The Rays' New Media Deal Won't Help Them Compete With The O's

According to the Sports Business Journal, the Rays are in discussions to sign a long-term extension with Fox Sports Sun. Fox is expected to offer roughly $50M in 2019, and offer an average of $82M per year. If this is accurate, and presuming a linear rate of increase, this would result in an increase of 6.5% per year.

Such a large annual increase would be odd. Normally, baseball media rights deals result in a yearly increase between 3% and 4%. It’s worth noting that a 3.5% linear yearly increase of a 15 year deal starting at $50M would result in the Rays receiving $82M in the last year. This makes me wonder if the deal doesn’t offer $82M per year, but rather $82M in its final year. If this is in fact the case, the Rays would receive $980 million for 15 years as opposed to the $1.2 billion over 15 years they’d receive if they did get an annual increase of 6.5%. Then again, the Rays received $15M in 2012 but the Sports Business Journal claims they received $35M in 2017.

In recent years, both the Diamondbacks and Cardinals have signed new media rights deals and details of these deals have made it into the media (the Reds also extended their media rights deals, but no one has been able to report the terms). Here’s how the Rays' deal (using both 3.5% annual increases and 6.5% annual increases) compare to the Cardinals' and Diamondbacks' deals.

Depending on which annual increase is used, the Rays' deal is either slightly better than the Cardinals' and Diamondbacks' deal or slightly worse, but either are in a similar category. In either case, the Rays would start out earning slightly less than the Diamondbacks or Cardinals, but could end up receiving slightly more depending on the final terms.

While it has been reported that the Rays aren’t allowed to broadcast their games in the Miami DMA, both MASN and the RSDC stated in the MASN case that the Rays media territory includes the Miami DMA. Presuming this is accurate, then the Rays' media territory has roughly 7.2 million cable and satellite subscribers, of which 1.7 million are in its core market of the St Petersburg DMA. Note that all of these subscribers may not have access to Fox Sports Sun. This is significantly larger than the Cardinals' media territory which has 5.1 million subscribers and a core market of 1.2 million as well as the Diamondbacks' territory which has 4.1 million subscribers and a core market of 1.6 million subscribers. However, the Cardinals always have high ratings and had an average of 94,000 viewers per game in their core media market in 2017. The Diamondbacks had above average ratings and on average 66,000 viewers per game. The Rays have below average ratings and only 52,000 viewers per game in their core market. Unlike the Cardinals and Diamondbacks, the Rays don’t have particularly good attendance, suggesting limited interest in the Rays. The Rays may have a stronger market than either the Diamondbacks or Cardinals, but both those teams have stronger fan interest.

The Orioles/Nationals shared media market is far larger than the Rays, Cardinals or Diamondbacks media market but includes two teams instead of just one. MASN's core DMAs of Washington and Baltimore are roughly the same size as Miami and Tampa Bay combined and has 9.5 million total cable and satellite subscribers as well as 3.2 million subscribers in its inner core. However, MASN has roughly 5.9 million subscribers compared to the Rays 5.6 million subscribers in part due to MASN's failure to gain carriage in North Carolina. Based on solely a market size analysis, it would be reasonable to expect the Nationals and Orioles combined to receive slightly higher media fees than the Rays and Marlins combined. That stated, the Nationals and Orioles have higher ratings than the Rays and Marlins and are in more valuable markets making them clearly more valuable properties.
It is hard to determine how much MASN will pay the Nationals and Orioles in media rights fees because the rates are set to change every five years based on network revenue. In addition, Allen and Co, MASN, the RSDC and the Nationals each have their own drastic ideas of how fair media rights should be determined.

Allen and Co, on behalf of Comcast, offered a deal in which Comcast would offer both teams starting in 2012 a media rights fee of $42.5M and increasing by 4% annually until 2032. This would result in both teams earning roughly $1 billion each over the fourteen years from 2019-2032, or roughly the same as what the other teams in this sample are receiving. Given that the Nationals and Orioles are in a stronger market than all of these teams, this offer would be disappointing. Unsurprisingly, MASN didn’t accept Allen and Co’s offer.

