HHP: MASN/Nats/Orioles case (Inside the Courtroom)

[T]he Nationals are locked in the dispute that has been mediated by a three-member panel - with representatives from the Rays, Mets and Pirates - overseen by MLB Executive Vice President Rob Manfred since late spring. At last check, per reporting by colleague James Wagner, the Orioles wanted to pay the Nationals $34 million for their rights fees this year, while the Nationals asked for roughly $110 million.

Under the current contract, the Nationals stand to make $45 million in 2013 from MASN between their rights fees ($37 million) and their share from their equity stake ($8 million).

The sides remain entrenched. The Nationals believe the landscape for rights fees has changed so much since the original contract that it would be harmful and negligent for baseball in the Washington market to allow it to stand. The Orioles are negotiating with the current MASN contract on their side and have no shown no willingness to budge from the original deal.

MLB has broached the possibility of restructuring the MASN deal to increase the Nationals' ownership stake in the network. The Nationals currently own 13 percent of MASN, with their share scheduled to go up roughly one percent each year until it reaches 33 percent. The Orioles have pushed back against that idea, again digging in to defend the original deal.

The news about the Dodgers should only intensify the Nationals' desire for a new deal. Receiving $45 million per year from their television would put the Nationals at a stark competitive disadvantage to comparable markets. The Los Angeles market is far larger than Washington, but the Nationals' market, which includes the large surrounding suburbs, is substantial. The lucrative tide caused by the Dodgers' deal, the Nationals will argue, should raise all boats.

For now, the standoff remains. The Nationals are not happy with the current arrangement, the Orioles are fighting to keep it that way and, with MLB holding the reins, there seems to be no clear end in sight.

http://www.washingtonpost.com/blogs/nationals-journal/wp/2012/11/27/as-the-dodgers-hit-paydirt-the-nationals-masn-talks-remain-in-limbo/

Something about this article doesn't seem to add up. It says under the current deal, the Nats would receive $8 mm in 2013 as part of their equity stake in MASN (which I assume means, their share of MASN's profits). First of all, the Nats don't own any part of MASN; their owners do. Putting that to one side, it has been reported that the Nats' (owners') current share of MASN is 13%. So, if 13% of the profits are $8 mm, then the Orioles' (owners') share of the profits are about $54 mm. That hardly suggests that there is some vast pool of money available to pay the Nats the $110 mm they are seeking. That's basically what they'd get if they received their $37 mm rights fee and 100% of the MASN profits, if the numbers in this article are accurate.

But if those numbers are accurate, and MASN basically turns a $62 mm profit after paying the Nats and Orioles each $37 mm in rights fees, then you almost have to wonder if the MASN model makes any sense. Yes, it is profitable, but a lot of teams are now generating more money than that by selling their rights to independent regional sports networks. It seems like there would be more money to be made if MASN sold the rights to broadcast Nats and O's games to another carrier.

http://www.washingtonpost.com/blogs/nationals-journal/wp/2012/11/27/as-the-dodgers-hit-paydirt-the-nationals-masn-talks-remain-in-limbo/

Something about this article doesn't seem to add up. It says under the current deal, the Nats would receive $8 mm in 2013 as part of their equity stake in MASN (which I assume means, their share of MASN's profits). First of all, the Nats don't own any part of MASN; their owners do. Putting that to one side, it has been reported that the Nats' (owners') current share of MASN is 13%. So, if 13% of the profits are $8 mm, then the Orioles' (owners') share of the profits are about $54 mm. That hardly suggests that there is some vast pool of money available to pay the Nats the $110 mm they are seeking. That's basically what they'd get if they received their $37 mm rights fee and 100% of the MASN profits, if the numbers in this article are accurate.

But if those numbers are accurate, and MASN basically turns a $62 mm profit after paying the Nats and Orioles each $37 mm in rights fees, then you almost have to wonder if the MASN model makes any sense. Yes, it is profitable, but a lot of teams are now generating more money than that by selling their rights to independent regional sports networks. It seems like there would be more money to be made if MASN sold the rights to broadcast Nats and O's games to another carrier.

Great find. And you are right. There's probably more than one thing that is off about this too.

It also doesn't make sense under the terms of that agreement where the O's have to receive the same rights fees. So that's $220 million in rights fees that would need to come out of this agreement a year under the Nats proposal. And an owner wouldn't want to bankrupt the company and wouldn't ask for something that was impossible to provide, because that owner would get laughed out of any negotiation.

