MLB’s Winning and Losing Efforts to Conquer TV, Part II: Beating the Bubble by Craig Edwards February 27, 2020 Television money draws a lot of attention when it comes to MLB’s finances, in part because the national revenues are easily identifiable. But the big driver of baseball revenue since the strike hasn’t been national television. Instead, local television deals and brand new stadiums with capacity for significantly more fans (and many highly priced tickets) have helped MLB revenues soar. Baseball’s national television deals have certainly gotten bigger, but getting fans to the ballpark has been more important to the bottom line over the last few decades. Baseball’s increasingly diverse streams of revenue have even reached to land deals surrounding ballparks, and helped create a financially strong industry in which one bad television deal won’t topple the sport and lead to a strike and lockout, as it did in 1994 (covered in Part I). However, MLB must be careful not to head back in that direction, and current trends are less than promising. In the second part of this series, we’ll look at how MLB has grown into an industry that generates nearly $11 billion per year in revenue, with a valuation above $50 billion. While the 60s, 70s, or 80s (or whichever era you grew up in) were probably the halcyon days of the sport, you wouldn’t know by looking at attendance figures. In the 1980s, average attendance was roughly 22,000 fans per game and tickets were about six bucks a piece (around $14 after inflation). In today’s dollars, that’s roughly $25 million per team per year. Over the last decade, attendance is up to 30,000 per game, one-third more what it was in the 80s (a topic that is often overlooked when examining the health of the sport), and ticket prices have averaged around $29 per ticket in that time. For an average team, that’s $70 million per year, an 180% increase over the 1980s even after accounting for inflation. Even with that increase, gate receipts account for somewhere between 20% and 45% of revenue, depending on the team. Helping to fuel those increases, almost every major league team has received a brand new, publicly funded stadium to bring more fans to games at considerably higher prices. In the last 30 years, national television money has doubled after inflation, but gate money has grown nearly twice as fast. Local television revenue has grown just as fast as gate revenues and provided teams with a windfall of cash over the past 20 years, necessitating revenue sharing as the disparity between the biggest and smallest baseball markets have grown. The massive cable television deals, coupled with notable failures in Houston and Los Angeles, have caused speculation about a cable bubble as carriers lose subscribers and become reticent to pay big per subscriber fees for niche channels. Back when the Yankees first signed their deal with MSG to put their games exclusively on cable and ESPN signed their first deal to broadcast games in 1990, there were concerns that baseball was depriving many fans of access to games. ESPN was only in about 60% of households at the time, making the vast majority of national broadcasts unavailable to 40% of the audience, with the same holding true for Yankees’ fans in New York. Those concerns evaporated as the number of households with cable television rose steadily, eventually reaching 90% of homes. That trend enabled teams to reap millions of dollars from cable television providers and Regional Sports Networks (RSNs), but the reversal of that trend brought about new concerns. When the bubble first burst on baseball 25 years ago, it was because ad revenue couldn’t keep up with the rights fees MLB charged. That hasn’t changed. Over the last few years, advertisers have spent around $300 million on national MLB broadcasts while networks have paid close to five times that much. Thirty years ago, the networks might write off some losses as worthwhile to keep affiliates happy and promote other shows on the network. When the losses became too steep, however, the networks stopped paying. Cable networks, especially sports networks, don’t have that same issue because they make so much money off of subscriber fees. So how can ESPN, Fox, and TBS afford to pay $1.5 billion if they only make $300 million in advertising? They charge cable providers like Comcast and Time Warner a fee for every subscriber with their channels and demand to be placed in the standard cable tier so that nearly all cable subscribers get their channels. In 2011, ESPN had nearly 100 million subscribers; it charged cable providers close to $5 per month, generating something close to $6 billion in subscriber fees alone. Since that time, ESPN has lost 13 million subscribers, and that’s where the fears of a bubble come in. If customers keep dropping cable, revenues at ESPN and other cable channels go