What would a deal between Comcast and Leonsis mean for the Nationals, Orioles, and MASN?

The five-year old MASN dispute between the Nationals and Peter Angelos made news last week when the Orioles won a victory in the New York Supreme Court vacating the previous MLB arbitration decision awarding the Nats $60 million a year in TV rights fees. The victory was a temporary one for the O’s with only one major implication: this dispute is guaranteed to linger even longer than we originally thought. Fans hoping for a resolution to this mess will only have to wait.

In the aftermath of this decision came news this morning in the Washington Post Ted Leonsis’ Monumental Sports is negotiating a deal with ComcastSportsNet to own a piece of the Regional Sports Network (RSN). This development, if it comes to fruition, is notable to Nats fans for many reasons, and it raises some obvious questions.

First, Leonsis is now making a deal the Lerner family can only dream of making. Leonsis is following the industry trend in sports, where teams gain an equity share in a local RSN, a mutually beneficial arrangement for both parties. For the RSN, an equity partnership guarantees long-term rights to televise the team’s games, locking in live, local, and daily content, which is especially valuable in the DVR and “cord-cutting” era. For the team, an equity partnership ensures lucrative annual equity payments from the RSN and a protection against “carriage battles” (like MASN faced in 2005) since the RSN is owned by the cable provider.

By locking in Capitals and Wizards games long-term, CSN would make itself a valuable property in the foreseeable future. Were Leonsis to take his Capitals and Wizards broadcasts elsewhere, the network would likely shrivel up and die. It’s hard to imagine CSN surviving on DC United and Washington Kastles broadcast alone; they would need a flagship property among the four major sports to justify it’s carriage fee to cable subscribers. In return, Leonsis will see what promises to be high equity payments equal to a third of CSN’s revenue. This is huge for not only Leonsis’ personal wealth, it largely secures the financial security of his two teams.

Meanwhile, the Lerners are stuck in neutral in the middle of a nightmare scenario. The owners of the Nats lack to autonomy to strike a deal like the one Leonsis is making. Instead of getting equity in a large RSN like CSN, they have to settle for a smaller equity stake in MASN, plus a rights-fee which is currently the subject of litigation between the O’s and Nats. The biggest problem here, and one of the biggest complaints about MASN in general (besides Bob Carpenter), is that MASN leaves far too much money on the table with the way it is structured. The monthly per-subscriber carriage fee is generally believed to be much lower than what you would expect for a network carrying two valuable properties like the Orioles and Nationals. Put simply, baseball is the most valuable local television property simply because it’s live and it’s every day. Comparatively speaking, local baseball games rate very well in the right demographic advertisers are trying to reach. This isn’t my opinion, it’s fact reflected in the huge deals being struck around the country by baseball teams with local television providers.

The Orioles are fine with the fact MASN brings in less money than it otherwise could because they’re keeping the largest piece of the pie. They’d rather have the majority of smaller pot than risk a new financial arrangement where they would most assuredly be given a smaller piece considering how much smaller a market Baltimore is than Washington D.C. So the Orioles will fight and defend an outdated cable TV deal struck in 2004 before the Expos even moved to DC. The Nats can only sit and watch Leonsis take advantage of a new lucrative industry trend while Peter Angelos litigates in state court the right continue the trend of 10 years ago.

Prior to Leonsis striking a deal with Comcast, CSN likely represented the best compromise between the O’s and the Nats. CSN is carried in both Baltimore and Washington and they likely would have jumped at the chance to carry the Orioles and Nats, a move that would have instantly doubled the network’s value and made it a giant in the mid-Atlantic region. Now it’s fair to wonder if Leonsis has crowded the O’s and Nats out of the market place. It’s really hard to imagine CSN forming an equity partnership with Monumental, the O’s AND the Nats. Leonis got the table first, and now there’s no other RSN with the clout of Comcast to take its place. The O’s and Nats missed their opportunity back in 2014 when MLB tried to negotiate a sale of MASN to Comcast.

So Ted Leonsis is the winner. He not only secured his own financial future, he stuck it to a local competitor. For the Nats, it’s likely MASN today, MASN tomorrow, and MASN forever. Even if the Nats Houdini themselves out of the MASN deal, or Peter Angelos has an out-of-body experience and decides to compromise, there is one less option on the table. Comcast two years ago provided the Nats the easiest and most profitable way out of this MASN thicket. Now, as they watch the slow wheels of justice turn in the New York state court, the Lerners get to see the Comcast option taken by Ted Leonsis, a fellow sports owner lucky enough to never be forced to do business with Peter Angelos.

Explaining the MASN court decision in non-legal terms 

You’re probably confused about the MASN court decision, which is totally fine. If I wasn’t a lawyer, and I hadn’t read the decision myself, I’d be confused too. The reporting on the MASN issue has been particularly sparse. Reporters who cover baseball are not business reporters, nor are they lawyers (most of the reporting I’ve seen looks more like spin, leaked from one of the parties). To save you time, here’s my very brief analysis of today’s decision in non-legal terms so anyone can understand it. 

Background

The MASN contract requires the network (majority owned by the Orioles) to pay the Nationals the right to broadcast their games. Every five years, the parties renegotiate these fees and go to arbitration if they don’t agree, which is exactly what happened here. The arbitration panel ruledin 2014, attempting to forge a compromise between the Nats and the O’s. The O’s didn’t want a compromise, they wanted to win, so they appealed the arbitration decision in court. 

