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.

The MASN Lawsuit: Orioles And MASN File An Appellate Brief

The next act in the MASN Lawsuit started a few weeks ago after MASN filed an appeal of the original decision by Justice Marks. As a refresher, the underlying dispute concerns the amount of telecast right fees payable to the Nationals. In 2014, MLBs Revenue Sharing Definitions Committee (RSDC) ruled that MASN would need to pay the Nationals $300 million in rights fees from 2012-2016. The RSDC is an MLB committee comprised of three MLB club owners, each of whom is appointed and at the sole discretion of the Commissioner of Baseball.

MASN argued that the RSDCs ruling was due to an unfair process and appealed their ruling in court. In 2015, Justice Marks agreed with MASN that the process was unfair and vacated the RSDCs original decision. However, Justice Marks didn’t agree to order a rehearing in front of a different arbitral court, but rather that the sides should come to a consensus about the next step. Now, MASN will argue that this case should be reheard in front of a neutral arbitral panel instead of going back to the RSDC.

MASNs argument is that the RSDC can’t rehear the case because MLB is incurably partial, irredeemably biased and financially interested in the outcome. Arbitrators are supposed to be neutral and therefore able to judge fairly. If the RSDC has been biased by MLB, then a rehearing in that forum would ultimately end up being overturned and would simply be a waste of time and judicial resources. There are three primary reasons why MASN argues that this is the case.

MASN notes that the Commissioner of Baseball has stated in a public forum that “sooner or later” MASN will be required to pay the amounts reflected in the now vacated award. The Commissioner has stated publicly how he thinks the RSDC should rule. Due to his ability to appoint owners to the RSDC at his own whim, this could potentially bias their decision. As I’ve mentioned on a number of occasions, it was extremely unwise for the Commissioner to make a number of his public pronouncements. Why give MASN ammunition to claim that MLB and the RSDC is biased?

MLB first attempted to prevent judicial review of the award threatening both the Nationals and Orioles with sanctions if they went ahead with court proceedings. After this threat failed, MLB actively litigated against MASN. This puts into question MLBs ability to be impartial. While it’s understandable that MLB would not be in favor of this, parties have the right to judicial review if they’re unhappy with the result of an arbitration. Again, one has to question the prudence of some of MLBs actions in this case. If MLB stayed on the sidelines and let MASN exercise its rights, they’d be in a much better position to demand that the case be reheard in front of the RSDC.

MLB also decided to give the Nationals $25 million in 2013 to ensure that the Nationals wouldn’t take legal action to demand the release of the award. MLB promised the Nationals that they wouldn’t be required to pay this money back to MLB. Rather, MLB would be repaid from any additional money that MASN would be forced to pay the Nationals for their 2012 and 2013 media rights. Justice Marks felt that this $25 million didn’t bias the RSDC because the award was written before MLB agreed to give the Nationals this cash. However, it seems plausible that it could bias a future RSDC decision because MLB has a current financial stake in the outcome of the case.

It is reasonable to presume that MLB had good intentions when giving the Nationals the $25 million. MLBs hope was that this payment would buy the parties enough time to come to a mutually agreeable decision to avoid a messy court battle. While it is unquestionably true that arbitral bodies like the AAA would never make a payment to a party, it is reasonable to expect different behavior from MLB due to MLBs relationship with each of its clubs. Furthermore, given that MLB made this payment with the knowledge of the RSDCs decision, it’s fair to say that this payment didn’t bias MLB. But now that the decision has been vacated, this payment makes it extremely difficult for MLB or the RSDC to judge the case fairly. While MLB had good intentions, it was irresponsible not to get buy-in from all the parties before giving the Nationals money. MLB may have an interest in ensuring that each of its clubs resolve their differences peacefully, but that doesn’t give MLB the right to make a deal that hurts another party.

MASN also discussed the relationship between MLB and the RSDC. MASN makes the claim that MLB was in charge of conducting the prehearing conference, determining which data was provided to the parties, provided data and instructions to the arbitrators, discussed the case with the arbitrators and ultimately wrote the final award. Manfred also wrote a set of e-mails to Alan Rifkin discussing scenarios where MLB would look into either not issuing the RSDCs award or giving the RSDC different instructions in the future. There is a substantial amount of evidence showing that the RSDC has very little independence from MLB and therefore can’t be trusted to give an independent decision.

MASN also notes that MLB primarily used the Bortz Methodology to determine the fair amount of rights fees for team controlled RSNs. This methodology was used at least 19 times over a decade and a half to determine fair market value. However, soon after Bortz sided with MASN in this court case, MLB decided to end its relationship with Bortz and Mr. Wyche. This just further shows how MLB will punish any party that dares disagree with their dictates.

MASN did an excellent job tying the RSDC to MLB and showing how MLB is biased against MASN. Simply put, fair arbitrators don’t argue for one side. If the appellate court ultimately does agree with MASN, then this will largely be due to some poor decisions by MLB. The Commissioner didn’t have to make public remarks suggesting that MASN would lose and indeed this made him look biased. Nor was MLB required to join the lawsuit in support of the Nationals. MLB could have ensured that all parties were willing to let MLB give the Nationals the $25 million instead of doing it behind the Orioles’ and MASN’s back. Finally, MLB could have done a better job ensuring that the arbitral body was able to make a fair and impartial decision. Due to this collection of errors, MASN has a strong stronger chance of convincing the arbitral body that the RSDC is unable to be partial and that this case needs to go in front of a different arbitral panel. If this occurs, MLB can only blame itself for the embarrassment and loss of prestige that it will suffer.

