25 November 2015

How Much MASN Money Is At Stake?

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The Washington Post recently claimed that:
"Television contracts play a major role in the sport’s finances, which for the Nationals prevents an obstacle. They suffered a major setback last month in their legal fight with MASN and the Baltimore Orioles over how much money they should receive in rights fees. Their television contract with the Orioles, put into place by Major League Baseball before the Lerners purchased the team, ensures they cannot reap profits from their rights fees as much as other teams in their situation could.
The fate of MASN and Harper are intertwined. It’s why Boras, in December 2014, attended one of the New York Supreme Court hearings in New York regarding MASN."
Thomas Boswell has also wondered whether having that money would have impacted their last offseason. Camden Depot and others have discussed the implications of Justice Marks ruling in favor of MASN and vacating the RSDC's decision. What hasn’t been well defined is how this decision financially impacts the Orioles and Nationals or the amount of money that is actually at stake. Could this decision potentially cause the Nationals to lose Bryce Harper?

The Washington Post has stated that the difference between the RSDC decision and MASN's offer is $20M per year in annual TV rights fees. This is technically accurate, but misleading because it ignores changes in equity stake distributions and impacts of revenue sharing. Basically, suppose someone worked at a job where they received both a salary and an end of the year bonus. If ones' salary increased $20,000 but their bonus decreased by $20,000 then they wouldn't see an increase in income. These extra annual TV rights fees come out of profits and means that the Nationals receive less in profits then they would otherwise.

Documentation filed in the court case shows that the actual difference between the two offers is $9.2 million in 2012 (plus $4.2 million in interest and tax rebates), $10.9 million in 2013 (plus $180,000 in interest) and $10.6 million in 2014 resulting in a total of $30.7 million. There has been no documentation provided to the public discussing the difference for 2015 and this figure probably hasn't been calculated yet. MASN disagrees with these figures in part because they don’t account for all the cash that MASN has given the Nationals.

However, as first publicized by Jonah Keri, MLB decided to compensate the Nationals for the difference between these two scenarios for both 2012 and 2013. The Nationals requested and received documentation from MLB stating that they don’t need to repay this money regardless of how this situation is ultimately resolved. MLB further reiterated this in court in December. If the Bortz Methodology is ultimately implemented, then the Nationals will keep the $25 million from MLB and the extra profit distributions from MASN. This will result in them receiving more money than they're supposed to receive.

In any event, the Nationals have received all of the money that they're supposed to for 2012 and 2013. The only money that the Nationals haven’t received already is the $10.6 million in 2014, whatever they’d receive in 2015 and relevant interest and tax compensation.

The documents that MLB provided explaining why the Nationals were owed what they were in 2012 and 2013 can help determine what they might be owed in 2015. Below is the document describing what MLB thought that the Nationals were owed in 2013.

Basically, there are five steps involved. The first step is to determine the difference in media rights fees between the two offers. The second step takes into account revenue sharing and the Market DQ. Subtracting these two numbers from each other is the difference in media rights fees after taking revenue sharing into account.

The third step is to determine the much interest MASN owes the Nationals for not paying them right away as well as the taxes the Nationals owe due to receiving money as profits as opposed to rights fees.

The fourth step is to determine the difference that the Nationals receive in profits due to these two decisions and the fifth step is to simply add the increased rights fees to the interest and subtract from the reduced profits.

In order to determine the difference for 2015, the first step is to determine the difference in media rights fees between MASN's offer and the RSDC's decision. For 2015, the RSDC decision was that the Nationals TV rights were worth $62,611,974 while MASN's argument was that they were worth $42,044,874. Multiplying this number ($20,567,100) by two ($41,134,200) is the entire extra amount that MASN needs to pay both teams and therefore the amount that comes out of MASN's profits.

The second step is determining the amount of media rights fees that goes towards revenue sharing. Teams do not need to pay revenue sharing taxes (32.866%) for money distributed by RSNs via equity rights distributions but do for money earned via media rights fees. The RSDC decision would increase media rights fees at the expense of equity rights distributions and therefore trigger larger revenue sharing taxes. 32.866% of $20,567,100 is $6,759,583 and therefore the extra amount that each club would owe via revenue sharing taxes.

However, in the latest CBA (Attachment 26), a new clause was created called market disqualification. Prior to the current CBA, large market clubs (top fifteen clubs by market rank) were able to receive revenue sharing funds if they had below average revenue. This led to a situation where teams in small markets such as the Cardinals were forced to subsidize teams in large markets such as Nationals or Mets because they were successful and the other teams were less so. Teams earning a large amount of revenue could accept the need to help subsidize teams like the Rays, Marlins and Orioles that are in small or mid-sized markets but didn’t think it was fair to be forced to subsidize teams in large markets such as the Mets.

