June 25, 2012

Bizball

Inside the MASN/Nationals Television Contract Dispute

by Maury Brown

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To get to the heart of this messy matter, one needs to start at the beginning. The creation of Mid-Atlantic Sports Network (MASN) was the direct effect of negotiations between MLB and Orioles owner Peter Angelos to allow the relocation of the Montreal Expos to the Washington, D.C. market. Angelos was vehemently opposed to the move, saying that while the location proposed in the Nation’s capital would not infringe on baseball’s physical territory outlined in the MLB Constitution (see page 15), it would carve a hole in the Orioles’ television territory and take a massive dent out of TV revenues. The compromise was the creation of MASN. The Orioles initially controlled 90 percent equity in the regional sports network, while over a 23-year period the Nationals’ equity would grow to just 33 percent. Currently, the Nationals have a 13 percent equity stake. In terms of that being an equitable arrangement, the question becomes, “Do you give that much control of MASN to the Orioles or not allow the Expos to relocate to Washington, D.C.?” The answer was more or less, “We’ll choke on the equity stake, just let us (the Expos) into Washington, D.C. and let us become the Nationals.”

Into this mix has been the skyrocketing increase in television rights fees that began with the Texas Rangers’ $3 billion, 20-year deal that was mirrored by the Angels and has since set the market. The Padres—who, based on Nielsen, are the 28th largest Designated Market Area  (1,077,600 television homes)—are on the verge of completing a deal with FOX Sports San Diego in which the club will receive a 20-year  television deal that could top out at as much as $1.2 billion and has $200 million in up-front  equity. Such a rights deal would pull in $50 million annually.

The Nationals, who almost half-way through the 2012 season are seeing their best performance on the field since the 2005 season when they arrived from Montreal, are seeking a television rights increase. Currently, the Nats pull in $29 million in the D.C. market that is eighth in terms of Designated Market Area (2,360,180 television homes) and are looking for a sizeable bump in rights fees as part of a clause in their agreement that allows for what is called a “reset.” In that arrangement, the Nationals can opt to get a bump in the fee in the middle of the broadcast agreement, and it’s here that things get messy.

The Nationals point to the deals that the Rangers, Angels, and Padres are getting; the increased ratings bump this year due to better play on the field; Stephen Strasburg’s return; and the excitement around the Bryce Harper call-up. Put it all together, and the Nationals would like to see $100 million annually, or a $71 million annual bump for the next five years. The problem is that these “resets” are tied to the Orioles as a partner in the MASN framework. In other words, if the Nationals get a reset, so do the Orioles, and you can do the math: if the Nats get $100 million, the Orioles will want the same, and now MASN has to kick out $200 million annually.

On the other side of the coin, MASN isn’t really seeing things the same way as the Nationals. Fine, the Nationals want a bump, but the increase should be more like $35 million based on how ratings have been in the past and their low attendance. As of Saturday, the Nationals were averaging 29,482 per game, ranking 15th out of the 30 clubs in terms of attendance. The Nats pulled in a 24,877 for the 2011 season, 22,568 in 2010, and 22,715 for 2009 by average attendance.

Further complicating matters are the changes made in MLB’s latest Collective Bargaining Agreement. For the first time, market size helps determine whether a club is eligible for revenue-sharing. In the new labor agreement, the clubs in the top 15 in terms of market size are ineligible for revenue-sharing (unless in the midst of new stadium development or renovation). Based upon the changes, the Nationals will no longer be receiving revenue-sharing. As is the case with nearly every club in the league, television revenues are rapidly catching up with the prime revenue maker: the gate. Soon, local broadcast money is likely to surpass the amount of money clubs make from paid attendance through ticket sales. The Nationals are therefore pressured to make up what they have been pulling in prior via revenue-sharing, and the “reset” gives them this opportunity.

Because of the vast gap in what is being sought by the Nationals, the fact that the Orioles will also be seeking a “reset” deal, and how MASN views ratings and viewership interest compared to the Nationals, the sides are so far apart that they haven’t reached a deal. The league had pulled together an ad hoc committee to try and arbitrate the issue but has since extended the deadline to reach an agreement by the end of the month.

This is a matter much larger than just the Nationals and Orioles. According to the Sports Business Daily, other clubs are watching the matter closely. A decision that lands more closely to the annual amount MASN is seeking for the Nationals would send a ripple effect through the rest of the league as clubs come up on contract renewals for media rights.

Whether it’s the Nationals/MASN dispute; the Angels, Rangers, and Padres deals; or teams like the Mariners and Phillies that have deals coming up for renewal in the next few years, how these escalating contracts are paid by the regional sports networks begins to have far reaching implications for consumers. According to the SBD report, “MASN gets about $2.14 a subscriber per month, according to figures from SNL Kagan,” which is higher than many other RSNs. As media rights deals explode, the costs will ultimately be passed onto cable and satellite television subscribers in the form of fees. In that, there is a cumulative effect. In speaking with those that were part of the negotiations for the landmark Rangers deal, market escalation was factored in when looking at how broadcast deals for colligate conferences were headed. So the price increase for, say, the Nationals gets added to the other individual clubs; national broadcast deals for MLB, NFL, NBA, and NHL; and the fees that go to networks created by colligate conferences. The question becomes, when is the glass ceiling hit? When will there come a point that fees passed on to customers become so high as to be too much and top out? Watch your satellite and cable provider bills over the next few years. We’re all about to get sticker shock.

Maury Brown is an author of Baseball Prospectus. 
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