To the best of my knowledge, neither the Nationals nor MLB has written a response to this brief. It will be easier to understand these parties’ positions after they write such a response. Both the Nationals and MLB wrote a pre-argument statement when filing their appeal against Justice Marks’ decision, but failed to explain why they felt his decision should be overturned. Indeed, the Nationals have argued that Justice Marks’ decision should be overturned solely if the appellate court feels that this case should be arbitrated by a different panel. In addition, MLB and the Nationals will argue that the parties in this arbitration have chosen their method of dispute resolution, and can ask no more impartiality than inheres in the method they have chosen.

A number of things will occur before this case is heard by the appellate court. Both MLB and the Nationals will appeal Justice Marks’ decision because they don’t think the RSDCs original decision should have been vacated. If the arbitral court agrees with MLB, then the original decision will be reinstated and MASN will be largely out of legal options. In addition, the Nationals want to appeal Justice Marks’ decision that the parties shouldn’t go back in front of the RSDC a second time before the appeals are completed. Ironically, despite the Nationals’ claims that they want this matter judged expeditiously, this appeal will do nothing more than waste time. The Washington Post believes that the appellate court will hear oral arguments in December.

The next act may have started, but there will be a lot of documents written before it is complete.

Justice Marks Opts Not To Send The Case Back To The RSDC

Since November 2015, after Justice Marks vacated the RSDCs previous decision, the Nationals have attempted to compel MASN to return to arbitration before the RSDC. The Nationals claimed that a footnote in the Justice’ decision meant that MASN needed to submit to arbitration if the Nationals just changed their lawyers. On the other hand, MASN felt that the sides should agree to submit this case before a different arbitral body and thereby avoid the appeals process. Failing this, MASN wanted its appeal to be heard before a second arbitration case would be heard before the RSDC.

After more than half a year, Justice Marks ruled on Monday that MASN shouldn't be forced to submit to a second arbitration before the RSDC until appeals have been completed. Justice Marks clarified his original decision by stating that his footnote didn’t compel MASN to return to arbitration before the RSDC just because the Nationals changed their lawyers. He further noted that he was unwilling to re-write the parties contract to force its process to move faster than plain language requires.

It’s pretty simple when it comes down to it. As the decision states, it is inefficient for a court to have motions and appeals regarding confirmation and vacature of different arbitration awards, at the same time, all stemming from the same dispute.  In this case, there have been multiple motions and therefore Justice Marks decided it was best to ensure simplicity in order to conserve court resources. In addition, this would have the potential of wasting significant amounts of the parties’ time. Depending on the result of the appeal, a decision made in a second arbitration could easily become moot. And it was highly unlikely that a decision tendered in a second arbitration would be put into effect before appeals were heard for both the first and second arbitration.

As stated previously, the impact of this decision is negligible. This merely delays a future RSDC arbitration until after the appellate court rules on each parties appeal. If the appellate court doesn’t rule in MASNs favor, then it seems likely that this case will eventually go back to the RSDC. Likewise, if the appellate court does rule in MASNs favor, then the results of a second arbitration would be meaningless. This was nothing more than a skirmish.

And yet, it does have some interesting implications. The Nationals have claimed that they’ve receiving unreasonably low rights fees for the past three years. They were hoping to compel MASN to go to arbitration in order to rectify the solution. On Monday, they discovered that they wasted half a year on this motion and have nothing to show for it. Even worse for the Nationals, the current five year contract ends after 2016. It doesn’t appear that the sides will come to a decision by 2017 and therefore this dispute could impact the next contract. This was a costly waste of half a year.

Justice Marks noted that neither party has perfected its appeal as of today. Rachel Thorn, an attorney for MASN, noted previously that for the appeal to have been scheduled for the June term, the perfection date was March 21, 2016. MASN didn’t perfect its appeal by that date because the parties were in the midst of mediation and MLB hadn’t responded to Mr. Hall’s February 5, 2016 letter. It seems that she implied that if the Nationals’ didn’t waste everyone’s time by trying to compel MASN to participate in a premature arbitration, then MASN may have perfected its appeal in March and the case could have been heard in June. Instead, MASN needed to use its resources to respond to the Nationals attempt to compel arbitration. If so, it’s questionable whether even a Nationals victory would have sped up the process.

Mrs. Thorn further noted that the next available terms for the appeal to be scheduled are September 2016 and October 2016, which would require perfection by July 11, 2016 and August 8, 2016 respectively. Given that Monday was the 11th, it seems unlikely that the parties will be ready to submit their appeals by that date. It seems that the earliest this case might be heard is in October, but it’s very possible that this case won’t be heard by the appellate court until 2017. Even after the case is heard, it will still take a few months for them to come to a decision.

Furthermore, it isn’t clear what the Nationals were hoping to achieve by bringing this motion. Even if they were successful, it was unlikely that the RSDCs decision would be implemented before MASN had a chance to appeal Justice’ Marks decision about the first arbitration as well as the RSDCs second arbitration. It isn’t time efficient to attempt to compel MASN to return to arbitration if it meant a delay in the appeals’ process.

