October 2, 2012

Bizball

Do the Dodgers Really Have a "Secret Deal" to Avoid Revenue-Sharing?

by Maury Brown

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It went under the mainstream radar, but an article by Bloomberg News this past week raised the debate about economic parity within the league. The story centers on the lucrative television rights deal that the Dodgers are nearing as part of a potential regional sports network (RSN) and a “secret agreement” that would allow them to “cap income subject to revenue-sharing.” The article’s thrust is that somehow the Dodgers one-upped MLB and have figured out a way to get an advantage over all the other clubs as part of the sale that brought them out of bankruptcy.

From one standing on the sidelines, you’d have to think all the signs were there. After all, Frank McCourt had been sucking funds out of the Dodgers to fuel his lifestyle and sunk the club into bankruptcy. Shortly after the $2 billion sale of the club and an associated $150 million land deal, the team took on $262.5 million contract dollars in the trade with the Red Sox that brought Josh Beckett, Carl Crawford, Adrian Gonzalez, and Nick Punto to LA. This, of course, came on top of their other big acquisitions: Yasiel Puig, Hanley Ramirez, Randy Choate, Shane Victorino, Brandon League, and Joe Blanton.

While the article hits on a larger issue of how club owned RSNs create a revenue-sharing tax dodge, the premise that the Dodgers are somehow not paying revenue-sharing on television rights fees through some kind of secret arrangement is not true. In other words, the problem (if the Dodgers create an RSN) is the same one that has been around with the Red Sox (NESN), Yankees (YES Network), and Orioles and Nationals (MASN), among others: the distributions of equity in these RSNs are not subject to revenue sharing.

In speaking with those that have access to the actual agreement that Bloomberg speaks of, I’ve retrieved this line from the document: “All up-front cash payments and all annual rights fees shall be subject to revenue-sharing under normal principles.”

In other words, every penny of the deal’s upfront money and rights fees would be part of net local revenues that each and every one of MLB’s 30 clubs has to pay revenue-sharing on. You can also think of it this way: would the league’s other 29 owners, in a million years, ever sign-off on such a deal if the Dodgers (already in baseball’s number-two market) got a further leg up?

The article cites television rights consultant Ed Desser who, for better or worse, is not someone that the league exactly likes. The article goes on to say that Desser “projects that the Dodgers’ annual rights fees from a regional network would average $175 million to $225 million over a 20-year contract.” As one insider said to me, “Are you a betting man? Because I’ll tell you that there’s no way that that much is coming out of this deal. Not even close.”

So, what is happening? From the Bloomberg article:

The “special terms” set the Dodgers’ annual TV rights fees from the regional network at about $84 million, plus a 4 percent annual escalator, for the life of whatever contract the team signs setting up the network, said the people familiar with the terms. The special terms establishing the $84 million rights fee plus escalator was earlier reported by the Los Angeles Times.

That figure sets the amount of revenue the Dodgers must share. Baseball rules require that big-market teams share 34 percent of regional network rights fees with small-market teams. Unlike National Football League franchises, which get equal parts of league-negotiated TV rights fees, MLB teams have widely disparate broadcast revenues. The 34 percent revenue-sharing requirement is meant to level the financial playing field a bit…

One needs to remember the atmosphere that existed between former Dodger owner Frank McCourt and the league at the time of the bankruptcy sale. The relationship was so toxic and tense that McCourt was so concerned about being undermined in the sale, that the league would somehow undervalue the media rights, that terms were put in place that would set value.

What educated fans of baseball outside the diamond need to look at is the difference between clubs that sell rights fees to the likes of FOX or Time Warner Cable and those that have ownership equity in an RSN. It’s here that that “advantage” comes into play.

As mentioned previously, the distributions of equity in these RSNs are not subject to revenue sharing, so a club can decide to make a deal with itself in a fully- or partially-owned RSN at a discounted rate. (This came into play in the sale of the Cubs from Tribune, who owned WGN and had given the club favorable rights fees.) This is a real issue, not only in terms of the Dodgers but others as well. After all, the capacity to really make club-owned RSNs work means a combination of a large market and, more often than not, a storied franchise. Alone, these two things already give a club advantages over smaller market teams. The club-owned “loophole” just adds to it. League officials would never say as much, but if you could get them alone in a room, it’s possible that even they see the flaw.

Focus on this out of the Bloomberg piece: the Dodgers are going to pay revenue-sharing on every penny that comes into their coffers through media rights. They wouldn’t, however, have to pay revenue-sharing on any equity should they start an RSN with a partner such as FOX or TWC. Consider this “proliferation”—another big-market, storied franchise being able to move money from one hand to the other. After all, the Yankees and Red Sox have been doing it for years.

Finally, there’s this: there are only so many clubs that can pull this off. The potential is limited to a handful, which is why the league and its owners likely haven’t gone jumping into the fray to try and curb the “big fish” in the league. One wonders if that could change at some point. Whether it’s the Rangers, Angels, or Dodgers, new TV money is creating economic disparity, which fuels spending on players. Of course, “spending” doesn’t translate perfectly into “winning.” Since that August 25 trade between the Red Sox and Dodgers—the priciest trade, ever—the Dodgers have gone 14-17, dropping their winning percentage from .543 to .525. That’s not exactly headed in the right direction. If the Dodgers miss the playoffs, one question is bound to arise: does money really “buy” championships? The answer is, of course, no, but as anyone will tell you, having money never hurts.

Maury Brown is an author of Baseball Prospectus. 
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