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.

An Update of MASN's Economics

On May 6th and 7th, MASN responded to the Nationals request to send the case back to the RSDC for a second arbitration. In support of this effort, Mr. Haley, the executive Vice President and CFO of MASN wrote an affidavit. He wrote that the Nationals have received fair market value as determined by Bortz Media, a longtime MLB consultant that developed the RSDCs established methodology.  He noted that the Nationals received over $9.6 million in 2015 from profit distributions and tens of millions more via rights fees ($42M). Finally, he stated that the Nationals partnership interest has increased from an initial 10% to its current 17%. As MASN’s EBITDA has grown, so too has the Nationals’ asset value in MASN.

The Nationals have received a considerable amount of cash via profit distributions. As stated above, they received over $9.6 million in 2015, from 2014 distributions. Alan Rifkin wrote an e-mail two years ago, which showed the Nationals received $6.76 million in 2012 (based on 2011 results), $7.56 million in 2013 (based on 2012 results) and $9 million in 2014 (based on 2013 results). In addition, the Nationals' received a distribution for non-resident tax withholding payments. Mr. Wyche, the Managing Director of Bortz, developed a table in 2012 with the Nationals’ Rights Fees as proposed by MASN and the Nationals projected profit distributions from 2012-2016. It makes sense to compare the Nationals projected and actual profit distributions. Here’s a chart that puts everything together, with (P) standing for projected and (A) standing for actual/derived.

MASN has had larger distributions than expected despite the ongoing lawsuit. This makes sense because the Orioles and Nationals weren’t particularly successful from 2005-2011 but were extremely successful from 2012-2016. This resulted in higher ratings and therefore likely higher advertising revenue. It was impossible to predict that this was going to happen and therefore MASN was unable to account for it back in 2012.

MASN also appears to have distributed less cash in 2014 than in 2013. In all likelihood, this probably has little significance. For starters, MASN isn’t required to distribute all of its profits as distributions. Just because they distributed less cash doesn’t mean they earned lower profits. Also, the amount of cash in question is a few million dollars and therefore not a large sum. It’s probably worth keeping an eye on though.

Mr. Wyche also included a chart complied from the MLB Financial Information Questionnaires (FIQs) for media rights payments from 2005 through 2014 that compares the Nationals’ and Orioles’ relative media rights payments to all other MLB clubs. The CBA explains in Article XXIV that this questionnaire is completed by each of the Major League Clubs and submitted, together with audited financial statements, on an annual basis for each revenue sharing year to the Office of the Commissioner.  It appears that this chart shows the media rights payments as defined by the clubs themselves.

These rankings indicate that the Nationals were paid above average rights fees from 2005-2008, average rights fees from 2009-2012 and below average rights fees in 2014. The Nationals 2013 rights fees of $61.2 million were the third highest in baseball and are a combination of the rights fees received from MASN and a $25 million payment from MLB.

This $25 million payment corresponds to the difference between MASN’s calculated rights fees and the now-vacated RSDC Award for 2012 and 2013. MLB made this payment to the Nationals in order to buy more time to find a solution to the current dispute. This payment isn’t a loan and the Nationals are allowed to keep this $25 million regardless of the result of this case. However, the Nationals will be required to repay MLB from any extra revenue they may receive from a favorable RSDC decision. If the RSDC decision is reinstated then MLB receives $25 million from the extra MASN payments.

It’s worth noting that this methodology understates the actual amount that the Nationals received. MLB actually gave the Nationals $32.8 million, but deducted $7.8 million for revenue sharing. All other media rights revenue is determined before revenue sharing and therefore the Nationals’ accounting method understates the actual value of the money they received.

It’s worth remembering that in March 2012, the Nationals argued that fair market value for their media rights in 2013 was $113.3 million. It turns out that the $61 million they did receive trailed only the Yankees ($89 million) and another club. Unless that other club received a larger rights fee then the Yankees, it would have been the largest in the majors by roughly $25 million and at least $50 million more than the team that received the fourth largest amount. It is safe to say that the Nationals significantly overvalued the fair market value of their media rights fees.

At the same time, it’s concerning to note that the Orioles and Nationals ranked only 18th and 19th in total media rights fees for 2014. They’re probably closer to the average than it appears as the difference between 3rd and 20th in 2013 was roughly $24.6 million. It’s also worth noting that this chart doesn’t include profit distributions and that MASN will renegotiate its contracts with its major carriers in 2018.

To be clear, MASN believes that the Bortz Methodology should be used to determine fair market value and therefore what other teams receive is mostly irrelevant. Using this formula, MASN has an interest in maximizing its revenue in order to ensure the largest possible profit because it determines MASN's profit margins and therefore a reasonable rights fee for each team.

All in all, the new data provides an update on MASN's financial situation and each team’s rights fees. It suggests that MASN is distributing more money than originally projected. It suggests that the Nationals requested media rights fees in 2012 were unjustifiable. Finally, it makes it clear that MASN is paying the Nationals and Orioles rights fees lower than that of the median MLB team.

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

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

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

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

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

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

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

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

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

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

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

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