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November 27, 2012 at 9:53 AM

Will these gigantic TV deals last the length of their term in baseball? Maybe not, but don’t take up any collections

Read an interesting piece in USS Mariner this morning that looked at the whole regional sports network (RSN) explosion in baseball that is now changing the sport on a daily basis. The post asked a question which I’ve heard coming up more and more frequently as each new RSN deal is announced: what happens when the bubble bursts?

In other words, when cable companies, because of a consumer revolt against bundled charges, stop paying the going RSN rate to show games in order to subsidize the exhorbitant rights fees charged by teams? Or, when there’s a changing of technology away from the current TV model? Or maybe a decision by regulatory bodies to do their jobs and stop allowing for the gouging of TV-watchers who don’t even like or want sports programming?

What happens if all three things take place in coming years? Will the RSN then be able to afford to fulfill their financial obligations to a team, say, 10 years into a 25-year deal?

These are all very good questions, with no easy answers simply because none of us has the crystal ball to predict how the future will unfold. Three years ago, I thought the Flip camera was a great video device. Now, the product is obsolete because smartphone technology blew its video abilities out of the water within a span of 12 months. Today, I can wirelessly live stream stuff from my phone with the type of quality you would get from recorded video on a $700 camera just five years ago.

So, no. I won’t try to tell you where the future of television is going to wind up in 10 years.

For me, though, that’s not the biggest worry if I’m a baseball fan. For me, the worry right now would be that my team get the biggest slice of the RSN pie that it can before it all gets eaten up by the aforementioned possible changes.

Here’s why.

There is no question that at some point, somebody is going to step in and stop the continued gouging of consumers forced to pay for sports programming in order to watch their favorite shows as part of a bundled package. As mentioned, it will either be regulatory agencies that — in theory — are supposed to protect consumers from monopolistic practices (which, let’s face it, this is), or the consumers themselves, who simply turn away from cable in disgust.

That latter part won’t be as easy as it seems. Viewing habits are hard to break. But I can see it coming to a degree. There are days when I find myself watching all of my TV via internet-based streaming through Google TV (a birthday gift from a few years back). Netflix has actually become my go-to channel for non-sporting events.

And if you don’t mind waiting a few months, you can eventually watch entire seasons of your favorite shows on Netflix, or, if they don’t carry it, buy it a la carte from Amazon or one of a host of retailers offering such stuff.

But we are an increasingly impatient species, so I don’t necessarily see huge masses of TV viewers suddenly being willing to wait an extra six months to watch the latest episodes of Homeland or Boardwalk Empire.

Now, cable companies do get a cut from internet providers when a portion of their content is made available via streaming. Also, just because you can stream some things on some cable providers, it doesn’t mean you can get them on others. I don’t have access to NFL Sunday Ticket via Comcast, though I would on DirecTV.

So, no, I don’t see the worst-case scenario unfolding anytime soon, where cable companies are put completely out of business by new viewing models. Cable companies pay teams of people very handsome salaries to stay ahead of the game on that front and prepare for what life will look like down the road.

And even if the absolute worst-case scenario were to unfold, where cable companies start going bankrupt because of a drastic shortfall in revenues and inability to meet long-term commitments (after all, this did happen to a vast portion of the newspaper industry after a 200-year monopoly on news content), what would this really mean for baseball teams benefitting from major RSN deals?

First off, most of these deals contain opt-out clauses to deal with that very question of “What if?” the landscape changes.

Just as the Mariners are poised to benefit from a 2015 opt-out with ROOT Sports — now that the market has changed for the better and can garner the team substantially more money — the same could hold true for the network. If the market decreases significantly in coming years, a network holding an opt-out clause could exercise it to stave off being tied to future commitments it can’t pay for.

It’s called doing business. That’s why both sides pay very expensive lawyers and take months, even years, to negotiate such deals and prepare for contingencies.

Secondly, even if the cable revenue structure collapses and companies start filing for bankruptcy, the only way this devastates the team is if all of its TV revenue money has been spent ahead of time. We’re talking years ahead of time.

