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

[BradyBunch]

Of course by then a la carte cable might be a reality and all of the TV deals will be in jeopardy.

Yep, but I am also not a big fan of a la carte. That's another topic tho.

[Frobby]

I guess one person's bad timing is another's bad deal. Here's a few questions for you regarding how MASN/Os lawyers have handled this:

Why did the agreement with the Nats include a "re-set" provision BEFORE the carriage rates were "re-set"? Wouldn't a prudent business person have them reset at the same time? Why would someone allow for the possibility that the cost side of the business could increase dramatically with no chance to increase revenues?

On the revenue side, if the reset provision between the Os/Nats and MASN was so great, why wasn't a similar provision included between MASN/Comcast? Or at least some provision that set a floor to the rates relative to market value after an annual or bi-annual independent appraisal of the market value of the cable rates? Or an escape clause for when carriage rates fall below a certain % of market value? As the carriage rates have played out, the Os gave away tremendous upside to Comcast and did not contractually safeguard against this possibility. I understand the need for these carriage rates to provide cost certainty on one hand, but there should be safeguards in case the carriage rates fall way out of line with market rates especially in long term deals.

Why wasn't there a cap on the "re-set" provision for local tv rights to prevent against costs exceeding revenues? If the carriage rate for 2012 was known at the time the deal was set up, why wasn't the total local TV rights to be split by the Os and Nats capped? Isn't this just common sense? How easy is it to add a provision that says, "Under no circumstances are local TV rights fees to be paid to the Os/Nats that would cause Total Costs to exceed Revenue. Local TV rights are to be capped at the lower of a) Revenue Less Programming Costs Less Appropriate Margin or b) market rates."

If the Os are so adamant now in court filings about appropriate margins for MASN, why wasn't a minimum margin or margin range included in the contract?

Timing may be a reason why MASN revenues are not market based, but the largest portion of responsibility for this entire fiasco is on the business people and lawyers who drew up these agreements. They are bad agreements.

You may be right, but I don't think you know enough about how the cable business works to have a very informed opinion. There may well be good answers to the questions posed above. For one thing, I don't think these contracts with the cable companies are of uniform length and expire all at the same time. Each one is the product of a negotiation. Which party has the leverage may vary from one market to another. And the negotiation dynamics of the MASN/MLB deal were quite unique, not really like a negotiation between a cable channel and a cable carrier.

[Frobby]

I think to sit back and look at all of this from 10,000 feet, IMO, is where I get frustrated at the combination of the apparently massive profits being enjoyed by our ownership through the Os and MASN and what I consider a massive under-investment in the Os franchise by the same owners.

It really is unbelievable to look at the explosion in local TV rights fees enjoyed by other teams who set up networks (BoSox, NYY) and those who didn't (Seattle, Houston), to have an owner that owns the majority of local TV rights to two MLB teams, to see pieces of articles mentioning the tremendous profitability of MASN, to see articles hinting at MASN's below-market fee structure, and to see the Os keep payroll under $100M into 2012, to see other small market teams bid over $20M for Chapman (Cincy), $3+M for Sano (Twins), $4+M for Inoa (Oakland), etc ......

I understand the Os have made the playoffs for two of the past three seasons. I understand many large free agent deals don't work and that many multi $M international prospects don't pan out, but the level of profitability and the lack of investment have reached points where I think it is appropriate to complain.

Have you read the MASN arbitration decision or not? If not, why not? Why rely on "apparently" massive profits and "pieces of articles mentioning the tremendous profitability of MASN?" The decision sets out exactly what MASN's profits were. So why cite to guesses? And by the way, MASN was quite profitable, so it's not like your point will be undercut. I just don't like to rely on speculation when the facts are readily available.

[hoosiers]

You may be right, but I don't think you know enough about how the cable business works to have a very informed opinion. There may well be good answers to the questions posed above. For one thing, I don't think these contracts with the cable companies are of uniform length and expire all at the same time. Each one is the product of a negotiation. Which party has the leverage may vary from one market to another. And the negotiation dynamics of the MASN/MLB deal were quite unique, not really like a negotiation between a cable channel and a cable carrier.