down, making them less likely to pay exorbitant fees to broadcast games. In the near term, ESPN has simply raised its rates to closer to $8 per subscriber, so even if it has only 85 million subscribers, it makes $2 billion more than it did back in 2011. That might not be as viable long-term, and is representative of MLB’s potential segmentation problem, though it should be noted the network now has 6.6 million subscribers for its ESPN+ platform, a service for which it charges $5 per month for more niche sports offerings. These concerns affect local sports networks just as much, if not more so, as they do national networks given several prominent failures. At the end of 2012, the Dodgers agreed to a shocking $7 billion, 25-year deal with Time Warner Cable that caused great concern about the local sports rights bubble bursting. There was a bubble in Los Angeles, as the Dodgers attempted to enter a market with three other local RSNs; a fourth proved too many as the team is still only in half the households in the area nearly a decade later. An ugly dispute in Houston raised further alarms when the Astros couldn’t get their channel carried by all providers; the channel ended up in bankruptcy. The battle over who owes some of the debts is still ongoing. Despite those blunders, the Mariners, Phillies, Rangers, Diamondbacks, and Cardinals all signed billion dollar local TV contracts, and the Cubs opted to start their own network this season, even as they have had some carriage difficulties. All told, RSNs pay teams somewhere in the neighborhood of $1.8 billion per year (right in line with the national broadcasts), and that’s before team ownership in the networks is accounted for (16 teams have an ownership stake). One of the biggest concerns about the cable bubble is the loss of subscriptions, but one of the biggest mistakes people made in assessing those concerns was how quickly the change would happen. In 2011, a Turnkey poll of “1,100 senior-level sports industry executives spanning professional and college sports” asked “In how many years will online/device streaming of sports surpass traditional cable viewership?” Nearly a quarter of respondents said it would happen within five years, or 2016, and more than half said within 10 years, which is now just a year away. Cable is still prevalent, and even MLB Network has more subscribers today than ESPN did when it signed its first contract to broadcast baseball games. Technology takes a longer time to catch up than we might realize. More than 50% of the country still had a landline phone in 2014; more than 40% of households still have them now. Those figures don’t mean it is good to be in the landline business. Fortunately for MLB, it’s tech arm, MLBAM, was at the forefront of streaming technology, which positions the league not to just keep pace, but to pace the industry when it comes to streaming as customers move away from traditional cable. MLB struck gold when it formed MLBAM at the turn of the century. MLB was interested in broadcasting games online, but it had a problem, namely, that transmitting live broadcasts of games is incredibly difficult, and doing so for up to 30 broadcasts in a single night even more so. MLBAM, an investment that cost the owners under $100 million total, found a solution to that problem by developing MLB.TV. In so doing, MLBAM created the blueprint for some of the biggest media companies in the world, helping HBO, WWE, PGA Tour, NHL, Fox, and ESPN. Disney eventually realized they had no direct path to the streaming future on its own and has since paid more than $2.5 billion in two separate transactions for control of the company, a figure that has been equally divided among MLB owners. In recent years, Disney has been able to take control of Hulu, and launched ESPN+ and Disney+ to great success. MLB still owns 15% of BAMTech. As it stands, MLB isn’t reliant on the cable bubble in the near term revenue-wise. RSNs and the money that comes with them could go away tomorrow, and the percentage hit to revenues would be less than when MLB couldn’t get a decent deal ahead of the 1994 baseball season. Finding 10 million customers willing to shell out $180 per season for local games streamed online wouldn’t even cause a significant drop in revenue. Increased money at the gate, spreading out the TV money between local and national, long-term contracts with Fox that go for the next decade as well the revenues in house at MLBAM for MLB.TV, the MLB app, and MLB.com spread the risk across multiple revenue streams. MLB beat the bubble, but declines in attendance, which place increased reliance on companies with an older business model like Sinclair, and alienating fans by contracting the minor leagues and making its product harder to watch could threaten the sport’s diverse revenue streams. We’ll get to those issues in the next installment.