Astros’ Regional Sports Network Awash In Losses And Lawsuits

Comcast SportsNet Houston went live Oct. 1, 2012, and has been in trouble ever since. Actually, the trouble may have started before the first broadcast signal beamed to homes in the Houston area. Now the network and its various constituent owners are fighting in federal bankruptcy court and in Texas state court. The situation may get worse before it gets better.

The Houston Astros own the largest equity stake in CSN Houston, at 46%. The Houston Rockets own 32% and Comcast has the remaining 22%. Comcast owns NBC Universal, which operates Comcast Sports Group — the network of regional sports networks that includes CSN Bay Area, CSN California, CSN Chicago, CSN Philadelphia, CSN Mid-Atlantic and CSN Northwest.

Not only do the Astros have a large stake in CSN Houston, but also a 20-year, rights-fee deal that was supposed to pay the team, on average, $80 million per season. That figure is in line with other recently-inked broadcast deals for MLB teams in medium-to-large television markets: the Rangers and Angels are on the high end, with deals averaging $150 million per year for 20 years. The Padres are on the low end, with a deal averaging $60 million per year for 20 years.

But what the Astros were scheduled to be paid for the broadcast rights to their games differs significantly from what they received. Forbes reported that the CSN Houston deal called for the Astros to be paid $56 million this year, but the network paid only $25 million because it didn’t have the revenue to meet its obligations.

There are several factors contributing to CSN Houston’s bleak financial situation, but biggest is the network’s inability to reach agreement on carriage fees with the non-Comcast cable and satellite operators in the viewing area. AT&T-Uverse, Time Warner Cable and DISH Network have, thus far, refused to pay the $3.40 per-subscriber-per-month fee that CSN Houston demanded to carry the network. As I wrote in July, cable and satellite companies are using more sophisticated rating data to determine who is and who isn’t watching local sports. AT&T-Uverse decided against carrying CSN Houston based on this new, detailed ratings information. Overall, 60% of the homes in the viewing area don’t have CSN Houston.

And so, in late September, Comcast/NBC Universal and several other creditors filed an involuntary bankruptcy petition against CSN Houston and asked U.S. Bankruptcy Judge Marvin Isgur to appoint an interim trustee to oversee operations at the network. The creditors allege that in the negotiations leading to the formation of CSN Houston in 2010, then-Astros-owner Drayton McLane agreed to the carriage fees the network would seek to charge the non-Comcast cable and satellite operators. But after McLane sold the team to current owner Jim Crane, the Astros sought a higher carriage fee, leading to the impasse. A link to the motion (with court-approved redactions) can be found here.

Judge Isgur held an evidentiary hearing on Oct. 28, and at the same time permitted the parties to participate in closed-door negotiations in an attempt to agree on a way forward. The outcome was a court order granting the Astros the authority to “investigate and negotiate the terms of carriage agreements, broadcast agreements, management agreements, lease agreements, equipment agreements, purchase and sale agreements and debt and equity investments and other matters pertaining to the formulation of a business plan.” A link to the court’s order is here.

With Crane in charge, CSN Houston offered its programming free-of-charge for 45 days to the cable and satellite operators that had balked at the $3.40-per-subscriber-per-month carriage fee. That would have made Houston Rockets games available throughout the city, as the NBA season got underway. All of the operators declined the offer, which is a bit curious because the operators might gain a better understanding of network demand if it were offered to subscribers.

Late last week, Crane filed suit in Texas state court against Drayon McLane. Crane alleges that McLane made material misrepresentations regarding the financial viability of CSN Houston during negotiations leading to the sale of the Astros. Crane told the press on Friday that the club has lost tens of millions of dollars — if not hundreds of millions — as a result of representations made by McLane about the business prospects of CSN Houston. McLane and Comcast deny the allegations.

The action returns to bankruptcy court on Dec. 12, when Isgur holds a hearing on the Astros’ efforts to buy, sell  or reorganize CSN Houston. If the Astros haven’t made sufficient progress, the court may still appoint an interim trustee to oversee the network’s operations. Other options are on the table, as well.

The question for Major League Baseball and the teams that have TV deals set to expire in the next few years — including the Phillies, Rockies and Diamondbacks — is whether the situation in Houston is particular to those teams (Astros and Rockets) and that market (Texas, Louisiana, Oklahoma, New Mexico and Arkansas) or a sign that the sports-rights fees bubble is losing air. Howard Megdal reported on Oct, 21 for Sports on Earth that a new, lucrative Phillies TV deal was expected to be announced within 30 days. We’re now five days past that window, and there’s been no such announcement. It’s a holiday week and all, so an announcement just before baseball’s Winter Meetings is still possible. It’s also possible the situation in Houston has given several parties pause.

So for now, we wait. We wait to see what happens in the bankruptcy court. We wait to see what happens in Texas state court. We wait to see what happens in Philadelphia.