grows by 5.5% in the first ten years and 4.5% in the last ten years then the deal will be worth $37.2 million in 2016 and $74.7 million in 2031.

A COMPARISON OF ALL THE MEDIA DEALS

The following table shows how all the deals compare to each other.

With the exception of the Angels, all of the deals cover at least 2016-2031. In order to get an idea of what the Angels deal might look like if it lasted past 2028, it is possibly to multiply the 2028 numbers by the standard increase per year. The following table shows how the deals compare to each other from 2016-2031.

Year	Nationals	Phillies	Astros	Dodgers	Angels 1	Angels 2	Padres
2016-2031	1356.60	1345.08	1325.94	4389.68	1724.84	1831.56	873.35

Despite having a weaker market than the Phillies or Astros, the Nationals/Orioles are projected to receive more from 2016-2031 than either of those teams in media rights fees. Given that the Rangers are expected to receive a similar amount in rights fees (but starting two years later) to the Astros, the Nationals/Orioles should receive more than them as well. It appears that comparing the first year of the MASN deal to the average amount in the Phillies or Astros deal does not provide an accurate picture of the future. While a significant part of each teams deal is the equity that they receive in their network, it is likely that each of these deals are similar in value.

What MASN is offering the Nationals/Orioles appears to be far inferior to what the Dodgers are receiving from SportsNet LA until one considers that the Dodgers received no equity in their deal. The Dodgers deal is still the most lucrative but by less than it may appear on first glance. The Angels are also receiving more in media rights fees than the Nationals/Orioles and will receive roughly the same amount from 2016 to 2028 that the Nationals/Orioles will receive from 2016 to 2031. Given the strength of the Los Angeles market, this should be expected.

The Padres are receiving less money in media rights fees than all of the other clubs in this post. Given that their market is easily the smallest this should come as no surprise.

CONCLUSION

To sum up, MASN has a similar but less lucrative media market to most of the other teams listed in this comparison especially when factoring in the fact that it controls the rights for two teams. Despite this, the amount that they are paying the Nationals and Orioles from 2016-2031 is projected to be slightly larger than the amount that the Phillies and Astros are receiving from their deals and considerably larger than the amount that the Padres are receiving from their deal.

So, why were the Nationals asking for between $100 million and $120 million in 2012? Especially if it’s true as Forbes states that MASN’s revenue will likely be under $200 million in 2012, obviously not nearly enough to support $100 million rights fees for the Nationals and Orioles and have any money to reinvest back into the RSN. After all, the Nationals are receiving a fair amount in media rights fees and if MASN goes bankrupt they’d lose their equity stake. Furthermore, if the Nationals are being offered a fair deal then why is MLB giving them money to make up for their current deal?

Part of the reason is that the current deal presumes a 7.7% increase each year. It may be questionable to expect a 7.7% increase annually in 2026 when the deal is on par with the deals that the Phillies, Astros and Angels received. Another part is that the Nationals position really hasn’t been explained clearly in the media and as a result there are a number of misconceptions. In Part 4, I will explain the Nationals position in the dispute between them and MASN.

What We Don't Know About MASN

My previous post discussed what we know about MASN. In this post, I'd like to take a look at some of the things that we don't know in this post. Just to recap from last time, here's the table I printed at the end of last post with everything that known in it.

I’d like to start with a thought experiment. Suppose that the MASN deal provided an equal amount of equity stakes profits each year. In other words, suppose MASN paid out 50 million in equity stakes profits in 2014, 50 million in 2015, 50 million in 2016 and so forth. If so (it isn’t), then the Nationals would receive 22.5% of the equity stakes profits while the Orioles would receive 77.5%. This is because the average of the Nationals equity stake from 2012-2031 is 22.5%.

