January 22, 2007

Prospectus Today

The Deal Almost No One Likes

by Joe Sheehan

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Hi, Joe. Long time reader here. You may be aware that MLB just gave exclusive broadcasting rights for MLB Extra Innings to DirecTV. This completely screws thousands of displaced fans who don't have satellite TV as an option and don't want to sit at their desk watching a small, grainy picture on MLB.TV.

There may not be anything that can be done about this, but I'm worried the national media won't really say anything. I think it might be fodder for a nice op-ed piece either on BP or perhaps some other forum. There are a lot of people who are pretty angry about being deprived of watching their favorite team for what amounts to about $1,000,000 per team per year. Myself included. Just a thought.

--Michael Newman

I sent Michael a note privately to tell him that I would write about this for today, although I did warn him that this would not be the piece he was looking for.

Michael is correct about a number of things. Yes, Major League Baseball appears ready to assign exclusive rights to its Extra Innings (EI) package of out-of-market televised baseball games-as well as the exclusive rights to an MLB Channel-to News Corp.'s DirecTV satellite service. DirecTV is paying a whopping $100 million a year over seven years for these rights. Based on the information in the Sports Business Journal, that represents a five-fold increase over what inDemand was paying for the rights to EI. This is a considerable boost to MLB's bottom line, although the marginal gain isn't necessarily over the $20 million or so they were making under the previous deal, but over the reported $70 million a year SBJ claims inDemand offered. Even at that, $30 million a year is nothing to sneeze at.

Michael is also correct in his statements about the deal's effect on fans. This has been the talk of the town over the weekend, both on Internet message boards and on BP's internal mailing list. The majority of expressed opinions resemble Michael's: frustration among those who do not have DirecTV that they will now be denied an opportunity to purchase what many of us call simply "the package." Is it worth, as Michael puts it, alienating a segment of your fan base for a million bucks per team per year?

Here's the problem: the answer to that question is "yes."

Before I go any further, let me make something clear: I am a DirecTV subscriber who would normally not be affected by this decision. However, I will almost certainly be in new housing by Opening Day, and the area to which I'm moving is not always amenable to satellite dishes. Whether by rule or by circumstance, I may well be unable to have the package for this upcoming season. At the least, it's another factor complicating the housing search. I would personally prefer to not be in this situation.

Back up a second and consider what Extra Innings is: 1200 or so baseball games a year beamed into your house. Some nights, there are 15 games to be watched, and the only nights during the season when you're not getting something are over the All-Star break. That is, by even the standards of a lifelong fanatic, a lot of baseball. It's a product aimed at the very top of the pyramid; 750,000 subscriptions were sold last season, a bit more than a third of the number that bought the NFL equivalent.

MLB is going to tick off a subset of that group: EI subscribers who either have Dish Network or cable. However, they're not going to lose that group of people as fans of MLB as a whole. Some of those people will switch to DirecTV, others will make do with MLB.tv, still others will not purchase a package and live without the extra games. The number of fans that MLB will lose because of this decision, however, could fit in my living room. You simply don't go from being such a big fan of baseball that you would purchase 1200 games a year on satellite to a non-fan based on one decision.

This also goes to the point that Maury Brown chose to emphasize today, that this decision goes against the idea of growing the game's popularity. In fact, it is completely orthogonal to that notion. New fans of baseball aren't created by having them consume the game from a firehose, but by having them attend games, or watch the local team on local channels, or perhaps catch highlights on the news or on "Baseball Tonight." EI is a non-factor in that process. It is a niche product for extreme users, not a gateway drug.

I don't mean to dismiss the concerns of the disenfranchised. Remember, the frustration that's being expressed is largely among those people who will not even have the opportunity to purchase the package at any price. Even this, however, may work in MLB's favor. The largest clusters of these users are likely to be in large urban areas, where renters may struggle against either rules that ban dishes or a lack of the famous "view of the southern sky." These people, however, are likely to turn to one of two sources for their fix: the local team's games on cable, or MLB.tv. If the former, those teams will see a rise in ratings that should eventually lead to higher rights fees and ad rates. It is this factor, actually, that I see as the biggest hidden benefit in this deal. When you consider how many teams are now either wholly or partially co-owned (or vice versa) with their broadcast outlets, the idea of pushing hardcore fans to watch the local nine seems to be a genius move.

The other landing point for the EI refugees will be MLB.tv, the online source for all televised games. For $80, you get roughly what EI offered, although on your computer screen…without the ability to rapidly flip between games…with online-video quality…. This is not a comparable product. I used MLB.tv this year as an adjunct to, not a replacement for, Extra Innings. It was helpful when I was on the road or as a marriage saver, but it is not any kind of substitute for watching games on a television. Besides, from an aesthetic standpoint, who wants to relax at the end of the day while watching their monitor?

Nevetheless, MLB.tv will likely see a nice boost this year from people who cannot purchase the package. That's more direct revenue as a result of the new deal.

When you break it down, this decision is clearly the right one for MLB. They make more money up front. The people it affects negatively have a series of options, albeit aggravating or inferior ones, and their pursuit of those options is likely to create additional revenue. The far-left-end users who will be hurt by DirecTV's exclusivity are going to be the most vocal about their unhappiness, but at the same time, they are the ones least likely to be completely turned off of baseball.

Make no mistake: this is a fairly fan-hostile decision. However, MLB has proven that it will alienate a segment of the population in the short term to make more money in any term. This is comparable to the way in which teams have rushed to move their telecasts to new channels that they own. By doing so, they've instigated public pressure on cable companies to add that channel to their lineups, even when said channel has just three hours of valuable programming a day.

DirecTV is essentially going to be calling the same play. They will not only get a boost in dish ownership and subscriptions to EI, but there should be some benefit in the resulting demand for dish penetration in areas where regulations have kept the units out, a move likely to be led by…disenfranchised baseball fanatics.

Michael, I'm sorry. This is a pretty good move for MLB across the board, with more hidden benefits than hidden costs. I sure hope I get to use channels 734-748 this year, but if I can't, I'm not going to be able to argue against the deal with anything but self-interest.

Joe Sheehan is an author of Baseball Prospectus. 
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