MLB’s Winning and Losing Efforts to Conquer TV, Part III: Danger Lurks by Craig Edwards February 28, 2020 As consumers have been given more and more entertainment options, their choices have become more fragmented when choosing what to watch and how to spend their time. Cable television took away the absolute dominance of network television, and due to its ubiquity, viewing options for most Americans were readily available and universal. Whether someone preferred to watch sports, home and garden shows, Mad Men, cable news, or Friends re-runs, all were available, and the customers of one preference subsidized the viewing habits of the others in a cable bundle. (This is the third piece in this series with first one covering MLB’s prior reliance on national television money, and the second one on MLB’s massive rise in revenues since the strike). That bundled philosophy is still strong, and even newer streaming entrants to the market like Sling, Hulu, and YouTubeTV stuck with the bundle. However, as HBO, Disney+, Netflix, and Amazon Prime begin to siphon off customers, and with NBC joining the fray as well, the bundle is threatened. While the solution to the slow dwindling of cable subscribers is not readily apparent for content producers and providers, it’s representative of the difficult decisions Major League Baseball faces with their television contracts, their attendance, and their ability to bring in new fans. Unfortunately, MLB seems to be focused on short-term gains at the potential expense of the long-term health of the sport. As streaming services grow in popularity, MLB is well-positioned with their technology and their reach. In 2017, MLB.TV was the fourth-biggest OTT service, behind only Netflix, Amazon, and Hulu, and ahead of HBO Now, which reportedly had close to five million subscribers at the time. MLB has the ability to serve fans with a streaming-only option and keep or maintain revenue levels even if every team were to lose their cable television contracts tomorrow. If we assume there are around five million customers paying $120 per year for MLB.TV, and teams receive $1.8 billion under their local RSN contracts, they would need just 12 million customers nationally who were willing to pay $200 a year to sustain revenues before considering advertising that mostly goes to cable companies right now. The problem with that plan is that it denies access to close to 100 million potential or actual fans who were able to watch the teams on their standard cable package. Long-term, that’s an awful idea if the goal is to create new fans. HBO doesn’t need an eight-year-old in the year 2000 to like The Sopranos in order to get that same person to like Game of Thrones or Succession as a 28-year-old in 2020. HBO can simply create a new television show and develop new fans. Disney+ can capitalize on the popularity of Star Wars and Marvel and create The Mandalorian and other new series, continually generating content and gaining new subscribers as adults regardless of what those new subscribers thought when they were eight years old. It’s not that easy for baseball, as the game needs that eight-year-old in 2000 to like baseball, develop a love for the game, and then buy tickets and an MLB.TV subscription in 2020. Removing access for those potential fans at a young age could have a massive effect on the popularity of the sport down the road. The subscriber model is going to look better and better from a financial perspective even as it shuts out millions of potential new fans. Even as the number of cable subscribers falls, 60% of households is still pretty good market penetration when a subscriber OTT model might be closer to 10% of homes. If there are lessons to be learned from the RSN failures in Los Angeles and Houston, it isn’t that MLB is prone to suffer due to a cable bubble. In Los Angeles, the lesson is that it is hard to enter a market already saturated with similar options, and at some point, there can be too many. More importantly, television money in Houston — whether traditional or new — is going to keep flowing into baseball, but only if the sport offers a popular, compelling product. The Astros tried to charge a higher price to get on cable coming off two straight 100-loss seasons (they were on their way to a third) with sparsely attended games. The channel filed for bankruptcy before the first season was through. Sustaining popularity is most important, and increasing short-term revenues can’t come at the expense of losing fans over the long term. A year ago, Sinclair Broadcasting purchased the cable television stations that air 14 of MLB’s 30 teams. They’ve also partnered with the Yankees and Cubs for distribution of those clubs’ channels. The purchase price ended up being about half of original estimates for those networks, and an attempt to buy four AT&T-owned RSNs fell short because the auction price was also roughly half of the expected purchase price. Sinclair has a history of nasty carriage fights, as DISH and Sling have already balked at putting the Sinclair RSNs on their lineup, YouTubeTV is following suit, and the Cubs are having a difficult go of negotiations with Comcast. The increase in broadband internet across the country should provide more options to fans in how they consume baseball, but Sinclair’s negotiating tactics are resulting in considerably fewer options than even one year ago. Sinclair isn’t even basing it’s future on wide distribution, instead seeing gambling as their big moneymaker down the line. These deals are ultimately profitable for MLB teams given the large rights fees involved, but they are reaching fewer and fewer customers and providing less access and choice for kids who will grow up to be the fans spending money on the tickets and television packages that keep MLB alive. The Blue Jays are the latest team to try and cash in on current fans. All Canadians have traditionally been able to stream Toronto games through the MLB.TV app. That will change this year as the club starts offering streaming through their own app at a separate cost. This isn’t fundamentally different from the rest of baseball, but it is a change in practice that will either cause existing fans to pay double for baseball or not watch the Blue Jays like they have previously. While the concerns echo those of putting broadcasts on ESPN in 1990, the difference is that the cable audience grew from then on for nearly all customers while what’s happening now is shutting out more and more fans as options become increasingly individualized. A modified, slightly less-profitable approach would be a free ad-based streaming option for a quarter-to-half of games with a paid option for the full ad-free season, as well as the full slate on cable locally (negotiated to reach as many homes as possible). This would mean that carriage locally might make less money now, but access would improve considerably. The problem for baseball isn’t just a viewership problem. Attendance dropped 4% in 2018, but increases from higher-priced tickets meant a slight increase in gate receipts. Last season saw a further decline in attendance, with a 1.7% drop and the lowest figures since 2003, down more than 10 million since 2007. While publicly funded stadiums have been an ever-present opportunity for growth and increased revenues, it isn’t clear that the new stadium stream of revenue will continue. As the number of new stadiums has slowed, so has attendance. Revenues have held steady due to higher ticket prices, but like with television, serving a smaller audience at higher prices means less fans in the long-term. Major League Baseball has been mostly immune to the sports media rights bubble bursting due to the large number of fans at the ballpark and an increasing number of digital revenue streams, which have served to provide significantly more money to the league now as well as insulating MLB should a bubble pop in the future. That said, the portion of MLB revenues coming from television is now up to more than a third, higher than it’s been since the strike. Baseball’s future is not contingent on technology but on its popularity. If attendance continues to head down, and if the game isn’t as accessible to children through playing it, watching it at home, and heading to games, then the league will suffer. Initiatives like Play Ball and RBI aren’t little side projects. They are vital for the continued health and growth of the game. Minor leagues can’t just be big league incubators, but must also be the avenue to creating future fans. Baseball beat the bubble, but challenges remain to ensure the game remains popular for future generations, and recent actions by MLB indicate future growth is not a priority.