Imagine during a hypothetical negotiation one side asking for 101% or 110% or anything above 100% ownership stake in any company. That's Tooth Fairy land of reality.

So you are right, something is off. My guess it's both that $8 million figure and what the Nats are asking for. Unless, we honestly think a business owner would negotiate for a mathematically impossible payout for a business he has access to the books of during a mediation where everybody has access to those same books. That just seems nonsensical. I don't think it improves a bargaining position. But who knows.

Great find. And you are right. There's probably more than one thing that is off about this too.

It also doesn't make sense under the terms of that agreement where the O's have to receive the same rights fees. So that's $220 million in rights fees that would need to come out of this agreement a year under the Nats proposal. And an owner wouldn't want to bankrupt the company and wouldn't ask for something that was impossible to provide, because that owner would get laughed out of any negotiation.

Imagine during a hypothetical negotiation one side asking for 101% or 110% or anything above 100% ownership stake in any company. That's Tooth Fairy land of reality.

So you are right, something is off. My guess it's both that $8 million figure and what the Nats are asking for. Unless, we honestly think a business owner would negotiate for a mathematically impossible payout for a business he has access to the books of during a mediation where everybody has access to those same books. That just seems nonsensical. I don't think it improves a bargaining position. But who knows.

There are a couple of plausible explanations:

1. It could be that the numbers in the article are just wrong. However, I'm pretty sure we've heard that MASN has gross revenues of around $160 mm. So, if rights fees of $74 mm plus profits of $62 mm = $136 mm, that means MASN spends $24 mm on other expenses. Frankly, that seems like a believable number to me. They have 324 games to broadcast, plus rights fees for various other sports they broadcast, plus a few shows they produce, etc.

2. It could be that the Nats' $110 mm number is not based on the profitability of MASN, but rather what their rights fees would be worth if they were subject to open bidding. This is a matter of how the MASN contract reads -- we know the rights fees are to be adjusted every five years, but we don't know what the contract says about the criteria for setting the rights fees. It could be based on what's reasonable for MASN to pay given its' profitability, it could be based on fair market value without regard to MASN's balance sheet, it could be something else entirely, or it could have been left totally vague in the contract.

OK...maybe I'm missing something here.

I thought that this deal between the Nats and MASN was pretty much agreed to by MLB back in the day because the Orioles' market was being infringed upon? This deal was somewhat of a "sweetener" to Angelos to assure that he (and/or the Orioles) would get the majority of the money from MASN due to the fact that the Nats were going to be "stealing" some of the O's fanbase.

I'm having a hard time feeling any compassion for the Nats in this case if the agreed upon contract is being questioned.

I found this article:

But there is more to the math than market size. MASN charges carriers an average of $2.14 per subscriber, per month, 35 cents below the average for regional sports networks, according to SNL Kagan. As a result, MASN’s revenue will likely be under $200 million this year, obviously not nearly enough to support $100 million rights fees for the Nationals and Orioles and have any money to reinvest back into the RSN.

not sure how MLB is going to handle this one...

http://www.forbes.com/sites/mikeozanian/2012/10/02/outcome-of-tv-dispute-could-decide-if-orioles-or-nationals-win-a-world-series/

There are a couple of plausible explanations:

1. It could be that the numbers in the article are just wrong. However, I'm pretty sure we've heard that MASN has gross revenues of around $160 mm. So, if rights fees of $74 mm plus profits of $62 mm = $136 mm, that means MASN spends $24 mm on other expenses. Frankly, that seems like a believable number to me. They have 324 games to broadcast, plus rights fees for various other sports they broadcast, plus a few shows they produce, etc.

Xfinity pays MASN $14MM/month ($168MM Annually)

[\QUOTE]

OK...maybe I'm missing something here.

I thought that this deal between the Nats and MASN was pretty much agreed to by MLB back in the day because the Orioles' market was being infringed upon? This deal was somewhat of a "sweetener" to Angelos to assure that he (and/or the Orioles) would get the majority of the money from MASN due to the fact that the Nats were going to be "stealing" some of the O's fanbase.

I'm having a hard time feeling any compassion for the Nats in this case if the agreed upon contract is being questioned.

Every 5 years they can change the numbers based on any market changes, right now DC is one top the top television markets and is being paid like a bottom 5 market.