You are right that I do not know the ins and outs of the cable business, but I do know business and I did work for seven years for two of the largest IT/consulting companies in the US/world doing nothing but new business as part of very elite financial deal teams. I worked on new business proposals ranging from $10M to over $1B across for federal government bids, state and local bids, bids for communications, tobacco, energy companies, etc for dealings involving new companies, new services, negotiations involving equity, contingency payments, and long term outsourcing. The financial analysis of these deals involve a primary business case around documented assumptions and then contains sensitivity and risk analysis that would involve testing variables in the assumptions and understanding best and worst case scenarios. There are obviously industry specific characteristics that exist, but protecting a businesses upside/downside is not, nor are protections that reset assumptions if one side is profiting too much from an arrangement.

Frankly, I thought the questions above were softballs. We see many baseball teams with well below market deals over time so obviously most or all of these deals seem not include any sort of re-set or adjustment provision - though I can tell you I would have asked for one. I assume cable companies crave cost certainty with these channels so they can plan long term with the rates charged to subscribers. However, another preferred deal characteristic in every industry is for deals to be "win-win". Maybe the Os/Nats were overpaid in the initial years when viewership was down (and MASN knew it had locked in strong profits) and we see now that Comcast is enjoying carrying MASN at well-below market rates for the last half of the deal.

Further, I assume there were no caps and no minimum margins because MASN folks thought the Bortz formula would always be used or at least used through the first carriage reset (as I understand the Nats are insisting in their arguments). Regardless, the fact that a reset provision exists obviously opens the door for some sort of adjustment from expectations and, as a result, there should have been some very simple language in the contract capping the local TV rights fees such that MASN could not have incurred a loss and could always be expected to operate at a minimum margin. It does seems odd that there is a reset provision for the Os and Nats and yet the Os keep insisting on this Bortz formula. I could use an explanation on that - since MASN keeps on insisting on the Bortz formula as if it keeps a lid on the local TV rights while there does exist a reset provision which suggests the local TV rights are not pre-determined.

Anyway, I understand I am making a lot of assumptions and I don't know the cable industry (and eventually I was let go from the large consulting company in a downsizing), but many characteristics of business deals, specifically those protecting upside/downside and protecting against losses (as well as lining up the timing of the reset provisions with the re-negotiation of the new carriage rates) are not.

[hoosiers]

Have you read the MASN arbitration decision or not? If not, why not? Why rely on "apparently" massive profits and "pieces of articles mentioning the tremendous profitability of MASN?" The decision sets out exactly what MASN's profits were. So why cite to guesses? And by the way, MASN was quite profitable, so it's not like your point will be undercut. I just don't like to rely on speculation when the facts are readily available.

I have not read the arb decision. There have been enough published evidence and comments for years from analysts and experts (besides suggestions from PA himself that the network alone would be instrumental in the long term competitiveness of the Os) for me to be pretty secure in my opinion. Besides, the very idea of creating the RSNs is to generate more $ for a franchise and its owners than what was being offered for local TV rights by the cable companies.

Mostly, I don't care about the MASN decision because I don't understand what is best for the Os. I don't understand what is best for the Os because it appears the ownership of the Os/MASN have been making enormous profits (not to mention the presumed increase in total franchise value for the Os/MASN) while simultaneously under-investing in the Major League team and its acquisition of amateur talent WITH MASN. Isn't it ridiculous to look at Os/MASN profits and to look back at the DD "how to build a team with 100 marbles" fiasco last offseason? We have an ownership that may be clearing $50M-$80M pre-tax every year with this team/network and who might clear $500M when eventually selling Os/MASN and we have had to wait like paupers for the franchise to clear $100+M in annual payroll and are still waiting for our first $1M annual international signing. I suspect an adverse decision on MASN for PA would be bad, but I have a major issue with how the team has been treated and (sadly) am open to alternatives.