Also, suppose the Nationals were victorious on Monday. If MASN was successful in the RSDCs second arbitration, then the Nationals would be in the uncomfortable position of needing a victory when appealing the RSDCs first arbitration. If MASN wasn’t successful in a second arbitration, they could use the results of the second arbitration to strengthen their appeal of the Judge’s ruling of the first arbitration. It seems like the Nationals placed MASN in a win-win situation with this motion while placing themselves in a situation where they couldn’t win.

In the meantime, Manfred has continued to make outrageously biased comments in favor of the Nationals. The Commissioner stated that “It is important to bear in mind the fundamentals. The fundamentals are that the Orioles agreed the RSDC would set the rights fees for MASN and the Orioles every five years. The Orioles have engaged in a pattern of conduct designed to avoid that agreement being effectuated.” Manfred has further argued that “We are intent on making sure that the agreement that gets the Nationals a fair market value for their TV rights is enforced, and we’ll do whatever is necessary to get that.” Yet, Manfred refused to acknowledge that the agreement was also vacated due to evident partiality and therefore that the panel was biased towards the Nationals. It is obviously unreasonable to claim that MASN is at fault for fighting against a decision found to be unfairly biased against them. As this case continues to progress, Manfred is further demonstrating his anti-MASN bias and thereby ruining his credibility. The appellate court will have to wonder if the RSDC is independent enough from the Commissioner to make a fair ruling. The longer MASN is able to delay a final decision, the higher the likelihood that Manfred will make a significant error which proves that the RSDC is an unsuitable arbitrator for this dispute.

All in all, the practical implications of this victory are minimal. But the fact that the Nationals just wasted months on this motion and have yet to win a single victory in this entire case is probably a bad sign for them. Why did they decide to waste several months on a motion which had little importance and a minimal chance of success if they want a decision as soon as possible? One has to question whether the disqualification of Proskauer Rose has had significant implications.

Pandemonium In The Court

The newest chapter in the dispute between MASN and the Nationals was written this weekend, as MASN replied to the Nationals request that this case be sent back to the RSDC for a new arbitration decision.  As a quick recap, back in 2014, the RSDC determined that the Nationals rights fees were worth roughly $300 million from 2012-2016. MASN was unhappy with this decision and took the matter to court. Last November, MASN was victorious and the decision was overturned. Ever since, the parties have attempted to determine future steps.

These attempts have resulted in nothing more than a mess. MASN and the Orioles have appealed the Judge’s decision because they feel the RSDC is no longer an appropriate forum for this case. Likewise, MLB and the Nationals have appealed the Judge’s decision because they feel that the RSDC’s prior award shouldn’t have been vacated. In addition, the Nationals are attempting to compel MASN to go to a new arbitration hearing in front of the RSDC, prior to the resolution of these two cases. In response, MASN informed the Court that it is likely to both oppose the Nationals’ motion to compel and seek a formal stay of that arbitration. In addition, MASN and the Nationals are arguing about the relevant timelines for just about each motion. The Court attempted to coordinate with each side to determine an appropriate process, and the Nationals responded by demanding that all conferences with the Justices’ primary law clerk be transcribed. It is nothing less than complete pandemonium that has quickly devolved into arguments over insignificant matters.

In response to this pandemonium, the Court “suggested” that it was “considering” sending this matter to mediation to reach a consensus on the next steps and an acceptable timeline. Mediation took place on April 12-13, 2016 and was seemingly unsuccessful causing the original Court mandated timeline to be imposed on the two parties. MASN was required to respond to the Nationals request to compel arbitration by May 6, 2016. The Nationals were given until May 27, 2016 to reply to MASN's response while MASN was given until May 27th to make a motion for a stay. The deadline for the Nationals to respond to MASN's response is June 17th and the parties are expected to meet in court on June 20th.

The Nationals argue that a delay causes them harm because they are receiving rights fees that are unilaterally determined by MASN. Since the Nationals agreed to use different counsel, they see no reason why this case can’t go back in front of the RSDC immediately.

The new documents show how MASN's argument can be summed up in three points. First, the Nationals’ motion will not accelerate the resolution of this dispute, but rather only waste judicial resources and time. If either side wins on appeal then the results of a new arbitration would be moot. Second, it is fundamentally unfair to compel MASN to arbitrate before a tribunal controlled by MLB when MLB is attempting to reinstate the prior tribunal’s decision.

Third and in my opinion, most important, the Court did not order the parties to arbitrate before the RSDC nor has the RSDC summoned MASN to another arbitration hearing. Indeed, MLB wrote a letter to the parties stating that MLB will not make any determinations about a reconvened process until the Nationals’ motion to compel is addressed by the Court.  It is clear that the MLB Commissioner, not MASN, has the ability to convene the RSDC and has so far declined to do so. It’s unreasonable to hold MASN responsible for MLBs actions in this regard.

MASN further argues that the Nationals aren’t suffering substantial financial harm from this delay since the Nationals are still receiving millions of dollars in the interim, and that they can’t contend they are “at a competitive disadvantage to other MLB Clubs”, since their team value, revenue and payroll have increased significantly since 2012 and is in the top tier of all MLB clubs. In addition, they note that this situation can be resolved quickly if the Nationals agree to arbitration at a neutral forum such as the AAA.

