13 January 2016

How The Garber Case Could Hurt The Orioles

Nathaniel Grow wrote an article in Fangraphs discussing a court case that could change the future of televised baseball and absolutely wreck MASN and the Orioles. As he explains in his article, the plaintiffs in this case — Garber v. Office of the Commissioner of Baseball —, claim that MLB shouldn’t be allowed to assign its teams exclusive local broadcast territories and that every team should be able to broadcast its games anywhere they please via both the internet and cable in the United States.

The Orioles and Nationals would be significantly hurt if MLB loses this case. Currently, both of these teams are able to broadcast their games throughout a territory that reaches nearly more than 9.5 million pay television households and has 5.9 million paying subscribers. This territory includes not only Maryland, Washington D.C, Delaware, Northern Virginia and Southern Pennsylvania, where there is significant interest in the Orioles or Nationals, but also areas such as most of Virginia, a significant part of North Carolina and a bit of West Virginia where there is minimal interest. Indeed, when the New York Times printed a map of baseball fandom based on Facebook likes, they discovered that neither the Nationals nor Orioles were one of the three most popular teams in much of Central/Southern Virginia or North Carolina. In addition, MASN has been unable to gain carriage by Time Warner in North Carolina because the provider successfully argued in court that there simply isn’t enough interest in either of these two teams. It seems likely that if given a choice, pay television subscribers in these areas would rather receive the ball games of the Yankees, Red Sox and/or Braves.

It is true that MASN charges higher prices for its programming to subscribers in their core regions of Baltimore and Washington D.C then to subscribers in North Carolina and Virginia. However, over half of MASNs total pay television households albeit not subscribers reside in areas where there is little interest in the Orioles or Nationals and therefore losing those regions could cost MASN some $40-45 million in revenue.

MASN would face adverse consequences in their core regions as well. There is significant interest for Orioles and Nationals games in Maryland, Washington D.C, Delaware, Northern Virginia and Southern Pennsylvania. However, the Yankees, Red Sox and Phillies are also popular in parts of this region and pay television providers may consider them an adequate replacement for MASN. While the Orioles are extremely popular in Baltimore and are unquestionably must-see television, the Nationals have limited popularity everywhere and didn’t have over 35% popularity in even their home county in 2014 when the New York Times baseball map was created. Nationals’ games usually had only the fourth highest ratings in their time slot. Due to the Nationals’ weakness and faced with competition from YES and NESN, it seems likely that MASN would have to accept significantly reduced rates to maintain carriage even in their core regions.

Advertising revenue would take a huge hit due to the reduced viewership and increased competition. There would be more supply for baseball programming and therefore companies could buy ads on other stations which would reduce the price for ads on MASN.

MASN would potentially receive increased television revenues because they could broadcast their games to other markets. However, neither the Orioles nor the Nationals have significant national popularity and therefore would struggle to compete with all 28 other teams. The Orioles are ranked 23rd and the Nationals are ranked 29th in MLB in Facebook likes. Regardless of one’s feelings about Facebook and whether this data makes up a scientific poll, it is a fact that this data is typically used and given weight in court cases.

There are many games occurring at a given time, so it is unclear what significant advantage a cable broadcaster would gain by purchasing the rights for every team and it is impossible to broadcast all games on basic cable due to channel limitations. It is far more likely that broadcasters would be interested primarily in teams with a strong brand like the Yankees, Red Sox and Giants and therefore unlikely that MASN, the Orioles or the Nationals would earn minimal extra revenues from other markets.

The Orioles would likely be in a superior position than the Nationals due to the fact that the Yankees and Red Sox are in their division and therefore play the Orioles often. In addition, the Orioles and Nationals could potentially team up with other teams in an attempt to increase the value of their rights.

MASN is currently projected to earn roughly $200M in revenue. With this extra competition, one shouldn’t be surprised if MASN saw its revenue drop by over 50% and thus saw its annual profits and equity value drop significantly. Such a scenario would force MASN to reduce its media rights payments to the clubs and thus have an adverse effect on the Orioles and Nationals.

