18 March 2014

Possible Solutions to the MASN Conflict and a Summary

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.


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.

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.

1 comment:

Anonymous said...

The most obvious solution is to equalise the equity so both Nats and O's own 50% and award equal rights fees. therefore both teams are incentivised to ensure that the network is as succesful as possible. As it stands the Nats can take a calcualted gamble by putting MASN at risk of insolvency as if that happens they would be free to go onto the open market get a better deal and equity stake in a RSN as other teams have done and will be in a better position than with MASN. The O's with a worse market, worse owner and limited appeal outside core markets will be significantly weaker. Therefore I believe the O's will blink first as what do the Nats have to lose by taking this all the way to court claiming a restraint of trade etc?