December 12, 2001

The Numbers (Part Two)

Local Media Revenues

by Doug Pappas

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Part One

The second column of MLB's financial disclosures sets forth each club's purported revenues from local television, radio, and cable contracts. As the table below shows, media revenues are heavily affected by the size of a club's local market. For example, the Mets and Diamondbacks have identical media contracts on a per capita basis, but because the New York metropolitan area is so much larger, the Mets gross $32 million more.

Sources:

TV/radio/cable money: MLB disclosures.
Metropolitan populations: 2000 U.S. Census CMSA/MSA figures and StatCan 2000 estimates (Toronto and Montreal), adjusted for number of teams in market.
Number of TV/cable games: 4/2/01 Broadcasting and Cable.

These figures look only at a team's home market, and divide all two-team markets equally between the clubs. Mike Jones has developed a broader method which attempts to assign more distant markets to particular clubs.

Four major-league clubs are owned by large national-media companies: the Angels (Disney), Braves (AOL Time Warner), Cubs (Tribune Company), and Dodgers (News Corporation/Fox). This is a red flag for analysts, because the common ownership of a baseball franchise and a related enterprise can allow the parent company arbitrarily to apportion revenues and expenses between the companies.

In particular, an entity that owns both a baseball team and its local television outlet may well charge the TV station less than fair market value for the club's media rights. This strategy not only allows the club to cry poverty during baseball labor talks, but artificially inflates the station's profits, a figure closely watched by stock analysts. All four of these clubs report suspiciously low media contracts, but in only two of these cases do the suspicions appear justified.

On a dollars-per-resident basis, only the Expos earn less from the media than Disney's Anaheim Angels. But the Angels aren't broadcast over any of Disney's stations. Flagship radio station KLAC belongs to Clear Channel Communications, TV station KCAL was sold by Disney before it acquired the Angels, and cable outlet Fox Sports Net is owned by a competitor. The real problem runs much deeper: nobody cares about the Angels.

Plenty of people care about their local rivals the Dodgers, who also have a substandard media deal. However, the Dodgers' 2001 TV and cable contracts were a legacy from the O'Malley era, not the result of Fox manipulation. Before the 1997 season the Dodgers entered into a five-year contract with KTLA-TV, which bought TV and cable rights, then sublicensed the latter to Fox.

That leaves the two national superstation teams, the Braves and Cubs. The undervaluation of the Cubs' rights is especially apparent, as according to MLB, they earned $6.5 million less than the crosstown White Sox, despite a superior radio deal and more games airing on the WGN superstation.

An MLB spokesman recently told the Chicago Tribune (another part of the same empire) that the superstation part of the Cubs' TV deal is valued separately from the local broadcast rights. The Cubs keep about 30% of the superstation money, with the rest paid into the common pool, an arrangement that only increases the incentive to undervalue the Cubs' contract. As MLB admits that the Cubs would out-gross the White Sox if the Cubs' portion of the superstation money was added to the local contract, the superstation share of the Cubs' TV package is worth at least $22 million, possibly much more.

Then there are the Braves. MLB claims that the inventors of the superstation earned less from radio and TV than the Cleveland Indians. The best way to value the TBS contract is to compare it to the ESPN national baseball package:

• Both TBS and ESPN air about 90 major league games a year.

• Both TBS and ESPN are carried on virtually every cable system in America, though some of ESPN's games air on the lower-carriage ESPN2.

• TBS's ratings are significantly higher than ESPN's: in 2000, TBS averaged a 1.6 for its Braves games, ESPN a 1.0 for all its MLB games.

• ESPN has higher production costs, because many of its games are regionalized and its crews and announcers don't follow the same team all season.

• TBS has made the Braves the de facto home team of millions of fans far from Atlanta, creating additional economic benefits for the club.

On the other hand:

• ESPN's contract includes expanded rights to highlights and archival MLB footage, staples of its "Baseball Tonight" coverage even when the network is not airing live games.

