The Numbers (Part Two): Local Media Revenues

Part One

The second column of MLB’s financial disclosures sets forth each club’s
purported revenues from local television, radio, and cable contracts. As the
table below shows, media revenues are heavily affected by the size of a
club’s local market. For example, the Mets and Diamondbacks have identical
media contracts on a per capita basis, but because the New York metropolitan
area is so much larger, the Mets gross $32 million more.

Sources:

TV/radio/cable money: MLB disclosures.
Metropolitan populations: 2000 U.S. Census CMSA/MSA figures and StatCan 2000
estimates (Toronto and Montreal), adjusted for number of teams in market.
Number of TV/cable games: 4/2/01 Broadcasting and Cable.

These figures look only at a team’s home market, and divide all two-team
markets equally between the clubs. Mike Jones has
developed a broader method
which attempts to assign more distant markets to particular clubs.

Four major-league clubs are owned by large national-media companies: the
Angels (Disney), Braves (AOL Time Warner), Cubs (Tribune Company), and
Dodgers (News Corporation/Fox). This is a red flag for analysts, because the
common ownership of a baseball franchise and a related enterprise can allow
the parent company arbitrarily to apportion revenues and expenses between
the companies.

In particular, an entity that owns both a baseball team and its local
television outlet may well charge the TV station less than fair market value
for the club’s media rights. This strategy not only allows the club to cry
poverty during baseball labor talks, but artificially inflates the station’s
profits, a figure closely watched by stock analysts. All four of these clubs
report suspiciously low media contracts, but in only two of these cases do
the suspicions appear justified.

On a dollars-per-resident basis, only the Expos earn less from the media
than Disney’s Anaheim Angels. But the Angels aren’t broadcast over any of
Disney’s stations. Flagship radio station KLAC belongs to Clear Channel
Communications, TV station KCAL was sold by Disney before it acquired the
Angels, and cable outlet Fox Sports Net is owned by a competitor. The real
problem runs much deeper: nobody cares about the Angels.

Plenty of people care about their local rivals the Dodgers, who also have a
substandard media deal. However, the Dodgers’ 2001 TV and cable contracts
were a legacy from the O’Malley era, not the result of Fox manipulation.
Before the 1997 season the Dodgers entered into a five-year contract with
KTLA-TV, which bought TV and cable rights, then sublicensed the latter to
Fox.

That leaves the two national superstation teams, the Braves and Cubs. The
undervaluation of the Cubs’ rights is especially apparent, as according to
MLB, they earned $6.5 million less than the crosstown White Sox, despite a
superior radio deal and more games airing on the WGN superstation.

An MLB spokesman recently told the Chicago Tribune (another part of
the same empire) that the superstation part of the Cubs’ TV deal is valued
separately from the local broadcast rights. The Cubs keep about 30% of the
superstation money, with the rest paid into the common pool, an arrangement
that only increases the incentive to undervalue the Cubs’ contract. As MLB
admits that the Cubs would out-gross the White Sox if the Cubs’ portion of
the superstation money was added to the local contract, the superstation
share of the Cubs’ TV package is worth at least $22 million, possibly much
more.

Then there are the Braves. MLB claims that the inventors of the superstation
earned less from radio and TV than the Cleveland Indians. The best way to
value the TBS contract is to compare it to the ESPN national baseball
package:

• Both TBS and ESPN air about 90 major league games a year.

• Both TBS and ESPN are carried on virtually every cable system in
  America, though some of ESPN’s games air on the lower-carriage ESPN2.

• TBS’s ratings are significantly higher than ESPN’s: in 2000, TBS
  averaged a 1.6 for its Braves games, ESPN a 1.0 for all its MLB games.

• ESPN has higher production costs, because many of its games are
  regionalized and its crews and announcers don’t follow the same team all
  season.

• TBS has made the Braves the de facto home team of millions of fans far
  from Atlanta, creating additional economic benefits for the club.

On the other hand:

• ESPN’s contract includes expanded rights to highlights and archival MLB
  footage, staples of its "Baseball Tonight" coverage even when the
  network is not airing live games.

