Mariners’ Gamble on Majority Stake In ROOT Sports Northwest by Wendy Thurm April 19, 2013 In a deal announced on Tuesday, the Seattle Mariners will become the majority stakeholder in ROOT Sports Northwest, the regional sports network (RSN) owned by DirecTV. ROOT Sports NW currently broadcasts Mariners games under a 1o-year rights fee contract that pays the Mariners $45 million per year. That agreement gave the Mariners an opt-out clause after the 2015 season, which led many to speculate that the team would look to match the mega deals recently struck by their American League West rivals. In 2011, the Angels inked a new local TV deal with regional sports network Fox Sports West, valued at $2.5 billion over 17 years, plus a 25% equity stake in the RSN. The Texas Rangers kicked off this new frenzy in late 2010 with its 20-year/$1.7 billion deal with Fox Sports Southwest. After the Angels’ new deal, the Houston Astros cashed in, joining with the Houston Rockets to create a new RSN with Comcast, called Comcast SportsNet Houston. The Astros will receive $80 million a year for the next 20 years, plus income generated from its 45% equity stake. Instead, the Mariners are headed in a different and somewhat surprising direction. The new deal — estimated by Forbes at $2 billion over 17 years — will give the Mariners broader control over the RSN’s programming. But that control may come with some financial uncertainty. At the moment, three MLB teams own majority stakes in their regional sports networks: New York Mets (SNY), Boston Red Sox (NESN), and Baltimore Orioles (MASN). The New York Yankees recently sold their majority stake in the YES Network to News Corporation. The Los Angeles Dodgers expect to join the group next season with the launch of SportsNet LA, an RSN operated by American Media Productions, a newly-formed subsidiary of the Dodgers’ ownership group. The financial uncertainty arises, in part, from the way MLB treats the different revenue streams from a team-owned RSN for purposes of the league’s revenue-sharing program. For example, NESN pays the Red Sox $90 million each year for the exclusive right to broadcast Sox games. That $90 million is included in the Red Sox’ “net local revenue” and subject to revenue-sharing. But the Sox also receive revenue as a result of its majority stake in NESN. That investment income is not subject to revenue sharing because the Red Sox bear the risk of NESN’s overall financial performance. Only the guaranteed yearly payments are subject to revenue sharing. (If you haven’t read my earlier posts explaining the ins and outs of MLB’s revenue-sharing program, you can find them here and here.) Contrast the Red Sox/NESN situation with the Angels’ new deal with FoxSports West. Under the Angels’ 17-year/$2.5 billion deal, the team is guaranteed $150 million in annual rights fees and investment income from their 25% equity stake in the RSN. That’s $60 million more in guaranteed money each year for the Angels compared to the Red Sox, but with a much smaller upside from the minority stake in FoxSports West. The full $150 million rights fee is subject to revenue sharing. The details of the Mariners-ROOT Sports NW deal have not been been made public. If Forbes’ numbers are correct, the team will likely receive an annual rights fee in neighborhood of $117 million. That would top the annual rights fees of the Red Sox and the other teams with majority control over their RSNs. But we’re awaiting details on the size of the Mariners’ equity stake in the RSN; all we know now is that it will be more than 50%. And the equity stake isn’t the only uncertainty. There’s also all the question of what this new RSN will broadcast. All of the team-controlled RSNs have a wide variety of sports programming. NESN is home to not only the Red Sox, but also the Boston Bruins games and other New England sports programs. SNY covers the Mets, the New York Jets and Big East Conference football and basketball games. MASN broadcasts Orioles and Nationals games, and covers the Baltimore Ravens. The rich and diverse content on these RSNs drives up the network’s value; the MLB teams benefit from their majority share. For now, ROOT Sports NW is the home of the Mariners and the Utah Jazz, plus the Seattle Sounders and Portland Timbers of Major League Soccer, and Gonzaga University’s men’s basketball team. The Mariners’ decision to take over control of the RSN now may be a calculated gamble that the Sacramento Kings will be sold to the Seattle-based investment group, moved to Seattle, and be looking for a new broadcast home. If that happens, the Mariners would be in a very good position to cash in. But that’s a very big if. And then there’s the issue of whether we are in a sport rights “bubble” and whether that bubble is about to burst. When an RSN guarantees a sports team millions and millions of dollars each year, the RSN has two main avenues for raise the cash to pay those fees: advertising during the sporting events and carriage fees charged to cable and satellite operators to carry the RSN on their network. Sometimes, negotiations between the RSN and the cable/satellite operators break down. That’s happened with the FoxSports San Diego, the new RSN in Southern California that’s agreed to pay the Padres $60 million per year for 20 years, and with Comcast SportsNet Houston, the new RSN that’s agreed to pay the Astros $80 million per year. Several cable/satellite companies in those cities have refused to pay the fees the RSNs have demanded; customers of those companies can’t watch the Padres and Astros, respectively, on their home TVs. In other instances, cable and satellite companies try to pass on the carriage fee — or a portion of it — to the customers by including a local sports programming surcharge on the monthly bill. For now, a customer’s only choice is to either cancel his service or pay for the sports programming and the extra fees. A DirecTV executive told the New York Times in January: When a team sees their rights fees, and therefore the costs to consumers, rise more than sixfold, as is rumored, for the exact same games that they got last season, that’s an unsustainable model. Remember, DirecTV is the parent company of ROOT Sports. What we know for sure is that the Mariners have more than doubled their local TV broadcast revenue for the next 17 years. That keeps them within striking distance — financially — of the Angels and Rangers. What we don’t know — what the Mariners don’t know — is whether their gamble of a majority ownership of ROOT Sports NW will pay off.