Revenue-Sharing Flexibility Stretches With New TV Deals

Last week, I reported on local TV contracts for all 30 major-league teams. The article’s lede was the Dodgers’ potential $6 billion-to-$7 billion deal with Fox Sports West that was slated to start in 2014 and would run for 25 years. It turns out the Dodgers and Fox did not come to agreement by last Friday’s deadline. Under their existing contract, the Dodgers can make one final demand by this Friday, which Fox can either accept or reject outright. If that doesn’t lead to an agreement, the Dodgers are free to negotiate with others. Time Warner Cable is waiting in the wings.

Whomever the Dodgers ultimately cut a deal with to broadcast the team’s 162 games, expect the deal’s value to stay in the $6 billion-to-$7 billion range. But it may not be a straight-cash deal. As Bill Shaikin of the Los Angeles Times reported, the Dodgers may end up with a significant ownership interest in Fox Sports West or another broadcast partner, much like the Rangers’, Angels’, Astros’ and Padres’ new deals.

At first glance, a part-equity deal would seem to counter some of the outrage elicited by the all-cash deal, which was estimated to net the Dodgers $240 million to $280 million per year in broadcast-rights fees. But in reality, an all-cash deal is better for the league as a whole, because rights fees paid to the Dodgers (as opposed to profits from an equity stake in a regional sports network) would be included in a team’s “Net Local Revenue” — essentially the bundle of money subject to MLB’s Revenue Sharing Program.

Or would they?

Remember the Dodgers have something of a sweetheart provision when it comes to local TV fees and revenue sharing: As part of the former owner Frank McCourt’s bankruptcy proceedings, the court ruled the Dodgers’ new TV contract would be “valued” at $84 million for purposes of revenue sharing. In other words, if the Dodgers go with a straight-cash deal, only the first $84 million in yearly fees will be subject to revenue sharing; the rest can be pocketed for the team’s own use. The result will be the same if L.A. goes the partial-equity route, as long as the cash payments exceed $84 million per year.

But put aside the Dodgers’ $84 million revenue cap. The revenue-sharing program in the current collective bargaining agreement is designed to capture a significant portion of the additional cash teams will rake in with the new local television deals. In fact, the revenue-sharing language in the current CBA changed fairly dramatically from the CBA that was in place from 2007 through 2011. Remember that the first wave of new TV contracts came in late 2010, when the Rangers and Fox Sports West reached a 20-year, $1.7 billion deal to commence before the 2015 season. It appears that deal was very much on players’ and owners’ minds when the current CBA was negotiated in 2011.

A few weeks ago, I explained the current revenue-sharing program in this post. If you didn’t read that post, do it now, as I won’t repeat that detailed discussion here. Here’s the basic outline:

• Teams share their “Net Local Revenue” — essentially all money made from baseball operations other than money earned through MLB’s Central Fund.

• The Central Fund includes revenue generated by MLB’s national TV contracts, MLB Advanced Media (which operates MLB AtBat, MLB.tv), licensed merchandise and the All-Star Game.

• Under the Base Plan, every team contributes 34% of its Net Local Revenue to the pool, which is then divided equally among all 30 teams.

• The Supplemental Plan adds an additional 14%, putting the total percentage of Net Local Revenue shared at 48.

• Teams do not contribute and receive revenue from the Supplemental Plan by equivalent percentages. Instead, each team pays into the pool or receives from the pool in accordance with its Performance Factor. For example, the Yankees’ Performance Factor in 2012 is 27.7%; the Royals’ is -8.2%. In other words, the wealthiest teams pay the most. The least wealthy teams receive the most.

• Starting in 2013, big market teams (Yankees, Red Sox, Mets, Dodgers, Angels, Cubs, White Sox, Giants, Phillies, Blue Jays, Nationals, Braves, Rangers and Astros) will forfeit an increasing percentage of revenue-sharing proceeds, but those forfeited funds will be funneled back to most of those same teams according to the Performance Factors.