There are a couple of plausible explanations:

1. It could be that the numbers in the article are just wrong. However, I'm pretty sure we've heard that MASN has gross revenues of around $160 mm. So, if rights fees of $74 mm plus profits of $62 mm = $136 mm, that means MASN spends $24 mm on other expenses. Frankly, that seems like a believable number to me. They have 324 games to broadcast, plus rights fees for various other sports they broadcast, plus a few shows they produce, etc.

2. It could be that the Nats' $110 mm number is not based on the profitability of MASN, but rather what their rights fees would be worth if they were subject to open bidding. This is a matter of how the MASN contract reads -- we know the rights fees are to be adjusted every five years, but we don't know what the contract says about the criteria for setting the rights fees. It could be based on what's reasonable for MASN to pay given its' profitability, it could be based on fair market value without regard to MASN's balance sheet, it could be something else entirely, or it could have been left totally vague in the contract.

Both of those seem like plausible explanations to me.

I have a difficult time believing that in open negotiations the Nationals could get the $110 m annual rights fees they are reportedly seeking from MASN. Unless I am overlooking another party, CSN would be the only other serious bidders. Obviously the fees would go up somewhat from the current level of $37 m in an open bidding situation between MASN and CSN. However, if MASN's gross revenues are $160 m currently, then there is no way either side could see the Nationals TV rights as being worth $110 m. From my point of view, this shouldn't have dragged out this long except that it is the best interest in baseball (and the other owners) for TV right fees to remain high across the league. Looking at just the facts (assuming the ones presented are correct) it is hard to justify anything close to a $110 m annual rights fee for the Nationals.

I get the impression that this information is fairly accurate and that the Nats are relying on the situations of the Dodgers and other teams to make their case, while ignoring the fact that their situation is not really comparable to those other team's.

There are a couple of plausible explanations:

Xfinity pays MASN $14MM/month ($168MM Annually)

[\QUOTE]

Every 5 years they can change the numbers based on any market changes, right now DC is one top the top television markets and is being paid like a bottom 5 market.

OK...great! Thanks for the clarification.

I found this article:

* * *

http://www.forbes.com/sites/mikeozanian/2012/10/02/outcome-of-tv-dispute-could-decide-if-orioles-or-nationals-win-a-world-series/

That's one of ther best articles I've read on this situation, and I think the paragraph just after the one you quoted is pretty telling:

Which begs the question: is MASN mismanaged? After all, Comcast Sportsnet Mid-Atlantic is getting $4 per month for Washington’s Capitals (NHL), Wizards (NBA), and Redskins for the preseason (NFL), which total much fewer games than MASN’s slate of Nationals and Orioles contests. And ratings for the Nationals and Orioles are up considerably this year.

Mismanaged? No way!

Where else could you watch ESPNews beside ESPNews?

There are a couple of plausible explanations:

1. It could be that the numbers in the article are just wrong. However, I'm pretty sure we've heard that MASN has gross revenues of around $160 mm. So, if rights fees of $74 mm plus profits of $62 mm = $136 mm, that means MASN spends $24 mm on other expenses. Frankly, that seems like a believable number to me. They have 324 games to broadcast, plus rights fees for various other sports they broadcast, plus a few shows they produce, etc.

2. It could be that the Nats' $110 mm number is not based on the profitability of MASN, but rather what their rights fees would be worth if they were subject to open bidding. This is a matter of how the MASN contract reads -- we know the rights fees are to be adjusted every five years, but we don't know what the contract says about the criteria for setting the rights fees. It could be based on what's reasonable for MASN to pay given its' profitability, it could be based on fair market value without regard to MASN's balance sheet, it could be something else entirely, or it could have been left totally vague in the contract.

This to me is much more interesting than which value players we'll sign this offseason.

The $160m figure is definitely what it all comes down to. When its reported it's an estimate like anything else. But you can see where the reporters get the numbers behind it.

For example - and this is 10 minutes of work so it's got all kinds of errors and assumptions in it but it works for just general thinking.

I'm not going to officially be a Marylander again for 1.5 more months, so I don't get billed on MASN on my cable bill. But I've heard it's $2.00 a month right?

Now how much of that goes to Comcast and other providers is where this all becomes the gray area.

So let's say it's $2.00 a month across the board in all MASN viewing areas just for raw data crunching. Once again, just general thinking.

