The Dodgers’ TV Mess Isn’t Over

For two seasons, Time Warner Cable, owners of SportsNet LA, the exclusive local television home of the Los Angeles Dodgers, have failed to get their network into more than half of the cable homes in Los Angeles. With losses mounting (a reported $100 million of them last season), Time Warner has offered a significant cut in prices in hopes of luring DirecTV, Verizon, and Cox into carrying the network for the 2016 season. The Dodgers and the mayor have gotten involved, invoking Vin Scully’s last season in what appears to be a desperate public-relations move to broadcast Dodgers games throughout all of Los Angeles. A closer look at the offer shows that Time Warner is not yet in desperation mode.

Using Dodgers like A.J. Ellis and Joc Pederson in order to curry favor with the fans in this dispute — and attempting to leverage legendary icon Vin Scully’s last season into greater public interest — certainly looks like a plea for help, a final Hail Mary to get the Dodgers on television. Publicizing a 30% price drop, from $4.90 to around $3.50 per subscriber per month, reinforces the perception of desperation that Time Warner has lost and that they are finally ready to give in. That is not the case.

Upon further examination, one finds that the aforementioned discount currently being offered by Time Warner applies only to the 2016 season. DirecTv (and Verizon) would pay $3.50 per month per subscriber in 2016 (around $75 million based on 1.8 million subscribers), but next year would be faced either with paying a higher price for the channel or once again removing it from their lineups. From DirecTv’s perspective, it would be far easier, in terms of customer relations, never to have the channel in the first place as people are more likely to complain, or perhaps even switch carriers, if a channel is taken away.

Jeff Passan called the Time Warner-Dodgers deal an “unmitigated disaster,” and for the most part, he is correct. Time Warner’s loss of $100 million last year on the channel is a big misstep for them, and the company has made big mistakes since launching two years ago. But the channel is also not so far away from being a success.

Consider the $3.50 gambit the network is currently offering. If successful, Time Warner will receive $75 million in subscriber fees this year. Add in 10-15% in advertising revenue and make up the difference of having Charter for a whole year instead of half like last season, when Charter was in the process of buying Time Warner Cable. All of a sudden, by that arrangement, SportsNet LA is already breaking even. Extract another fifty cents or a dollar on the price next season and those losses turn to profits. Time Warner Cable looks desperate, but they are not yet in an entirely troubled position. As Bill Shaikin and Ryan Faughnder of the LA Times note, Time Warner Cable has yet to get the desired response from providers, and it is not clear whether their latest move will end up with SportsNet LA in more homes.

Time Warner Cable is not desperate yet, but perhaps the better question is: should they be? Where Time Warner Cable made a mistake was in their initial pricing to try to get in the LA market. They had their own 30% footprint, but left 70% of the market up to negotiations that failed. In his piece, Passan correctly writes that Time Warner Cable is a middle-man and the way of the future is more direct-to-consumer broadcasts that MLBAM is well-equipped to handle. Where Passan might go too far is citing the Dodgers’ deal as a trend in the sports-rights bubble that is bound to pop.

Now three years into this impasse, we are coming to a determination on the price point where the sports-right bubble in Los Angeles is situated. Los Angeles currently has four regional sports networks broadcasting the major professional sports leagues, and that leaves out the Pac-12 network, which has had its own distribution issues. The only other city populated by as many networks is New York. As the table below illustrates (from this piece on the Chicago Cubs’ own search for a network), Los Angeles was likely pushing the limits when the Lakers began their own channel (also owned by Time Warner Cable).

The easy comparison for Los Angeles is New York, but their landscapes were different. The Dodgers looked at the $5 per subscriber that providers pay for the YES Network and tried to replicate that in Los Angeles. The direct comparison is not appropriate in this case. The YES Network was established in 2002 and is entrenched in the New York market — and even they are experiencing difficulty with Comcast in the surrounding areas of New York City. In addition, YES also broadcasts Nets games, providing year-round live sporting events appealing to more than one fan base. We have the benefit of hindsight, but attempting to extract the same price was a misstep by Time Warner Cable.

Now compare the Dodgers to the Mets, who also have just one team broadcasting its network. The Mets’ cost per subscriber is roughly half that of YES or SportsNet LA — and Time Warner Cable and Comcast have minority ownership interests in SportsNet NY. While the Lakers are the only team from the four major sports on its network, it is also priced less than SportsNet LA and they also broadcast LA Galaxy games. Time Warner Cable tried to enter the LA market with only the Dodgers, demanded a 50% increase in the per-subscriber fee for regional sports networks when three already existed, and their plan backfired.

Deciphering a bubble or miscalculation on the part of Time Warner Cable is difficult. If they had begun by offering $4 per subscriber, would that have gotten DirecTV to budge? What if they had come in with a one-year offer around $3 per subscriber? If the company’s losses were minimal, or perhaps they were only breaking even, we might not be hearing how the deal is signalling a trend in the industry. True to stereotype, a greedy cable company got greedy, and so far that greed has failed to pay dividends as it has so often in the past. A fourth regional sports network at prices significantly higher than the existing three amounts to a Los Angeles bubble of sorts, although there is likely a point in the middle where an acceptable deal can be made.

Unfortunately for Dodgers fans in Los Angeles, we have yet to reach that point. While the situation is embarrassing in Los Angeles, the slow dwindling of cable and satellite customers across the country presents a much more interesting dilemma than one regional dispute. We see one team and network standing their ground despite half the city lacking access to its programming. We will not see half of all households in the country ditch cable in the immediate future, but what happens when it is 20% or 30% and many of those are the desired younger demographic? Will MLB still cling to its cable money and deals or will they make more of an effort to ensure everyone has the opportunity to watch their local team? At some point, MLB will be faced with that decision. They will have the technology to move forward, but cable money might still be there, and that money will be tough to turn down.