This is part II of the debate over the MASN contract MLB and the O’s negotiated before the Nats moved to DC.
- The Debate: The Nationals, the Orioles, Peter Angelos, and MASN Part 1 (halfstreetheartattack.com)
Is this a big deal or just a strange arrangement?
I think this is going to be the answer that surprises you the most. Yes it is strange, but the concepts are not entirely bad. After looking over the numbers on a series of spreadsheets, I have a better understanding of MLB TV revenue; I think this is not as big of a deal as I once thought. There are three components (actually four for some teams) to television revenue for a MLB team:
1. National rights payment: With the new deal MLB signed with Fox, each team is getting a reported 52 million a year
2. Revenue Sharing: Each MLB team pays in 34% of their local rights into a pot and then that is spread evenly between the 30 major league clubs. This helps to level the playing field between the large market teams like the Yankees and the team like the Braves and Marlins who are trapped in unfavorable TV contracts. According to my math this is about 30 million a year once the big cable deal teams pitch in.
3. The Rights fees paid to the team: This is what the O’s and Nats are negotiating. As it currently stands this only makes up a little over 1/3 of the total television revenue.
4. The fourth way some teams make money is the equity ownership of regional sports networks. This is where the Red Sox and Yankees make their money. About 1/3 of the teams are at least part owners of their own sports network and take profits from them. This is the crux of the argument between the Nats anad O’s. The O’s take 86% of the profits and would prefer to maximize those while the Nats see no reason to take a lower than market rate so the O’s can take the profits like they have been doing for the last 6 years.
Bottom line: Looking at the offer presented by both sides we are only negotiating about 20% of the teams total television revenue; that 20% could be 35 million a year, but not under the current contract. More likely under the current agreement, they are arguing over 20 million the Nats feel they are owed from MASN in the form of yearly as profit. They want that in the form of TV rights.
Is this deal MLB brokered with the O’s a fair one?
Under the assumptions when it was brokered it is not an unfair deal. One thing that needs to be made clear is that MLB negotiated with one of their fellow clubs on this deal. MLB proceed to flip the sale of the club and make huge amount of profit on the transaction. MLB was trying to broker a deal that wasn’t so bad that the team couldn’t be sold, it was heavily weighted in the favor of Angelos for that reason.
It was brokered because MLB, by placing a franchise in a market the O’s had rights to the value of the team was decreased. I think it is also fair to note that Washington DC is not Baltimore or even the same media market like San Francisco/Oakland, Chicago, LA and New York. The two cities are distinct as far as radio, television and census data. They are fairly close and some people live in between the two, but Washington is the bigger of the two. In fact DC’s is 2.3 million TVs (9th) and Baltimore is 1.1 million (26th) in market size. If Baltimore were the team of Washington, they would be in Washington. They are not; they are a team that was fairly close to Washington and by default, picked up some of the hardcore baseball fans in the area. It is interesting to note that if you combine both cities they would be the 4th largest media market behind NY, LA, and Chicago (all have 2 teams).
The one aspect of the deal that makes it fair and actually advantageous to the Nats is the five year reset for the rights fee and the MLB arbitration. Most of these TV contracts are locked in for many years, with the assumption that the value of the deal will favor the network in late years. The Nats can take advantage of increasing rates by only being limited to the 5 year contract. The other issue is MLB. As long as MLB acts as a fair arbitrator, then there should be no issue. So far they have refused to rule, so the Nats are stuck waiting for MLB to hold their side of the bargain they brokered.
Are the O’s treating the Nationals fairly within the framework of the deal?
There is no way the O’s think they are offering a fair deal. They are engaging in hard nose negotiation. I am using some of the numbers I have read from various sources to come up with my assessment of these offers. Assuming that the Os are offering a 37 million rights fee and then 8 million equity at 14%. We can assume then that MASN expects to make 57 million profit. This means that Angelos’ plan is for the O’s to take 49 million in profit and share 8 million. That makes the total take: 87 million for the O’s and 45 million for the Nats. Or, a 1/3, 2/3 split. One of the advantages of this plan is equity is not included in profit sharing with MLB so by keeping most of the TV value in MASN and not in the rights then both teams share less money. I will break this down in much greater detail in the future.
The Nationals don’t think they should have to provide MASN any profit considering they will never have more than 33% of equity in the company and one of the items in the initial agreement is that the O’s assumed the risk of the venture.
A starting point for a fair deal would have been closer to the numbers Houston completed just last year they are in the number 10 TV market is getting 80 million from their deal. The Cubs who also share a market are at 60 million on an older contract, heck Oakland gets 48 million. Any of those numbers on a comp bases would have been fair. Instead the O’s went with the low ball offer. This caused the Nationals to go high as their initial offer. The Nats offer by the way would force the O’s and Nat’s to pay some of their money back into MASN to keep the netork afloat, except the Nats would only need to put 14% of the needed money back in. If you work out the numbers the Nationals are asking for a 2/3 take on MASN revenue.
Does MLB have a long term plan?
No, but the Nationals are trying to force their hand. I don’t think the Nationals are actually serious about their offer either, I think they intend to force MLB to make the contract so unworkable that both sides tear it up and develop a new equitable agreement with the Nationals and O’s instead of MLB forcing an unworkable agreement on one of the sides. Word leaked out that MLB was quietly approaching sports networks such as Fox and Comcast on buying MASN and getting out of this entire agreement. The O’s don’t want to give up on the agreement and are going to require MLB to force them to, which they can through the arbitration process by awarding the Nationals a high but market based rights fee. MLB does not like confrontation, especially when it is owner against owner (See Oakland’s move to San Jose and Houston’s move to the AL), that is why we are where we are.
What are the immediate and long term implications for both franchises?
The long term implication of this is that MLB is going to be setting the Nationals TV contract every 5 years unless the O’s decide to split MASN revenue 50/50 through paying most the channel profit to both teams in the form of rights fees or tearing up the thing and starting over.
One interesting thing to consider, with the current equity cut the O’s get from MASN they have to be one of the most profitable teams in baseball. One thing that annoys me is that they get a competitive balance pick for being a small market team. That pick was the key piece in the Bud Norris trade.
I think the more interesting questions have not touched on yet:
Is there anything wrong with MASN?
Can you envision a scenario where both teams can coexist without one team taking advantage of the other?
- The Nats FA Class of 2016: Enjoy the Next 2 Years (halfstreetheartattack.com)
- Orioles, Nationals still nowhere near TV deal (bizjournals.com)
- The Ultimate Jayson Werth Debate (halfstreetheartattack.com)