[weams]

I have not read the arb decision. There have been enough published evidence and comments for years from analysts and experts (besides suggestions from PA himself that the network alone would be instrumental in the long term competitiveness of the Os) for me to be pretty secure in my opinion. .

You should read it. It does wash away some of the speculative drek we have spouted.

[Frobby]

You should read it. It does wash away some of the speculative drek we have spouted.

Here's the link again: https://iapps.courts.state.ny.us/nyscef/ViewDocument?docIndex=66tyxyVbc5j3nEqlV2lvTg==

As to MASN's operating profits, why speculate when the decision tells us:

2007: $6.1 mm after paying $25 mm rights fees to each team

2008: $31.9 mm ($26 mm to each team)

2009: $32.7 mm ($27 mm)

2010: $44.0 mm ($28 mm)

2011: $51.1 mm ($29 mm)

Profitability after 2011 depends on the outcome of the arbitration/litigation over the rights fees. If the RSDC decision stands up, profits should be $10 mm for 2012 growing to $16 mm by 2016, but possibly growing more to to expiring contracts with cable companies during that period expected to be negotiated at higher rates.

Recall that the Orioles' ownership of MASN started at 90%, and shrinks by 1 % a year until it reaches 67%. So right now it's about 82% or so.

[hoosiers]

Ok. I read the report. I conclude/believe on the following:

1) Massive MASN profits (as noted by Frobby above) were pretty much locked in for those first five years with little risk.

2) Repeated references are made to the Nats getting fair market value for their local TV rights in a reset for 2012-16. A methodology to determine the FMV of those rights (referred to here as the Bortz formula) would be used only in the event the parties do not agree on FMV.

3) The RSDC attempts to look at the FMV of the Nats 2012 local rights in two ways - one looking at the MASN income statement and providing a reasonable, market based profit margin and a second by looking at existing deals of clubs in comparable markets.

4) The RSDC profit margin method provides a very low profit margin in 2012 of 5% but notes this will rise, perhaps substantially so, because the RSDC believes MASN's revenue projections are conservative.

5) The Nats used methodologies to determine their FMV that were entirely inappropriate - a hypothetical LA Dodgers deal, deals reached subsequent to 2012, used average annual contract values for deals going out multiple decades in the future, etc.

6) The Os were not as egregious, but still presented laughable comparable markets such as the Rays/Marlins and based their FMV evaluation on deals reached in 1999 and 2004.

7) Despite noting that deals presented by the Nats took place after 2012, the RSDC still used those same comparables (after removing the hypothetical Dodgers deal) and discounted back to 2012. This is ridiculous and in no way reflects the current market deals in 2012. Further, IMO, the RSDC allows the Nats argument that the Nats should be deserving of a FMV worthy of a Top 10 market when, in fact, the Nats are about 8th in market size - in other words, toward the bottom of the top 10. Comparable markets should probably be an average of the sixth through 10 markets not one trough ten.

I think the RSDC kind of massaged various numbers on both the margin side and the FMV side to align toward the middle of the various methodologies in order to appear reasonable. In doing so, I think the numbers skew away from what is truly reasonable and hurts the Os. It is not appropriate to ask MASN/Os to operate at profitability lower than it had even during the start-up phase (and a level lower than the Cleveland deal operated at during its start-up phase). Certainly it strains credibility to think that NESN or YES pay out local TV rights at that level of profitability. The RSDC does note that in setting the 2012 profit at 5%, that MASN should see profits reach near 11% by 2016 (near the next reset) and that MASN could have higher profits since the RSDC felt the revenue projections upon which the TV rights were based was likely conservative. I think the RSDC could have set the minimum margins closer to 8-10% for 2012. Nonetheless, I do believe the RSDC that MASN revenues were conservative, perhaps egregiously so, and that MASN is likely, under the proposed decision, to reap large profits again when cable carriage rates are re-negotiated.

