How the Golden Age of Television and Baseball Ends

It was early December and a buzz was rippling throughout the baseball world. Jay-Z, the hip-hop mogul turned sports agent, was reportedly flying to Seattle on a private jet with his star client, second baseman Robinson Cano. They were seeking a contract so large that even baseball's richest club, the New York Yankees, had balked at its size.

The media dismissed the visit as leverage – Cano was surely using any interest from Seattle to pry a better deal out of the Yankees, the team for which he had played his entire career. After all, the Mariners had only the 20th highest-paid roster in baseball last year; the Yankees spent a whopping 168% more on salaries. 

Yet, on the next day news broke that Cano would be joining the Mariners for a deal that would pay him $240 million over 10 years. When you consider that Cano is already 31 and generously might have seven good years left in his career, the contract effectively pays him $35 million a year. 

Cano's megadeal is the sixth baseball contract over $200 million in the past five years. No sport in the world competes with baseball for the kind of money it pays its best players. The eight largest contracts in sports history have been signed by pro baseball players.


The size of baseball contracts have left other sports far behind.

Soaring player salaries are the result of baseball's fortunes trending upward. Bloomberg now estimates the average franchise is worth a billion dollars. For a league that considered contracting teams last decade, baseball is doing amazingly well, and its success is far beyond the usual powerhouse teams like the Yankees and Red Sox. Teams like the Mariners, Dodgers, and Rangers are flush with cash and competing for baseball's biggest free agents. 

The paradox is that baseball's newfound riches come from lucrative new television contracts, yet the sport's popularity on television has actually been declining in recent years.

How is that possible?

TV: Sport's sugar daddy

Baseball is far from television's greatest sports draw. The Dec. 1 night game between the NFL's Redskins and Giants (who came into the game with a dismal combined 7-15 record) still attracted 17.7 million viewers, a higher viewer total than all but one of this year's World Series games. In fact, the top 26 most watched sporting events last year were all NFL games.

Overall, the NFL collects just a tad shy of $5 billion annually from NBC, ABC, CBS, and ESPN for national broadcast rights. Toss in deals with DirecTV and Verizon, and its broadcast rights come in at about $5.9 billion. 


Football national rights are in a different league.

Compare that to baseball, where Fox, ESPN, and Turner Sports recently signed deals that will pay MLB a combined $1.55 billion annually for national broadcast rights. The disparity reflects the continuing popularity of primetime football.

Given football's dominance over other sports in terms of viewership, you might expect salaries to be leaving baseball in the dust, and the value of NFL teams soaring past the best MLB clubs.

Yet, while the NFL sells almost all of its broadcast rights to national broadcasters like ESPN and CBS, baseball's meandering 162-game season means the vast majority of its games aren't broadcast nationally. This leaves baseball teams open to negotiate local TV contracts that are shown on regional sports networks.

Until recently, these local contracts were a nice complement to gate receipts and national TV revenues. However, in the past three years the size of local TV contracts began swelling. They're the new economic engines that are driving the next 15 years of Major League Baseball. The new "haves" in baseball are teams with lucrative new local contracts, and they're competing with traditional big spenders like the Yankees and Red Sox.

Local television contracts are redefining the business of baseball. But what's even more fascinating is that they're becoming the central battleground around the future of television itself.

The MLB game-changer: local TV contracts

In August 2012, a group that included Magic Johnson purchased the Los Angeles Dodgers for over $2 billion. Just eight years earlier, the team had sold for $430 million. That $2 billion purchase price easily eclipsed the previous record amount paid for a U.S. sports team, $1.1 billion for the Miami Dolphins in 2009.

Magic and the new owners didn't end their big-spending ways once they bought the team either – shortly after the purchase they announced a megatrade to absorb a handful of overpaid Boston Red Sox players. Between the beginning of the 2012 and 2013 seasons, the Dodgers payroll ballooned by 129%. The new owners wanted to bring the team back to its winning ways after the previous owner had throttled spending.

Yet, more importantly, the Dodgers were in negotiations for a new local TV contract and the new owners wanted to create excitement around the team for maximum negotiating leverage. Their record purchase price was nearly entirely predicated on their ability to land a record-size local TV contract.

The bonanza around local TV contracts in Major League Baseball really took off in 2010 when the Texas Rangers inked a 20-year deal estimated to be worth $1.6 to $1.7 billion. The size of the deal sent shockwaves throughout baseball. The Rangers' previous local TV contract was an estimated $250 million over 15 years. In just a decade's time, the team saw nearly a 5X increase in the value of their local TV contracts!

The Rangers were just the beginning. Soon after, the Los Angeles Angels signed a deal valued at $2.5 billion over 17 years. The Astros – one of baseball's most dismal teams in recent years – signed a deal paying a reported $80 million annually.

Even the Mariners – a team with the third longest postseason drought in baseball – received a new local TV deal worth about $2 billion over 17 years. That gave them the financial firepower to outbid the Yankees for Robinson Cano's megacontract.

Oh, and the Dodgers ended up getting their new local TV contract last off-season as well. Their deal with Time Warner Cable is worth a reported $7 billion over 25 years. That's an average value of $280 million per year coming in, before any gate receipts, national TV revenue, corporate sponsorships, concessions, radio revenue, or merchandising dollars.