• ESPN is under considerable competitive pressure to pay more than market value for MLB games, since losing baseball would blast a hole in its summer programming schedule and effectively cede the entire baseball market to Fox.

Balancing all these factors, I think it's reasonable to conclude that if the TBS package were competitively bid, it would be worth more to Braves owner AOL Time Warner than to anyone else, and would sell for about as much as the ESPN contract.

The current ESPN deal is hard to value because it was negotiated to settle a lawsuit. MLB received an up-front payment of $125 million in 2000, then rights fees of $35 million in 2000, $40 million in 2001, and $40 million in 2002 as provided in the previous contract, jumping to $175 million in 2003 and $200 million in 2004-05. Let's call it $115 million for 2001, $35 million of which would go to the Braves.

That would revalue the Braves' package to about the level of the Yankees' deal, but not for long. The Yankees' media contracts expired after the 2001 season. The club has teamed with the commonly-owned NBA Nets and NHL Devils to form the YES Network, scheduled to debut in March. Even without out-of-market superstation telecasts, Yankee media revenues could top $80 million in 2002. Their crosstown rivals aren't as fortunate: the Mets are midway through a 30-year cable contract they foolishly signed in the mid-1980s.

The Mariners' #3 ranking is the strongest response to those who claim some major-league markets "just won't support baseball." Ten years ago the Mariners were a basket case. Seattle had lost one team and was about to lose another. When I attended a game at the Kingdome in September 1991, even half-price general admission tickets couldn't entice more than 10,000 fans into the sterile concrete mausoleum...but the game was officially a sellout, because a local grocer bought all the remaining seats to prevent the Mariners from triggering an attendance clause that would have allowed the club to void its lease. Seattle's $3 million in media revenues was MLB's lowest, half of what the Expos earned, and the most prominent local coverage involved bars that tied the price of happy-hour drinks to Dave Valle's anemic batting average.

Now, the Mariners have the best per capita media deal in all of MLB--even without including the cash from Japanese TV--and the highest-rated local telecasts.

A few remarks about other teams:

• The second-best per capita media contracts belong to the Cleveland Indians, another club given up for dead a decade ago. In a market smaller than that of the Twins, the Indians receive almost three times as much money from the media.

• The Boston Red Sox also control NESN, their cable outlet. Their media deals appear slightly undervalued for a club whose appeal, and TV/cable reach, extends throughout New England.

• The Orioles' media money seems so low only because Baltimore and Washington are considered part of the same metropolitan area. An NL team in Washington would likely have little effect on the Orioles' radio and TV rights.

• When I lived in Ann Arbor during the Tigers' glory days, the club was so popular that their local TV outlet regularly preempted first-run episodes of The Cosby Show and the rest of NBC's powerhouse Thursday-night lineup to show their ballgames. Now the Tigers earn half as much, per capita, as the Colorado Rockies.

• Like the Red Sox, the Phillies are part-owners of their cable outlet. The low price paid for Phillies' TV rights suggests that the club may be putting some of its money into a different pocket.

• Toward the bottom of the table, clubs not only come from smaller cities, but also make fewer games available to TV and cable. Because of network preemptions, a "full schedule" of local telecasts is usually about 150 games, but the Royals telecast just 81 games, the Reds 85, all on cable.

• Once again, the Expos are in a world of their own, with no English-language radio or TV coverage. In a market twice the size of #29 Milwaukee, the Expos receive less than 1/10th as much media money.

Next column: "All Other Local Operating Revenue," or "Why Clubs Love New Stadiums."

Doug Pappas is chairman of SABR's Business of Baseball Committee. His writings on the subject are archived at http://roadsidephotos.com/baseball/. Although his early professional experiences included helping the USFL win $3 in its antitrust suit against the NFL and watching Bowie Kuhn flee to Florida one step ahead of his bankrupt firm's creditors, he continues to practice law in New York.