I’m sympathetic to the argument that the Court should attempt to expedite the process as much as possible because this conflict has lasted for over four years. MASN appears to be sympathetic to this argument as they state they would be willing to re-arbitrate this dispute immediately in front of a neutral form independent of MLB. I would question whether allowing a new hearing would in fact be productive and whether MASN can be compelled to return to arbitration when the RSDC hasn’t asked them to do so.  Furthermore, it certainly would be ironic if arbitration, traditionally a method used to relieve congested dockets in the courts, would simply cause this docket to be even more clogged.

The implications of a decision either way would seem to be minimal. If the Nationals lose, then they would need to wait until after the Appellate Court has ruled before requesting that the case return to the RSDC. If still necessary, it would take several months to determine that the RSDC is the proper venue, and to give each side enough time to perform its due diligence and create their arguments. If the Nationals win, then the aforementioned steps will presumably be completed concurrently to the appeals and thus reduce the time waiting for a new decision. Ultimately, the most important factor isn’t when the bodies make their judgement, but how the Appellate Court and if necessary the RSDC will rule.

Camden Depot Contributing To MASNsports.com In 2016

Camden Depot has again been asked to write weekly Orioles-related posts for MASNsports.com. This season, Ryan Romano will be the contributing writer.

Ryan's posts will run every Tuesday during the season, so make sure to check them out. His first post, which ran earlier in the week, discussed the projected production of the Orioles' offense and how new additions Mark Trumbo and Pedro Alvarez (and Joey Rickard!) will affect the team's overall numbers.

You can find those MASN posts on the Orioles Buzz blog along with articles from other contributing bloggers. You can also find links to those posts and more by following @masnOrioles. Links to Depot articles and more can be found on our Twitter account: @CamdenDepot.

Thanks for reading.

The MASN Case: Will The Case Go Back To The RSDC?

In the beginning of November, MASN was victorious in court. Justice Marks ruled that the RSDC proceeding objectively demonstrated an utter lack of concern for fairness that is “so inconsistent with the basic principles of justice” that the award must be vacated.  Ever since, the Court, MASN, MLB and the Nationals have attempted to negotiate next steps.

MASN has insisted that the case be reheard in front of a neutral, unbiased panel such as the American Arbitration Association. When neither the Nationals nor MLB would accede to this request, MASN filed a limited appeal of the court’s decision, insisting that the court should have ruled that the case be heard by a different panel.

Meanwhile the Nationals agreed to use different counsel and insisted that the case be reheard by the RSDC. When MASN refused, the Nationals filed a motion to compel MASN to submit to an arbitration before the RSDC.

The Nationals claim that their motion should be granted because a delay causes them harm. Until a decision is accepted by all parties, the Nationals will only receive rights fees that MASN unilaterally determines and this has significant financial implications for their operations and competitiveness. The Nationals also argued that there is an absence of a reasonable likelihood that the Orioles will prevail on the central question presented in their appeals – whether this court should have rewritten the agreement by directing arbitration to a panel other than the RSDC.  The Nationals made these arguments because these are legal points that a judge will consider when choosing to grant their motion or not.

On January 5th, Judge Marks’ principal law clerk set a schedule for the Nationals’ current motion. The Nationals’ were to file their notion by January 22nd. MASN was given a chance to respond by February 16th but apparently waived that right. The Nationals were given a chance to respond to any of MASNs' statements by the 23rd and the Court will hear the case on the 24th. The ruling will determine whether MASN will be forced to submit to a new arbitration before the RSDC regardless of the status of their appeal.

There is a legal maxim called “justice delayed is justice denied”. If some legal decisions are or aren’t implemented immediately, then it can cause irreparable damage to a given party. For example, if the delay of a decision causes a company to go bankrupt, then even a favorable decision after the fact can’t repair the damage inflicted by this delay. MASN successfully made this argument in 2014, when they requested that the court put a stay on the RSDCs previous decision. Allowing the Nationals to sell their media rights to a different broadcaster would have forced MASN to renegotiate its contracts with all of its providers at a significant reduction in value and therefore caused irreparable damage.

The Nationals’ argument that a delay would cause them substantial harm wasn’t persuasive the first two times that they used it, and they are hoping that the third time is the charm. It is certainly the case that the Nationals could use any extra cash to improve their operations. However, typically parties to a lawsuit can use any extra cash they may win as a result of a decision. The minimal cash at stake will not force the Nationals to shut down operations and certainly at this point will have no impact on their free agent spending. As such, while being forced to wait for a decision is inconvenient and unfortunate, a delay will not cause any irreparable or even substantial damages.

In addition, it is implausible that the Nationals would receive any cash from a favorable RSDC decision, presuming that it is favorable, until after the court came to a decision about MASNs appeal. Therefore, even if the Court did agree that MASN should be compelled to return to the RSDC panel, it would have no impact on the Nationals bottom line. If so, it is hard to see how sending this case back to the RSDC panel would have any effect on the Nationals money woes.