Why sports on TV has become so valuable

Understanding why local TV contracts in baseball are exploding requires some background on the tectonic technological shifts that are threatening America's television industry. Aside from the rise of cable in the late '70s, television media has remained startlingly unchanged in the past 50 years. Until now.

With the rise of streaming services like Netflix, online video, video on-demand, and devices that allow consumers to watch TV on their own terms, television has seen more change this decade than the preceding half-century. 

Channels that had previously relied on filling programming with syndicated reruns of TV shows or movies suddenly became less valuable. For the first time, viewers had a choice beyond "channel surfing." Rather than watching an episode of Roseanne because a rerun happened to be on TBS, a viewer could fire up Netflix, explore recordings on their DVR, or look through video-on-demand offerings. 

But sports still demands that viewers watch it live. According to research from Nielsen, 99% of primetime viewing of sports is either live or watched on the same day. For drama TV shows, that figure is 70%. Netlix, Hulu, and the like can fill viewers' needs for comedies and dramas, but you need live TV for sports -- nobody wants to watch the 2011 Super Bowl on Hulu. And more than 100 million viewers will watch the next Super Bowl live on television on Feb. 2.

An introduction to affiliate fees and your cable bill

Not only that, but sports are must-watch programming for a considerable percentage of the population, which gives cable channels that carry sports programming significant leverage when negotiating the fees they charge cable operators.

In this article "cable operator" is used as fill-in for any company that provides television services. The illustration above shows the choices a consumer in a given area might have. Usually, an incumbent such as Comcast and a satellite provider like DirecTV will be available. In certain areas, alternatives such as Verizon FiOS are available.  

The finances of most sports channels have been shifting away from advertising in the past decade. Since viewers spend around 16 minutes of each TV hour watching advertising, you might assume advertising drives the finances of cable companies. That would be true for most non-sports channels. However, sports channels (and a handful of non-sports channels as well) increasingly rely on "affiliate fees" – the amount a cable operator like Comcast pays to a cable network/channel such as AMC or ESPN to include its channels in varying cable packages – for a majority of their revenue. 

In AMC's case, these affiliate fees accounted for 58% of their revenue in 2012. It's reported that ESPN makes two-thirds of its profit from affiliate fees charged to cable operators; just one-third of its profits are from advertising. These fees wind up getting passed on to consumers via rising cable bills. So, whether or not you watch ESPN, if it's in your cable package you're paying roughly $5 a month in affiliate fees for the channel.

In short, affiliate fees are a guaranteed monthly payment from consumers to cable channels that are hidden in your cable bill. While consumers may groan about Comcast boosting their bill each year, in the background ESPN is raising its affiliate fees by 7% each year and forcing the cost of cable upward.

Court filings have shown that ESPN has secured affiliate fee increases with Time Warner Cable that will see the channel's fees hit $8 a month by the end of the decade.

The deciding factor in whether a cable channel can continue raising affiliate fees is whether it has programming leverage over cable operators. And the single biggest point of leverage is unique "must-see" programming that viewers would loudly complain – or cancel their service – if it was removed.

Cable channels don't necessarily need a full slate of widely watched programming to get high affiliate fees either. The vast majority of AMC's programming, for example, is older television shows and movies. Yet, because it has shows like Mad Men, Breaking Bad, and Walking Dead with fiercely loyal fan bases, the company has been able to extract huge raises in the affiliate fees it charges cable companies to carry its channels. Cable One, a small Phoenix-based cable operator, recently said AMC was demanding a 520% increase in the fees it was charging to carry its programming.

Baseball: the ultimate affiliate fee weapon

Regional sports networks, or RSNs, copy the playbook of AMC very well. They surround relatively unwatched programming throughout the day with marquee programming like games from the local MLB or NBA team during primetime hours. Even if you've never watched one, RSNs are likely on your cable package under names like "Fox Sports West," "Root Sports," or "Comcast SportsNet."

Like AMC leveraging its ownership of Walking Dead, RSNs leverage live sports such as Cincinnati Reds games. When it comes time to negotiate affiliate fees, local cable operators are forced to continue paying through the nose for access to that marquee "must-see" programming such as baseball even if other programming on RSNs is of limited value.

That strategy is working, very well. Over the past five years, researcher SNL Kagan estimates RSNs across the country have been able to increase their affiliate fees by 52%. On a longer-term time frame, the average basic cable bill rose by 150% in the 15 years between 1995 and 2010, according to the FCC. Sports is a key driver of those increases. 

RSN fees typically range in the $2 to $3 range, but new deals could see the most lucrative RSNs closer to $5 per month. Source: AllThingsD, SNL Kagan, Barclays. Numbers are estimates from February 2012. 

Looking at the above chart, you might expect that ESPN is the most-watched cable network since it can command affiliate fees four times the most expensive non-sports channel. However, in the week ending Dec. 15, ESPN was actually just the fifth most watched cable channel in terms of average viewership.

Its ability to extract such large and growing affiliate fees comes not from consistently highly viewed shows, but rather the fact that without ESPN, viewers would miss marquee events such as Monday Night Football and the BCS National Championship game. Likewise, in terms of total viewership, RSN ratings are anemic; their value is predicated almost entirely on live broadcasting of local games.

