Featured Post

The Oncoming Baseball Financial Apocalypse

cropped_storm

Baseball is in a financial bubble. Not only baseball: American professional team sports in general. But the action is happening in baseball first. You might not have read about it, because it is happening in slow motion and a lot of people haven’t yet noticed. It’s going to be ugly.

Baseball clubs, and professional sports in general, broadly speaking generate revenues from three sources: stadium revenue (tickets, naming rights, concessions, etc.), merchandise sales (official team jerseys, tchotchkes, etc.), and broadcast rights. All three categories have been growing, sometimes beyond all reason–the amounts people will pay for jerseys is astonishing–but it is the third one, broadcast rights, that are the topic at hand.

Baseball broadcasts used to follow a straightforward business model. A club would sell local broadcast rights to a local television station, which would recoup the costs by selling advertising. On the national level this would be organized on the league level, selling the rights to a television network, which would sell advertising. The model was not really any different from any other TV show.

Enter the cable era. At first, little changed. The broadcast rights were still held by local stations and/or national networks. There were carried by cable systems just like those stations’ and networks’ other programming. Then came cable-only networks, including ESPN. It initially had trouble getting the rights to anything good. Early ESPN programming was a running joke (dodgeball on ESPN 8: “The Ocho”). This gradually changed, and ESPN was able to demand high carriage fees from cable systems.

Carriage fees are central to this story, so please forgive a brief digression. This all about the flow of money in the modern TV economy. Cable networks buy or produce programming and package it as a cable channel. They sell the right to carry that channel to the various local cable providers. The price is negotiated on a per-subscriber basis. For a basic cable channel this based on the entire subscriber base, while for the various premium tiers, only those who subscribe to that tier are counted. The cable provider recoups the carriage fees with individual subscription fees, so the higher the carriage fees the higher your cable bill. The cost of those obscure channels with high numbers is mere pennies, while for the more popular channels you are typically looking at a buck or so. That’s a buck or so each, so all those channels add up, and your cable bill with them.

As ESPN started getting good programming, it was able to plausibly claim to be essential. Not every subscriber cares about sports, but those who do care a lot. Cable systems came to consider ESPN a must-have, and its carriage fees rose accordingly. It now is by far the most expensive channel, at around $5.50 per subscriber per month.

Finally, we come to the regional sports networks. These arose in the late 1990s. The idea was to package sports of regional rather than national interest, meaning mostly local professional baseball and basketball and local collegiate sports. (The NFL is a different situation, with all TV broadcasts controlled by the league: a discussion for a different day.) This on its face is a perfectly sensible idea, but the reality on the ground is not one network for the region, but proliferating networks, each with their particular piece of the action. So you get stuff like the Yankee Entertainment and Sports Network (YES). Now consider a large market with multiple teams playing multiple sports, each horning in on the action. Critical to this is that they each, like ESPN, had a plausible claim to being essential programming within the region, and charging cable systems carriage fees commensurate with their essential status. A basic cable bill ends up jacked up substnatially for the various sports networks.

Let’s step back for a moment and admire the business model. It is all very well and good to create a product that people want, and have those people pay you for it. But even better is to find a way to get people to pay for your product whether they want it or not. Even the best product only appeals to a fraction of the populace. Consider how many people paid to see the new Star Wars movie. Now consider the much larger number of people who didn’t. All those people not buying the product makes any businessman sad. Find a way to make them pay, even though they don’t want your product, and our businessman will be happy.

Professional sports have a long history of getting non-fans to pay them by extorting stadium deals with local governments. These make team owners happy, bu only to a point. Local governments will accept ludicrously bad deals, but they do demand that the contracts provide for some period of years for the deal. This limits how often the owners can belly up to that trough. This makes them sad again.

With regional sports networks, we make those owners happy. The key is that the sports networks are always–Always!–part of the basic cable package. Subscribers pay for them whether they care about sports or not. And, since these channels are essential, the owners can demand premium carriage fees.