The other argument that the Nationals noted, whether the court can rewrite the contract, is considerably stronger. If the court doesn’t have the authority to rule that this case should be heard by a different panel, then MASNs appeal is meritless and taken primarily for the purpose of delay. If that’s the case, then the Court should reject MASNs appeal and issue an order compelling MASN to arbitrate before the RSDC.

MASN argues that the Court does have the authority to rule that this case should be heard by a different panel. The New York Civil Practice Law and Rules (§ 7511(d)) states that:

(d) Rehearing.  Upon vacating an award, the court may order a rehearing and determination of all or any of the issues either before the same arbitrator or before a new arbitrator appointed in accordance with this article.  Time in any provision limiting the time for a hearing or award shall be measured from the date of such order or rehearing, whichever is appropriate, or a time may be specified by the court. 

Likewise, the Federal Arbitration Act (9 U.S.C. § 10(b)) states that:

(b) If an award is vacated and the time within which the agreement required the award to be made has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.  

It seems from MASNs perspective that the court has the right, even if not necessarily the obligation, to decide that the case should be heard by a different panel. Justice Marks quoted Hooters of America, Inc. v. Phillips in his decision, a case in which a court decided to void a previously existing contract. It appears Justice Marks was well aware that he could send the case to a different panel if he chose to do so, even if he couldn’t necessarily re-write the contract.

However, Justice Marks made a number of interesting remarks during the May Court Hearing, which possibly give insight into his thought process. He made the following comments:

"If Proskauer is taken out of the case, do we have a problem with the arbitrators? In fact, I think it's -- I think I read the Committee membership has changed anyway."

"But the Commissioner is not one of the arbitrators."

“If there is a round two, wouldn't it be different? Isn't round two more of a magnifying glass than round one, given all that's happened here?”

“What if it went back to the same entity and they were directed to apply the Bortz methodology? And I'm not saying that I would do that, or I don't know that I even have the authority to do that, but would that make you happy?"

“What else would they do if they were given that instruction to be that precise, there would be nothing left for them to do”. 

It's worth noting that the Orioles also agreed that the members on the RSDC had changed.

Justice Marks’ remarks potentially explain why he declined to send this decision to a different arbitration body. He rejected all of MASNs arguments except for the one stating that the verdict should be vacated due to evident partiality caused by Proskauer Rose’s involvement. This conflict no longer exists now that the Nationals have new legal representation. If there were new teams on the RSDC then it would be implausible that Proskauer’s previous involvement would have any effect.

Justice Marks also stated that the Commissioner isn’t one of the arbitrators and therefore feels that the members of the RSDC will be able to be impartial and fair regardless of MLB’s wishes. Arbitrators, especially in a situation like this one, are expected to be able to withstand outside pressure. This is unfortunate for MASN, but if Justice Marks feels this way, then it certainly seems logical that he wouldn't send this case to a different forum.

The only problem is that the Nationals and MLB are seemingly hell-bent on proving each of Justice Marks’ assumptions false and that sending this case back to the RSDC would do nothing more than create a mockery of justice. Justice Marks made the reasonable presumption that the Nationals and MLB would proceed more carefully in a second arbitration in order to avoid further non-confirmable decisions. So, it probably came as a surprise that the Nationals requested on November 25th, 2015, that the RSDC hearing be scheduled for late-January 2016.

MASN reasonably argued that this schedule would only give MASN two months to determine whether there are any illicit relationships between Quinn Emmanuel and any of the three MLB teams on the RSDC. Mr. Hall noted that such a schedule would ignore the lessons that should have been learned over the past year and a half such as that the parties should take as much time as necessary to ensure that everything is proper for Round 2.

Determining whether there are any illicit relationships between Quinn Emmanuel and members of the RSDC is a considerable challenge in and of itself. It becomes even more challenging when one notes that there are currently only two teams on the RSDC. MASN would be forced to look into whether any of the teams in baseball have a relationship with Quinn Emmanuel or they would have even an extremely limited period to determine whether the third team, as of yet unknown, has an illicit relationship with Quinn Emmanuel.

Even worse, MASN couldn’t rely on the team in question to state accurately whether or not it had a relationship with Quinn Emmanuel. The Pirates President and one of the members of the previous RSDC panel, Francis Connelly, stated that he had “failed to recall” certain dealings the Pirates had with Proskauer. If a member of the RSDC had “failed to recall” its dealings with law firms in the past, then there is no reason why it couldn’t happen in the future. The fact that the Nationals want an expedited schedule illustrates how they failed to learn lessons from the past year and a half and how they clearly don’t feel like they’re under a magnifying glass.

Justice Marks stated that he doesn’t believe that the Commissioner will be able to bias the members of the RSDC panel. That’s fair enough, but it’s still worth outlining Manfred’s remarks about this case. Manfred stated in May 2015 that "I think the agreement's clear in MASN.  I think the RSDC was empowered to set rights fees. That's what they did, and I think sooner or later MASN is going to be required to pay those rights fees." Manfred stated in November, after the decision was vacated that, “We are intent on making sure that the agreement that gets the Nationals a fair market value for their TV rights is enforced, and we’ll do whatever is necessary to get that.” In addition, it’s impossible to forget that MLB will receive an extra $25 million if the RSDC issues a similar ruling to the previous one. The court may question whether MLB is able to bias the RSDC panel, but there can be no question that Manfred will do so if he is able.

