05 January 2015

Why CSN-Mid Atlantic Can't Be Compared to MASN

One question that comes up when discussing the MASN dispute is that Comcast SportsNet Mid-Atlantic (CSN-MA) was able to charge the highest fee of any RSN in 2013 at $4.33 per subscriber while earning $36.1 million in advertising fees and earned $4.60 per subscriber in 2014. Meanwhile, MASN received only $2.28 a month per subscriber in 2013 and I believe $2.42 in 2014. Given that MASN has more valuable programming than CSN-MA but receives less money people wonder whether this means that MASN is undercharging for its product.

To answer this question, it’s necessary to understand CSN-MA’s financial situation. As shown in the link above, CSN-MA was projected to be in roughly 4.5 million homes in 2013 and therefore earned at least $235 million in subscriber fees and another $36 million in advertising fees or roughly $270 million total. SNL Kagan projected that CSN MA earned $222 million in revenue in 2011 and $260 million in revenue in 2012 so the information in the link above is probably slightly understating their revenue.

Their expenses are considerably less than $250 to $300 million. The Capitals and Wizards currently earn about $30 million total in rights fees. I haven't seen an article discussing their other expenses but if they have the same amount of other expenses as MASN then that costs CSN-MA another $50 million and therefore have about $80 million total in expenses.

If that’s the case then CSN-MA earns about $190 million in profit and has a profit margin of 70%. Meanwhile, MLB is claiming that MASN shouldn’t earn a profit margin of 33% despite the fact that CSN-MA very probably has a profit margin that is twice as high. Either CSN-MA is overcharging its customers and therefore shouldn’t be used as an example to show that MASN is mismanaged or CSN-MA is charging its customers a fair amount and therefore MASN should be entitled to a profit margin well over 30% similar to CSN-MA. Ultimately, CSN-MA is charging its customers a large rate but that money doesn't go to media rights fees. Rather that money goes straight into Comcast's pocket.

If that’s the case then why do providers agree to pay CSN-MA’s fee? Comcast Sports Net Mid Atlantic is owned 100% by Comcast. Comcast signed a deal with the city of Baltimore in 2004 that gave them what amounted to a monopoly until 2016 and therefore they control nearly 97% of all cable subscribers in the Baltimore DMA. Historically, Comcast also controls nearly 70% of all cable subscribers in the DC DMA. These are the two core DMAs for CSN Mid-Atlantic and therefore the areas where they receive most of their revenue. The primary provider that CSN-MA needs to convince to pay a huge subscriber fee is Comcast. If Comcast can force their customers to pay large amounts to view CSN-MA content then that means they receive large profits.

A recent dispute between Dish and Comcast explains why Dish and Direct TV agree to pay CSN-MA’s fee. It seems that Comcast negotiates with Dish and Direct TV for the rights for CSN-MA, CSN Chicago, CSN Bay Area and CSN California at the same time. If they don’t come to a deal than it isn't clear whether they can carry any of those four stations. This gives Comcast considerable leverage when negotiating deals with Dish and Direct TV. It's one thing to not carry a single station but it's quite another to not carry the sports stations for Chicago, San Francisco and Washington DC. In addition, it also gives Comcast room to maneuver.

For example, Comcast only controls between 20 to 30% of CSN Chicago. Suppose Comcast decided to give Dish and Direct TV a discount on CSN Chicago and asked for an inflated price for CSN-MA. This would have little impact on Dish and Direct TVs bottom line but would result in Comcast receiving an inflated profit. 

One could note that CSN Chicago charges a subscriber fee of $3.25 per month despite broadcasting the Bulls, Blackhawks, Cubs and White Sox while CSN Mid Atlantic charges a subscriber fee of $4.60 per month just to broadcast the Wizards and Capitals. This is interesting because the Blackhawks boasted a 4.33 average rating and an average of 153,000 viewers in 2014 and the Bulls had an average of over 100,000 viewers in 2014. The Cubs and White Sox didn’t do as well as they only averaged 49,000 and 33,000 viewers per game respectively in 2014

In comparison, the Capitals had a 1.39 average rating and an average of 34,000 viewers in 2014 while the Wizards had a 1.03 average rating and an average of 25,000 viewers in 2014. This means that more households watched the Blackhawks or Bulls last year than watched the Capitals and Wizards combined. The Cubs and White Sox weren't as popular as the Bulls or Blackhawks but they still were more popular than the Capitals and Wizards also. It would appear that CSN-MA's content is considerably less valuable than CSN Chicago's. Yet for some reason, CSN-Mid Atlantic has a larger monthly subscriber fee than CSN Chicago. It's probably just coincidence that if CSN Mid Atlantic cost $3.25 per month and CSN Chicago cost $4.60 per month that Comcast would lose around $50 million per year while Direct TV and Dish would see no change in their bottom line. 

The final major provider of CSN Mid Atlantic is Cox. Cox’s subscribers are primarily in Virginia and are in non-core areas. The way that RSNs work is that subscribers in core areas pay a larger subscriber fee than subscribers in non-core areas. After all, it's only reasonable that people living in DC are more likely to have interest in Wizard and Capital games than people living in Norfolk. Therefore, it's fair that they are charged more. The thing is that while newspapers have reported the average subscriber fee for all subscribers it isn't possible to know what the average subscriber fee is for core subscribers vs non-core subscribers. This means that it isn't possible to determine how much Cox subscribers are paying for CSN Mid Atlantic. It is possible that Cox’s subscribers are paying a reasonable rate and that Comcast is simply charging its subscribers in the core regions heavy fees.

The reason why there is such a discrepancy between the fees that CSN Mid Atlantic is able to charge its subscribers and the fees that MASN charges its subscribers is because Comcast has a dominant position in the DC/Maryland/Northern Virginia region. Therefore, they have an interest in increasing the fees that customers pay for CSN Mid Atlantic while decreasing the fees that customers pay for MASN. Since Comcast has a number of networks it allows them leverage to make deals with Direct TV and Dish in order to increase their profits. Therefore, it probably doesn’t make sense to say that MASN is mismanaged just because CSN-MA is able to charge large fees for less programming. All it means is that Comcast has the significant advantage of owning a network in a region where they have a dominant position in the market.

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