• ESPN is under considerable competitive pressure to pay more than market
  value for MLB games, since losing baseball would blast a hole in its summer
  programming schedule and effectively cede the entire baseball market to Fox.

Balancing all these factors, I think it’s reasonable to conclude that if the
TBS package were competitively bid, it would be worth more to Braves owner
AOL Time Warner than to anyone else, and would sell for about as much as the
ESPN contract.

The current ESPN deal is hard to value because it was negotiated to settle a
lawsuit. MLB received an up-front payment of $125 million in 2000, then
rights fees of $35 million in 2000, $40 million in 2001, and $40 million in
2002 as provided in the previous contract, jumping to $175 million in 2003
and $200 million in 2004-05. Let’s call it $115 million for 2001, $35
million of which would go to the Braves.

That would revalue the Braves’ package to about the level of the Yankees’
deal, but not for long. The Yankees’ media contracts expired after the 2001
season. The club has teamed with the commonly-owned NBA Nets and NHL Devils
to form the YES Network, scheduled to debut in March. Even without
out-of-market superstation telecasts, Yankee media revenues could top $80
million in 2002. Their crosstown rivals aren’t as fortunate: the Mets are
midway through a 30-year cable contract they foolishly signed in the
mid-1980s.

The Mariners’ #3 ranking is the strongest response to those who claim some
major-league markets "just won’t support baseball." Ten years ago
the Mariners were a basket case. Seattle had lost one team and was about to
lose another. When I attended a game at the Kingdome in September 1991, even
half-price general admission tickets couldn’t entice more than 10,000 fans
into the sterile concrete mausoleum…but the game was officially a sellout,
because a local grocer bought all the remaining seats to prevent the
Mariners from triggering an attendance clause that would have allowed the
club to void its lease. Seattle’s $3 million in media revenues was MLB’s
lowest, half of what the Expos earned, and the most prominent local coverage
involved bars that tied the price of happy-hour drinks to Dave
Valle‘s anemic batting average.

Now, the Mariners have the best per capita media deal in all of MLB–even
without including the cash from Japanese TV–and the highest-rated local
telecasts.

A few remarks about other teams:

• The second-best per capita media contracts belong to the Cleveland
  Indians, another club given up for dead a decade ago. In a market smaller
  than that of the Twins, the Indians receive almost three times as much money
  from the media.

• The Boston Red Sox also control NESN, their cable outlet. Their media
  deals appear slightly undervalued for a club whose appeal, and TV/cable
  reach, extends throughout New England.

• The Orioles’ media money seems so low only because Baltimore and
  Washington are considered part of the same metropolitan area. An NL team in
  Washington would likely have little effect on the Orioles’ radio and TV
  rights.

• When I lived in Ann Arbor during the Tigers’ glory days, the club was so
  popular that their local TV outlet regularly preempted first-run episodes
  of The Cosby Show and the rest of NBC’s powerhouse Thursday-night
  lineup to show their ballgames. Now the Tigers earn half as much, per
  capita, as the Colorado Rockies.

• Like the Red Sox, the Phillies are part-owners of their cable outlet.
  The low price paid for Phillies’ TV rights suggests that the club may be
  putting some of its money into a different pocket.

• Toward the bottom of the table, clubs not only come from smaller cities,
  but also make fewer games available to TV and cable. Because of network
  preemptions, a "full schedule" of local telecasts is usually
  about 150 games, but the Royals telecast just 81 games, the Reds 85, all on
  cable.

• Once again, the Expos are in a world of their own, with no
  English-language radio or TV coverage. In a market twice the size of #29
  Milwaukee, the Expos receive less than 1/10th as much media money.

Next column: "All Other Local Operating Revenue," or "Why
Clubs Love New Stadiums."

Doug Pappas is chairman
of SABR’s Business of Baseball Committee. His writings on the subject are
archived at http://roadsidephotos.com/baseball/.
Although his early professional experiences included helping the USFL win $3
in its antitrust suit against the NFL and watching Bowie Kuhn flee to
Florida one step ahead of his bankrupt firm’s creditors, he continues to
practice law in New York.