The current CBA has a rule that prohibits large market teams like the Nationals (ranked #12) from receiving revenue sharing funds. It was scheduled to start in 2013, when large market teams were to receive only 75% of what they would if they were small market teams and decrease by 25% for the next three years.

The Nationals were receiving money from revenue sharing from 2012 to 2014 and therefore had below average (mean) revenue in those years. If this trend continues in 2015, then it is possible that they wouldn’t pay any revenue sharing taxes on this extra revenue. If the Nationals did have above average revenue in 2015, then they would be taxed as much as $6,759,583. The Orioles are ranked twentieth and therefore would pay revenue sharing taxes on this revenue regardless of whether they had below average revenue.

The third step is to determine the difference that each team receives via equity rights distributions based on MASN's proposal and the RSDC ruling. The RSDC ruling states that an extra $41,134,200 should be awarded to the teams’ via media rights fees. The Nationals control 16% of MASN as of 2015, and therefore would lose $6,581,472 in equity rights distributions while the Orioles would lose $34,552,728 in equity rights distributions.

It is safe to say that the Nationals would receive no more than $14 million and earn no less than $7.2 million before interest and tax payments while the Orioles would lose roughly $20.75 million in 2015 if the RSDC decision was implemented instead of Bortz.

Of course, all of this revenue wouldn’t necessarily go to payroll. The rule of thumb is that 47% of revenue goes towards payroll suggesting that the RSDC decision would increase the Nationals payroll by between $3.4 and $6.6 million and decrease the Orioles payroll by about $10 million. Matt Swartz argues that only 40% of revenue now goes to payroll and therefore the impact on payroll is even lower than the above figures. This would seem to have a minimal impact given the amount that the Nationals spend on players and therefore would mostly be a non-factor when deciding to extend Harper. It could potentially have a larger impact on the Orioles.

It is important to understand that if the Nationals have above average revenue then they’ll receive a minimal amount of cash from MASN. If the Nationals have below average revenue then they may receive a good chunk of change from MASN in this situation but then they have below average revenue.

In the meantime, they had a $165 million dollar payroll in 2015 or the fifth or sixth highest in the majors. If they did have below average revenue then this means that the Nationals payroll was $30 to $40 million more than their revenue would suggest and therefore that they lost a lot of money in comparison to other teams. It would seem that having below average revenue but above average payrolls would have a bigger impact on the Nationals' future payroll decisions then how this case is ultimately resolved.

The Nationals spent so much money on payroll because they had a chance to sign Max Scherzer in free agency and were unwilling to pass up the opportunity. It’s hard to argue with that decision given that he threw two no-hitters, had an ERA of 2.79 and an fWAR of 6.2 in nearly 230 innings despite somehow having a 14-12 record. He may have been expensive but was certainly a dominant starter.

Instead of praising the Lerners for being willing to absolutely shatter their budget and suffer significant losses in an attempt to win, the Washington Post argues that this signing was simply an example of the Lerners trying to do too much. Boswell argues that the Lerners set sufficient yet inflexible budgets and that therefore made it impossible for Mike Rizzo to make in-season additions such as Gerardo Parra or Tyler Clippard. Mr. Wagner argued that this was a clear flaw in the Nationals’ process since “Because of ownership, the front office had little wiggle room in adding payroll.” The Post further argued that: “this will be the Lerners’ toughest offseason to show good judgment, respect their baseball people and do enough but not too much. And it will be the roughest winter for Rizzo, whose astronomical batting average has been seriously dented by hiring Matt Williams and trading for [Jonathan] Papelbon.”

These hometown writers seem to believe that the Lerners’ made a mistake by signing a genuine ace rather than having flexibility to trade for an outfielder that had a .237/.268/.357 line, an OPS+ of 69 and -1 fWAR after the trade deadline. If I had the option, I’d rather have the ace and damn the midseason flexibility.

The Lerners recently were involved in picking a new manager for their club. They ended up in the enviable position of deciding they were interested in both Bud Black and Dusty Baker. They were unsure which one they wanted so they started negotiations with both with compensation being a deciding factor. The Nationals were able to reach a mutually beneficial deal with Dusty Baker albeit not with Bud Black. Instead of praising the Lerners for properly using leverage to save money to go after top free agents, the hometown paper decided to write a number of articles criticizing them.

The Washington Post called this decision “a fiasco” and said that the Lerners should know better by now. They further wrote that "This season, the Lerners shelled out $165 million in payroll for players, sixth in the majors. Good for them. They still lack an understanding of how to treat people within their industry." They also claimed that “the Lerners are generally unwilling to spend freely on big free agents” despite the fact that the Nationals have signed high profile free agents such as Jayson Werth, Rafael Soriano, Dan Haren, Adam LaRoche and Edwin Jackson from 2011 to 2014. My datafile that tracks free agent spending has the Nationals ranked a respectable #10 in the majors over that four year period. It certainly seems like they were willing to spend on high profile free agents.

