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