Exclusivity the key to trumping uncertainty

The Dodgers' deal hinged on big TV rights fees. But how much bang for their buck do networks and cable companies really get?

How high is too high for local TV sports rights these days? The new owners of the Los Angeles Dodgers are about to test the boundaries of the marketplace with what’s expected to be a blockbuster cable pact that could have repercussions for the media biz overall.

When the Magic Johnson-fronted investor group agreed late last month to pay a record $2 billion for the Dodgers, TV bizzers understood that the eye-popping pricetag was driven by the skyrocketing value of the team’s local cable rights, which appear headed for a bidding war led by Fox Sports and Time Warner Cable.

The value of those rights is driven by the importance of Dodger telecasts to Fox Sports’ Prime Ticket regional sports network, which commands hefty fees from cable and satellite operators because it carries the hometown baseball team. Time Warner Cable is looking to snare those rights to seed its own regional sports channel, just as it did last year in cutting a $3 billion, 20-year deal with the Los Angeles Lakers.Media analysts say the sports rights biz is all about subscription fee revenue for programming that has the advantage of being largely DVR-proof and exclusive to TV even in an ever-widening multiplatform universe.

On the heels of Fox Sports’ $3 billion, 20-year deal with the L.A. Angels, bidding for the next Dodgers cable pact is expected to start at around $4 billion for a 20-year term. Those numbers have biz observers wondering how media companies can justify their enormous commitments to sports rights.

Advertising is only a small piece of the pie. Ad revenue from local Dodgers broadcasts — including over-the-air as well as cable — was $3.3 million in 2011, according to research by Kantar Media, up from $2.8 million in 2010.

Rich Greenfield, BTIG managing director and a respected media analyst, told Variety that “there is no price that’s too high (for sports TV rights) if you think you can make it up in a subscriber fee.” But he also wonders how long cable, satellite and telco operators will be willing to pay increasingly higher fees for a growing number of sports channels. At present, fees for regional sports nets average $2.28 per subscriber per month, according to an SNL Kagan estimate.

The amount Fox has paid for the Dodgers’ cable rights has nearly tripled from $14.7 million in 2002 to what reportedly will be $38.8 million in 2013 (an increase that partly reflects growth in the number of games accorded Prime Ticket telecasts). Fox Sports’ exclusive negotiating window with the team ends Nov. 30.

“I think the interesting thing is that the ratings for the Dodgers are nowhere near the ratings for a team like the Yankees and certainly don’t have the type of local audience that the Lakers do,” Greenfield said. “So you have to wonder whether the price paid for the team is actually justified.”

Sports rights inflation is not limited to marquee teams. The San Diego Padres are reportedly about to make official a 20-year cable rights deal to Fox for $1 billion, repping an annual percentage increase of more than 200% over their last deal with Cox. The new agreement will precipitate the launch of new regional sports net Fox Sports San Diego in which the Padres would have an equity stake.

On the national level, Major League Baseball’s current deals with ESPN, Fox and TBS, which combine to pay out more than $750 million annually, expire following the 2013 season. Given the sport’s recent uptick in ratings nationally, especially come playoff time, and the valuation rise for sports rights in general (heightened by the possibility that other networks could enter the bidding), expectations that the next contracts will yield a combined $1 billion per year may be conservative.

The reliance on subscriber fees might seem risky amid all the industry talk of cord-cutting and increasing use of Major League Baseball’s MLB.TV by some fans. A basic subscription to the mobile platform costs $19.99 a month.

However, in a nod to the importance of TV revenue to the ballclubs, games beamed via MLB.TV are blacked out on desktop computers, tablets and mobile devices in local markets. While Dodger fans elsewhere in the country can pay to watch a game on their iPhones, for example, Dodger fans in Los Angeles cannot. TV is the only medium to see a live broadcast of your local team.

That exclusivity, which does not appear to be going away anytime soon, is critical to keep cord-cutting from undermining the sports rights bankroll.

“As certain content leaks out of the system, the only thing sealed off inside the system (is) live sports,” said Chris Bevilacqua, CEO of Bevilacqua Media Co., citing the migration of entertainment programming to Netflix, Hulu and other outlets. “As a result, it takes on greater meaning. … Sports is in many ways the glue holding this business model together.”

Critics say the sports rights mania ultimately winds up being paid for by consumers in the form of higher subscription-TV bills. That has fueled the steady call in Washington and elsewhere to allow for an “a la carte” model that would would allow viewers to choose the channels they want to pay for — a shift that is anathema to Hollywood on many levels.

In a Bernstein Research note, senior analyst Craig Moffett pointed out that live sports programming accounts for about 20% of all viewing hours but about half of all programming costs and an even larger percentage of programming cost growth.

“In short, sports fans are overwhelmingly being subsidized by nonsports fans,” Moffett wrote.

At the same time, Moffett notes a huge barrier to an a la carte system of distribution. “The owners of the sports networks — most notably Disney — have no interest in letting distributors offer ESPN in anything other than the current take-it-all or leave-it-all format. After all, it’s hard to envision a model any better than one where they get paid $5 per month from every family that doesn’t use their service,” Moffett wrote. “And any distributor willing to take a principled stand by refusing to carry ESPN on its basic tier won’t just lose ESPN, they will also lose the Disney Channel, Toon Disney and, yes, the ABC network.”

However, ESPN spokesperson Amy Phillips said that ESPN and its other cable networks are offered on a standalone basis, and that “an operator has no obligation to carry any other network or service we own.”

But even as Wall Street frets about the economics of the deals, there are more outlets trying getting into the local and national sports biz — witness NBC’s commitment to beef up the erstwhile Versus channel into the NBC Sports Network. The more bidders, the higher the rights fees will go.

As outgoing Dodger owner Frank McCourt learned after netting more than a cool billion in his bankruptcy-driven sale of the Dodgers, there’ll be no shortage of contenders as long as bidders see green at the end of the tunnel.

“It’s a great time to be one of the biggest sports brands in the world in the second-largest media market in the U.S. with all their rights free and clear,” Bevilacqua observed.