20 October 2014

MASN and the RSDC

Previously I discussed why the Nationals felt their media rights were worth $590 million from 2012-2016 and why this argument was rejected by the RSDC. In this post I’d like to discuss why MASN is disputing the ruling made by the RSDC. The most basic understanding of the dispute is that MASN believes fair market value for the Nationals and Orioles media rights is nearly $200 million each over the five year period while the RSDC believes that fair market value for the Nationals and Orioles media rights is nearly $300 million each over the five year period.

Both MASN and the RSDC agree about certain points. They agree that the most valid method to determine fair market value is by analyzing the results of MASNs income statement. The RSDC final decision states that “while the RSDC has considered market comparables as a “check” or point of reference in considering the results of the income statement analysis in the past, it has never relied exclusively or even predominantly on comparables in determining whether a rights fee is of fair market value.” Bortz Media claims on behalf of MASN that “a comparables analysis would be completely improper here, assuming arguendo that such an analysis has any validity”. Unlike the Nationals that solely use market comparables both the RSDC and MASN believe that comparables are of limited or no importance.

MASN and the RSDC disagreed about two things when analyzing MASNs income statement. The first difference was the operating margin for baseball programming while the second was the amount of MASNs revenues attributed to Nationals and Orioles programming.

MLB wants to ensure that team controlled RSNs pay their parent club a reasonable rights fee so that the MLB team benefits from the RSN and MLB receives a reasonable amount for revenue sharing taxes. Therefore the RSDC determines a fair operating margin on baseball programming for each team controlled RSN. This determines the percentage of profit that a team controlled RSN earns and all other baseball generated revenue goes towards baseball-related expenses and media rights fees. This makes it impossible for team controlled RSNs to set a low media rights fee and thus pocket excessive profits.

Bortz Media claims on behalf of MASN that the typical operating margin on baseball programming on pay television services is at least 20% and therefore MASN should receive that operating margin. They further note that if MASN paid a rights fee based on a 20% operating margin then MASN would have an overall EBITDA of approximately 33 percent. Bortz Media has extensive experience working with the RSDC to determining fair operating margins and claims that typical RSN margins are between 30 to 40 percent. This claim is supported by a large number of public documents unrelated to MASN. 

The RSDC notes that “according to MASN’s own data, the operating margin for the entire network was 6.2% in 2007 and grew to 25.7% in 2008, 25.1% in 2009, 30.9% in 2010 and 33.4% in 2011.” The RSDC further notes that “as the price of rights fees increases, the margins of RSNs have not surprisingly decreased. Therefore taking these considerations into account, the Committee believes that MASN would have been forced to operate at a relatively low operating margin for baseball programming in 2012.”

It is important to understand that MASN had a low operating margin in 2007 due to extenuating circumstances. MASN didn't receive the rights to broadcast the Orioles until April 2007 and therefore their affiliates didn't pay license fees reflecting the addition of the Orioles until MASN received those rights. In addition, MASN and Dish didn’t agree to carriage until April of 2007. These circumstances meant that MASN didn't receive a full years worth of revenue while still having to pay a full years worth of expenses. As these extenuating circumstances no longer exist it may have made sense to simply ignore or reduce the importance of the 2007 results.

Instead the RSDC claimed:
Indeed, in light of the robust market for sports rights fees in 2012, MASN’s contractual obligation to increase the Nationals’ rights fee to fair market value in 2012, and the corresponding right of the Orioles to receive the same rights fee as the Nationals, it would be wholly unrealistic to assume that MASN could recognize an operating margin much higher than the six percent network operating margin it achieved in 2007. Accordingly, the Committee will assume that MASN would have achieved an operating margin from baseball programming in 2012 of five percent had it obtained the Nationals local broadcast rights in an arm's length transaction, which would result in an operating margin for the entire network of approximately eight percent.
Bortz Media believes that MASN should receive a reasonable operating margin of at least 20% just like all other successful team-owned RSNs. The RSDC believes that MASN should receive an operating margin based on its 2007 results despite the extenuating circumstances and the fact that those results were not recent.

The second disputed point is about the amount of revenue that comes from Nationals and Orioles programming. MASN and other RSNs only pay rights fees based on the amount of revenue directly related to baseball programming. Some RSNs like NESN control the media rights to sports teams in multiple leagues and it wouldn’t be reasonable to make NESN pay rights fees to the Red Sox based on revenue earned from the Bruins. Likewise, MASN is expected to pay rights fees to the Orioles and Nationals based on revenue earned from the Nationals and Orioles and not from revenue earned from televising NCAA basketball, football and lacrosse games.

Bortz calculated that MASNs baseball-specific revenues are 81% of total revenue. They determined this “by determining the same reasonable allocation for MASN's subscription fee revenues to baseball programming as Bortz has consistently applied to all other related-party telecast rights fees analyses and allocated advertising revenues based on the actual data regarding the allocation of those revenues to baseball and non-baseball programming. Bortz calculated revenues for baseball programming to be approximately 80% of total revenue and provided that analysis and data to the RSDC.” Bortz's documentation explaining this in detail is still redacted.

The RSDC asserts that baseball specific revenue makes up 95% of MASNs total revenue. They claim that baseball programming accounts for virtually all of the network’s revenue and there is little reason to believe MASN would secure non-trivial carriage without the baseball rights that the Agreement provides. They give no explanation as to why baseball specific revenue should make up 95% of all revenue as opposed to 80%, 90% or 99%.

These two differences are the reason why MASN and the RSDC are in conflict. MASN believes that they should receive profit margins that are reflective of the industry while the RSDC believes that MASN should receive significantly lower profit margins.

I find charts to be helpful when attempting to visualize this type of data. The following five charts show the total revenue, each teams’ media rights fees and each teams’ equity stake payment according to MASNs proposal; the RSDCs decision; if MASN received a 20% baseball operating margin and 95% of total revenues from baseball; if MASN had a 5% baseball operating margin and 81% of total revenues from baseball and the amount of media fees proposed by Allen and Co on behalf of potential buyers of MASN.

No comments: