MLB’s Winning and Losing Efforts to Conquer TV, Part II: Beating the Bubble

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.

We hoped you liked reading MLB’s Winning and Losing Efforts to Conquer TV, Part II: Beating the Bubble by Craig Edwards!

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Craig Edwards can be found on twitter @craigjedwards.

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fjtorres
Member
fjtorres

It’s good to hear the end of the local cable windfalls won’t greatly hurt MLB as a whole but if that relies on finding customers willing to spend $30 a month for local streaming the sport as a whole will hurt and the pain on the teams will be unequal.

A point to consider is that a strong majority of cord cutters forgo live TV entirely. Many rely on local over the air TV for some channels but a significant fraction give up on live TV completely, as the NBA has recently acknowledged.

MLB needs to end blackouts and allow for teams to stream nationally and access out of market fans as well as local fans. They also need to recognize that ad-supported live streaming must exist side by side with ad-free paid subscriptions. The cordcutter world is not fond of paying for ad-supported content which is a big driver of cable’s decline. Multiple tiers, as WarnerMedia is doing and NBCUniversal has announced, is the best way to maximize viewership. And streaming revenues. One thing Disney’s Hulu has proved is that ad-supported viewers often convert to ad-free premium customers so ad-supported doesn’t cannibalize paid viewing but rather increases it.

For MLB, doing away with MLB.TV blackouts and using the MLB apps to access local ad-supported streams nationally would achieve that. Which is to say that instead of waiting for cable RSNs to fade away, they should start weaning themselves from that business. Cut out the middlemen and take control of that side of the business themselves just as most content owners are doing by going direct to consumers.

Shalesh
Member
Member
Shalesh

I could be wrong, but I don’t think rabid sports fans are cord-cutters. Indeed, cable bundles are perfect for sports fans because they get other subscribers to subsidize our viewing. Until teams can get viewers to pay $30/month, teams aren’t going to cannibalize RSN’s by simultaneously streaming the same games for only the $8/month we pay for ESPN + whatever we pay for our local RSN.

12M-14M people watched World Series games. Craig says average attendance across the league is 30k, so even if it’s the same 30k going to every game, that’s 30k * 30 = 9M attendees/year. I think it’s doable over say a 10-year transition period to get 10M people to pay $30/month to watch their local team. (The Cubs are testing this now.)

Perhaps Craig will explain tomorrow, it seems that MLB gets something like $2.2B from ticket sales, $1.8B from RSN’s, and $1.5B annually from Fox/ESPN/TBS. Where is the other $5.5B revenues coming from? I can’t see Luxury boxes, concessions, parking generating anywhere near that.

spudbeer
Member
spudbeer

The point is the cable bundles are the bubble that is deflating. Rabid sports fans aren’t going to get their viewing subsidized as time goes on. I would rather pay $30 a month for the RSN only and otherwise watch OTA TV rather than pay $50 for the RSN and all the other channels I barely watch at all.

dukewinslow
Member
Member
dukewinslow

I think tech savvy sports fans (or even NOT tech savvy ones) go to illegal streams, and I’d like to see evidence of the elasticities for people going from illegal streams to legitimate ones when the product becomes available. My dad has to hop through a VPN to watch baseball because he doesn’t live in the states, but would pay for a product that let him watch it where he lives.

williamnyy
Member

If you are a sports fan who also like other entertainment, you are absolutely being subsidized, and the cost of MLB.TV would likely go up if RSNs moved to a DTC model.

As for revenue, for 2018, Forbes pegged the national vs. local split at $2.76 billion and $7.29 billion, respectively. National includes network TV, licensing, league-wide streaming rights, international sources, joint endeavors like MLBAM and remaining stake in BAMTech, etc. The local revenue runs the gamut from concessions to ticket sales, local rights fees, sponsorships, and other brand leveraging endeavors.

spudbeer
Member
spudbeer

The whole purpose of MLB.TV is to watch out-of-market games. Any DTC version of an RSN would likely have their games blacked-out outside their defined market areas in order to protect MLB.TV, NHL.TV, etc. Not seeing where any subsidization of MLB.TV comes in, outside of the IT backbone the whole thing is basically found money.

williamnyy
Member

That’s the purpose now, but if you eliminate the territorial system, there are no more in-market or out-of-market games. There are just games, and MLB.TV would then either become a centralized a la carte method of distribution or teams would be given unfettered ability to sell their streaming rights and MLB.TV might go away. If you keep the territorial system, but migrate to DTC, the blackouts would remain. Either way, a baseball fan’s cost per game will likely rise.

The subsidy comes from the fact that everyone who pays for a tier that has an RSN is contributing to the cost. That makes it financially worthwhile for RSNs to produce nearly every game and do so at high quality. The existence of such immense inventory is what makes MLB.TV possible. Remember, MLB.TV is just infrastructure. It produces no content. The RSN’s need to have a financial incentive to produce every game, and if that isn’t coming from carriage fees spread over a larger population, it will come from higher DTC fees paid by the smaller group of strictly baseball fans.

In other words, though frustrating at times, blackouts are the backbone of a system that, overall, has benefited most fans.

fjtorres
Member
fjtorres

It will only benefit the sports fans as long as enough non-sports watchers keep paying for stuff they don’t watch. That could be counted on while viewers had no alternative. But they now have options. And they are using them.
The more subscribers they lose, the higher the price for the ones that remain. That sports fan subsidy won’t last.

spudbeer
Member
spudbeer

“If you keep the territorial system, but migrate to DTC, the blackouts would remain”

Local blackouts? Preposterous. There would be little point in a team DTC product otherwise. As it is, an RSN can only offer the games in a team’s territory. The DTC would be no different other than it bypasses carriage contracts with a distribution platform. You could watch Marquee on your phone in Evanston and see the Cubs game, but if you watch Marquee on your Roku in Santa Monica you won’t see the Cubs game on it (sans faking your IP address) because the MLB.TV app is the “proper” DTC platform for out-of-market games.

spudbeer
Member
spudbeer

I tried rewriting the above post but the editor timed out.

