Saturday, April 07, 2012

Baseball Matters, Part 3

Deadspin also had an interesting article addressing the source of the vast, ever expanding amounts of money MLB owners seem to have on hand these days. Recent examples include a small market team like the Reds paying Joey Votto $225 million, the Angels recently signing two players (Albert Pujols and CJ Wilson) for a third of a billion dollars, and the Dodgers getting sold for a cool $2 billion (nearly three times as much as any previous MLB franchise sale). Where is all this money coming from?

The surprising answer - cable TV subscribers. The new windfall for baseball is not based on the hundreds of millions in public subsidies for ballparks or $60 tickets and $10 beers sold to fans, the BIG money is in the broadcast rights sold to regional sports networks.

The Reds don't yet have a giant television deal, not like the Angels' 20-year, $3 billion contract. Instead, they extended Votto with a theoretically big TV payout in mind. Because TV is going to make everybody rich.

Right now, there are two kinds of regional sports networks (RSNs). Some are team-owned, like the Yankees' YES Network, and some are independent, like most Fox Sports Net and Comcast Sports Net channels. They make their money by charging a monthly per-customer fee to cable and satellite providers in the team's market, and the providers pass that fee onto their customers. All of their customers: nearly everyone with a cable subscription in New York, New Jersey, and Connecticut paid an average of $33.60 to the Yankees' network and $28.56 to the Mets' network last year. And those networks get to sell advertising on top of those fees.

It's a great scam. So far, TV networks have provided their teams with tremendous cash flow—as with the Angels' deal—or equity. The Wilpons have borrowed $450 million against the value of SportsNet New York, the channel that carries Mets games.

The Twins’ regional broadcast network is Fox Sports North. They announced a new contract last year, though both sides refuse to reveal the financial details. One of the immediate consequences though was the ending of any free TV broadcasts of Twins games, as they had been doing since their inception, most recently via Ch. 29 on Sunday afternoons. The business model, forcing all cable TV subscribers to pay extra for access, demands a monopoly on supply. So if you want to watch the Twins you’re going to pay.

The Twins rationalize all of this as a natural outcome by forces out of their control:

Twins president Dave St. Peter said that the organization was sensitive to fan reaction, but that cable exclusivity in local markets was "inevitable." At least 16 teams have already gone that route, he said. The Detroit Tigers, for example, will air 152 games on its FSN affiliate with nine national games on Fox. Every team will have a similar setup by 2014, he predicted.

If it’s inevitable, I guess we should just relax and enjoy it. Thanks for being sensitive to our feelings though, Twins.

Another inevitable consequence of these deals is increased monthly bills for cable TV. The experience from other markets has not always been obsequious compliance:

According to reports (because none of this is transparent), Madison Square Garden wanted Time Warner customers to pay a 53 percent increase on its $4.65-a-month fee. That's $7.11 a month—or $85.32 a year, from every Time Warner subscriber in New York—for the Knicks, Rangers, Islanders, and Devils. Time Warner naturally balked, and might have held out longer if not for Jeremy Lin. In San Diego, Fox Sports San Diego is reportedly seeking a 400 percent fee increase from Time Warner Cable. Time Warner wisely has said no.

How will this all end? Something’s got to give, and Deadspin posits a worst case scenario:

But this rights-fees boom is premised on the assumption that cable and satellite providers will forever squeeze their customers at the whims of RSNs, and that the customers will forever tolerate it, and that the FCC will forever endorse it. All that happening seems highly unlikely.

The cable-riches scheme is quite fragile because of the already-big fees charged to people who don't care about sports. And the networks that carry MLB's teams are asking everyone in that system to pay more and more. The cable companies are fed up with it, and every fee increase they condone will further vex their customers, perhaps leading to revolt or desertion.

But the cable-riches scheme needs those unfettered giant fee increases, just like Wall Street relied on ever-increasing housing prices. Once the blips start, the whole scheme's doomed to collapse. And then this apparently good story, of the homegrown Votto getting a deserved payday from a beloved, old small-market franchise, will become the darker and more familiar one, of middle America making a financial promise it couldn't afford.

Will the Twins someday declare bankruptcy because they can’t pay Joe Mauer’s contract? Unlikely. As long as we have public servants RT Rybak and the Hennepin County Commission around, there’s probably always another hundred million or so tax payer dollars available for professional sports.