The Dodgers’ New TV Deal, the Mariners, and Irrational Exuberance

marc w · November 26, 2012 at 8:12 pm · Filed Under Mariners 

Just less than one year ago, the Angels sent shockwaves through the baseball world by negotiating a long-term cable TV deal worth nearly $3 billion, and by signing two big free agents to (back loaded) contracts. The Rangers topped that with a $3 billion deal of their own, spread over 15 years. The Mariners, whose 10-year, $450 million deal with Fox Sports (now ROOT Sports) was one of the most lucrative in the game at the time, suddenly looked indigent in comparison.

As you’ve probably heard now, the Dodgers just inked a new deal with Fox Sports worth between 6 and 7 billion – a deal which obliterated the previous record, and seems to justify every penny of the Guggenheim Group’s $2 billion deal to purchase the Dodgers from Frank McCourt. There are a number of rational responses to this, from lamenting the gap between rich- and poor teams, as Jeff Passan does here,* to counting the days until the M’s window to renegotiate their current deal opens, to making comparisons with tulip bulbs and the US housing market. This post is mostly the latter.

Everyone knew the Dodger deal would set a new record for a couple of reasons. First, the LA media market is gigantic, and there are two legitimate buyers competing against each other for the TV rights. The Lakers TV rights went to Time Warner, and so the Dodgers ably played Time Warner and Fox against each other. The precedent here is the Houston Astros partnering with the NBA’s Rockets to create a new station (“Comcast SportsNet Houston”) and give the Astros a huge new revenue stream despite the fact that the Astros have had local cable ratings as abysmal as their MLB record. This is why a new NBA team in Seattle could conceivably help the M’s in their negotiations – getting two large pro-sports franchise rights gives the cable company much more leverage in negotiating with cable providers. Regional sports networks have followed ESPN’s (and NFL Network’s) lead in charging cable operators more for the rights to show their channels. So far, most cable companies have relented, fearful of driving away more customers.

More broadly, the Dodger deal seems to be the clearest signal yet that we’re dealing with a bubble. Competition and pliant cable companies aside, when we go from $20/30 million per year to $150-$300 million per year in the space of 5-10 years, we have to start questioning the assumptions at the heart of these agreements. Fewer and fewer people watch baseball on TV, as the record low ratings for this year’s World Series attest. Sure, national ratings don’t map to regional TV deals perfectly, but the Astros averaged 22,000 viewers per broadcast last year. 22,000! Obviously, they’re not always going to be awful, but local ratings for regional MLB games aren’t that high. The idea that cable companies will continue to fork over ever-increasing fees for the right to serve decent-but-not-huge segments of the market seems irrationally exuberant.

Some will say that it’s not so bad, because the Adobolian/Kerviel-esque sums of money are spread out over 15-20 years. That blunts the year-to-year hit, especially in the out-years, but it also brings up another problem: how sure are we that the cable TV market of 2035 will look pretty much like it does today? Alternatives to cable aren’t some far-fetched idea, they’re used daily by millions. Here’s Dave talking about watching through a Roku, and the comments beneath discuss using proxies to get around blackout areas. If local sports rights keep pushing monthly bills higher, how many people will start to look at Roku/PS3/internet options instead? What options will exist 10 years from now?

That’s why I’d expect some of the cable companies to start pushing back. The M’s saw this last season, when GCI Cable in Alaska dropped ROOT for what it says were unreasonable demands (ROOT sports characterized the dispute differently, of course). If more follow suit, it seems like it would have to impact what RSN’s could pay teams for broadcast rights. I want the M’s to get themselves a Dodgers-type (OK, I’d settle for an Astros or Rangers-type) deal, but even if they get one, it seems more and more likely that at some point a regional sports network won’t be able to meet its annual obligation. What happens then isn’t really clear. As important as TV rights are to team payroll and operations, I don’t think we’d be looking at the notorious ITV Digital bankruptcy in 2002, when the satellite operator who’d won the rights to show English Football League soccer games (NOT the Premier League) went belly-up, and the sudden loss of revenue pushed several teams to the brink of insolvency. But it obviously wouldn’t be good – long term contracts would have been negotiated on the assumption that revenue would support the expenditures. Highly leveraged teams (like the Dodgers under McCourt) would be in big trouble, whereas other teams could probably weather the storm for a while.

