The Impact of Television Revenue on Major League Baseball

MSA 404

Professional sports leagues have been selling their television rights to national broadcast networks since the 1960’s. The commissioner of the National Football League (NFL) at the time, Pete Rozelle, decided that even distribution of television revenue was one way to even the competitive balance between the league’s large and small market teams (Winfree & Rosentraub 224). Major League Baseball (MLB) eventually decided to follow in the NFL’s footsteps and adopt a similar TV revenue sharing model. However, the MLB’s situation is slightly more complicated thanks to Regional Sports Networks (RSNs). RSNs televise all the hometown team’s games that are not picked up by a national network. Recently, some large market MLB teams have begun signing mega-deals with these RSNs. These monster contracts could greatly impact the competitive balance in Major League Baseball, and astronomically increase cable bills for both distributors and subscribers.   

Prior to the 2013 season, the MLB signed new television contracts with ESPN, FOX and Turner to nationally televise select games. These three deals are collectively worth more than $12.4 billion over eight years. With equal revenue sharing that means each team will receive more than $51.67 million a year because of the deals. This is more than double what each team received under the league’s previous TV contracts (Warner).    

After taking a quick glance over the TV revenue figures, it does appear that a team’s broadcast profits are directly correlated to the size of its metropolitan area. The Angels generated the most TV revenue in 2013 at $119 million. The Yankees and the Mets, with $96 million and $81 million, followed them respectively. At the other end of the spectrum, the Cincinnati Reds finished last with only $44.93 million from TV revenue. The Atlanta Braves and St. Louis Cardinals only fared slightly better, raking in a measly $47.57 million (Warner). Surprisingly, all of the bottom three teams made the playoffs in 2013, while the Angels, Yankees and Mets all missed the post-season. Even though teams are bringing in big money from these TV contracts, they still have to share with the rest of the league to provide some sort of a check on competitive balance. The league’s collective bargaining agreement says that teams must enter 34 percent of their local TV money into the shared pool (Warner).

The Houston Astros also exemplify how potential viewers mean more than on the field performance when it comes to netting a big TV contract. In 2013, the Astros made the fourth most money from TV revenue in the MLB at $77.93 million, in spite of having the worst record in the league. The Astros were one of three teams in the MLB last season who could cover its entire payroll just from TV revenue. In fact, the team could pay off its entire $24.33 million payroll three times with the money it generated from TV contracts. After factoring other sources of revenue, such as tickets and merchandise sales, the 2013 Astros were the second most profitable team in the history of baseball (Yonder).      

All 30 MLB teams can expect to see their TV revenue figures rise in 2014. This is primarily due to the record-breaking deal recently signed by the Los Angeles Dodgers. The Dodgers, along with Time Warner, are getting ready to launch its new RSN called SportsNetLA. This deal is expected to award the Dodgers more than $7 billion over the next 25 years, and is the largest TV contract in the history of baseball. Next season, the Dodgers are expected to eclipse the Angels as the biggest TV earners in the league. The team is expected to make more than $179 million in TV revenue in 2014. This deal will also pad the pockets of the other 29 teams. They can each expect to receive an extra $44 million next year thanks to revenue sharing (Warner).  

In order to avoid sharing local television revue with the rest of the MLB, quite a few teams are beginning to buy stakes in their personal RSN. The Yankees own 30 percent of the YES Network and the Boston Red Sox own 80 percent of New England Sports Network. Both of those networks are actually more valuable than the franchises they cover (Nightengale). The Houston Astros also co-own their network, SportsNet Houston, along with NBC (Yonder).

Unlike the other big four American sports leagues, the MLB does not have a salary cap. This means a team can devote as much money as it possibly can to its payroll. If teams spend more than $189 million on their payroll they are fined a luxury tax (or competitive balance tax) by the league. Last season, the New York Yankees accrued a $28 million luxury tax on top of its already $237 million payroll (SB Nation). We first began seeing the affect these massive deals has on team payrolls two off-seasons ago, with flashy free agent signings by the Los Angeles Angels and the Texas Rangers. The Rangers signed Japanese pitcher, Yu Darvish, to a $111 million contract. The division rival Angels signed slugger Albert Pujols to a 10-year, $240 million deal, and all-star pitcher C.J. Wilson to a $77.5 million contract. The Rangers financial windfall came in 2010 when they agreed to a 20-year, $3 billion deal with Fox Sports Southwest. The Angels entered into a similar 20-year deal with Fox Sports West in 2011, but their deal was valued at slightly more than $3 billion. For comparison, the Angels previous deal was $500 million for 10 years (Nightengale). The Dodgers have also already put their money to good use. They recently signed Cy Young winner Clayton Kershaw to a seven-year, $215 million deal. This is the largest contact for a pitcher in baseball history (SB Nation). This influx of television revenue can really help some teams stay afloat. The Rangers filed for bankruptcy in 2010, and by 2012 they were financing a more than $127 million payroll (Nightengale).