Sports have created a new economic model that's far more lucrative than other television channels, and those riches are trickling down from the TV channels, to the sports leagues, to the players.

In 2002, the Yankees cut out the middle man and set up their own RSN, the YES Network. The Yankees owned 25% of the venture, with the remainder owned by Twenty-First Century Fox, the Nets, and Goldman Sachs. Likewise, the Red Sox have long been 80% owners of the regional network carrying their games.With RSNs seeing their ability to continue charging cable operators more and more each year, Major League Baseball teams have swooped in to get their fair cut of the TV loot.

Baseball franchises know their 162 games provide the majority of the value for RSNs, so they've begun getting far more aggressive in recent negotiations. The local RSN is given two options: Either they must significantly increase the annual fees they're paying to broadcast baseball games, or teams can threaten to copy the Yankees and carry their games on a network they create with a rival joint venture. The increased bargaining power baseball teams now possess led to the Rangers' $1.6 billion contract and the glut of eye-popping deals that followed.

The fading popularity of big-time baseball

The irony of baseball entering a golden age where teams are now being valued in the billions of dollars is that in many ways, baseball is less popular than ever. Interest in the World Series has been falling for decades while Super Bowl viewership continues to rise.

The World Series, the showcase of baseball's empire, is no more popular than an airing of The Big Bang Theory on CBS.

Not only that, but ratings for national showcase games have been falling. Fox's nationally televised Game of the Week saw its audience shrink by 33% between 2004 and 2012. Across all national stations that broadcast MLB, ratings have been falling.

Across the board, fewer people are watching baseball. Source: Sports Business Daily

To be sure, while national interest might be flagging, regional ratings can be much stronger. When teams are very good the results are lucrative. RSNs in Cincinnati, Detroit, St. Louis (all playoff teams in the top five of local baseball ratings) sold almost all of their advertising before the season even started, according to Broadcasting & Cable. Baseball appeals particularly to men in the 25-54 demographic, a group that's coveted by advertisers. The best baseball teams can see local ratings of 7-10 on their RSNs, (ratings represent the percentage of households watching a show in a given area), which is better than just about any programming you'll find on cable.

The flip side is that struggling teams often are unable to find sizable audiences. The Los Angeles Angels, who signed that massive $2.5 billion contract in 2012, averaged less than 65,000 households watching their games last season in the Los Angeles market, which is the second largest in the country. The Astros, who recently signed a deal paying $80 million annually, did even worse. Their average household viewership in Houston last year was less than 10,000 viewers. The ratings nadir was an Astros game that was watched by fewer than 1,000 households. Its local ratings were lower than an out-of-market WNBA game the same day.

Cable operators that sign multi-year contracts with RSNs are captive to those seasons when the local team is making a heroic playoff run and everyone gets swept up in the success, when that civic passion that's unique to sports takes hold. The top-5 highest rated baseball teams in 2013 all made the playoffs and all saw huge ratings in the process.

And it's not like the cable operators have much of a choice. Cord-cutting is a viable phenomenon that's picking up traction. If a cable package can't provide sports – the one area Netflix can't replicate – it invites consumers to wonder why they're shelling out so much for their cable bill every month.

There is also the one-sided PR nightmare that comes from not carrying popular programming. 

With cable pricing so opaque, the cable operator is always the bad guy. It's very difficult for cable operators to explain the complicated issue of affiliate fees and get any sympathy from customers if they cut a channel. Ultimately, the bill each month comes from them. ESPN is never named a "worst company in America," but cable operators routinely lead those lists. 

It's an uneasy and sometimes strained relationship between sports and cable operators, but one they've ultimately made work in recent years because they need each other.

Can the game of fewer viewers and more money go on?

We've observed that baseball in many ways is less popular than ever, but at the same time making significantly more money. According to ESPN's sports business reporter Darren Rovell, even after factoring for inflation, baseball revenues are up 242% since 1990. In turn, player salaries have risen 194% in that time. Television is bringing riches to everyone involved with baseball. Footing the bill are consumers who pay an unseen "baseball tax" in their cable bill each month.

Baseball has managed to pull off the remarkable feat of decoupling revenue from popularity because it's the single largest beneficiary of cable bundles.

Can baseball – and sports – continue increasing the amount of money they're bringing in each year while ratings are stale or falling? The question naturally becomes, if cable operators are seeing sports channels demand large affiliate fee increases and consumers fret over cable bundles where they have to pay for channels they don't watch, why does the cable bundle continue?

Beyond sports: The cable bundle works for everyone

Even with hand-wringing from cable operators about how sports programming cost increases aren't sustainable (researcher NPD estimated the average cable bill could crest over $200 by 2020, largely thanks to sports), the simple fact is that they haven't yet aggressively fought back against sports because the cable bundle works tremendously well for all parties involved.

In the case of cable operators, Comcast made over $13 billion in operating profits across the past year and its stock is up 111% over the past two years. Selling cable in bundled packages has been working for the company and helps cable operators receive higher revenue per user. Not only that, but some cable operators are trying to cut out the middle man and get more into the sports game themselves. That $7 billion Dodgers deal is in partnership with Time Warner Cable, which will then charge local cable competitors the high affiliate fees funding the deal. 