The M’s new deal, whether it starts in 2015 or sometime after that, will be eye-popping, and I’ll cheer for the team when they sign it, and then I’ll try not to be nervous for as long as it lasts. I know, I know, we need to get back to focusing on building a better Mariner club, but the out-of-control growth in media revenue impacts everything. There’s salary inflation league-wide because of the league-wide broadcast deals, and the M’s position in their division and the league’s impacted by what their competitors have done. The M’s can’t ignore the changing marketplace, and I can’t ignore the feeling that this all seems completely unsustainable. That’s hardly a novel observation, but given the total amount of money in play, someone better have some contingency plans in the works.

* I like Jeff’s piece, despite the fact that the line “Baseball might be the greatest example of free-market capitalism in America” made me laugh uncontrollably for a while. Baseball, the sport with the Congressionally-conferred anti-trust exemption? The whole cartel aspect of it probably fuels the escalating prices for TV rights! We’ll put aside the revenue-sharing, the draft and all the other aspects that make baseball far less nakedly capitalist than European soccer. The line isn’t central to Passan’s article, but I couldn’t let it go.


27 Responses to “The Dodgers’ New TV Deal, the Mariners, and Irrational Exuberance”

  1. PackBob on November 26th, 2012 8:34 pm

    Well, someone has to pay for it eventually. It’s not only cable consumers that foot the bill, it’s the fan at the ballpark as well. Higher prices for advertisers mean someone not interested at all in baseball might be paying some of the bill, having to pay higher prices for the advertised goods.

    A product is worth what the market will bear, but that doesn’t have quite the same meaning now as it used to have.

  2. ivan on November 26th, 2012 9:31 pm

    I read through all this, and yet it’s unclear to me why I should care about any of it.

  3. Breadbaker on November 26th, 2012 10:16 pm

    Baseball’s antitrust exemption is court-conferred, not Congressionally conferred. The courts refer to Congress’s inaction, not its action. Football has a Congressionally-conferred antitrust exemption (in exchange for the blackout rule).

  4. earinc on November 26th, 2012 10:29 pm

    Fantastic post. Spot on. My only hope is that the M’s relatively large geographic fan base (from B.C. to Oregon to Idaho to Montana, roughly) gives them some kind of competitive advantage here?

  5. georgmi on November 26th, 2012 10:53 pm

    the Astros averaged 22,000 viewers per broadcast last year. 22,000!

    Good God. They also averaged almost 22,000 empty seats per home game. (Averaged 19,848 fans per home game, Minute Maid Park’s listed capacity is 40,981.)

    They don’t even need a broadcast; everybody who wants to see an Astros game will fit in the ballpark at once.

  6. MKT on November 26th, 2012 11:50 pm

    “I read through all this, and yet it’s unclear to me why I should care about any of it.”

    You should care for the same reason that you care if the Angels sign Albert Pujols, and the Mariners sign say Mike Napoli. Where does that money come from, that the Angels can make a disastrous acquisition such as Vernon Wells and then go right back out again and bring in Pujols and CJ Wilson? How much will it cost the Mariners to retain Felix? All of those things are directly affected by what’s going on with these TV contracts.

  7. MrZDevotee on November 27th, 2012 12:19 am

    Ivan said:

    “I read through all this, and yet it’s unclear to me why I should care about any of it.”

    Well Ivan, some teams, when they come upon lots and lots and LOTS of money, they invest it in their players, and the teams can get pretty good, often winning more games than they lose, and lots of people go to the games, which earns more and MORE money still… and it gets really fun… And next thing you know, really great players want to play for us, and we don’t even have to overpay– which, ironically, SAVES us money, which we have lots and lots of… again! It goes on and on like this…

    As a Mariner fan, it’s understandable to have forgotten how this works.

    (NOTE: Sarcasm aimed at the front office, NOT Ivan!)

  8. GLS on November 27th, 2012 12:41 am

    Good post. The Seattle Times says the deal is worth between 6 and 7 billion over 25 years. Assuming the higher estimate, that comes to $280,000,000.00 each year. I don’t know anything about the advertising market, but it seems unlikely that the RSN will be able to sell that much in advertising each year.