Now in 2012, the Nationals received an amount between $7 and $7.3 million in equity stakes profits. In 2013, the Nationals received between $8 and $8.3 million in equity stakes profits. And in 2016, the Nationals are projected to receive between $11.5 and $12 million in equity stakes profits. We don’t know what they are projected to receive in either 2014 or 2015 but we can presume that the amounts are between $8.5 and $11 million. Otherwise, this would indicate that the Nationals received more money in either 2014/2015 than they did in 2016 or less than they did in 2013. It also seems reasonable to surmise that the number in 2014 is smaller than the number in 2015.

If this is all correct then the Nationals will receive an amount between $45.5 million and $48.5 million in equity stakes profits between 2012 and 2016. Suppose that amount is actually $47 million. 

Now suppose the Nationals will receive $47 million in the first five year span and an equal amount in equity stakes profits from 2017-2031. If so, the Nationals should be projected to receive 24.2% of all equity stakes profits. Now suppose that the Nationals will receive 47 million in the first five year span, a similar amount the next fifteen years with a 2% bump for inflation and all the rest of the money in the last five years. In that case, the Nationals will receive 26.3% of all equity stakes profits. I don’t believe that either of these cases are what will happen or what is projected to happen. 

What they tell me though is that the Nationals will receive an amount between 24 and 26.5% from this deal or that the Nationals will receive roughly one out of every four dollars in equity stakes profits from 2012-2031. If so then if as the Washington Post reported that the Nationals are projected to receive $600 million from equity stake payments than the Orioles should be projected to make roughly $1.8 billion from equity stake payments give or take $50 million over the twenty year period.

POSSIBLE MODELS

Using what we know from the previous post, I attempted to build a model that would project what MASNs revenue, media rights payments, equity stake payments and operating expenses look like. I was able to come up with one model based on the revenue numbers that Keri stated in his article and another model based on the revenue numbers that I’ve heard. Both models presume that operating expenses go up by a fixed amount per year while revenue goes up by a fixed amount per year plus an extra increase for each incremental year. This is because the revenue numbers that are known increase by a larger percentage each year.  

The financials using my revenue numbers may look similar to this. All numbers are in millions.

Using the revenue numbers provided by Jonah Keri the data might look like this.

The model using the revenue numbers provided by Keri has an annual operating expenses amount similar to that of CSN Houston. The model using the revenue numbers that I heard has a more linear amount of revenues. I feel that including both is helpful. Fortunately, each model results in a similar amount of equity stake payments paid to the clubs and therefore end up with the same results describing how much the Orioles and Nationals will receive from MASN from 2012-2031. I tried building a number of models and the relationship between the Orioles and Nationals equity payments remained roughly the same. 

 

The last unknown is the future value of MASN. As stated earlier, the Nationals will control 33% of MASN while the Orioles will control 67% of MASN at the end of 2031. Unfortunately, I have been unable to find any information about how much MASN is projected to be worth at the end of 2031. 

This Washington Post article, quoted Bloomberg as currently valuing MASN at $600 million. If so, 33% of this is $200 million. If MASN doesn't gain any value between now and 2031 than the Nationals stake will be worth $200 million. But this seems unlikely.

This article from the Philadelphia Daily News suggests that CSN Philadelphia might grow by 10% per year. If MASN grows by 10% per year than MASN will be worth $4 billion in 2031 and the Nationals stake will be worth $1.3 billion. The Nationals stake will grow by 20% from 2012-2031 and the Nationals will have received another $800 million in equity.

To sum up, both teams are receiving $1.5 billion in media right fees. The Orioles are receiving roughly $1.8 billion from equity stake payments while the Nationals are receiving $600 million from equity stake payments. If MASN is worth $4 billion in 2031, than the Nationals will have received $800 million in equity due to this deal bringing them to a total of $1.33 billion while the Orioles will own $2.66 billion in equity. The Orioles will have received $3.3 billion in money payments and will own an asset worth $2.66 billion while the Nationals will have received $2.1 billion in money payments and an extra $800 million in equity while owning an asset worth $1.33 billion.

Now that I've discussed MASN's financial situation and what each team receives from MASN on a year-by-year basis, next I'd like to compare what the Orioles and Nationals receive from MASN to what other teams receive from their media deals.