But what about non-sports channels such as USA and Fox News that receive a fraction the affiliate fees ESPN receives relative to their viewership? In their case, while affiliate fees are a big part of their business, the biggest advantage of the cable business actually comes down to advertising.


Different cable companies are normally part of larger cable networks that have strong bargaining power against cable operators.

Overall, the total TV advertising market in the United States will be about $70 billion in 2013, which overshadows the estimated $39 billion collected in affiliate fees. In the past decade, with consumers shifting away from magazines and newspapers, advertising dollars have been moving to online areas like search, banner ads, mobile, and video. Of the older advertising mediums, only television has managed to grow along with the emergence of online advertising. Even today, it's about 60% larger than all digital advertising in the U.S. and is far and away the world's biggest ad market. 

What the bundle does so well for cable companies is limits competition and assures distribution; it puts a wall up to ensure viewers and advertisers have limited choice. As much as we might marvel at TV packages with hundreds of channels, there still isn't a lot of competition in the space relative to the amount of money advertisers are pouring into the medium.

There might realistically be only 50 cable channels consumers regularly watch. In addition, cable programming is dominated by a very small group of companies that then bundle their own programming. A suit from cable operator Cablevision against media conglomerate Viacom accused the company of forcing the inclusion of 14 "lesser-watched" channels to get access to the company's more notable channels such as Nickelodeon and MTV. 

This means the bundle gives cable networks themselves a point of tremendous leverage over cable operators. They can expand their revenues by creating lightly watched channels that get very low affiliate fees, but are assured distribution to millions of homes they can sell advertising spots to as well.

Take Scripps as an example. The company owns channels like HGTV, Travel Channel, and the Food Network. In the past year its profit margins are higher than Microsoft and Google. Think about that for a minute – those leading technology companies have been accused of being monopolies, and a cable network that runs a package of lightly watched channels claims higher pricing power! Scripps does it almost all through advertising as well, with ad spending being 69% of its television revenues.

Once you're in the cable bundle, you're one of a very select few companies that gets to split up that $70 billion television advertising pot.

There is no escape from the bundle

When you add it all up, every party benefits from the cable bundle. While consumers might grouse at only wanting to pay for what they watch, the reality is the famed "a la carte" solution would devastate the industry. 

Let's look at ESPN. If it were part of an a la carte option at the prices it currently charges ($5+ a month in affiliate fees), a large percentage of cable subscribers would choose not to pay for the channel. Investment bank RBC estimates around 80% of basic cable subscribers would pass on sports if given the option. In such a case, ESPN would need to charge at least $25 per subscriber a month to keep its revenue the same.

Two major problem emerge here. First, having one-fifth the subscribers could devastate the third of ESPN's profit that comes from advertising. Second, even sports fans might balk at the higher price. Even if 40% of subscribers are wiling to pay for sports, these two problems still ensure that in any unbundled scenario ESPN doesn't come out whole. The math is even crueler for local RSNs. 

Then you could look at a company like Scripps, the owner of HGTV and other networks. If Scripps charged consumers monthly fees for carrying its channel, a high percentage of people would opt out. That lost viewership would devastate the advertising business that contributes 69% of its television revenues. On the other hand, if Scripps decided to cut the 31% of its business that's affiliate fees in hopes of seeing higher advertising revenue, opportunities are limited. Of the roughly 114 million households with televisions, about 104 million pay for cable. With the cable bundle, Scripps' best channels are already reach a tremendous amount of their potential audience. 

Finally, we could look at cable operators like Comcast or DirecTV. At the end of the day, they're largely passing affiliate fees on to customers. The problem is, researcher Needham says consumers name an "ideal price" of $30 per month for unbundled cable packages. With the average American paying closer to $90 in cable bills right now, that's a huge difference. At such a low price, cable operators would have a hard time keeping up their healthy profit margins. 

Where this will all go wrong

There is only one real way to describe the current world of cable: Mutually assured destruction. While no one in the broader pay-television landscape speaks happily about cable bundles, they all know that if any party left, the whole industry would see profits crumble. 

Yet, with all parties so entrenched, what situation could lead to the cable bundle falling?

Simple: Excess, greed, selfishness, self-interest.

Right now, every piece of the cable bundle is exploiting the bundle's bizarre economics to maximize their own benefit. Sports is using its limited, yet fanatical fan base to charge huge affiliate fees. Largely unwatched RSNs are commonly the second-most expensive channel in cable lineups. Beyond baseball, other sports are cashing in as well. Realignment in college football is driven by new television contracts. In basketball, the Lakers are creating two RSNs that will charge affiliate fees. The list goes on. 

Cable networks have created their own bundles of minor channels and required their inclusion in cable television packages. All these moves increase the price consumers pay while adding little benefit to cable TV as a product. 

Each move is minor in isolation. An RSN charging an extra $1 a month in affiliate fees won't break cable, neither would the inclusion of an MTV3 that adds $1 a year. However, added up, they're all straining the limits of what consumers will pay for television. 

In the third quarter of this year, the nation's fourth largest cable operator, Time Warner Cable, lost 306,000 TV subscribers. While companies have yet to report results, its expected that 2013 will be the first ever annual decline in pay TV subscribers. With streaming services becoming more varied and more content available online, there are real alternatives to television. 

The good news is that as long as all the cable networks hold firm, only remaining on pay TV, television cancellations will remain a relative trickle.

