Dodgers To Launch SportsNetLA In $7-Plus Billion TV Deal

The Los Angeles Dodgers announced this morning the creation of a new cable television network that will broadcast all Dodgers games and other Dodgers-related programming beginning in the 2014 season. The network, to be called SportsNetLA, will be operated by American Media Productions or AMP, a newly-formed subsidiary of the Dodgers’ ownership group. Time Warner Cable (TWC) will carry the new network in Los Angeles and Hawaii and pay the Dodgers between $7 billion and $8 billion over 25 years for that privilege.

“We concluded last year that the best way to give our fans what they want — more content and more Dodger baseball — was to launch our own network,” Dodgers chairman Mark Walter said in a prepared statement. “The creation of AMP will provide substantial financial resources over the coming years for the Dodgers to build on their storied legacy and bring a world championship home to Los Angeles.”

Although details of the deal were not released, it is believed TWC will pay the Dodgers in the neighborhood of $280 million per year for the next 25 years. In return, the cable company will control all advertising on SportsNetLA and keep all ad revenue generated by the programming. TWC will also be responsible for convincing other cable operators in the Los Angeles market to carry SportsNetLA.

Major League Baseball has not yet approved the deal, and the league’s approval is not just a formality. Of utmost importance to MLB — and the other 29 teams — is how much of the Dodgers’ annual $280 million rights fee will be counted toward the team’s “Net Local Revenue” under the Collective Bargaining Agreement and, thus, subject to revenue sharing. The court overseeing former Dodgers owner Frank McCourt’s bankruptcy ruled that the value of the team’s new TV deal would be capped at $84 million. MLB contends that the Dodgers should contribute the full $280 million rights fee to the revenue-sharing program if the team bears no financial risk in its new arrangement with TWC.

The difference for MLB’s revenue-sharing coffers would be substantial. As I explained in this post in December, each team contributes 34% of its Net Local Revenue to the revenue-sharing program. Big-market teams contribute an additional amount above the 34%, based on a sliding scale called Performance Factors. If we assume the Dodgers’ overall revenue-sharing contribution each year is 40% of Net Local Revenue, the difference between an annual rights fee worth $84 million and one worth $280 million is $81.6 million. Over the 25-year life of the deal, that’s more than $2 billion. You can be sure the other 29 teams will make considerable noise in MLB’s Park Avenue offices before Commissioner Selig makes a final decision.

Monday’s announcement confirmed news reports that have been circulating for weeks of the Dodgers intent to launch their own local TV network. With the creation of SportsNetLA, the Dodgers will join the Yankees, Mets, Red Sox, and Orioles as teams with ownership control over a regional sports network. None of these teams receives annual rights fees more than $100 million. The Yankees receive $90 million a year, but that figure will rise significantly as a result of News Corporation’s purchase of 49% of YES, the Yankees Sports & Entertainment Network. Over the next several years, News Corp. will increase its equity stake to 80%, which will reduce the Yankees ownership interest, but result in more cash for the Bronx Bombers.

The Dodgers aren’t the first baseball team in the Los Angeles market with a local TV deal worth more than $100 million a year. In late 2011, the Los Angeles Angels entered into a new local TV contract with Fox Sports West. Under that 17-year deal, FSW pays the Angels $147 million per year and the Angels owns a 25% equity stake in the network. The Angels include the entirety of that $147 million in the Net Local Revenue for revenue-sharing purposes.

The explosion in local sports TV deals in recent years has experts wondering about an unsustainable bubble. Right now, local sports programming is the gold standard in value because it is DVR-proof. Viewers watch games live with no ability to skip over commercials. That makes the sports-watching audience more valuable than other TV viewers, and justifies higher ad rates. But ad revenue isn’t sufficient to cover the cost of these new deals. That puts pressure on the regional sports networks to charge higher and higher “carriage fees” — the amount the cable and satellite operators pay to carry the network. Those carriage fees are then passed on to consumers.

The New York Times reported last week that TWC subscribers can expect to see a $4 to $5 increase in their monthly cable bill as a result of its new deal with the Dodgers. That’s on top of the rate increase TWC imposed in the fall to pay for its new 20-year/$3 billion TV deal with the Los Angeles Lakers. Viewers who purchase cable or satellite TV for non-sports programming are starting to bristle over their skyrocketing bills. But a la carte programming — where viewers pay only for the channels they want — is still a ways off.

For now, the Guggenheim Group’s $2.3 billion purchase of the Dodgers appears justified by the launch of SportsNetLA. Even if MLB forces the Dodgers to share more than $84 million per year with the rest of the league, the new owners will enjoy a significant return on investment.