    The 25 years seems curious. I would assume that both parties have escape clauses built in. Even at those inflated numbers, I would imagine the Dodgers would like to make sure they have the right to renegotiate at some point.

  9. maqman on November 27th, 2012 2:03 am

    34 percent of the Dodgers (and all teams) regional TV contract income is distributed by MLB in equal portions to each team. If the Dodgers give $80 million to MLB every year that works out to the M’s getting over $2.5 million in additional income every year. The same applies to the Rangers and Angels big regional contracts.

  10. ivan on November 27th, 2012 4:14 am

    “You should care for the same reason that you care if the Angels sign Albert Pujols, and the Mariners sign say Mike Napoli. Where does that money come from . . .”

    I understand all those relationships. I understand why people choose to follow them and why baseball bloggers would want to write about them.

    I just don’t give a shit about the suits and what the suits do. If the suits all dropped dead, there would still be baseball, between the white lines, and players would still have to hit the cutoff man, and lay off the breaking balls in the dirt, from T-ball right up to the bigs.

    At some point, all this TV contract stuff, while meaningful at its own level, ceases to be about baseball, and the people who, uh, play it, and becomes just business reporting.

    I suppose it’s for each of us to determine how large we want our scope to be.

  11. 9inningknowitall on November 27th, 2012 4:28 am

    Ivan if all the ‘suits’ dropped dead there probably would not be baseball other than little league, high school and college. Like it or not suits are the ones that make the baseball indusrty profitable. If baseball stops being profitable than it will turn into the NHL which would rather cancel a season again than lose even more money.

  12. ivan on November 27th, 2012 6:47 am

    The suits will not drop dead because I might wish it so. I will continue to concentrate on what takes place between the white lines and in the dugouts. Others will do as they please.

  13. Carson on November 27th, 2012 7:56 am

    Really? People are still on this “M’s front office doesn’t spend!” kick?

  14. Carson on November 27th, 2012 8:03 am

    As for the piece. Well done, Marc. This is something that has been on my mind a bit.

    Not only what could happen down the road when the bubble burts, but when the deals stop being super-gigantic. It’s too bad the M’s deal expires when it does. The proverbial hot iron period is now, so I wish they could strike.

    Who knows what will happen is just two short years.

  15. MtGrizzly on November 27th, 2012 8:07 am

    If this really is a bubble, then it’s temporary. At some point in time, the bubble will deflate and the teams that haven’t inked one of the inflated deals will be stuck with a lesser revenue stream.

    If the bubble deflates before the M’s ink their next TV deal then we will all care.

  16. Westside guy on November 27th, 2012 9:49 am

    I really enjoyed reading this excellent piece, Marc. Actually “enjoyed” is the wrong word, because I’ve wondered about this myself on occasion, and I find it somewhat concerning.

  17. maqman on November 27th, 2012 10:53 am

    This “bubble” is not likely to burst anytime soon. It’s all about eyeballs and commercials. People record most popular entertainment and then when they play it back they zip through the advertising content. This makes it harder for advertisers to reach an audience. This has been recognized as has the fact that people prefer to watch baseball live and they may leave the room sometime when ads are running but they don’t turn the TV off. This has made ads in live games more valuable to advertisers and so as a consequence teams can now demand and get more money for their product. This will change only if people throw out their recorders or for some reason stop liking to watch baseball live. Don’t hold your breath.

  18. low on November 27th, 2012 12:50 pm

    very good point maqman

  19. MrZDevotee on November 27th, 2012 5:13 pm

    By “people” I assume you meant “me”… And I was being silly, NOT earnest. Sorry ’bout that.

    I don’t want dumb contracts. Honest. Didn’t want Fielder. Don’t want Napoli, nor Hamilton.

    Again, just needling our decreasing payroll the past few years (can’t deny that part, but I don’t expect silly spending)… Also lamenting the situation we’re in currently (low wins/low attendance) that makes it hard to attract free agents at a reasonable price.

    AND lamenting the fact that Marc’s writeup makes too much sense, and puts a lid on the enthusiasm of the looming TV deal…

    Good fun, sorry. (Sarcasm NEVER works on the web, for me anyways.)