However, that's unlikely. 

The slow doomsday scenario

Fox recently canned its lightly watched Speed channel and instead created Fox Sports One to compete with ESPN. NBCUniversal refocused Versus into its more pre-eminent NBC Sports channel. The companies want to cash in on juicy sports affiliate fees, and have the money to buy programming. In the end, this will lead to larger affiliate fee demands from Fox and NBC, and more pressure from sports programming on cable prices. 

With sports fees – and the number of sports channels – continuing to increase, the tension is growing with other non-sports channels. Those channels commonly rely more on advertising, which is harmed when customers cancel cable. Not only that, but affiliate fees shifting toward sports will lead to cable operators pushing back against the fees they pay to non-sports programming. 

Put yourself in the position of Scripps Network. If in the coming years cable subscriber numbers are slowly falling and cable operators are beginning to resist affiliate fee increases, would you decline an incremental revenue opportunity to move television-like programming off of cable?

Let's say such an offer was from Google. The company now receives an estimated $5 billion a year from advertising on YouTube and sells its popular $35 Chromecast device, which bridges mobile devices, PCs, and the television. If they offered guaranteed money upfront, and a revenue-sharing deal for subscribing to online channels similar to what you already offer on television, would you decline that offer? There is little doubt a company like Google is interested in television – it's an ad company, and television is the largest ad market in the world. They've already begun pushing different channels as the central focus of YouTube in an effort to make it more "TV-like."

One cable network alone wouldn't have a watershed impact, but if several companies began testing moving more content away from cable and into online, the trend of cord-cutting could escalate quickly. None of them would be endangering their cable revenue in the near-term, all immediate revenue would be "incremental." The damage would be done by slowly chipping away at the advantages of the television ecosystem. Moving enough programmed content away from TV to make consumers more comfortable not paying for bundled television. 

While cable's reign might seem a given today, entrenched industries can fall fast to rapid external change. While it might be easy to look back and know newspapers died the day the web was born, in reality, the rapid decline of print advertising didn't begin in earnest until late 2006, and within three years the industry was half its size. Give consumers a "good enough" alternative, and the speed at which they'll adopt it has surprised many once-thriving industries. 

Remember, television companies are used to impressive growth rates. In the past five years Scripps has grown sales at 10% annually. Discovery Communications has seen its sales grow across the same period at 15% annually. If advertising growth slows or affiliate fee increases are pushed back on, they'll be looking for opportunities like I described above to incrementally increase their revenue. To satisfy shareholders with lofty expectations. 

The cable bundle stands to falter because it's a tremendous deal for all included, but they're helpless to not continue pursuing better deals that are increasingly straining the bundle proposition itself. 

Microsoft-like profit margins can't last forever. 

The biggest loser in all this: baseball

Predicting the future is at best an imprecise science, and at worst a fool's game. How fast cable could decline, we can't say. 

However, what can be said for certain is that the next decade of television is fraught with unknowns. Pay television faces two great challenges in out-of-control cable bundle economics and technology beginning to encroach on its space. The most dangerous assumption for any cable network would be to assume pay television will look the same a decade from now as it does today. 

Yet, that's just the assumption being made in baseball. Many of the monstrous RSN deals being signed right now have timeframes that run in excess of 15 years. The Yankees' current deal with their RSN, YES, runs through 2041. That's 27 years away.

To put that into perspective and to show the speed of technology, the World Wide Web didn't exist 27 years ago. 

These deals are being signed under the belief sports programming will continue increasing in value, largely thanks to its ability to charge more affiliate fees in the cable bundle. With sports – and especially local RSNs – standing to lose tremendously if the cable bundle sees serious changes, there is tremendous risk signing such long-term contracts. 

You could say that risk is on the local RSNs that are committing to such large contracts. However, since Major League Baseball takes 34% of all local TV revenue to be spread out under "revenue sharing" plans, many teams have begun forgoing more guaranteed television money in exchange for equity stakes in the local RSNs. The value of ownership stakes in RSNs isn't shared with fellow MLB clubs. 

For example, the value of the Mariners "$2 billion" deal includes an ownership stake in their local RSN. The Angels received a 25% stake in their RSN as part of their $2.5 billion deal, and the Astros deal included a 46% ownership stake in their newly created RSN. 

Essentially, the rules of baseball "revenue sharing" has led teams to tie their own financial futures to the idea that the cable bundle will last for decades. That affiliate fees will be on the rise. That baseball can continue indefinitely see more revenue even as fewer and fewer people watch its games. 

The risk, therefore, is actually baseball's.

The NFL is in a dramatically better place. While it collects $1.9 billion from cable bundle-dependent ESPN each year for "Money Night Football" and owns its own cable channel, it has major deals with broadcasters like FOX, CBS, and NBC that are worth about $3 billion annually. Those deals are almost fully supported by advertising, rather than cable channels using their programming to command higher affiliate fees. 

The value of MLB franchises may rival the value of many NFL franchises, but the risk facing baseball's television revenues is dramatically higher. 

Has it already begun?

Last Sept. 27, the Astros were surprised when the RSN they owned 46% of declared bankruptcy. It was just a year old. The RSN was seeking a reported $3.40 per month from cable operators to carry its channel. With the Astros having a league-worst payroll, cable operators balked at the high cost and refused to carry the channel. Astros games are currently only on Comcast, a co-owner of the RSN. 

