TV Ratings Up, But Teams Still Dependent on Cable Providers

Major League Baseball seems to be in a constant public fight about its popularity and importance in society. To some it is in decline, to others it is boring, and to those who point to attendance and revenue, the sport is vibrant and successful and contradicts the nonsense of those who believe baseball is dying. The sport can always do more to keep the game entertaining, but early signs this season indicate that baseball is still relevant and popular, as both attendance and television ratings are higher — the latter despite an overall decline in cable ratings. Increased ratings mean more people are watching the games but don’t provide any more revenue for the teams. When it comes to the lucrative local television deals, ratings do not drive revenue. Local television revenue is still tied to the health of the major cable companies like Comcast and Time Warner.

Before getting to baseball’s dependence on the health of major cable companies, here is a brief look at some early season numbers. The first month of the season has seen big increases in viewership for national games on Fox Sports 1 and MLB Network, including double the amount of viewers aged 18 to 34 watching game on Fox Sports 1. The Chicago Cubs have doubled their ratings after their increased commitment in the offseason as well as the arrival of Kris Bryant. The Kansas City Royals have done the same coming off their World Series appearance. The Houston Astros have seen an increase in viewership after finally resolving their local disputes, at least as far as getting their games on all the local cable packages. The Arizona Diamondbacks have seen their highest ratings in a decade while the games of the Cleveland Indians, Detroit Tigers, Kansas City Royals, St. Louis Cardinals, and San Diego Padres rank first in their broadcast territories among all shows. A recent article by Maury Brown at Forbes showed that baseball games beat playoff games from the NHL and NBA in many markets across the country.

The ratings so far this season are a great indicator of baseball’s popularity. Not only is baseball beating playoffs in other sports, it is also beating first-run shows on networks. The sport’s ratings should continue to do well as competition from other programming lessens in the summer months. The conventional wisdom is that higher ratings mean more advertising dollars and more advertising dollars means higher payments for sports programming as viewers prefer to watch sports live, thereby consuming more advertisements than they might by way of other shows (which are often DVR’d). That holds true for national deals on networks like CBS, NBC, FOX, and even cable channel ESPN, as those networks shell out huge amounts of money for broadcasting rights to the NFL, MLB, and college sports. Those networks still make a substantial amount of their revenues from advertising — including ESPN, which also has the highest per-subscriber cost of any basic cable network. The same does not hold true for the cable networks that show most of the baseball games seen on television, which make much more money on the per-subscriber fees charged to cable companies.

Teams do not receive a direct increase in revenue due to more viewers. The networks airing baseball games do not receive significantly more revenue from higher ratings. For the regional sports networks that air a vast majority of baseball games, very little of their revenue is dependent on advertising. Their model is not very different from the one employed by the major cable companies. Comcast, Time Warner, Charter, and Cablevision are the four biggest cable providers in the country, and none of them have advertising revenues that make up even 10% of their total revenues, with subscriber fees and internet constituting the vast majority of revenue for those companies. It isn’t important that you watch, only that you pay. On a smaller scale, the same holds true for regional sports networks that air baseball games.

Cable companies charge subscribers large flat fees for cable packages that include a lot of channels, a technique called bundling (for more on bundling and a potential sports bubble, see Wendy Thurm’s piece here). As a result, consumers are forced to pay for channels they don’t watch. Non-sports fans are forced to pay for sports, but this is true for all cable subscribers, as no single cable channel has more than three percent of the total television-watching audience. Sports networks, however, generally charge the most and give the cable companies an all-or-nothing ultimatum, demanding to appear within the basic-cable tier or preventing the cable company from offering the channel at all. (This is the subject of the current lawsuit between Verizon and ESPN, which was not included in their latest basic offering.)

Providing only the basic-tier-or-nothing negotiating tactic prevents the regional sports network from appearing on a sports package with fewer subscribers and a corresponding loss in revenue. Getting on the basic-cable tier is vital for a regional sports network’s profitability, and the failure to strike a deal in Houston caused the Astros’ RSN to file for bankruptcy after deals with the cable company could not be reached. It is also why Time Warner’s SportsNet in Los Angeles is likely losing money in the first few years of its multi-billion dollar deal with the Dodgers. These negotiations are often contentious and battled through the public, but, in most cases, the networks and the cable providers come to terms as the local baseball teams’ games are still seen as a basic service by the providers.

Television ratings for baseball can be cited to illustrate interest in the programming provided by regional sports networks, and can be used in negotiations as a reason to get on the basic-cable tier, but the ratings themselves do little for the networks’ bottom line. Just like the cable companies, they make money from subscribers, and as long as cable companies keep paying the regional sports networks, the megadeals signed by teams in the last half-decade are unlikely to stop. Cable companies do not want to unbundle, as customers will undoubtedly pay for fewer services, and those providing the content will provide alternative means to deliver their product, not unlike the services provided by MLB.tv and the recently unveiled HBO Now. Cable companies have generally been paying the cable networks that they negotiate against publicly enough money to prevent the content providers from making their product available directly.

While cord-cutting is occurring across the country, it has not been widespread enough to cause a change of course in the current cable model. The recently discussed merger of Time Warner and Comcast that eventually fell apart would have actually further strengthened the current system. That cable companies also provide internet service, a much more necessary service than cable, only helps them keep subscribers. Change is inevitable, however, and better technology (including services provided by baseball’s own MLBAM) and internet service will eventually cause the current model to fall apart, as those with content will eventually be able to provide that content to their entire audience without the assistance of a cable provider.

The rumblings in Houston and Los Angeles, the lawsuit between ESPN and Verizon, and the direct digital content provided by HBO have not yet turned to a roar. Dish and Comcast resolved their disputes last winter, and regional sports networks are still on basic-cable tiers almost everywhere. The Diamondbacks just signed a new deal worth more than $1 billion. Unless the cable companies are faced with massive losses due to subscribers leaving in much greater numbers, better, cheaper internet alternatives, or government intervention, the current model will survive and teams will continue to sign major contracts. While no team is likely to match the Dodgers deal, the Chicago Cubs’ current contract expires in 2019. If they sign another multi-billion dollar contract, that will be a major indicator that the current cable model will survive.