The Court Case

To win, the Orioles had to prove there was something wrong with the arbitration. Like most lawyers do, the attorneys representing the O’s threw as much as they could against the wall, hoping something would stick. Among other things, they argued: fraud on the part of MLB when drafting the MASN contract, collusion between MLB and the Nats during the arbitration process, a conflict of interest for the arbitration panel members, and a conflict of interest for the attorneys representing the Nationals. In short, the O’s were hoping to get the arbitration award thrown out, so they could get another hearing and an award that required MASN to pay the Nats less money. 

The Decision

The Orioles won. The arbitration award was thrown out. However, the court rejected most of their arguments. The only argument they agreed with: there was a conflict of interest for the attorneys representing the Nationals. 

Analysis

It’s a hollow victory for the Orioles. The arbitration award is thrown out, but on relatively narrow grounds. If there’s no appeal, or if this decision is upheld on appeal, there will still be another arbitration hearing, this time without the conflict of interest. The Nationals might get an even bigger award next time. TV rights fees have only risen since the last hearing. The biggest impact for the Nats, however, is in the short term. The have more uncertainty about their TV rights, and they’ll continue to wait for more TV money. This isn’t good news for Nats fans, but today’s “win” isn’t exactly a windfall for the Orioles either. The main battle is still to be fought. Either side could win. 

Is the Cable TV Bubble shrinking and did the Nats miss their window?

An article on Sports Business Daily about ESPN’s shrinking customer base caught my attention today. ESPN, by far the most profitable cable channel, peaked in customers May 2011 at just over 100 million subscribers. They are now closer to 93 million, their lowest total since 2007.

This shouldn’t be surprising. Cable TV has become increasing expensive and services like Netlix and Amazon make it easy for customers to receive quality television content without paying $200 a month to Comcast or Time Warner.

To understand the reason for ESPN’s “demise” it’s important to understand the business model of Cable TV networks. ESPN, while unquestionably the king of cable, lived in a palace built on quicksand. ESPN’s model is simple: corner the market on popular live sports programming (like Monday Night Football) and then charge exorbitant monthly fees to cable companies to deliver their network to the customer. The last time I checked, ESPN charged cable companies like Comcast over $6 a month for the right to deliver the ESPN family of networks into your home. The cost of course is passed on to you, which is why you pay so much for cable. Through “bundling” non-sports fans don’t even have the option to avoid paying over $6 a month for a channel they don’t watch. Your grandmother who doesn’t even watch sports still pays over $70 a year for ESPN.

You can see why the model is unsustainable. Other channels sought to mimic ESPN’s success, such as Turner Broadcasting (TBS and TNT) and on a regional level, networks like MASN. This, of course, directly relates to the Nationals, who are currently at the mercy of their MLB-negotiated contract of adhesion, but one day hope to own their own cable rights. The Phillies, Dodgers, and other teams cashed in on the Sports TV Bubble, signing long-term deals with local cable channels who in theory pass on high-subscriber fees to local cable customers—whether they watch baseball or not.

As the price of cable started to outgrow the demand for the product, younger customers started to “cut the cord” in favor of Netlix and cable providers like Verizon started to offer non-sports cable packages. As this trend continues—and it’s hard to imagine a reason why it won’t–the value of sports programming will shrink. There are a few implications here for the Washington Nationals:

-Even if the Nationals achieve their dream of winning their TV rights back from MASN, the rewards of that victory will be less than they were in 2011, the peak of the Cable TV Bubble according to ESPN’s numbers. The Dodgers fueled their outrageous spending spree the past few seasons by signing a cable deal at the peak of the bubble. From the outside, that deal now looks like a disaster. The cable company fueling the Dodgers spending spree is having trouble getting the Dodgers’ cable network on the air as some providers refuse to pay the fee necessary to make the deal profitable. In a future where many young DC residents don’t even have cable, and non-sports fans won’t pay for a cable package containing a newly-formed Washington Nationals Sports Network, it’s almost impossible to imagine a Dodger-sized deal in DC.

-It’s worth noting this trend may impact the litigation with MLB, the Orioles, and MASN. The Nationals are guaranteed “fair market value” under the existing contract, which of course will be less if the value for sports programming decreases. However, the MASN contract situation is so complicated, this is barely worth bringing up. There are so many factors in the MASN case, it’s impossible to predict how the existence of declining cable customers will affect it.

-It’s also worth noting that no one trend happens in a vacuum. Declining cable customers may hurt the overall value of sports programming, but sports programming by itself has never been more valuable to advertisers. The trend in entertainment, as you know, is away from live TV. As customers turn towards Netflix they turn away from ads. Desperate advertisers will continue value programming like baseball games. Pretty soon Nationals fans may be the only people watching TV ads in the DC area on a nightly basis. While the overall trends seem to be hurting the value of sports programming, the situation is far from bleak for teams like the Nats who depend on television as a main source of revenue.

-This is the most important point. As artificial demand for sports TV programming disappears, teams will be forced to compete for your dollar. The Nats will have huge incentive to grow the fan base, rather than sit on the fact that millions are forced to buy the product whether it’s good or not. Teams will fight to get you in the stadium and they’ll be forced to be competitive on the field, lest they lose their TV audience. In other words, capitalism will force the Nats to get better at everything, from quality of play to presentation of the product. Aside from your grandmother’s smaller cable bill, that’s the best possible outcome.