Instead, MASN proposed their own rights fee for 2012-2016, as did the Nationals. In addition, the RSDC made a decision about the appropriate rights fee for 2012-2016 that was ultimately overturned. Any attempt at guessing what any of these parties might request over 2019-2032 requires a lot of conjecture.

That stated, MASN offered $45.7M in 2016 with a 7.7% annual increase. That rate of increase projects to roughly $57M in 2019 -- or more than any other team in the sample received. This doesn’t take into account that MASN was likely to receive an increase in revenue as a result of renegotiating its contract deals with other cable providers.

The RSDC felt that $66.7M was fair value for 2016. This is significantly higher than what any other team in the sample received in 2019 -- and presumably the teams’ rights fees would go up from 2017-2019. It’s likely that such an amount would only be reasonable if the Nationals/Orioles shared media territory is significantly more valuable than any of the other teams in the sample.

Meanwhile, the Nationals requested $127.4 million in 2016. Such an amount would be larger than any of the teams in the sample received in 2032. It’s likely that the Nationals request for 2019 would be roughly the same as what the Cardinals, Rays and Diamondbacks receive all together. This seems to be an awfully optimistic request.

Based on my understanding of the economics, I project that MASN's offer was on pace to be worth $1.45 billion over the fourteen year period, the RSDC's offer was on pace to be worth $2.1 billion over the fourteen year period and the Nationals' offer to be worth $3.7 billion over the fourteen year period. If so, the deals look like this.

These graphs always look a bit weird when I include the Nationals' request. Here's how the chart looks without them.

It appears that the Rays' media deal appears to be fair value compared to what the Diamondbacks and Cardinals received. It is likely that the Rays will receive less in media rights fees than what the Nationals and Orioles will receive in rights fees from MASN, but that is because the Nationals'/Orioles' media territory is more valuable. This media deal isn’t going to change the Rays' financial situation and likely means they’re going to struggle to maintain a competitive payroll going forward.

How The Diamondbacks' And Cardinals' Media Deals Compare To The Orioles'/Nationals'

Earlier this year, the Arizona Diamondbacks signed a television contract with Fox Sports Arizona starting in 2016 for 20 years and $1.5 billion in rights fees including an equity stake. A month ago, the St. Louis Cardinals signed a television contract with Fox Sports Midwest starting in 2018 for 15 years and $1 billion in rights fees, an equity stake in Fox Sports Midwest of 30%, and an unknown signing bonus. According to the St. Louis Post-Dispatch, the deal starts at close to $55 million (up from $35 million) and increases at the rate of inflation. Forbes claims that the deal starts at $50 million (up from $30 million) and increases until it ends at nearly $86 million. One obvious question is how do these deals compare with what the Orioles and Nationals may earn from MASN?

As per all television contracts, the Diamondbacks' deal doesn’t pay $75 million per year but rather starts at a considerably lower figure and increases at a set rate per year. While a 3.5% interest rate is used on occasion, standard practice for media deals is a 4% increase per year.

The articles discussing the Cardinals' media deal provide an estimate for what the Cardinals will receive in media rights fees in 2018. If the St. Louis Post-Dispatch is correct that the deal starts at nearly $55 million in 2018, then the rate of increase will be 3%. If Forbes is correct that the deal starts at nearly $50 million in 2018 and ends at roughly $86 million in 2032, then the rate of increase will be 4%. Here’s what the deals look like.

 

Many of the parties involved have different thoughts about what MASN should pay based on their projections of future revenue as well as acceptable profit margins. Allen and Co. on behalf of Comcast provided proposed rights fees for the Nationals and Orioles until 2032 if MASN sold them the rights. MASN itself believes that rights fees should be based on the Bortz Methodology. The RSDC believes that rights fees should be based on its reasoning and the Nationals believe that rights fees should be based on a comparables analysis. It’s possible to go through each of these four scenarios to understand what future rights fees could look like.