It is unclear why the Washington Post wrote what it did. Perhaps their writers really think that having the flexibility to trade for Parra and Clippard is more valuable than adding Scherzer. Maybe they believe that paying a manager a few million more than necessary will somehow help his performance and improve chemistry. Or maybe the real problem that the Washington Post has with the Lerners isn’t about their decisions but that they declined requests to comment through a team spokesman to talk during the season as well as declined repeated requests  for comment during the late-inning slide.

It is worth noting that the Braves general manager is also receiving his share of criticism. Mr. Coppolella recently had a phone conversation with reporter Bob Nightengale in which he complained about all of the accusations he's been receiving. He said "I’m getting so tired of this. If guys want to take shots, or (degrade) us, fine. But let’s let it play out for a few years before we start branding our pitchforks and torches. I feel in my heart this is the best for the Braves." This is despite the fact that Atlanta media has been supportive of his moves. If nothing else, it appears that high ranking officials are aware of what both the fans and media say about them and take it to heart.

The Lerner family has been reported to be frustrated due to the team’s competitive struggles despite their high payroll. This should come as no surprise as they lost tens of millions of dollars last year to try and build a winner and got savaged by their hometown media. They probably weren't happy to see article after article insulting them.

Given the Nationals’ inability to produce in 2015 and the excellent depth created by Rizzo, it would not be surprising if their payroll dropped in 2016. Why spend extra money if it isn’t appreciated and not necessary to build a winner? Why spend extra money if it just results in being mocked by the press?

If their payroll does drop, it won’t be due to an adverse decision in the MASN situation. This situation will have a minimal impact on year-to-year spending and is primarily valuable for maximizing long term asset value. And it's preposterous to argue that this situation could cause the Nationals to lose Harper. The Lerners have shown a willingness to lose money to build a top baseball team and it's unlikely that having a few million less in revenue will make them decide they can't afford to keep a Hall of Fame player. The only reason that their payroll may drop is because the Nationals lost a significant amount of money in 2015 and their reward was to be called inflexible for busting their budget signing Scherzer instead of going after Parra and Clippard as well as being called incompetent for negotiating for a manager.


Unknown said...

is the flip side of all this that Orioles owner is pocketing
the "extra" money and not spending it on the team?

I guess this off season will be a test - ton of holes to fill.

You guys see Fangraphs has Osuna from Marlins for K. Gausman as an "even" trade.

thoughts on that deal ?

Matt Perez said...

On the one hand, Forbes and others consistently have the Orioles as one of the teams with the lowest revenue in the league. From 2012 to 2014, the Orioles had bottom ten revenue (think 21st or 22nd highest rather than mid or low 20s) and received a revenue sharing check for $20M in 2012. In 2015, the Orioles had revenue in the 15-20 range (again, think closer to 20 than 15).

On the other hand, the Orioles market is ranked 20th in MLB by MLB. Which means that the Orioles are doing about as well as expected earning revenue. It's not like the Os are the White Sox and Mets and are simply doing a poor job earning revenue in a large market.

Meanwhile, Orioles' payroll was ranked #12th in baseball last year. I propose that extra $20M going into payroll is coming from somewhere. Chances are, that's the MASN money.

The big cash from this deal isn't the year-to-year sums that impact the fans. It's the equity value and the ultimate sale price. Great for the owners, but has a minimal impact on the fans.

Both Osuna and Gausman strike me as players that are mostly potential. They each had strong 2014s and regressed in 2015. Each have flaws that can prevent them from reaching their potential. I think Osuna is far more likely to be successful as an Oriole while Gausman has a better chance of succeeding as a Marlin.

But I think Gausman has the most talent in the trade. Gausman can become a legit ace. Ozuna can become the next Adam Jones. I like Adam Jones, but I think the ace is more valuable. The Orioles have a limited amount of talent and really need to take some risks on players with high ceilings but extremely low floors. It doesn't help that Ozuna would be playing in a corner and would therefore lose value whereas the Os really need a starter.

I also think that the Os really like Gausman and the Marlins aren't happy with Ozuna. If that's the case, I'm not interested in a fair trade. I want to pay 70 cents on the dollar and that means I need to get considerably more than Ozuna in a trade for Gausman. But unless the Marlins are willing to play it risky and take Bundy and Harvey, then I don't see how the teams can match up for a deal.

Unknown said...

Gauzman not going. Duquette, unlike McPhail doesn't like to trade. Even less now since the last couple of deals have soured on the fans.

Unknown said...

Gauzman not going. Duquette, unlike McPhail doesn't like to trade. Even less now since the last couple of deals have soured on the fans.

Jon Shepherd said...

Duquette has pulled off more trades than MacPhail.

Jon Shepherd said...

Duquette has pulled off more trades than MacPhail.