The ROOT Sports Acquisition and Risk

marc w · April 16, 2013 at 5:05 pm · Filed Under Mariners 

I wanted to follow on Dave’s great post about the RSN acquisition. I’m broadly in agreement with Dave and essentially everyone else that this is almost certainly going to give the M’s a lot more revenue, particularly in the medium term. The overall revenue stream will get bigger, and the M’s will keep more of it. But I haven’t seen a whole lot of discussion about the risk involved, and while I think the upside is more tangible and likely, that doesn’t mean we can ignore the risk completely. As I mentioned in 2012, what we’ve seen in TV deals the past few years bear the hallmarks of a bubble. RSNs are paying skyrocketing rates for the rights to televise baseball games even as fewer people are watching baseball. They’ve had free rein to push for higher and higher carriage fees with cable carriers (Comcast, DirecTV, DISH Network, Time-Warner, etc.) and consumers have, in general, paid up. Part of the calculus here is that live sports are an effective antidote to DVR technology, meaning advertisers will reach more eyeballs than they would with a highly rated drama series, where many people DVR the show and skip the ads when they play it back. In addition, many of the RSNs get better ratings than national titans like ESPN, which makes sense if there’s a game on the RSN and yet another SportsCenter on ESPN.

But what happens when carriers start to balk about the spiraling carriage fees? This isn’t a theoretical problem. Last year, the Houston Astros and Rockets created their own RSN, Comcast SportsNet Houston, in a billion dollar deal. This would supposedly transform the Astros revenue, as they had the worst TV ratings in baseball in recent years (for obvious reasons) and a poor deal with Fox Sports Houston. The problem is, cable operators in Houston have been holding out, and thus DirectTV, DISH Network, and Time-Warner cable don’t carry the network. Again, the brand new network that has the rights to the Astros, the Houston Rockets (who are in the NBA Playoffs this year!), Rice and University of Houston football, *is not available on most carriers in Houston*. The same thing’s going on to a lesser extent in San Diego, where Time-Warner’s balked at the new Fox Sports San Diego’s carriage fee demands after the latter acquired the rights to the Padres games (and gave the Pads a 20% equity stake as well). Local government officials are involved in both Houston and San Diego, trying to help broker a deal.

So Comcast and DirecTV have battled tooth and nail in Houston, with rival campaigns and websites. Now, DirecTV has a stake in ROOT sports, and while Comcast already carries the network, I can imagine that negotiations when the current agreement is over will be, um, intense. Operators are trying to stave off customers cutting the cord and moving to netflix/roku type devices, and at the same time offer advertisers the kind of un-DVR-able programming that live sports provides. It’s making all negotiations a lot more contentious, as many of you saw in Tacoma when city-owned operator Click Network stopped carrying local ABC affiliate KOMO when negotiations hit a wall. That’s led to lawsuits and a fascinating* lawsuit involving whether these rates are protected trade secrets. Similar disputes are happening elsewhere, as the industry’s still adjusting to new technology, deregulation in the 1990s and increased costs.

In an ideal world, the new ROOT Sports comes to some sort of agreement with a new NBA team and a potential NHL team that would give them a lot more leverage than the M’s could on their own (“Seriously! We have prospects! Good ones! Stay tuned!”). Unfortunately, the M’s may not be on Chris Hansen’s christmas card list after their objections to his SODO arena proposal. They’re talking, though not about the network, and after an awkward start, the M’s have said all of the right things about their potential new neighbors recently. And in any event, Comcast may want to partner with a new team to give them leverage in any possible fight with DirecTV. Of course, the Houston experience shows that even if one company acquired the rights to all of the local teams, that wouldn’t necessarily be a guarantee that they could extract the fees they expect from cable providers. A balkanized TV sports world hurts everyone, especially consumers; I’d guess that the overlap between basketball fans and baseball fans is pretty substantial. I also know that ROOT will work hard to come to a deal with Comcast, and they may get one lasting several years. All of these risks are down the road and speculative. But the parallels to the housing market circa 2006 are starting to get eerie. The M’s made a completely logical decision to do what other teams have done and purchase their own cash cow. One that will pay them 2X or 3X more than what they got in 2007! Everyone’s doing it, you know. With values tripling within a few years, why, you can’t afford NOT to. People will *always* tolerate sizable annual rate increases.

* if you’re really geeky and also bored

Comments

6 Responses to “The ROOT Sports Acquisition and Risk”

  1. greentunic on April 16th, 2013 6:11 pm

    Thanks for the read!

    In response to the assertion that this could increase the Mariner’s payroll, what about the capital used to acquire the network? Can the Mariners really afford to be more aggressive in free agency and taking on salary if they just spent such a large amount of cash as forward-looking investment?

  2. Westside guy on April 16th, 2013 6:32 pm

    Very well said, Marc.

  3. MrZDevotee on April 16th, 2013 7:12 pm

    greentunic-
    If the deal works out as well as it would appear, they’d have a pretty easy time getting financing for this sort of deal, and showing how easily they’ll be able to make payments (based on the craziness of other new tv deals recently– AND the fact that they don’t have to pay the Mariners, er, themselves very much in the next tv deal).

  4. greentunic on April 16th, 2013 11:09 pm

    Ah, bank loans. Of course! Thanks :)

  5. sergey on April 16th, 2013 11:33 pm

    As a PAC-12 fan, I hated when the games were carried by the PAC-12 Network. Where I live on East Coast –> Bars are not paying the money to pick up PAC-12 Network.

  6. hplovecraft on April 18th, 2013 11:37 am

    Insightful post…

    It looks like Forbes has the deal valued at $2billion over 17 years.

    link:
    http://www.forbes.com/sites/mikeozanian/2013/04/16/seattle-mariners-sign-estimated-2-billion-network-deal-with-directv/

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