With only 40% of households in Houston able to see the games, the channel couldn't collect enough affiliate fees to pay the Astros agreed upon annual fees. There isn't an uproar from customers of other cable operators because there is little demand to watch Astros games. 

The Astros are seeking to dismiss the bankruptcy, claiming it's a "transparent" attempt by co-owner Comcast to take control of the RSN. Yet, the fact is, this deal is just a year old and already failing. 

With the Astros among the worst teams in baseball history, it'd be easy to dismiss the struggles of their RSN as an isolated incident. Yet, there are other troubling signs on the sports landscape.

Time Warner Cable is refusing to carry the Padres' RSN. DirecTV has refused to carry the Pac-12 Network. These disputes aren't new – in 2002 CableVision refused to carry Yankees games when their new RSN premiered. 

However, it is concerning that there are so many disputes when cable television is still in its golden age. After all, every year before 2013 saw increases in the number of pay television subscribers. With baseball television contracts stretching out for decades, will these disputes become more common if 2% of customers cut their cable? What about 5%, or 10%? Cable operators will feel far less need to pay the high prices to pander to a sliver of fanatical sports fans if other customers are leaving in droves to pursue cheaper viewing options. 

Ten years down the road, as a 41-year-old Robinson Cano wraps up the final playing days of the contract he just signed, will anyone be watching?

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 12, 2014, at 11:27 PM, TMFBoomer wrote:

    In a nutshell, Big Bang Theory is America's new favorite pastime.

    Great article.

  • Report this Comment On January 13, 2014, at 1:30 PM, TMFRoyal wrote:

    Well done article, Eric!

    Jim

  • Report this Comment On January 13, 2014, at 5:38 PM, rizno wrote:

    I'd be interested to hear what your take is regarding MLB.com streaming subscription rates and how that benefits baseball. Also I'm curious about this growing trend for Baseball viewership and its impact on the model. They are at the top of the app store on iOS for sports and I get the general impression that they're very popular among fans who are cutting the cord. In my opinion this is a lot better for their fans when compared with the NFL who basically requires fans to use DirecTV if they want access to all games.

  • Report this Comment On January 13, 2014, at 5:46 PM, anash91 wrote:

    It's sad to see my favorite sport become less and less popular, but these things cycle. Once the NFL introduces all the new rules everyone hates, people will look for alternatives

  • Report this Comment On January 13, 2014, at 5:59 PM, Snertie wrote:

    Interesting read. And I think about this every time I see another omni-million-dollar contract signed by some hotshot. Except what I didn't see is what happens when the hapless cable subscriber finally has enough and screams "Uncle!". From the consumer's standpoint, all the players in this scenario are acting like this can go in indefinitely. It can't.

    I'm one of those subscribers. My Comcast bill for "basic" service (in low-def) is now closing in on $100-a-month for 100 channels of mostly crap. I know plenty of people paying $200 or more. My Roku box gets me tons of content on-demand in high-def for a fraction of that.

    Baseball is the only reason we've held on to cable. But as the bill continues to increase every 6 to 9 months, now I'm questioning that. I can just as easily walk over to a nearby bar or friends house and save the $1,200-a-year. I can't be alone in feeling that way. This situation will change quickly when more people come to this conclusion and cut the cord.

  • Report this Comment On January 13, 2014, at 6:09 PM, colleran wrote:

    Excellent, well researched and written article. I wonder how much of baseball's reduced viewing is due to the income disparities among teams.

    In the NFL, for instance, teams like Green Bay can only be competitive because the league shares its revenue among all the teams.

    In baseball, you have teams like the Astros that have no chance at matching the Yankees, given the almost 10 times difference in salaries. Yankees in 2013, $229 million vs. Astros 23.4 million. As we say in the South, that dog won't hunt.

  • Report this Comment On January 13, 2014, at 6:16 PM, EDJMCPS wrote:

    I would cut the cord in a second if it were not for family influences. I have Comcast at $178.00 a month and track the monthly and yearly totals. At some point the ridiculousness of all this will shine thru when they all realize is being spent each year, and on what?

  • Report this Comment On January 13, 2014, at 6:17 PM, stan8331 wrote:

    Fantastic article. Best, clearest explanation of the cable TV ecosystem I've ever seen.

    Really glad I don't own any stock in cable companies. :)

  • Report this Comment On January 13, 2014, at 7:02 PM, MikeinDenver wrote:

    @colleran The Astros payroll doesn't have as much to do with the lack of revenue as the cheapness of the owner. The Astros made approximately $53M last year after salaries. So the money is there they just don't want to spend it.

    As for unbundling channels it could be done but the massive profits and salaries would have to decline in sports and other channels. I don't know too many people that would be sad about that. The numbers you quote are for maintaining their revenue. Something they don't deserve for the junk they put out.

    I personally went with OTA HD channels and online subscriptions which are a fraction of the price of our old DirecTV bill.

  • Report this Comment On January 13, 2014, at 7:25 PM, swiing wrote:

    Excellent in-depth article. The unraveling will come if Aereo wins its case before the Supreme Court. Aereo will offer very cheap network programming over the internet. Aereo combined with a Netflix or similar streaming combined will cost $15/month and will be very attractive to those that don't want to pay for sports - ESPN/RSN.