The next assumption that MLB has disproved is about the makeup of the RSDC panel. In 2012, the three clubs on the Panel were the Pirates, Rays and Mets. In October 2014, the three clubs on the panel were the Rays, Cubs and Blue Jays. These teams appear to have been the three clubs on the panel in May 2015, when Justice Marks and the Orioles both agreed that the teams on the RSDC have changed. Therefore, it was reasonable to presume that the teams on the RSDC would be different for a future second round.

This didn't happen. The teams on the RSDC panel as of January 2016 are the Cubs and Pirates with the third seat vacant. My understanding is that the Blue Jays were being represented on the RSDC by their president Paul Beeston. When he retired at the end of October 2015 this created an opening on the RSDC. This suggests that the Rays were replaced by the Pirates, one of the teams on the RSDC panel that originally ruled on the MASN dispute in 2012.

The Pirates President, Mr. Connelly, was a member of the RSDC panel from 2008- November 2013. In addition, from 1998 to 2007, he also served as the General Counsel-Labor for the Office of the Commissioner of Baseball. He further stated that during his tenure working with MLB, he also served as a legal attorney providing support to the RSDC panel.  Mr. Connelly would be a poor choice to be a judge on this new panel because he has already been biased by the proceedings that occurred during the previous panel.

Mr. Connelly felt it necessary to write an affidavit to the court responding to MASNs claims that the RSDC panel was biased due to Proskauer’s involvement and therefore decided to involve themselves in the previous court case. Although this isn’t a typical situation, it is usually expected for arbitrators to not act on behalf of one side or the other in future proceedings.

In addition, Mr. Connelly is likely to be the member of the RSDC with the most experience in these regards and therefore be the most influential member. Given the number of potential candidates, it is certainly the case that the Pirates would be a poor choice to be on this panel and their inclusion would be worrisome.

The Cubs are the second team on the panel. In theory, Mr. Ricketts would be a reasonable choice for this panel as he had no connection with the previous proceedings. In practice, he’s a poor choice. The Sports Business Daily wrote that “Mr. Ricketts is also a close ally of Rob Manfred, which has elevated his role in league circles.” In addition, ESPN wrote that “behind the scenes, Manfred has made some personnel changes at MLB's central office in New York and given prime committee assignments to Tampa Bay's Stu Sternberg, Tom Ricketts of the Chicago Cubs, Hal Steinbrenner of the New York Yankees and other owners who weren't necessarily part of the game's "old boy'' network.” Mr. Manfred has spent capital elevating Mr. Ricketts role in the league by placing him in important positions. Given that relationship, it seems unreasonable to expect Ricketts to be completely impartial to the Commissioner’s wishes. Ricketts gains considerable prestige due to his relationship with the Commissioner and may not be willing to jeopardize that for MASN and the Orioles.

Finally, my understanding is that the third team on the RSDC panel will be determined by Manfred. It clearly isn’t fair to allow the Commissioner the ability to select the third panel member when he has already stated his preferred outcome.

Manfred has further shown that he has the ability and desire to stack committees the way that he sees fit and thus reward owners that agree with him while punishing owners that work against him. When Manfred was first appointed, he stated that he wasn’t going to take into account which owners voted against him. Those owners that voted against him appeared to be the Arizona Diamondbacks, Boston Red Sox, Chicago White Sox, Cincinnati Reds, Los Angeles Angels, Oakland Athletics and Toronto Blue Jays. So, it was surprising when Mr. Manfred decided in January 2015 to completely change the membership of MLB’s executive council. Manfred replaced seven of the eight owners on the executive council with the only owner remaining coincidentally Manfred’s strongest supporter during the confirmation process. Mets360 argued that, “it’s hard to argue that there wasn’t some shred of cronyism in his decision, as the Wilpon appointment was part of an almost-total retooling of baseball’s executive council.” They also argued that “So at least we have a theory as to Manfred’s motivation – he wants baseball’s hierarchy to consist of those who helped elect him commissioner.” The blog further argued that the owners on the executive council that supported Manfred were giving plum positions, even though they were removed while the owners that didn’t support Manfred were not and therefore were punished.

This indicates that the Court shouldn’t underestimate Manfred’s ability to bias the proceedings. If Manfred was able to pack the Executive Council with his supporters and punish his detractors, then there is no reason why he wouldn’t do this to members of the RSDC. The RSDC is far more vulnerable to the Commissioner than it may have appeared at first glance.

Finally, there has been considerable conjecture that the MASN lawsuit is why the Orioles weren’t selected to host the 2018 All-Star Game. I wrote about this situation in April. Without repeating myself, it is worth noting that a number of publications, such as the Washington Post, Baltimore Sun, Fox Sports, and NBC Sports all wrote articles speculating that Baltimore didn’t receive the all-star game due to this conflict. It seems at minimum plausible that Manfred didn’t award the 2018 All-Star Game to punish the Orioles for this conflict. If so, other teams have likely learned that Manfred will punish them if they cross him and issue a decision that he doesn’t favor.