    Scolding acknowledged.

  20. georgmi on November 27th, 2012 8:41 pm

    My Econ degree was almost twenty years ago now, marc, but you look to me like you’re making a good case for a bubble–just like the dot-com bubble and the real-estate bubble, decisions seem to be based on a current snapshot of conditions, without a real look at the trend lines.

    The only thing keeping me subscribed to the dish, instead of the much-cheaper alternative of Hulu/ (I already have Netflix and Amazon Prime, so I’m halfway gone already) is inertia and an almost certainly overestimated learning curve, and I know plenty of other folks who are also heading in that direction. It doesn’t take a lot of imagination to see a watershed coming.

    Can’t know for sure when, but I wouldn’t bet against somebody who claimed a majority of sports fans will be getting their teams off the Internet rather than cable/dish within the next ten years.

    Remember newspapers? : )

  21. Liam on November 27th, 2012 9:21 pm

    People may remember that the Mariners previously had one of the largest radio contracts in all of baseball when they switched over to KOMO from 2003-2008. KIRO reacquired the broadcast rights in 2009 for about half what KOMO was paying. ($10M to $5.5M per season)

  22. MKT on November 28th, 2012 9:49 am

    This is where a crystal ball would be invaluable. People have made good comments about why live broadcasts remain a unique and valuable asset. But others have made good points about the changing technology of how people watch sports. I lean towards the bubble-about-to-burst hypothesis — the KIRO radio example is especially eye-catching — but I’m far from certain, and people who have bet on rising sports revenues, valuations, contracts, etc. have historically been correct more often than those who have bet short.

  23. Glen on November 28th, 2012 11:43 am

    The Seattle Times says the deal is worth between 6 and 7 billion over 25 years. Assuming the higher estimate, that comes to $280,000,000.00 each year.

    The cost would be approximately $30,000 per 30-second TV spot for Fox Sports to recoup their investment of the broadcast rights.

    The Dodger average about 250,000 people per broadcast, and would have to charge advertisers a minimum of $120 per 1,000 (if my math is right), which is pretty high. Glee for example (one of the highest network shows for cost of advertising) is only $45 per 1,000.

  24. greentunic on November 29th, 2012 2:05 pm

    Who would the players even be for the M’s TV rights? Obviously RSN (Root Sports Network) will want it. Who else?

    Comcast Sports Net?
    A cable channel (a la WGN or TBS)?

    I always hear about how teams with their own networks (Yankees, and I think the Longhorns?) make so much more. Would this ever be an option for the M’s. If not, why not?

    I minored in econ but know little about sports econ!

  25. philosofool on November 29th, 2012 7:05 pm

    I’m a huge nerd for economics, intellectual property rights issues, and the internet, so this just hit a home run with me.

    I really believe that cable is dead within a decade (or less) and that cable companies will either default on their debts to sports franchises or be forced to sell their rights at a loss. Probably the latter, as the value of sports distribution rights won’t go away, but internet competition will force the cable companies to sell these valuable properties while they try (with futility) to stay afloat. I hope the M’s are visionary and negotiate a contract that reserves the right to distribute their games over the internet within their blackout region.

    (MLB owners need to have a sober discussion about the role of the internet in baseball “broadcasting” and stay ahead of this game, because it’s going to change–the only question is when.)

  26. Liam on November 29th, 2012 7:46 pm


    Fox Sports would also make money from subscriber fees, like how ESPN is $5 of everyone’s cable bill.

    “Fox last week bought a 49% share of the Yankees’ YES Network, in advance of starting a national cable sports channel to rival ESPN. By securing the Dodgers’ rights, Fox could launch the new channel with two marquee teams on its roster.”

  27. henryv on November 30th, 2012 9:00 pm

    I’m wondering how teams with shrinking cities (Cleveland, Detroit, Pittsburgh(?), Cincinnati, St. Louis) are going to be able to keep pace. A lot of these cities are great baseball towns, however, are they going to be able to keep up with the rest of the league as their fan populations age, and they don’t have as many new fans growing up in their cities? I mean can Ohio and Western PA really support 3 major league teams?

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