Until they can’t. Enter online streaming. Now, the television viewer who considers it critical to keep abreast of the real housewives can do this without a cable subscription. Indeed, it turns out that if you subscribe to Netflix, Hulu, and Amazon Prime you can get nearly everything, for a small fraction of what you had been paying for cable. This is an existential threat for cable providers. I suspect that their business model is doomed, and they will transition into being broadband providers. But that is a different discussion. On topic here is that “nearly” part of “nearly everything.” Baseball and other major sports are the exception. Why is this? Because the rights are locked up in sweet, sweet multi-year contracts. They aren’t available for streaming. This is absolutely essential to maintaining the sports networks’ essential status. The non-sports fans can now keep themselves informed about top chefs without paying for sports. The people who want to watch the sports still have to pay for cable.

Finally we come to SportsNet LA: the canary carcass with the coal miners standing around it. If you live in southern California you probably already know this story, but you might not if you live elsewhere. This is a regional sports network set up by the Dodgers and Time Warner in 2013. Time Warner paid the Dodgers a whopping $8.35 billion–that’s billion with a “b,” folks!–for the rights to Dodgers games over the next 25 years. Do the arithmetic and that comes out to an average of $334 million a year. You can buy yourself a couple good pitchers with that kind of do-re-mi.

Time Warner is itself a cable provider with a chunk of the local market, so partly it figured on making this up through its own subscribers’ fees. The bigger part, though, was to come from selling the rights to the other regional cable providers. It reportedly demanded multi-year contracts with carriage fees starting at $4.90 and going up from there. This would make it by far the most expensive regional sports network, and indeed second only to ESPN among all networks.

Most of the other providers balked. Time Warner has since been bought by another provider, Charter Communications, with the combined entity covering about 38% of the market. A handful of other carriers agreed to the price, but this still comes out to under half the market. The cable companies covering the rest of the region have refused to pay the carriage fees, meaning that if you live in those areas and want to watch Dodgers games you are out of luck. On the other hand, if you live in those areas and don’t want to watch Dodgers games, you can buy cable service without paying for those games. For every yin there is a yang, as my father somewhat mystifyingly used to say.

This is where it gets interesting. Games of chicken over carriage fees aren’t anything new. YES has been playing these games for years. What is different is that three years in they haven’t come to a deal. What is even more interesting is that SportsNet LA cracked, offering to reduce the fee to $3.50. This would still be high, but in line with the upper range of the other regional sports networks. Yet the other carriers have stood firm. They are unwilling even to sign a one year deal at the reduced rate. Why not? Three years in, they have taken whatever hit they are going to take from subscribers for not carrying the games. Sign a deal for one year and they are on the hook to go through that again when the carriage rate inevitably is jacked up. At the same time I suspect that they are getting a lot of positive feedback from their non-sports fan subscribers. What we have is a conflict between sports fans and non-sports fans and, for the first time, the non-fans won. The difference is that now the non-fans have options, and therefore leverage.

This is the beginning of the end of the ancien regime. Clubs and networks could force non-fans to pay only when the alternative for the non-fans was to lose the TV they wanted. The awful future the clubs and networks face is that they will have to depend on people who actually want their product. They really really don’t want that. The tip-off, if any were necessary, is that DirecTV offered to carry SportsNet LA as an a la carte add-on, charging whatever price Time Warner wanted it to. Time Warner wasn’t interested.

There is no way they can get this kind of money from just their fans. How much are fans willing to pay? Heck if I know. I doubt that anyone really does. By way of anecdatum, I cut the cord a year or two back. It wasn’t because of the three or four bucks going to the local regional sports network, but because of the total expense, coming in at around $120 a month. I realized that I could get everything anyone in the family watched through online streaming for about $20. Was I willing to pay a hundred dollars a month to be able to watch ball games on TV? No. So we have an upper limit, at least for me. Your mileage may, of course, vary. The point is that you can take whatever dollar amount they settle on, and multiply it by the number of people willing to pay it, and you will end up with less money than is coming in today.

Why haven’t we been reading about this? The SportsNet LA debacle has gotten some coverage, but it is treated as a routine story, not a sign of the impending apocalypse. Why not? I see two possibilities. The first is that I am totally full of crap and am misreading the situation. I give this about a 25% chance, but then again I am pretty much by definition the wrong person to make that assessment. More likely, I think, is that this is an apocalypse, but a slow-moving one. The Dodgers are still having truckloads of TV money backing up to the dock at their money warehouse. They can reasonably expect to continue to get these truckloads. The deal might be renegotiated at some point, but that point is not now, or even imminent. Charter Communications is taking a bath, but who cares about Charter Communications? They aren’t the ones out there signing free agents.

Where it is going to get ugly is when the various teams’ multi-year deals come up for renewal. They are going to find that their properties aren’t worth as much as formerly. Revenues will fall. Furthermore, I think they will fall hard. Yet player salary negotiations will continue unabated. The long-term trend in player salaries has been ever upward. This began in earnest in the 1970s with free agency, fueled by the value of television broadcast rights hitting high gear. The present day player contracts in the hundreds of millions are in turn fueled by regional sports network money. As this money dries up a whole lot of people are going to have to adjust how they negotiate. To add another bit of wackiness, the cable deals aren’t all going to come up at the same time. Some teams will be operating under the old regime even as others are adjusting to the new one, and how this falls out won’t necessarily follow the traditional lines of large and small market teams.

I have used the language of apocalypse, but this is mostly because it is fun. We ordinarily only have the opportunity when a good blizzard is imminent. It also is an excuse to use that awesome photo. But as the headline says, this is a baseball financial apocalypse, not a baseball apocalypse. This will not be an existential threat to baseball. This isn’t a threat to baseball having fans willing to spend. There will still be a lot of money floating around: just not as much. It will be an adjustment. It won’t even be all that painful an adjustment, in the big picture. Sure, there will be gnashing of teeth, but that will be on principle as much as anything. Who really cares if that pitcher only gets $100 million for his six year deal, instead of $150 million? I’m not even sure the pitcher really cares. Either way, he is set for life, or if he can manage to burn through $100 million and end up bankrupt, he would burn through $150 million nearly as quickly. At a certain point, this is more about keeping score than about putting bread on the table, and everyone is going to take that hit.

In the long run, I think it will be a good thing. There needs to be a minimum level of cash in the system for a sport to operate at a high competitive level. Baseball currently has far, far more than that. We are at the point where the system extorts money from the unwilling so that it can light cigars with hundred dollar bills. That can’t be healthy in the long run. Better to take the money from the willing, and settle for lighting your cigar with a twenty.

In conclusion, I have a vision of a day when the pearly gates open wide, divine light streams forth, and we can watch our local teams’ games on our computers. Do I hear an Amen?

Home Page 

Richard Hershberger is a paralegal working in Maryland. When he isn't doing whatever it is that paralegals do, or taking his daughters to Girl Scouts, he is dedicated to the collection and analysis of useless and unremunerative information.

Please do be so kind as to share this post.
TwitterFacebookRedditEmailPrintFriendlyMore options

30 thoughts on “The Oncoming Baseball Financial Apocalypse

  1. The other very important factor, maybe the most important factor – is that live sports are one of the few things left that doesn’t lend itself to time shifted on demand viewing – with the associated *inability* to skip commercial breaks.

    So while middle persons are squeezed, and the sunk costs into legacy broadcast structures may be lost, as *content providers*, live sports are still in a preeminent position above all other content providers (i.e. the people that make movies and TV shows) because of their better inherent ability to monetize their content.

    Report

  2. This is more like a bleg.

    Is there a place or webpage(s) where I can find out what shows are carried by whom, on a per show basis, so I can see if I need Netflix plus Hulu plus Prime, or if I am good with only one.

    I hate, hate, hate paying for ESPN and CNN and a lot of their companions, but I do like Top Chef :-), Amazing Race and Les Revenants

    Report

    • I’ll add to the bleg. I have a TV in the kitchen and a second in the den. They are each connected to a box lent to me by Verizon Fios. The boxes are connected to a thick white wire. Thereafter, magic happens.

      How does cutting the wire work? How does Hulu arrive in my house without the Fios wire?

      Please assume that I have the tech capacity of the oldest living member of your family. As I’m typing this on my iPad, that’s not necessarily true; I did get the wireless router working. But a default presumption that I’m largely clueless about how TV works these says is a good place to start.

      Report

      • First off, you need modern TVs. You know if you have a modern TV for purposes of this discussion if it is flat-screen and has USB ports. The good news is that the price has really come down on these. Eliminating cable bills will recoup the cost quickly. You need broadband, and a wireless router. Think of the router as a radio transmitter, sending the internet signal to your TVs. If you have broadband already, this is very easy. Unplug the internet cable from your computer and plug it into your router. Another cord will run from the router to the computer. There is the usual rigamarole of setting up software and a password, and you will have to enter the password into the TVs.

        I am by no means an advanced tech person, but I set this all up without any trouble. If you are stumped, pay the neighbor kid twenty bucks to do it for you.

        Report

        • Most (all by now?) of the per-TV devices plug into an HDMI video port on the television, not USB. With the exception of Apple TV, they’re all stripped-down Linux computers running one application and using the HDMI-enabled TV as the display.

          Measured by devices running his software, Linus Torvalds has now beaten Bill Gates and Steve Jobs.

          Report

      • Here is our experience with “cutting the wire.” Obviously, YMMV. Six years ago we got tired of the $100 cable bill, had an infusion of cash that purchased a new TV, and decided to make the plunge. (We don’t watch sports, so that wasn’t a problem. Without cable I don’t think you can easily get the various ESPN feeds, so a need for sports programming seems to require sticking with cable.)

        So, canceled the cable service. All broadcast TV (ABC, CBS, NBC, FOX, CW, PBS) comes in high-def free over the air. No problem. And all of those broadcast networks also have little sub-channels with more programming (mostly re-runs, etc.) that can be interesting.

        We subscribed to Netflix streaming, and a couple years later Amazon Prime. Each of those runs about $9.00 per month. With a modern TV, hooking up was no problem. You already have a wireless router that feeds info to your iPad. That same router will feed info to your TV. A proviso: you need a good internet connection. If your iPad is working great online, then I will assume that you have good internet. (We have a DSL line via ATT that works fine for us.) Setting up the router/TV connection is the biggest IT issue you have. If that is beyond you, spring a few bucks for a tech person to come over and do the hook-up. Or a savvy friend. It really isn’t that big a deal to do, but if you are at all uncomfortable with that kind of computer stuff, your first month’s savings with no cable bill will easily pay for a hook-up consultation.

        Once your TV is hooked up to your internet, subscribing to the various services is super easy. They all want your business; they make it simple. Do a little research to see which services suit your needs — most of them have free trial periods.

        Voila! That’s it. The only thing that we ended up missing (again YMMV) was some programming on HGTV and a couple of other cable channels that we watched occasionally, but the money drain slowed drastically. For us Netflix and Amazon Prime covered most of the loss. As I said, I think that losing the ESPN resource of sports would be a “make or break” if sports is an issue.

        So, you need a good internet connection, a relatively recent model TV (so it can use the apps for the various services you might want to sign up for), and someone to connect the TV to the router. Oh yeah, and a big jar to put all the money you will save into and then use to go on a big trip somewhere!

        Report

        • So, to be clear, once I get my internet connection from Verizon [now Frontier] (which I’ve done) and connect a wireless router (which I’ve also done) then I don’t also need to pay Verizon for cable service as well. I just set up the TVs to connect wirelessly to the router and then I’ve turned the TVs into computers. This allows me to cancel the cable service.

          Is that correct?

          Report

          • I think that will depend on the small print of your contract with Verizon.
            Since they (or now Frontier) supply the internet connection, is that part of a package deal that includes the cable service? If you are paying for the internet connection alone, and the cable is a separate thing, then perhaps you can just cancel the cable service. An easy way to find out is to call them up and cancel the cable — they’ll let you know if it’s all a package that can’t be separated or not. Good luck!

            Report

    • I don’t know if anyone has aggregated this information or not, and it changes as the sites get and lose rights. You probably will have to just go to the individual site and search or browse their listing. I know that my wife watches Top Chef, probably on Hulu. Also, many broadcast shows on the legacy networks can be watched through the network’s website, though perhaps not immediately.

      You don’t actually need a TV for any of this. Depending on your physical setup, you might be just as happy watching on your computer. Or, you can get a low end laptop for under $300. There is something gloriously decadent about lying in bed with your favorite show running on your laptop on your stomach. Comfy chairs also work well. Also, tablets.

      Report

  3. Random thoughts…

    Carriage fees are more… complicated than your description. Bundling. Incest (cable companies own production companies and sell things back and forth). Bulk discounts. Reverse fees (those obscure high-number niche channels may pay for their slot).

    Cable will die more slowly than you think. There are a large number of people in the US who have cable because they can buy month-by-month and (in many cases) pay their bill in cash at a local office. I remember entire local sales campaigns built around “You don’t need a credit card to buy cable.”

    Because the ISPs and backbone internet providers have chosen not to implement multicast, cable has an enormous cost advantage for delivering live events. If you sell local baseball live over the internet, you need server capacity to deliver an individual full-bandwidth stream to every viewer. You have to pay transit fees (at least indirectly). There may be local (eg, neighborhood) delivery problems if too many people are watching. Almost all of that goes away with broadcast delivery.

    Report

    • I don’t disagree with any of this. Yes, things are more complicated. This post already veers dangerously into the “long form” category. I don’t have a time frame for the death of cable. For that matter, I don’t really think it will die entirely, though I think the business model will have to change at some point. And certainly there are reasons why cable technology has advantages for delivering live events. The central point is that I don’t think the model of making everyone pay for sports whether they want it or not is sustainable.

      Report

  4. We pay $1500 per year for Directv. The only thing keeping us on is the ability to browse when we just want to watch general tv and the sports, particularly college football and to a lesser extent college basketball and golf. I’m basically paying $1500 for the ability to watch college football for hours a day for four months of Saturdays out of the year.

    Report

  5. I do not think this going to lead to an apocalypse. The SportNet LA situation was the culmination of rights fees going up through the stratosphere. This has demonstrated the top limit, but anything getting renegotiated is going to be much lower. The fees won’t get cut, they merely won’t go up as much.

    Report

    • That is the question. Before cord cutting was a practical option, I would have agreed. Non-sports fans would grumble, but they didn’t really have anywhere to go. Now they do. This is why I don’t think that SportNetLA is merely setting the cap. The fact that we are in year three of over half the market not getting Dodgers games establishes the precedent. The threat of the non-sports fans voting with their feet counts for more to the the cable providers than the perceived necessity of carrying the games.

      Look at the comments thread here. Much of it is non-tech types reacting with “Wait! There’s a way I can stop paying cable and still watch my shows? How do I do that?”

      Report

      • I am quite familiar with cord cutting and have discovered that not cutting the cord is the most financially wise decisions (and will actually continue to be so going forward). Part of it is that I negotiated a sweet deal with Verizon, but when you look at the cost of the individual services, compared to the cost of bandwidth only, I am paying about $40/month for the video part of my service. However, that includes a sports package and HBO and Showtime. If I wanted to get a video selection that has my minimum requirements, I’d have to pay $50 and would lose the ability for random stuff which ends up opening up some pretty fun random gems.

        tl;dr: The unbundling is a monkey’s paw style wish for many people.

        Report

        • I am currently watching The West Wing — which interestingly enough seems to include time travel as a feature.
          I do not need current television until I’ve finished old television.

          Report

      • If I can get Food network, TCM, A&E, Sy Fi, and a few others, I’d consider it. A pure internet connection would run me about 50 bucks a month. That leaves me with 100 dollars delta to play with. Generally I don’t watch movies, but I do watch a lot of stuff on those channels.

        Report

  6. “Apocalypse” is an overstatement only because this will happen gradually. When the NHL lost its national TV deal and the mount of money available dropped significantly all at once, the result was an entire season being cancelled.

    Report

    • Baseball will benefit from a decentralized financial structure. In the NHL case it was a single national deal, meaning the hit came all at once to the entire league. Baseball’s national broadcasting deal is comparatively trivial. With baseball it is a collection of individual clubs’ deals, which won’t come up for renewal all at the same time. Another difference is that the NHL has a salary cap, so the hit was immediately transmitted to the players, hence the labor wackiness. With baseball, it is a collection of individual player contracts of wildly varying duration and terms. So that hotshot pitcher will, upon hitting free agency, discover that the market won’t pay him what it would have a few years earlier. He won’t be happy, but this isn’t the stuff of labor actions. It is entirely possible that the owners will try to use falling revenues as an excuse to screw the players. Their doing this is entirely within my world view. But that would be a separate discussion.

