Cubs President of Business Operations Crane Kenney could not have been happy if he read this Los Angeles Times article, which discusses the "standoff" between Time Warner's new SportsNet LA TV channel and cable/satellite distributors.
The short version: cable/satellite distributors have balked at the price Time Warner is asking for the channel, thus no one except Time Warner cable systems in the Los Angeles area are carrying it, and so only about 30 percent of people in the L.A. metro area can see Dodgers games (and in some areas, Time Warner's not even available, so even if people wanted to switch their carrier, they couldn't).
This article will, via quotes from the L.A. Times piece, break down this issue into the parts that are relevant to the Cubs, and also the future of baseball on TV. Let's start here:
Before the start of the 162-game season, many observers expected that pressure from fans would force the pay-TV providers to the negotiating table, or face mass defections. That's what usually has happened in the past. But not this time. Instead, Time Warner Cable and the providers are deadlocked in what could become a definitive moment for the world of sports programming, as the industry realizes that exorbitantly priced television deals can backfire.
That's the crux of the issue right here. Teams are looking for big paydays from cable operators by signing multi-billion dollar deals -- but the Los Angeles problem appears to be the first sign of a bubble that's about to burst. The Dodgers have received a ton of money from their new TV deal, but here's why cable/satellite operators don't want to pay for the channel:
The annual fee that Time Warner Cable agreed to pay to the Dodgers started at $210 million this season, or $1.5 million per game, and increases through the life of the contract. That is more than four times what the Dodgers got last season from Prime Ticket and CBS-owned KCAL-TV Channel 9, which aired 49 games last season. Those fees are the reason Time Warner Cable wants so much for SportsNet LA. Last season, Prime Ticket charged about $3 per month, per subscriber, according to industry consulting firm SNL Kagan. DirecTV's York said he offered Time Warner Cable "more than what we paid for Prime Ticket last season when it had rights to three teams" and was refused. He said Time Warner Cable can't justify its asking price.
The Cubs would love to have a similar per-game increase in rights fees, but given the team's recent performance, the reported money losses by WGN (note: this is not intended to re-spark the discussion we had here last week, only to note that WGN says it's losing money), and the smaller market size of Chicago compared to Los Angeles, that isn't likely to happen -- and the L.A. dispute makes it even less likely to occur.
The rising costs to carry sports programming has distributors in a bind. On the one hand, sports is incredibly valuable content — Chris Bevilacqua, a top sports TV deal-maker described it as "the glue holding the pay-TV system together." On the other hand, the cost to carry regional sports networks and national services such as ESPN and Fox Sports 1 is getting so high distributors fear their customers who aren't sports fanatics will cut the cord to their subscription. "It's like a giant greedy monster that is incredibly difficult to stop," said Jimmy Schaeffler, who heads the Carmel Group, an industry consulting firm. Distributors have said they are willing to carry SportsNet LA on a specialty tier along with other more expensive channels or even offer it on an individual or a la carte basis. "We only want to charge the sports fans who want to see the team," said Andy Albert, senior vice president of content acquisition for Cox Communications. "To burden all of our customers with the high cost of this network is not what the majority of our subscribers want." Time Warner Cable wants SportsNet LA to be mandatory for all pay-TV subscribers, which is how regional sports networks have been traditionally sold including those owned by DirecTV. By being in every home, a network has a greater opportunity for higher ratings and ad revenue than when it is in limited distribution.
There's the crux of the dispute in a nutshell. Time Warner wants universal coverage of its channel, but is asking far more than distributors are willing to pay, or to pass on to their customers -- because cord-cutting is becoming something many are doing, and thus the proposal to carry SportsNet LA on a "specialty tier" or allow people to pay for it only if they want it.
That makes some sense, and might portend a future where a baseball team's channel is sold only to fans who want to watch the games. Thus all fans would be able to see games if they're willing to pay for them -- but that would likely greatly reduce the TV revenue that teams now depend on. You can just about hear the bubble bursting, can't you?
Another huge stumbling block for distributors: The Dodgers were insistent on owning their own channel rather than airing the games on an existing outlet. A few years ago, the market just had the two Fox-owned sports outlets. Now there is also SportsNet, SportsNet LA, the Spanish-language channel Deportes and two Pac-12 Conference networks. The amount of sports on television here hasn't increased much, just the number of channels carrying games and the price to watch them. "Los Angeles has a ridiculous number of sports networks and Angelenos are asked to pay an absurd amount," said media industry analyst Craig Moffett of MoffettNathanson Research.
The Dodgers, as one industry analyst said over the winter, already had a perfectly good TV channel before this year (Fox Sports West, which carried most Dodger games). "Why did they need another one?", he asked. It's a perfectly reasonable question.
Cox's Albert thinks what's happening in Los Angeles may prove to be a tipping point for sports on television. "The sports model is broken right now," he said. "I don't have an answer but certainly increasing the costs is not the way to run a business." Major League Baseball is also frustrated about the situation and has been unsuccessful in its efforts to encourage all the parties to come to terms.
This very well could be a "tipping point" for future baseball TV contracts. You are already seeing the retrenchment by the Cubs' failure to get a new TV deal for the WGN-TV portion of their contract and their floating proposals like a Cubs TV network based on local stations' subchannels. That one smacks of desperation, because the team isn't likely to get anywhere near the dollars they had hoped for if they're carried on local broadcast subchannels that many people don't know even exist.
What could happen in the future is for baseball TV broadcasts to migrate online, with people paying either "a la carte" or for season packages for teams, or for the whole league (as they can do now for MLB.TV). Blackout restrictions would have to be lifted for that, and doing that as opposed to selling rights fees to cable/satellite operators wouldn't provide anywhere near the TV revenue teams are getting now.
It's likely not a fun time to be a baseball executive trying to sell a package of his team's TV games -- whether that's Crane Kenney, or an executive from any other team whose TV deal is coming due soon. The Dodgers don't appear anywhere close to being able to be seen in all L.A.-area homes, and therein lies the cautionary tale.