As stated earlier, some owners have openly crossed Manfred despite being punished for it. It would be reasonable to presume that these owners would be more likely to be impartial than the owners currently on the RSDC. If so, there should be no reason why a panel consisting of three officials from the Arizona Diamondbacks, Chicago White Sox, Cincinnati Reds, Los Angeles Angels or Oakland Athletics would be a preferable option to the current RSDC. There is no reason to presume that they would biased against the Nationals but they are also the least likely to be biased by MLBs statements. Indeed, the White Sox's owner is on the record as speaking in extremely negative terms about the agreement and if anything would be biased against MASN.

I believe whether the Court thinks that Manfred can bias the RSDC may be relevant at a later date. If the Court believes that he is able to do so, then it is far more likely to look upon MASNs’ claims with favor. This is because MASN did agree to an arbitration process where some of the members may be partial. MASN could and probably should have realized that many MLB owners felt that MASN was given a generous deal at their expense.

However, MASN didn’t and couldn’t have known that MLB would actively attempt to coerce the members of the RSDC to rule against them. It seems unlikely that MASN had realized that MLB can appoint members to the RSDC solely at its whims and punish these members for a decision contrary to its wishes. Nor could they have predicted that the previous RSDC would have completely ignored and dismissed their repeated asserted concerns about fairness. Or that the previous RSDC would utterly ignore and disregard every precedent case when deciding to not use the Bortz Methodology solely for MASN.

It would appear that the Nationals arguments arguing that this case should be sent back to the RSDC before MASNs appeal is addressed are weak. On the other hand, MASN didn’t even bother to reply to the Nationals’ motion to have this case sent to the RSDC. It appears that MASNs argument is two-fold. The first point is that the RSDC is unable to rule fairly. The second is that the RSDC doesn’t even have three members at the current time and it will take months before it is ready to hear this case. How can the Nationals compel MASN to submit to arbitration in front of a panel that doesn’t currently exist?

There are advantages to having a second round of arbitration in front of the RSDC. A new RSDC decision may be able to resolve the current litigation. This dispute would come to an end if the new decision was based off of the Bortz Methodology or another slightly different methodology that was acceptable to all sides. Or it may become abundantly clear that the RSDC and MLB have no interest in fairness and therefore strengthen MASNs claims that this case should be heard in a different forum.

Meanwhile, the Court can rule that MASN should be allowed to appeal its decision and that MASN needs to submit to arbitration in front of the RSDC. The Court could decide to stay the RSDCs’ second decision until all of the appeals have taken their course. It seems that the only thing MASN would lose in such a circumstance is the time, effort and expense of preparing for an arbitration panel. Meanwhile, it is indisputable that this case has gone on for more than a year and that it is only fair to ensure that it comes to as speedy of a conclusion as possible. It would appear that the pros, however unlikely, would outweigh the possible cons.

I wouldn’t focus overly much on whether the Court decides to compel MASN to submit to arbitration in front of the RSDC or not. If MASN wins its appeal of the first Court decision, then any future RSDC decision will be meaningless. Likewise, if an appellate court decides that the first RSDC decision shouldn't be vacated, then a future RSDC decision will be meaningless. Even if MASN doesn’t win its appeal, then MASN still may have an opportunity to appeal a future RSDC decision. The main question is whether an appellate court will hear MASNs appeal and whether it will decide to send this case to a new arbitration panel.

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.

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.

Judge Rules In Favor Of MASN

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Since 2014, MASN and MLB have been involved in a court case over the amount that MASN needs to pay each club via media rights fees. Yesterday, another chapter in this situation has ended as Justice Marks ruled in favor of MASN and decided to vacate the RSDC's award. As stated in the decision, it is common for parties to apply to courts that an arbitration award should be vacated but it is one that is rarely granted. Justice Marks ultimately felt that only one of MASN's arguments were worthy of forcing him to vacate the award.

MASN argued that the decision should be vacated because MLB advanced the Nationals $25M while agreeing that repayment was an obligation of MASN's. If the Bortz Methodology is ultimately implemented, then MLB will not receive repayment from the Nationals and be forced to eat the loss.

Justice Marks agreed that MASN did make a persuasive argument that until the award was issued it was merely in draft form and subject to revision at any time, but also noted that the RSDC decided and notified the parties about the decision and approximate amounts of rights fees by early summer 2012. Since each party understood the amount that the RSDC would force MASN to pay the two teams, it didn’t raise any serious questions about the fairness of the arbitration process.

Justice Marks argued that MASN was unable to prove that there was a conspiracy between MLB and the Nationals to reset the media rights fees to the Nationals advantage or that MLB improperly controlled or influenced the arbitration process.

Justice Marks argued that the RSDC offered a more than sufficient explanation for why it used its methodology. Legally, their explanation only needs to be sufficient to offer “a barely colorable justification for the outcome” and therefore “must be upheld even if this court were to conclude that the RSDC's interpretation of its own established methodology was legally and factually incorrect”.

Nationals fans seem to think that this means that the Bortz Methodology is dead and doesn't need to be considered. I disagree with this interpretation because the judge made it clear that he wasn't passing judgement on whether the RSDC's interpretation is necessarily correct, but rather that he felt it wasn’t in the courts’ jurisdiction. He further stated that the RSDC explanation "must be upheld even if this court were to conclude that the RSDC's interpretation of its own established methodology was legally and factually incorrect." The RSDC decision doesn't need to be right to be upheld but rather merely reasonable.

