Sports Media Rights: Playing With Monopoly Money

In 2004 Frank McCourt bought the Los Angeles Dodgers for a little over $430 million, most of it with debt-ridden loans. He then proceeded to: drive the team into bankruptcy while driving away fans by raising ticket and concession prices annually, paid a close friend over $400,000 a year (25% of the budget) to run the Dodgers charitable foundation, and became involved in a bitter divorce fight that was scandalous even by Hollywood standards.

Among the disclosures coming out of the divorce suit was that the McCourts used the Dodgers as their personal bank, taking over $100 million from the team to finance a Hollywood lifestyle that included several luxury homes.

And what did McCourt get for all his incompetence and greed?

Earlier this week he sold the Dodgers to a group fronted by Earvin "Magic" Johnson for $2.1 Billion – CASH.

The same day that the sale of the Dodgers was finalized there were reports that the Fox Network is seriously considering challenging ESPN by starting a national sports cable network.

What these two events have in common is the seemingly staggering amounts of money that can be made from regional and national sports channels.

McCourt's sale of the Dodgers for over $2 Billion stunned the financial world (meanwhile the New York Yankees and Jerry Jones just smiled as their property values skyrocketed).

The dollar amount blows away the highest price ever paid for a sports franchise - the Miami Dolphins were sold for $1.1 Billion three years ago - and is over $700 million higher than the most optimistic valuation of the franchise.

How in the world can Magic Johnson's group justify overpaying by so much.

It's Not Sports - It's Entertainment

Within a year the Dodgers media rights will be up for bid. The greater Los Angeles television market is right at five million homes, and when you add outlying areas that number surpasses seven million. There seem to be two basic options for the new owners to maximize their media revenue.

The easiest option is to bid the rights out to an existing regional sports network, and now is a perfect time to create a bidding war in Southern California. The Dodgers games are currently on Fox's Prime Ticket, and they are critical to the success of the regional network. Fox has already offered the team a 17-year extension valued at almost $3 Billion.

Meanwhile Time Warner Cable has partnered with the Los Angeles Lakers to launch two regional sports networks (one in English, one in Spanish) sometime next year. Adding the Dodger to their inventory would be a tremendous boost.

Recently the Texas Rangers made a deal for their media rights that is estimated to be worth over $150 million a year, and it stands to reason that based on the population and the bidding factions in southern California that the Dodgers could expect to make more than that.

The other option would be to launch their own network, using the New York Yankees YES Network as a template. With its own network, the Dodgers would collect monthly fees from cable and satellite operators. Early estimates are that a Dodgers Network could charge up to $3.50 per subscriber per month. That could mean at least $300 million in added revenue annually, money that would not be subject to baseball's revenue sharing rules.

Of course all of this is based on cable and satellite operators agreeing to pay for the channel and have it on their basic sports tier, and this is where the battle between program providers and distributors will continue to be waged.

One certainty in all of this is that Dodger fans can expect to pay higher prices at the stadium, while also facing a higher cable TV bill.

Competition for ESPN

Fox, like the other broadcast networks, has traditionally acceded cable dominance to ESPN in sports. Now there are indications that Fox is willing to at least seriously study the feasibility of a national round-the-clock sports network. Recently both NBC and CBS entered the battle. CBS rebranded its cable channel as the CBS Sports Network and hired Jim Rome to work for it. The channel is only in 45 million homes right now, less than half as many as ESPN (100+ million homes).

Comcast purchased NBC last year and made it clear that challenging ESPN was a long-term goal. They re-branded the Versus channel as the NBC Sports Network. It is in a much stronger position than CBS. The NBC Sports Network is already available in 75 million homes, and has a stronger initial inventory since the broadcast network has the NHL, Notre Dame and the MLS already under contract, along with the Golf Channel. NBC also has the Olympics tied up for the next decade.

Fox has some advantages that come into play should they decide to enter the national cable sports arena. There are 20 regional networks in place that have rights to sports programming that could be called on to supplement a national network. Fox has contracts with the Big 10, Big 12 and Pac 12 that could also suppement inventory to a Fox Sports Network. As they acquire other sports programming, Fox could sprinkle some of it on their broadcast network and then put the other contests on their cable outlet.

Everyone behind the sudden growth of regional and national sports networks are all chasing the same Holy Grail - monthly subscription fees.

Cable Conundrum

As expected, this past Super Bowl once again set the record as the most viewed program in American television history.

The Super Bowl is an extreme example of what has become the #1 rule of television in America. Live sports programming delivers more "Do You Believe What You Saw?" moments than any other programming, and it is the closest thing to being "TiVo proof" that is out there for broadcasters. Sports programming also brings a highly-desired demographic (men 18-34) to the TV set that are generally hard to get.

Earlier this year, TiVo released a research report showed that of those homes that had TiVo, only 38% of viewing is live. That's a lot of commercials being skipped over.

It's also why ESPN can command $5.06 per subscriber per month from distributors for the Mother Ship and why they collect almost $7.00 per month for all of their networks combined.

More competition for ESPN also means more competition in bidding for the rights of sports programming, which will drive the price up, which will also drive the price of affiliate fees up for TV providers.

Therein lies the rub for the cable outlets. More and more customers are "cutting the cord" because they are tired of seeing their cable bill continually rise.

The cable and satellite providers know that regional sports networks bring an active customer base that wants to watch their favorite teams games - home or away - so they need to keep the service. The more expensive the regional channels get, the more expensive the cable gets, and other customers who don't care about sports begin to "cut the cord."

It's the Circle of Hell for providers.

What the regional sports networks and the providers are hoping is that the ESPN template will save them as well. ESPN boasts that 99% of its viewing is live, and they plan to fight cord cutting by never giving the product away.

Since 2005, ESPN had negotiated the rights for every platform (TV, Computer, mobile device, I-Phone) into every content deal. Want to watch the SEC game of the week on your I-Pad? Sure - as long as you have a paid television subscription.

The "TV Everywhere" concept is what all these companies are banking on for the future. Cable operators are now becoming programmers as well as distributors (Time Warner's deal with the Lakers, Fox's deal with the Big 10 Network, etc).

The question of course is where is the tipping point for the customer? Out in southern California, how many sports fans will pay for the Lakers Network, the Dodgers Network, The Angels Network as well as the Pac-12 and USC-UCLA channels?

All of which leads some industry experts to believe that the idea of a A La Carte menu will eventually have to be addressed by the providers.

Meanwhile the buying frenzy continues, with visions of television $$$$ dancing in the heads of sports teams continuing apace.


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