      Report

  7. By way of anecdatum, I cut the cord a year or two back. It wasn’t because of the three or four bucks going to the local regional sports network, but because of the total expense, coming in at around $120 a month. I realized that I could get everything anyone in the family watched through online streaming for about $20. Was I willing to pay a hundred dollars a month to be able to watch ball games on TV? No.

    It’s worse.

    I cut the cord last year, myself (well, the dish, I was a ten year DirecTV subscriber).

    Not entirely because of the total expense, although that was a major contributor.

    But also because for that total expense I got no guarantee of the service I wanted. When I hooked into DirecTV ten years ago, I could watch all 82 regular season Laker games either on the local broadcast channel, or on Fox Sports West. Last year I could watch about a dozen, because those were the ones that showed up on the basic package channels.

    I had NFL Sunday Ticket for a year, once. Because that was the only way I could watch 49er games down here in SoCal. But I didn’t really care about the rest of the package as much.

    Now, both the Dodgers and the Lakers have made the baffling decision to set it up so that a generation of potential fans won’t have the experience of having Mom or Dad grab the remote and queue up the game. That’s a lot of fan death by reverse osmosis.

    This ties into an undercurrent that is being played out in the contest between the content creator and the content consumer (the content carrier makes everything that much more complicated, of course).

    The creators look at the thing they create as entirely their property. In one sense it is, but in another sense it isn’t, because the value of their content is highly contextual to their content consumer base. Your baseball game broadcast has value because the fans consume it and share it and reinforce its value. Fandom is tribal, it isn’t a strict commodity to do with or without. If you’re creating a market space that deliberately makes it hard for fandom to do its thing, you’re doing more than cutting off your nose to spite your face.

    Report

    • Fiber internet came to my neighborhood a year or two back. The hubby had a throw down with Comcast over the cable internet and ended up cutting the cord entirely. 150 per month went up in a poof of smoke (Fiber internet is 19.99 per month for ALL THE INTERNETS*). Cord cutting is a hell of a lot cheaper if you can get fiber.

      *Seriously, buying games on Steam takes longer to install than it does to download the packages.

      Report

      • Fiber internet… Mmm…. My town is installing it as I speak. They are starting at the other end, where the light industry parks are, in the hope of attracting businesses, but within about two years they will cover the entire municipality. I am currently on barely-good-enough DSL. I am looking forward to the happy day the fiber reaches me.

        This is also a happy benefit of living in a main-street-Republican town. The ideology is strongly pro-business and pro-attract-business, so investing in a municipal fiber optic network seems simply good sense and a public good, much like the water and sewer. There is no nonsense about being offended at this as government overreach or preferring to leave it to the invisible hand to lay the fibers when it is good and ready.

        Report

    • I had NFL Sunday Ticket for a year, once. Because that was the only way I could watch 49er games down here in SoCal.

      Sports bars. Seriously. Go to one of those places with a gazillion TVs, and park yourself in front of the one with your game on it. Have a lovely carb-and-grease lunch and a couple of beers, and tip well. You likely will discover that you are far from the only 49er fan in the area, too. It will be fun. This would be impractical for other sports, but at just sixteen games this is entirely doable for football.

      Report

      • I’ve done it both ways to watch my Green Bay Packers. The sports bar route is certainly fun, and tasty. But I gained more weight, and I think I wound up spending more money than the cost of the NFL direct package. As my homebrew hobby attains a higher level of competence — my beers are good enough for competition, my kegs are getting assembled — I’ll have good beer on tap and my own food (which is already pretty damn good) so that’s my football Sunday solution for this year.

        you are more than welcome to make the trip and enjoy a 49er game at Casa Likko, so long as it is not broadcast the same time as the Packer game, in which case you’d have to content yourself with picture-in-picture.

        Report

Comments are closed.