However, Justice Marks did agree that while MASN accepted an “inside baseball” arbitration, MASN didn’t accept a situation where their arbitration opponent was represented in the arbitration by the same law firm that was concurrently representing MLB and the arbitrator clubs in other matters. He argued that MASN and the Orioles made many well-documented protests about this, but MLB and the Nationals took no actions in response. He felt that this gave the Nationals an unfair advantage and therefore allowed him to vacate the decision.

This doesn’t mean that the Bortz Methodology will be implemented and that the Nationals will receive what MASN offers. Nor does it necessarily mean that this case will be forced to go to a neutral arbitrator. What it does mean is that the RSDC decision no longer exists. MASN will be allowed to pay its proposed rights fees for the near future and the parties involved will need to agree on next steps. The two solutions that Justice Marks suggested were that the parties either go to a neutral arbitrator, such as the American Arbitration Association or that the Nationals use different counsel to retry this case in the RSDC. Alternatively, MLB can try appealing this decision to a higher court or try to come to a settlement now that the RSDC opinion has been vacated and each of the parties has more flexibility.

It’s impressive that MASN has gotten this far because courts rarely overturn internal arbitration cases and certainly this is far preferable to losing the case. However, it’s also questionable how much MASN has actually won. For starters, the decision was ultimately very close. Justice Marks claimed that he didn’t uncover any precedent involving a substantially similar factual scenario decided under the FAA and that this was an extraordinarily rare case. He claimed that if MLB, the arbitrators, the Nationals or Proskauer had taken some reasonable step to address petitioners’ concerns about the Nationals’ choice of counsel in the arbitration, then the Court might well have been compelled to uphold the arbitral award under the FAA. It seems plausible that such a decision could be reversed upon appeal and certainly the Nationals have also taken heart in the fact that only one of MASN's claims were upheld.

If the case isn’t reversed upon appeal, the Court still decided that it was unable to re-write the parties’ agreement to allow a panel of neutral arbitrators to judge this case. Justice Marks recommended that one possible way forward would be for the Nationals’ to retain different counsel that doesn’t represent MLB or the individual arbitrators or clubs and then return to arbitration by the RSDC. Given that MLB will lose money if the RSDC doesn’t return an award similar to the previous one, it is questionable whether a second hearing will be different than the first. If MASN is unable to get its case in front of an unbiased arbitrator, then it’s hard to see how the decision will change in the future.

That stated, there is a major issue with sending this case back to the RSDC. Justice Marks ruled that the $25 million that MLB advanced to the Nationals didn’t induce bias because all of the parties knew what a deal would look like and therefore how much the Nationals would receive. Ultimately, he wasn’t swayed by the fact that the deal could change because it was clear what the deal looked like at the time. Justice Marks also wrote that:

Petitioners’ argument on this point would be stronger if the advance had been made before the parties were informed of the RSDC’s internal decision. However, petitioners’ argument seems to confuse cause and effect. MLB set the amount of the advance with full knowledge of the amount of the planned RSDC Award.

MASN's argument about the $25 million would have been given more weight if it had been made before each side knew what the decision would look like. It's only logical that MASN's argument will be given more weight now that there's no longer any decision. It is highly likely that this advance now possibly biases MLB and thus any decision made by the RSDC would be challenged in court. At minimum, MASN would be able to delay a final ruling for years if this case went back to the RSDC.

Justice Marks also recommended that the parties could consider a neutral dispute resolution process with neutral arbitrators. It would be surprising if MLB agreed to this, but it would avoid many complications and ensure that there is no possibility of bias.

It is also possible that MLB and MASN could come to an agreement where perhaps MASN agrees to pay MLB $25 million while the MLB creates instructions for the RSDC insisting that it uses the Bortz Methodology. MASN has shown a willingness to compromise if it meant that Bortz would be used both now and in the future. Such a deal would anger the Nationals, but they have a considerably weaker legal position. Meanwhile, MASN would able to continue to pay its proposed rights fees to the Nationals and therefore a lawsuit wouldn’t really have an impact on anything. Now that the RSDC decision has been vacated, MLB has far more freedom to act.

MASN is clearly very happy about this decision because their remaining options would be limited if they has lost. Now they have leverage to potentially convince MLB and the Nationals to make a deal or possibly have this case heard by an independent arbitrator who could rule in MASN's favor.

It should thus come as no surprise that Arnold Weiner, counsel for the Baltimore Orioles, stated that “We are delighted that the court vacated Baseball’s arbitration decision today. As we argued, Major League Baseball’s arbitration over the rights fees lacked the fundamental fairness that the Orioles had a right to deserve. We are hopeful that this fairness will be achieved in a future and independent process.” While Alan Rifkin stated that “While we are very pleased that the court vacated the award, and did so for good reason, it is unfortunate that we had to bring this matter to the courts in the first place. Contracts are meant to be honored, and that includes honoring the integrity of the rights fee-setting process. We look forward to a fair and neutral process before an objective decision-maker in the future.” As far as I can tell, the Nationals are the only ones that mentioned possibly appealing this decision yesterday.

It is rare that an arbitration award is vacated. The fact that this one was shows MLB's complete disregard for fairness and the strength of MASN's position as articulated by their legal team.

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.