The truly “smart” analysts knew months ago that what was footing the bill for the Dodgers to acquire several big-ticket Boston Red Sox players back in August was anticipation of their new TV deal. They weren’t wagging their fingers in “tsk, tsk” fashion or preaching the tired mantra of cost-effectiveness to the Dodgers as some did a bit too rapidly.

So, when the Dodgers this week were reported to be finalizing a 25-year RSN deal with Fox said to be worth between $6 billion and $7 billion, the folks at Forbes weren’t trotting out their dog-eared Moneyball paperbacks to try to decipher what it all means. They had already spelled it out in plain text months ago: that even if all the mega salaries absorbed by the Dodgers in the trade with Boston put them over the luxury tax threshold, the new expenses and penalty would still be easily covered by one year’s worth of revenue from the new TV deal.

I know, it boggles the mind. But that’s how we have to look at things now. The old way of viewing it is so…so 2003.

The truth is, even the Dodgers, with all of their crazy spending in the second half, have it covered with other people’s money — the money from cable subscribers. And they aren’t even close to over-leveraging themselves.

When they start borrowing against incoming revenues a year or two, or three or four, ahead of time — to the point where we start seeing $300 million payrolls — that might be the time to start asking whether the potential of a bursting RSN bubble could spell disaster for teams down the road.

But we aren’t close to seeing that yet. We have two teams near $200 million right now — the Yankees and Dodgers — and they are easily covering their bills. The reason the Yankees are trying to stick below $200 million is simply to avoid more luxury tax payouts over the short term. They’ll almost certainly be back over that amount by the middle of the decade.

Actually, the desire of the Yankees to save millions in luxury tax penalties by sticking below a $200 million payroll is proof that MLB’s own system is protecting its wealthiest teams from over-leveraging. From the very thing that those pointing at a possible RSN bubble fear the most.

No, we aren’t close to seeing teams mortgage away their futures on an RSN model that might not last. Sure, it could happen someday. But we could all get hit by a bus this afternoon and I don’t see too many of you sitting out there fretting about it.

The potential of some MLB team going broke down the road becase they over-leveraged on an RSN bubble that could burst in five or 10 years is pretty low down the chart of things to worry about.

My biggest worry as a baseball fan when it comes to the RSN bubble?

That my team won’t get in on the fun in time. As this article by Jeff Passan at Yahoo! points out, we’re entering a very new age of haves and have-nots in baseball and it’s going to be based on which teams get their hands on enough RSN revenue to sustain them competitively over the next decade.

The good news if you’re a Mariners fan? The Mariners should be able to make the cut in time. You’d better hope that they do. But for now, they appear safe.

Look, I know this doesn’t sound fair. It isn’t. It’s a lousy, skewed system that makes things very difficult for have-not teams to succeed over the long-term. In a perfect world, owners worth hundreds of millions and even billions would put up some of their personal cash to subsidize yearly payrolls to keep them more competitive.

But that isn’t how it works. Owners hate spending their own money. They expect that anything they shell out beyond initial purchase price will come mostly from taxpayers via newer ballparks and from cable customers. Then, they expect (not “hope” but “expect”) to cash out later on with teams worth several times the initial purchase price, having benefitted from all the tax advantages and ownership prestige/perks in the interim.

I wish it wasn’t the case. But it is and it likely won’t change for a very long time because that’s not how the business of baseball operates. We saw this coming a year ago with the Rangers and Angels and now, the trend is real and is going to change who the perenial winners and losers are in this game for years to come. Even if the RSN bubble does burst, it’s not like cable companies will be able to opt out of deals overnight. It’s not like that flow of new cash to the teams with deals is suddenly going to go bone dry in the blink of an eye. These types of business deals simply don’t work that way.

Comapnies will spend years paying out on bad deals before they even contemplate something like filing for bankruptcy protection.

That’s why, if you’re a baseball fan, you’d best hope that your team gets in on all the fun before the bubble bursts. If it doesn’t, it could be left waiting for years on end before the system starts to level off again. If it ever does.

That would be No. 1 on my list of things to worry about should the RSN bubble finally burst. Anything else? Worry about the bus, first.

0 Comments | More in RSN | Topics: L.A. Dodgers, ROOT, tv deals

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