So here are the larger DMA's that MASN reaches. Some of these areas don't have 100% penetration I imagine, but also I'm leaving out some areas too probably. So it may even out or it may not. Depending on income level cable access ranges from very high 60s for lower income brackets to about 90% for highest. So using 80% across the board for monthly dues. (I'm going to guess this doesn't format very well)

DMA TV Households 80% Cable Access Monthly MASN Dues Yearly MASN Dues

DC 2,359,160.00 1,887,328.00 $3,774,656.00 $45,295,872.00

Raleigh-Durham 1,150,350.00 920,280.00 $1,840,560.00 $22,086,720.00

Charlotte 1,136,420.00 909,136.00 $1,818,272.00 $21,819,264.00

Baltimore 1,085,070.00 868,056.00 $1,736,112.00 $20,833,344.00

Asheville 846,030.00 676,824.00 $1,353,648.00 $16,243,776.00

Harrisburg 716,990.00 573,592.00 $1,147,184.00 $13,766,208.00

Norfolk 709,730.00 567,784.00 $1,135,568.00 $13,626,816.00

Greensboro 695,100.00 556,080.00 $1,112,160.00 $13,345,920.00

Richmond 553,390.00 442,712.00 $885,424.00 $10,625,088.00

Roanoke 445,470.00 356,376.00 $712,752.00 $8,553,024.00

Salisbury 157,830.00 126,264.00 $252,528.00 $3,030,336.00

Total 9,855,540.00 7,884,432.00 $15,768,864.00 $189,226,368.00

So we've got about 3.3% ballpark of all American cable viewing TV households paying a monthly kickback to Peter Angelos. Not bad for a small sports station.

Possibly $189 million and in change just in gross revenue from monthly cable dues - now how much goes to Comcast? How much goes to MASN directly? That's a major point. And then how much do they make in advertising? We know the ratings have been low in the BMore/D.C. DMA's but it's still most likely tens and tens of millions a year. Possibly 9-digits.

How a reporter would figure that out would just be to get a media kit from MASN and have a discussion on rates for different dayparts, shows, etc and start extrapolating.

So I could see anywhere from $130 million - $200 million maybe an overly generous $230 million being an educated ballpark depending on how positive or negative the reporter's estimates are.

All of it still makes the $110 m a year Nats request absurd unless I'm missing a revenue stream somewhere.

Xfinity pays MASN $14MM/month ($168MM Annually)

[\QUOTE]

What's your source for that? I'm very skeptical that this is correct, considering that several different sources have reported that MASN's revenues are under $200 mm.

This is another informative article. PA is pulling north of $50M annually in pure profit from MASN .... How is it possible any of this $ is going into the team?

I will throw out some big numbers, but if MASN were to charge market rates, pull in better ratings and advertising $, it would not surprise me if the revenue capability of MASN would be closer to $250M-$350M with the same programming costs. Assuming the market is 60/40 split between Nats/Os, again big numbers, it hints that the Nats alone could generate something like $150M-$200M+ on their own - and now you get an idea of why the Nats are so incensed. A long term TV deal for a first place team in a top market could easily generate $90M-$125M in annual rights fees, leave $50M for programming costs and still leave a handsome profit.

I am glad to see the Os generate $ from the Nats, but I fail to see how we keep putting out a $90M payroll product without the owner making a fricking boatload between the team and MASN. As more numbers come out, it is difficult to draw any other conclusion.

So if their ownership is worth $8 million for 13%. And by the original agreement they get $45. Even if the Orioles side gets $45 million they are benefitting from the 86% equity...or the 87% stake held by almost $60 million on top of the $45 would be worth $105 million. And we cant afford a 25 million per year player and a $110-$130 million payroll. Utter nonsense.

So if their ownership is worth $8 million for 13%. And by the original agreement they get $45. Even if the Orioles side gets $45 million they are benefitting from the 86% equity...or the 87% stake held by almost $60 million on top of the $45 would be worth $105 million. And we cant afford a 25 million per year player and a $110-$130 million payroll. Utter nonsense.

Your math is off. The $45 mm they get includes the $8 mm in equity, plus a $37 mm rights fee. The Orioles' (owners') share of the profits is more like $54 mm, not $60 mm, and you add that to the $37 mm rights fee, not the $45 mm. So, that suggests the O's (and/or their owners) get $91 mm, not $105 mm. Mind you, the rights fees already show up on the Orioles' balance sheet, so it's really the MASN profits we are talking about as possible extra resources.

Another point is that many corporations don't distribute all the profits, but use it to invest in expansion, new equipment, etc. It's not ncessarily the case that the $54 mm is being paid out to the Orioles' owners, though it could be.