“If you keep the territorial system, but migrate to DTC, the blackouts would remain”

I think you are saying mostly the same thing I am yet arguing.

A cable RSN and a DTC RSN would operate exactly the same way. Local blackouts on a local DTC would never happen. There would be little point in a local DTC product otherwise.

As it is, an RSN can only offer the games in a team’s territory even if the RSN is available outside the territory. People in Indianapolis can get NBC Sports Chicago on their cable package and see Blackhawks games, but Bulls games are blacked out because that is the Pacers’ NBA market. In other words, Indianapolis is in-market for the Blackhawks and out-of-market for the Bulls. If you want watch the Bulls in Indianapolis, you have to get NBA League Pass.

A DTC version of an RSN would be no different other than it bypasses carriage contracts with a distribution platform. You could watch Marquee on your phone in Evanston and see the Cubs game, but if you watch Marquee on your laptop in Santa Monica you won’t see the Cubs game on it (sans faking your IP address) because the MLB.TV site is the “proper” DTC platform for out-of-market games.

Will H.
Member
Will H.

I totally agree with allowing local streaming. I’m not sure if there are contractual issues with that insofar as I would imagine RSNs would have wanted to make sure they wouldn’t lose their hold on local viewers. It’s all so short-sighted by baseball, though, given that the typical viewership is so old and younger viewers tend not to have cable. I’d pay a lot to be able to stream my local team and I think many others would as well, plus at least as importantly I think MLB is risking losing a generation of new fans in not allowing them to see their teams via the platforms that they use.

spudbeer
Member
spudbeer

I think the other leagues are farther behind than MLB as far as local streaming. Manfred recently clarified that teams have local streaming rights in their defined market areas. Most RSN’s are carrying multiple teams which complicates simply creating a standalone streaming version of an RSN. The Cubs don’t have that complication as they are the only team on their new Marquee RSN. Even so, creating their own streaming version of their RSN would still require them to prevent people from outside their designated market area from getting a streaming version of Marquee so as not to violate the contract with MLB.TV.

dukewinslow
Member
Member
dukewinslow

the MLBTV product has no peer. ESPN plus, possibly, but they’re hamstrung by partners at the events some times.

fjtorres
Member
fjtorres

Oh, there are contractual restrictions right now.
But contracts expire.
That’s where the weaning comes in.
It’ll take time to transition as existing contracts expire but if they don’t commit to it and start moving that way, it’ll be more painful later.
The problem with cabke is they’re just middlemen and their costs are tied inversely to the number of subscribers. As subscribers leave, the rate they pay goes up because tbe content owners want to keep their income steady. Or growing.

That is why small regional operators are dropping TV as a product and going to internet only, why price gikes are accelerating, why cablecos are pushing triple play bundles and why the catfights over carriage fees are almost constant these days.
Sports and the tiny niche channels most definitely are subsidized by non-viewers but non viewers now have alternatives. The SLING skinny bundles and quasi ala-carte add-ons and Philo in particular live off people who don’t care beans about ESPN or CNN and just want the drama networks. And $20-25 gets them that.
So the subsidies that make RSNs possible are starting to fray.
People have choice.
And there’s more choice coming: right now the cablecos are milking inteernet service because most have regional monopolies and near monopolies. Those are also under threat as LEO satellite internet comes online. Three companies so far with two more looking to get in.
Cablecos are not well loved and they’re not ready for the pressures building up.
They won’t die but they won’t have bubdles of money to tgrow around anymore so it behooves the content owners to look for alternate models and alternate revenue streams.

Lanidrac
Member
Lanidrac

But ask yourself this: Is the cost of an exclusive baseball streaming service plus the cost of Netflix and/or whatever other streaming services you buy to watch other content that fits your interest going to be overall more than the cost of a single cable/satellite subscription? Most baseball fans don’t watch just baseball and nothing else, and sports fans in general are less likely to cut the cord no matter their age.

Overall, potential cord cutters have to be careful that they don’t actually wind up paying more for the various combined services that they need for everything they want to see as a replacement for traditional TV.

dukewinslow
Member
Member
dukewinslow

I’m sure other markets have this problem, but as a former NC resident, the Braves blackout rules were eyerollingly stupid. It basically cut the state in half.

I think that last bit about ad free support is key. I think people would want that. Thankfully, MLBTV doesn’t have the technical issues of other legitimate streams, but for soccer the illegal stream is often the one that works better than the “legitimate” one.

fjtorres
Member
fjtorres

The japanese anime producers were really smart: since they were being pirated left and right and they didn’t have the resources to go global day-and-date like HBO and BBC they licensed their content to CRUNCHYROLL and others.
Now the legal ad-supported alternatives offer one-hour later streaming. The producers get the same japanese money as before plus a share of the now-legal foreign fandom that has no reason to wait for pirate “releases”.
In many markets piracy is just a sign of unmet needs, people willing to pay with cash or eyeballs but who can’t. Give tgem a chance to pay and most will.

Lanidrac
Member
Lanidrac

However, sports fans are those who actually rely on live TV. Not many fans want to wait to stream their favorite teams’ games until after they’ve already happened. They also generally prefer local broadcasts over national ones for watching their local teams. If online streaming is the future of sports, then they need to make sure that live streaming of local broadcasts is still commonly available.