As noted above, the FMV calculations by both sides were ridiculous, but there appeared to be an opening if the Os had simply used the Astros/Rangers as a comparable market to come to a FMV the Nats for 2012 in the low $40Ms and that would have been reasonable and perhaps even accepted by the RSDC if not for the Os throwing in the Rays/Marlins to drag down the FMV comp to a ridiculously low number.

I believe in fairness and I feel little sympathy for MASN/Os ownership here (other than perhaps the RSDC decision appears skewed more toward the Nats than what seems reasonable). They were the majority owners, did not appear to make appropriate efforts to negotiate in good faith and bullied their way into a formula that generated profits for themselves more than anything approaching FMV (for the Nats or the Os) as called for in the contract. That those distributed profits might be called back because of the RSDC determination just gives the MASN/Os bullies their just desserts IMO. Further, had this case not dragged on, the methodologies of the RSDC, which noted the large increase in local TV rights fees after 2012, might have been more favorable to MASN and the distributed profits of MASN would be less.

Finally, I would assume from what I've read that the contract does not provide for a minimum margin, includes a reset fee to FMV for local TV rights well before carriage rates are re-negotiated and does not cap local TV rights to insure a minimum margin. MASN's Os owners are paying for those omissions in a major way now and those who allowed those safeguards to be included/omitted really negotiated a poor agreement.

[weams]

At the same time, the Nationals approach wasn't "win/win" either. It is clear to me that neither side ever really wanted to help the other or be partners. What a shame. This could have been done in such a way as to make each side feel like they were benefitting IMHO.

I disagree. The punitive ownership situation that was a part of the Washington Club's very existence. Not owning their rights was always going to cause them to try to blow it up. Better to get this out of the way now, then to have them attempt it during next reset.

[hoosiers]

The rights fees were pretty much locked into the contract through 2011 so your 2008 increase in rights fees would have been against the contract.

The real issue is determining a FMV and both teams provided analyses that would be considered jokes.

[weams]

The rights fees were pretty much locked into the contract through 2011 so your 2008 increase in rights fees would have been against the contract.

The real issue is determining a FMV and both teams provided analyses that would be considered jokes.

The Orioles really in any discussion can't deviate from the Bortz model, as it is the basis of their stance. Permanently.

[TonySoprano]

This was supposed to be a reset for 2012-2016. Will it get resolved before the contract calls for the next reset period? That's a half-serious question given how long this has taken. Will the Orioles owe the Nationals for back fees not paid in 2012-14?

[weams]

This was supposed to be a reset for 2012-2016. Will it get resolved before the contract calls for the next reset period? That's a half-serious question given how long this has taken. Will the Orioles owe the Nationals for back fees not paid in 2012-14?

I would assume not. I do know the Orioles have had to put the difference between the Bortz method and the award in escrow.

Seriously, the "loan" from the MLB was so arrogant and assumptive, I think any judge would see the well as poisoned.

[TonySoprano]

I would assume not. I do know the Orioles have had to put the difference between the Bortz method and the award in escrow.

Seriously, the "loan" from the MLB was so arrogant and assumptive, I think any judge would see the well as poisoned.

If no back fees paid then this may never get resolved because Team Angelos knows just to keep this in litigation. Papers have probably been drafted for the lawsuit for 2017-2021. Maybe Baltimore will get the 2022 All Star Game.

[Frobby]

The rights fees were pretty much locked into the contract through 2011 so your 2008 increase in rights fees would have been against the contract.

The real issue is determining a FMV and both teams provided analyses that would be considered jokes.

I agree with a lot of your lengthy analysis. I sort of think "a pox on both your houses" is in order. I might have been a bit more generous to the O's if I'd been making the decision, but I consider the award they made to be "in the range of fair value," as they say. At this point, you have to wonder if the legal battle over the 2012-16 rights fees will be over before it's time to negotiate the 2017-21 rights fees. That's just crazy.

PS -- I see TonySoprano beat me to the punch about the next reset period.