While some experts believe these big deals can aid competitive balance, others believe it will be more detrimental. Television contracts are driven by the number of viewers the network and potential advertisers can reach. On average, the New York Yankees have 318,000 households watching their games. Conversely, only about 32,000 households tune in to see a Kansas City Royals game (Nightengale). The Royals would never be able to command a contract any where near the ones the Rangers, Angels and Dodgers are getting. While mostly large market teams are getting the best deals that is not always the case. The San Diego Padres play in baseball’s 26^th largest market, yet make more than $75 million a year from TV revenue. Even with revenue sharing, most small market teams will always lag behind large teams when it comes to TV revenue. The Padres are an exception to the general rule (Nightengale).

It is getting difficult for cable distributors to keep up with the escalating cost of sports programming. Sports programming costs are increasing by more than 10 percent per year, compared to only seven percent for all the other genres. ESPN is the most expensive basic cable channel for distributors. It charges $5.54 per subscriber per month. This already high number is expected to grow by at least two dollars per subscriber by the year 2018. ESPN’s competitors are currently offering much lower rates. Right now, FOX Sports 1 is available for only 90 cents per subscriber per month (Lieberman).

Networks need to charge higher carrying fees due to the increasing proliferation of TV. Thanks to DVRs and the Internet, viewers can now zoom right past commercials and watch shows online so their networks have little leverage with advertisers. However, sports is the one type of programming people watch live so it can command big ad dollars. Networks need to charge high prices for sports programming so they can make up all the revenue they are losing from everything else (Thurm).  

RSNs are also charging more money to distributors to cover the cost of their contracts with the teams. Time Warner is planning on charging distributors more than $5 per subscriber per month to carry the Dodgers’ new SportsNet LA. For comparison, most RSNs that ask for a similar price carry games for at least two professional sports teams, as compared to one. The Dodgers’ deal is unique since they will be the only professional sports team whose games are carried by the new network (Lieberman). Most other RSNs carry an MLB team along with an NHL or NBA team.

Some economic experts are worried about the increasing price of cable TV and its rapidly growing contracts with the MLB, its teams and other professional sports leagues. They believe escalating prices will cause cable distributors to refuse to carry sports programming, and thus leave customers with no way to watch their favorite teams. Non-sports loving cable customers could also create problems by refusing to pay extra for sports programming and demanding a way to opt-out. This concept is called the “sports TV bubble” and some are expecting it to burst very soon (Thurm). According to a survey by Bloomberg Businessweek, 80 percent of cable subscribers would opt-out of sports programming if it was a choice. Broadcasters need advertising revenue to stay afloat, because the basic number of subscribers is not enough (Thurm).

Carriage fees are getting higher. Distributors usually comply to paying the RSN’s fees because they know their consumers will be satisfied being able to see their favorite sports team play (Thurm). This was not the case in Houston after the Astros signed their big deal with Comcast. Three cable providers in the area refused to pay CSN Houston’s high carriage fee and left 60 percent of cable subscribers in the Houston area without access to Astros’ games. A similar situation happened in San Diego, where thanks to a dispute with Time Warner, 40 percent of fans cannot tune into the games (Thurm). Some of this is done on purpose, AT&T Uverse decided not to carry CSN Houston after they discovered the Astros’ low ratings. They thought the price would not result in a positive return on their investment, and not that many subscribers would switch to a different provider anyway. Many cable providers are starting to look at actual viewership and not just the potential size of the market. Networks may need to start negotiating more economically friendly deals with teams so they can charge lower carriage fees. If not, they may lose the business of more and more cable providers (Thurm).      

In conclusion, big-time TV contracts are rapidly increasing the revenue of large market Major League Baseball teams. These deals are allowing them to go out and sign the game’s best players, and could potentially further the gap between the haves and the have-nots. However, Time Warner’s mega-deal with the Dodgers may be the last of its type. RSNs are pricing themselves too high and costing many cable subscribers access to their favorite teams.       

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