  • Report this Comment On January 13, 2014, at 7:37 PM, k3nR33d wrote:

    We use Direct TV now. There are only a few programs we watch. We record all of them and watch at our leisure. In effect, we're recording everything and watching later so we can skip commercials. This is especially true of sports television other than baseball.

    In baseball, you have automatic commercial breaks every half inning. Baseball is perfect for TV because the commercials get seen. Football is the worst. Commercial breaks are destroying the flow of the game. Now a 4-hour game is common if ESPN is televising it.

    I have no stock in a cable provider. I'm sure they will be dead as everything will be delivered over the internet. Our days with Direct TV are numbered as soon as we can get everything we watch on Apple TV.

  • Report this Comment On January 13, 2014, at 7:45 PM, Snertie wrote:

    @swiing, the problem with Aereo is that beyond a hand full of games of the week, most of baseball is now on cable. I love Aereo, but it's not going to do me much good as far as baseball is concerned. Aereo is great for watching the NFL, but won't be a decent substitute for cable if you're a baseball fan.

  • Report this Comment On January 13, 2014, at 7:55 PM, hcminer wrote:

    One of the best articles on the economics of TV and professional sports that I have ever read.

  • Report this Comment On January 13, 2014, at 9:32 PM, PeakOilBill wrote:

    I like baseball. There is only one reason why I don't watch it much. It is too slow. If they speeded it up just a little, it would attract a lot more viewers.

  • Report this Comment On January 13, 2014, at 9:34 PM, swiing wrote:

    @Snertie - Agreed. My point was not clear. I meant to say people that don't care much about the sports that are on ESPN/RSN.

  • Report this Comment On January 13, 2014, at 11:11 PM, TMFRhino wrote:

    Hey all,

    For all those who said they enjoyed the article, thank you.

    Rizno,

    MLB Advanced Media (their digital arm) is doing quite well. I think the last figures available are that it does ~$620 million a year in revenue. That's nothing to scoff at, and baseball has clearly been a leader on that front.

    That being said, it's still a sliver relative to television revenue. If TV revenue was endangered in the future and they somehow opened up their digital properties to more in-market games (currently blacked out), that'd obviously lead to better revenue on this front still. Perhaps baseball has enough die-hard fans that revenue from such a change would be larger than I or anyone else could imagine... But, long-term, the lack of broad visibility would present its own problems. You'd essentially be niching the sport availability only to diehards.

    So, I guess my thoughts would be that baseball is doing well there... But, it's still a minor piece of its empire.

    Colleran,

    As was mentioned, the Astros could spend far more. The owner who bought the franchise used a fair amount of debt, and was essentially purposefully being as bad as possible (and maximizing revenues) while rebuilding. As we're now seeing with their new RSN's bankruptcy, that strategy might have been pushed too far and is having its own consequences.

    Overall, a lot of small market clubs ask for more sympathy than they deserve. When MLB financial documents were leaked to Deadspin, the small markets were actually quite profitable thanks to revenue sharing. These big RSNs being signed include quite a bit of money that's shared. Overall... It makes a lot of sense for football to sell games in big national packages that are split up evenly, there is just such a low inventory of games.

    Football deserves a lot of credit for what it's done. Teams essentially have to spend to the cap each season, which means any team is always a couple years away from being competitive. Baseball has come a long way in the past decade in helping create a more "even" playing field... But, it'll never be football on that front. If you're an owner in a really great TV market, you're naturally resistant to more revenue sharing and other moves that encourage parity.

    Thanks for commenting everyone.

    Eric (The article's author)

  • Report this Comment On January 13, 2014, at 11:28 PM, TMFTomGardner wrote:

    Excellent article. I have a feeling my team, The Minnesota Twins, could be facing low viewership if they can't reverse the trends. And this article shows how that could crater quickly.

    If you feel compelled to write another article, I'd love to see your read on the NFL. They are in a command position, but their employees are getting destroyed in the workplace. Brett Favre already can't remember that his daughter played a full season of soccer. Potentially very, very sad.

    I think your conclusion here is right. Baseball is in long-term trouble. My expectation is that they'll change up the structure of a season. The steroid mess has rendered the most popular statistical records void. They can change the game. I think they should.

    Tom Gardner

  • Report this Comment On January 14, 2014, at 3:04 AM, Risky88 wrote:

    Longest MF article I have ever seen

    amazing

  • Report this Comment On January 14, 2014, at 4:36 AM, jomueller1 wrote:

    Well researched and well written article.

    It turns my stomach that I have to pay for stupid entertainment for the plebs because I cannot opt out of sports.

    As the owners of "content" (does not make me content) just look at their bottom line, so called sports is an expression of capitalism gone awry. It seems I have to move to another country where I am free from having something imposed on me that I do not want.

  • Report this Comment On January 14, 2014, at 4:51 AM, WhiteHatBobby wrote:

    This happens to every sport except the NFL, and that's because the NFL has a strict anti-siphoning policy in all home team markets.

    Under the terms of the NFL's anti-siphoning policy, all games involving a team in its primary home market MUST air on broadcast television. The NFL Network's Thursday and ESPN's Monday night games involving the local team MUST be blacked out, and the NFL will sell a syndicated package in each local market that only broadcast channels can bid.