This isn’t the only problem that the Orioles and Nationals would face. If teams are allowed to broadcast their games nationwide, then it is questionable whether MLBs national TV contracts would be enforceable. It seems from documentation in this lawsuit that these agreements would be null and void. The revenue from the MLBs national TV contract is split evenly between all thirty teams at the present time. If each team can sell their national rights, then there can be no question that popular teams will receive a majority of national TV money and less popular teams will suffer significant losses of revenue.  Fangraphs claims that the current national TV contracts pay $1.5 billion per season on average from 2014 to 2021. If so, it wouldn’t be surprising if an adverse decision caused the Orioles and Nationals to lose $33 million per year just from the national TV contract.

Additionally, this could allow teams like the Yankees and Red Sox to create their own internet streaming services and sell these broadcasts to the public. At the present time, interested consumers can only buy packages for MLB teams via MLB.TV and this revenue is split evenly among all teams. While some fans would remain interested in packages that let them watch all teams, others would prefer packages that allowed them to watch their favorite team which is unlikely to be either the Orioles or Nationals. This would have an impact on the Orioles’ current revenue and would inflict a huge blow in the future. MLBAM earned roughly $900 million in 2015 or about $30 million per club. The Orioles would receive considerably less if the Yankees and Red Sox were able to sell their own streaming rights.

The Orioles would be one of the worst off teams if MLB lost this case, but they probably wouldn’t suffer the most. The Dodgers signed an extremely lucrative TV contract that has turned into a disaster for Time Warner. If this contract was cancelled, then the Dodgers would lose billions of dollars.  Likewise, the Mariners control an extensive television territory and would suffer significant losses if it was opened up for competition. However, teams like the Yankees, Red Sox, Giants, Cubs, Cardinals, Tigers and Braves would receive significant benefits due to their strong national popularity and due to the fact that many of their rivals would be weakened.

All in all, it wouldn’t be surprising if the Orioles lost up to $100 million per year if MLB loses this court case while MASN profit and equity value would drop significantly. This would have a drastic and significant impact on the Orioles operations – far larger than a bad outcome in the MASN case. On the other hand, the Orioles would receive considerably more cash via revenue sharing, which would make up for some of the losses. The Nationals aren’t eligible for revenue sharing and would therefore suffer significantly more. In such a scenario, I would expect payroll to drop by $30-40 million or to about $90-100 million total. Revenue sharing would need to be severely restructured in order to allow mid-market teams to support competitive payrolls.

Of course, this is a worst case scenario that presumes that court will completely agree with the plaintiffs. If the court only agrees with some of their claims then an adverse decision would do less damage to the Orioles especially if MLB could retain its rights to exclusively be able to sell a package of exclusive games including playoff games and if they would remain the sole party that could offer internet streaming.

It is probably true that fans would have more flexibility to watch their teams via either television or the internet. It is also likely that the price of such services would decrease, although it isn’t clear whether this would help media consumers or simply improve the profit margins for media providers. However, it is also the case that such a change would have a drastic impact on the industry and make it harder for MLB teams to remain competitive. It may be good news for fans but would probably be terrible news for small mid-market teams like the Orioles.


Anonymous said...

Considering that money is a competitive balance issue, the only real "correct" solution would be the completely open up the market so anyone could sell anywhere and require that the money from all broadcasting rights - local and national - be split evenly among teams. That would significantly reduce the competitive issues with small market teams. It might even bring FA salaries back into a reasonable realm - being bad for the big FA and better for the middle FAs (more teams spending more money and fewer teams spending the biggest money).

Jon Shepherd said...

Just a note with how reasonable free agent contracts are, contracts are actually increasing at a lower rate than league revenue is increasing. This sport, during this past recession, went from 7 billion to 9 billion dollars in revenue.

Matt Perez said...

Why do people think it makes sense to split broadcasting rights evenly but not revenues from attendance? Practically, what's the difference between those two forms of revenue?

