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

[weams]

The sides in the dispute over the Nationals’ rights fees on Mid-Atlantic Sports Network have pushed a scheduling conference with the New York Supreme Court to Aug. 27.

[Guest]

James Wagner of the Washington Post reports that the legal battle between the Orioles and Nationals over the latter’s television rights with the Mid-Atlantic Sports Network (MASN) will drag on for at least three more months. The O’s have until Sept. 23 to file an amended petition to the New York Supreme Court, and the Nationals and MLB have until Oct. 20 to file a cross petition to dispute the other side’s claims. All parties involved will meet before a judge for a Dec. 15 hearing, Wagner adds.

http://www.mlbtraderumors.com/2014/09/nl-east-links-stanton-harvey-masn.html

[Frobby]

OK, I have finally hit the Mother Lode, i.e., the arbitration award that MASN is challenging in court. Anyone who wants to read it can find it here: https://iapps.courts.state.ny.us/nyscef/ViewDocument?docIndex=66tyxyVbc5j3nEqlV2lvTg==

The Award is 20 pages long and award the following rights fees:

2012: $53,170,018

2013: $56,253,879

2014: $59,347,843

2015: $62,611,974

2016: $66,744,364

So, about $298 mm over the five year "reset" period. That is calculated by the RSDC (the Committee appointed by MLB) to allow MASN to operate at a 5% profit margin, after paying rights fees. MASN had asked for a 20% profit margin, while the Nats proposal would have required MASN to operate at a loss. MASN was expecting to have revenues of $163.6 mm in 2012, growing at 5.9 percent a year though 2016 to $205 mm. MASN operated at a 33% profit margin in 2011 after paying rights fees of $29 mm to each of the Nats and Orioles.

Folks, there is a treasure trove of information in this award decision, and other exhibits to MASN's filings that were made about two weeks ago. FYI, MASN filed an amended petition on Sept. 23, the Nationals and MLB are expected to file a cross-petition on October 20, there will be some reply papers filed in late November, and a hearing before the court on December 15. All the papers filed in the case so far (and there is more stuff here than I have time to read) can be found here: https://iapps.courts.state.ny.us/nyscef/DocumentList?docketId=dNr/lpqSApGEnQBah6Bo3Q==&PageNum=3&narrow=

I encourage everyone who has an interest in this issue to read the award, at a minimum. It contains answers to questions we have wondered about for years.

[Nigel Tufnel]

Camden Depot had a pretty good article about the right fees, too:

http://camdendepot.blogspot.com/2014/10/the-reason-why-nationals-asked-for-590.html

[Can_of_corn]

Five percent seems pretty sparse. I wonder what it is for the other RSN?

[Satyr3206]

Five percent seems pretty sparse. I wonder what it is for the other RSN?

I agree. I don't know many businessmen that would operate a business of that size and scope for a 5% return. You could put your money in tax free muni's and get that return with virtually no risk and no work.

[mdbdotcom]

Five percent seems pretty sparse. I wonder what it is for the other RSN?

To compare them in a relevant way, you would have to take into consideration the efficiency and competence of each RSN being compared. If MASN is not optimizing its value, their margin should be lower.

[schittenden]

Five percent seems pretty sparse. I wonder what it is for the other RSN?

I agree. I don't know many businessmen that would operate a business of that size and scope for a 5% return. You could put your money in tax free muni's and get that return with virtually no risk and no work.

From the arbitration award...

Indeed, the Committee's recent evaluations of the market for the Clubs' local telecast rights suggest that regional sports networks are willing, even compelled, to run relatively low operating margins to secure live sports programming. Cf., Sixth Report, at 7 ("[W]e accept Bortz' expert opinion that television stations are willing to earn a lower than average operating profit to become the flagship station for a highly successful sports franchise such as the Braves.") SportsTime Ohio, for example, reported relatively low margins on Cleveland Indians programming during its startup phase. See Cleveland Bortz Report, at 5 (reporting a 3 percent margin in 2006 and 5.7 percent margin in 2007). Similarly, Fox Sports reported operating losses on Texas Rangers programming, which Bortz Media characterized as "reflecting the strong competition for the rights during contract negotiations." Texas Bortz Report, at 5 (reporting a -8 percent margin in 2006 and -5 percent margin in 2007).

Of course, what isn't clear is whether these were intended to be loss leaders that would lead to higher margins in the future under long-term agreements as opposed to low profit margins on an ongoing semi-permanent basis.

[schittenden]

The report also attributes 95% of revenue to baseball programming, but 90% of expenses. That suggests that MASN's other limited programming is reducing it's overall margin.

[Fan4Life]

The Award is 20 pages long and award the following rights fees:

2012: $53,170,018

2013: $56,253,879

2014: $59,347,843

2015: $62,611,974

2016: $66,744,364

These are the combined fees to both teams? If so, they actually paid out more in 2011 than they have recently?

[Frobby]

These are the combined fees to both teams? If so, they actually paid out more in 2011 than they have recently?

No, that much goes to each team.

[Fan4Life]

No, that much goes to each team.

Interesting Jump from $29 to $53 then basically increments of $3-$4M.

[Frobby]

Interesting Jump from $29 to $53 then basically increments of $3-$4M.

The jump is because MASN has been making a killing under the old prices, with a profit margin of 33.4% in 2011 after paying the rights fees.

Here's my take: the Committee didn't want to set prices that would put MASN in danger of being unprofitable, but wanted to set prices as high as reasonably possible because this will be used as a precedent when clubs negotiate with RSN's. I do get why MASN is unhappy with the ruling, but the ruling appears a lot more reasonable than the position MASN was taking (and of course, way more reasonable than the fairly ridiculous position the Nats were taking). I think at the end of the day the ruling will stand up in court (which isn't supposed to second guess the arbitrators anyway, but conduct a limited review for "corruption, fraud or miscalculation of figures), or at worst, the judge will require there be some further work by these arbitrators or others, that won't change the end result much.

[hoosiers]

A couple thoughts:

- MASN running at 33.4% profit margin should triangulate to the $40M-$60M profit for MASN that has been hinted at for years.

- remember that the award calculates the profit margin at 5% after paying rights fees to BOTH teams. Presumably, the Nats fees would be higher than the Os based on market. If the RSCD set the margin target low, this may have been a reason - to get more $ to the Nats, and as a result to the Os, and less margin for the Os who own most of MASN.

- nice to see the Os could get a $30+M increase in revenue through higher TV rights than today. Some of this gets shared with MLB, but a nice increase nonetheless - which comes out of the pocket of MASN owners - too bad.

- I think MLB is getting to the point where PA has made a boatload off the Os and MASN, his concerns about franchise viability should be largely put to rest for the medium term and the MASN cash cow is getting past its prime.

[schittenden]

The jump is because MASN has been making a killing under the old prices, with a profit margin of 33.4% in 2011 after paying the rights fees.

Here's my take: the Committee didn't want to set prices that would put MASN in danger of being unprofitable, but wanted to set prices as high as reasonably possible because this will be used as a precedent when clubs negotiate with RSN's. I do get why MASN is unhappy with the ruling, but the ruling appears a lot more reasonable than the position MASN was taking (and of course, way more reasonable than the fairly ridiculous position the Nats were taking). I think at the end of the day the ruling will stand up in court (which isn't supposed to second guess the arbitrators anyway, but conduct a limited review for "corruption, fraud or miscalculation of figures), or at worst, the judge will require there be some further work by these arbitrators or others, that won't change the end result much.

I tend to agree. The story that had been told about the contract mandating one specific methodology for calculating the fees and the arbitration panel using another method seems at best misleading and at worse entirely wrong.