    The FCC attempted to run an anti-siphoning list, but HBO sued and the Supreme Court ruled in HBO's favour, which is why we are seeing sports ratings drop, from college football's postseason to regular season MLB, NHL, and NBA, as games are almost exclusively on pay television and in some areas RSN actions are to blame; in South Carolina, we are forced to receive the Los Angeles RSN's with blackouts almost every day; TWC owns the RSN for the Los Angeles teams, and we must subsidise a channel we can't watch in order to pay for the rights fees. Similar actions are happening with the Yankees and Red Sox owned channels, but they offer a plethora of other events, including ACC games of local interest to them because of the conference being represented in those markets, and sports team-related documentaries. In Australia, the anti-siphoning list has become a major source of controversy.

    MLB's new television contract cuts Saturday afternoon network games to just 12 games during the season.

    One big reason soccer's Barclays Premier League is gaining viewers is the 20 network television games on NBC, with some NBC Sports Network, CNBC, Universal Sports, and Telemundo broadcasts. Those games, along with Fox's network games of the FA Cup and UEFA Champions League, are boosting viewers in the States when there is no FTA coverage of the sport in Europe. US live FTA broadcasts of European soccer matches began in 2012 (UCL Final, Fox).

    This is an issue we're seeing in tennis as now only one major (France) is on network television as cable has three of the four majors exclusively, all ESPN. Is that precipitating the decline of tennis?

    NASCAR has seen what happens when their playoff is on ESPN, so they signed a new NBC deal for 2015 that mandates more Chase races on network television, including the final.

    The SEC is college football's premier conference because of a guaranteed network television slot at 3:30 PM ET every week on CBS, a deal that dates to when CBS was a minor network nobody wanted to affiliate. The Big 12, Pac 12, Big Ten, ACC, and The American have Fox or ESPN Broadcast (fka ABC) deals, but the slots aren't guaranteed each week. You have different conferences on the slots each week so that hurts.

  • Report this Comment On January 14, 2014, at 12:19 PM, TheRealRacc wrote:

    Great article.

    I am busy at work - couldn't read the discussion, I apologize if this was mentioned.

    MLB.tv is how I watch all of my baseball. As long as the baseball fan-base is not alienated, I don't have any concerns about baseball and its relation to the changing landscape of TV.

  • Report this Comment On January 14, 2014, at 2:00 PM, sportsfan494949 wrote:

    Great article. Time shifting does not work in sports, ergo pricing power.

    As for me, I hate paying for T.V. but I am forced to by the city laws that prohibit the installation of an antenna. I buy the minimum Comcast (that and Direct TV are the only choices here) for $30/month.

    I love sports and own season tickets to the Niners and Giants. Sure I could watch more Giant and Warrior games (all Niner games are on local channels) on TV if I paid for the upgraded bundle at about $65/month. Thirty five dollars a month extra for one (1!) channel of viewing (the other channels in the bundle are worthless to me.) To me, being a sports fanatic, owning season tickets, following my teams...at some point the money to follow my team ON TELEVISION is not worth the cost. There are many new ways to keep up with your team and individual players that were not around even five years ago.

    I cannot understand how people can spend $200/month on TV. Most all of it is garbage. Better to take $150/month of that and invest it TMF recommendations.

  • Report this Comment On January 14, 2014, at 3:56 PM, Rocketman63 wrote:

    This is a terrific article and analysis that overshadows other "bubblefeeds" and treats it's audience with respect. The only comment I have is that the pace of change is quickening and the clever folks that applied business principles to sports will soon be ambushed by technology and their progeny. I don't like paying for a product I don't use and I can count on my kids to eventually show this old coot how to avoid this trap.

  • Report this Comment On January 15, 2014, at 8:11 AM, Wigo901 wrote:

    This is precisely the reason that I am a member of the Motley Fool community. This article is well written and thoroughly researched that it was a pleasure to read. I learned plenty. Thank you, Eric!

  • Report this Comment On January 15, 2014, at 9:05 AM, larrywelchusa wrote:

    Excellent Article. I expect in the future to be getting baseball live via a netflix like service from MLB or directly from our home team, the world series champion red sox.

  • Report this Comment On January 19, 2014, at 2:30 AM, bosolevu wrote:

    awsome article! this is great information and insight...

  • Report this Comment On February 28, 2014, at 12:48 PM, blastfc wrote:

    Decentt article. but honestly, you didnt prove anything, and at a few points, you were intentionally misleading. For example- saying 80% of basic cable subscribers opting not to pay for sports and then immediately saying that would cause espn to have to charge 25$ per person to get espn to maintain revenue. Thats simply wrong. In part because, well there are plenty of non-basic cable subscribers (oh and by the way THOSE are often the people paying for sports packages) and people who have non-cable companies. So essentially what you just said is "if ESPN loses 80% of 40% (32%, since you dont like math) of their revenue, they would have to charge 5 times as much to make the same, when in reality they wouldnt have to increase prices only 40-50%. admittedly, my 40% of their business from basic ca ble subsribers was a random guess, but you see my point. Your margin of error was around 500% (using my figure) its impossible for mine to be anywhere near that high, unless it favors my argument.

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