If revenue is split evenly by all teams, then why is it reasonable for each team to sell its rights on the market? In such a circumstance, it would definitely be easier for teams to just let MLB deal with media rights as they do with internet streaming rights.

It's one thing to expect teams to compete against each other if they'll benefit. But if the Yankees get no benefit from broadcasting in Tampa, then why is it fair to ask them to do it? It seems like people want the Yankees to start selling their own media rights so that fans will benefit and the teams themselves will suffer.

Nor do I understand why teams would agree to this plan. Why wouldn't the Yankees sue if they were forced to build their own infrastructure to provide games to the public but weren't allowed to keep their share of the profits?

This idea that broadcasting rights should be split evenly among all teams is frequently suggested but I fail to understand how it's practical.

Unknown said...

#Matt - of course fans want teams to do things to benefit the fans without regarding whether the teams will suffer. Just as teams want to do things to benefit the teams without regarding whether fans will suffer.

And I don't understand your point about infrastructure. As an example, and as I understand it, the Yankees have sold their media rights to a network. That network cannot offer itself to be carried in, say Tampa. Where's the additional infrastructure expense to the Yankees?

Matt Perez said...

All I'm saying is that there's no free lunch. People focus on the benefits of Garber without considering the possible negative implications of it.

I don't think I fully understand your question. For starters, all contracts would be pretty much null and void. YES agreed to buy the Yankees rights under certain conditions that would no longer be valid.

But I would presume it would cost the Yankees money to develop a system that allows them to stream their games via the internet.

vilnius b. said...

I'm pretty sure that the plaintiffs will lose this case. As we saw in the San Jose/Oakland decision, courts are loathe to overturn settled law. I'm pretty sure a very similar challenge to broadcast rights/territories has been rejected in the past.

On a minor note, I'm curious: how reliable is the Facebook system? I use FB to communicate with friends and family and have never thought once to go to the Orioles, Capitals or Terrapins home pages and register a like.

It's a small sample size and we're all of an older generation, but I posed that question to a friend and a relative before---when I first saw that map in the NY Times---and they both said they never thought to do the same thing either. And I can think of more than one occasion that I've met somebody from West Virginia at an Orioles game. So why the confidence that the court will rely on suspect information?

One little quibble: Nationals have a home county? That's news to me. The District of Columbia is a distinct political entity because it's the seat of the federal government.

I live closer to Washington D.C. than I do Baltimore and I'd advise that you look at Fairfax, Arlington and Prince William counties in northern VA and Montgomery county in MD to try and determine how many people are Nationals fans, outside of the fans that live in the city. And, if which Metro line they use after a game is a reliable indicator (I've been to a few Nats games) of where non-driving fans are coming from, I'd focus on Virginia.

Jon Shepherd said...

Regarding Facebook, I think people work on the assumption that it can be used as a survey technique because they have little reason that team interested Facebook users would be different proportionally. It is not that they think 40 year old guys are not important but that those guys are in proportion by team to whoever it is who clicks like on a Facebook page. Is there a selection bias? Maybe. They have shown that land line political polls have issues because that population differs from people who only have cell phones.

Matt Perez said...

If it was perfectly clear that the plantiffs would lose the case, then the judge wouldn't have agreed to a two week trial. And no one thought that MASN would get such a favorable result in their case. Most people thought the judge would disagree with MASN on all points.

I agree with what Jon said about Facebook. I'd just add that the final decision in the MASN vs Time Warner case about carriage in North Carolina quoted a small poll in a newspaper that had a sample of 500 people. In my opinion, data from Facebook is far superior and extremely valuable despite its flaws. Baseball teams have maybe 60 million Facebook likes total. A scientific poll probably wouldn't sample even 60 thousand people.

In any event, I doubt I could find information more accurate than Facebook if I tried to determine how many people were Nationals fans in certain counties. And if I could it almost certainly wouldn't come free or even cheap.

Agreed that the Nationals don't have a home county. I was looking at the New York Times data in county mode and wasn't sure how best to classify DC. In retrospect, I should have used an accurate descriptor instead of trying to remain consistent. Good point.