The Allen and Co. scenarios are the easiest because they provide documents spelling out their offer. They also provide a document that projects what MASN would pay both clubs according to the RSDC decision based on their assumptions. Basically, Allen and Co. presumes that revenue as well as rights fees will increase by 4% per year after 2016 while expenses will increase by 2.5%. The sole exception to this is 2019 when revenues will increase by 18% as a result of MASN renegotiating with its affiliates.

If the Allen and Co. assumptions are accurate, it is simple to determine how much MASN would pay using the Bortz Methodology. This method calls for MASN to earn a net profit of one-third of revenue. Subtracting profit and expenses from revenue and dividing by two will determine the rights fee for each team per year. This chart shows how the deals compare.



The problem with the Allen and Co. projections is that they’re conservative. MASN projected its growth at 5.8% per year from 2012-2016 and has surpassed those projections mainly because of larger than expected advertising revenue growth due to the success of both ball clubs over this period and the lack of success of both ball clubs from 2005-2011. SNL Kagan and PWC both predicted that RSN revenue will continue to grow rapidly in the near future. Yet, Allen and Co. suggested that MASN's revenue growth would drop from 6% to 4%. This is an unlikely and strikingly self-serving projection that would have saved Comcast hundreds of millions of dollars in the event of a sale.

It is possible to project how much MASN would each using a more realistic CAGR of 5.8% for every year other than 2019 when MASN will renegotiate with its affiliates and earn a 20% increase in revenue. With that information, it is possible to determine how much MASN would pay the Nationals and Orioles in rights fees using the Bortz Methodology.

In addition, the RSDC argued in its decision that media rights fees should increase at the same rate as revenue. If this remains true and the RSDC doesn’t decide to reset media rights fees to ensure that MASN earns only a 5% gross margin, then it is possible to determine how much the RSDC would give the Nationals and Orioles in rights fees in this scenario as described in this chart.

 

Of course, this scenario presumes that the RSDC won’t decide that MASN deserves only a 5% margin at each reset. What if the RSDC follows the same reasoning it did in 2012 and decides that MASN deserves only a 5% margin in the first year of each five-year contract and that each following year's rights fee should increase at the same rate as revenue? This chart shows how that much MASN would pay the Orioles and Nationals in that scenario.



The Nationals believe that their media rights should have nothing to do with MASN's finances but rather based on comparable deals. The Nationals’ expert argued previously that a 20% increase should be used to adjust the deal for two years of inflation. If one takes the extremely conservative view that the Nationals will propose a 20% increase for each reset period and a 4% increase for every other year, then the amount that MASN would pay the Orioles and Nationals looks like the numbers in the chart below. These are very conservative assumptions and the Nationals will likely ask for considerably larger sums of money. This is how all the results would look in chart form and via table.

 

It’s not difficult to tell which request is the outlier as the Nationals' request would be easily $1.7 billion more than the other requests and would be more than three times larger than some of the other cases. This is how the results would look in a chart with the Nationals removed. Below is the relevant table.

With the exception of Allen and Co.’s settlement proposal that was rejected, all of the other projected cases pay the Orioles and Nationals more media rights fees than either the Cardinals or Diamondbacks would receive over the length of their deals. Given that both the Nationals and Orioles will end up having a larger stake in MASN than either the Cardinals or Diamondbacks will have in their RSN, if MASN is allowed to pay reasonable rights fees then both the Nationals and Orioles will receive a larger amount in equity than either the Cardinals or Diamondbacks.

A billion dollars sounds like a large amount and therefore it seems like the Cardinals and Diamondbacks are receiving considerably more money than either the Nationals or Orioles at first glance. But when the lengths of each deal are taken into account, the Nationals and Orioles will both earn more than both of these teams.