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May 20, 2010

Squawking Baseball

The Enigma That is MLB Network

by Shawn Hoffman

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MLB Network has quickly become a very enigmatic business. It had the biggest launch in cable history last January­—when it instantly entered almost 50 million homes—and reportedly exceeded expectations on the advertising side in its first year. It’s also been a hit critically, as it won a bunch of Emmys last month, and—in my opinion—has been a hell of a lot better than "Baseball Tonight" since day one.

Despite all that, the network’s business is going to be stuck in quicksand for the foreseeable future. Thanks to the deals MLB made to get those incredible launch numbers, the network now has its hands tied behind its back, and it’s going to be very hard for it to ever become the huge revenue producer most once thought it could be.

If it sounds like MLB essentially sold the network’s soul to the devil—well, yeah, that’s basically what they did. Back in 2007, MLB signed a huge deal with DirecTV to give the satellite provider exclusive rights to MLB Extra Innings. I was pissed, and so were thousands of other baseball fans, including Senator John Kerry. But MLB actually seemed to have everyone right where it wanted them—when the cable providers came back to the table, MLB had an offer: put MLBN on your basic tier (thereby forcing everyone who buys cable to pay a monthly fee for it), and you can have Extra Innings back.

It worked beautifully, and many people (including me) thought it was an absolutely brilliant maneuver. In fact, I still think it was pretty brilliant, except for one huge problem: MLB made itself a slave to the cable providers in the process.

Here’s why. Cable networks make money in two ways: 1) The cable providers pay them a monthly fee for every subscriber that has access to that network, and 2) Advertising. In most cases, the former is a much larger source of revenue than the latter; think about the last time you watched a commercial on the Fine Living network, or any one of the 500 other channels you pay for every month but never watch, and the math becomes pretty simple. As a result, there’s usually endless haggling between the networks and the providers on sub-fee rates, and most of the time the networks win—why should the providers put up a fight when they can just pass the costs on to their customers (us), who continue to pay insane prices every month no matter what?

At first glance, MLB Network would seem to be a prime candidate for a sub-fee fight; MLBN reportedly charges 24 cents per subscriber per month, which is less than half what the NFL Network gets. (For comparison’s sake, ESPN takes about $4 per subscriber per month. Yeah.) That seems like the perfect arbitrage opportunity for MLB—why should the NFL get twice as much for something that is so similar?

But that’s where the ghosts of 2007 come back in. MLB didn’t just give back Extra Innings; they also gave the cable providers substantial equity in the network (somewhere around one-third), and likely locked itself into that incredibly low sub-fee number. And while that wasn’t necessarily such an awful result (it’s always possible they could have ended up with no distribution), MLB really needed a blowout victory if it wanted MLBN to become its next billion-dollar business. Extra Innings was the real prize for the cable companies, and once MLB had signed it away for the long-term, its leverage was gone.

Now three years later, the cable providers are firmly in the driver’s seat. Without an increase in sub-fees—which the providers have absolutely no reason to grant—MLBN’s subscriber revenues are going to be stagnant, barring a deal with one of the few remaining holdouts, such as Dish Network. (Which I still think will happen, if for no other reason than it has to for MLBN to see any substantial growth this year.)

Plus, despite all of the critical praise and all the pub it gets on MLB.com, the network is still struggling to draw significant ratings—it has been getting about half as many viewers as Speed Network in primetime, and trails the NFL Network by a significant margin as well. It’s no mystery why: The network has gotten terrible placements on cable dockets, usually landing somewhere in the high-100s or worse. MLBN did supposedly beat their ad revenue projections last year, but only because they set incredibly low targets. And anyway, an extra $10 million here or there is not going to affect MLB’s overall business in the slightest way.

So MLBN is what it is, at this point. It will probably take in somewhere around $150 million in subscriber revenue and $50 million in ads again, give or take a few either way. That’s pretty damn good for a year-old network, but it’s not even half of what MLBAM is bringing in, and BAM itself is a pretty small piece of MLB’s overall business. Add in the fact that the network’s revenue is not going to be getting substantially higher any time soon, and you have to think there are owners that are going to feel shortchanged.

It didn’t necessarily have to be this way. The NFL has had a very tough time selling its network, but through sheer brute force, it’s managed to win about the same distribution as MLB, without the handcuffs. And remember, NFL Network is charging close to 50 cents per subscriber and is getting better ratings, so its revenue is likely more than double that of MLBN.

At the very least, MLB still has full operating control of the network, and that’s a crucial point. Given MLBN’s current predicament, MLB really should be running it as a break-even business that sends any surplus cash back to the 30 teams. With some subsidiaries, this wouldn’t be the easiest thing to do, but the model is actually pretty simple in this case: MLB can put more games on the network and charge a "market rate" for the rights fees, up to and until the point where the network is breaking even. After all, why leave money in the network, where the teams only own two-thirds of it?

Of course, that’s not the business model most people had in mind when the network was conceived. Cable is old media’s last major cash cow, and most figured that MLB would be able to make a lot of money out of it—at least until cable’s current pricing model dies. But instead, it looks like MLB Network will remain a nice side project. There are worse tragedies, but the league’s financial stakeholders should certainly be disappointed.

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  MLB,  MLB Network,  Business

18 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

kephils
(240)

For some reason, and I've often suspected it's Comcast being bratty, MLB Network is on channel 738 on my remote. 738, around such channels as "Filipino On Demand" and other niche channels. MLB Network is the only channel within literally hundreds that's actually included on the basic tier...all of its neighbors in either direction are pay channels. This seems like a minor complaint, but I often ask friends and colleagues if they watch the channels, and they have no idea whether they have it, and where it is...

May 20, 2010 08:45 AM
rating: 0
 
Deelron

I wouldn't read too much into that, on my Comcast it's located right with FSNHD and the ESPN HDs.

May 20, 2010 09:00 AM
rating: 0
 
baserip4

On my DISH Network its located... oh, right. I'm sure it will come to DISH at the same time DISH disables my DVR.

May 20, 2010 09:35 AM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

"Filipino On Demand"..... That's fantastic.

May 20, 2010 09:42 AM
 
kcboomer

I have it on Comcast 226 which is strictly High Def.

I don't know how this network wins awards; its flagship show is absolutely dreadful. Could they have come up with a worse crew of ex-jocks to discuss the game?? Mitch Williams has single-handedly dragged sports commentary to an abysmally low level.

Not a single one of them has a clue about the statistical revolution that has occurred.

May 20, 2010 09:48 AM
rating: -1
 
BP staff member Shawn Hoffman
BP staff

I actually like Mitch Williams. He's not an "analyst" obviously, but he's funny as hell, so he's bringing SOMETHING to the table -- basically he's what John Kruk is supposed to be.

None of these guys are ever going to be statheads, and you shouldn't take anything analytical they say seriously, but you can just take them for what they're worth. More of the MLBN guys are worth something, unlike the ESPN guys who are dumb AND bland.

May 20, 2010 10:43 AM
 
Michael Bodell
(89)

I haven't watched much MLBN because it hasn't made it into my DVR programming, but the little I've watched didn't seem very good to me.

I actually like the BBTN guys and think BBTN does it's job pretty well (except Sunday, the Sunday show is nearly unwatchable when Chris Berman is on).

May 20, 2010 17:33 PM
rating: 1
 
buddaley

I think the network is a mix of excellent and meh, certainly better than I remember ESPN (I haven't watched it in years) which was a mix of dreadful and beyond words dreadful.

I like the Costas interviews very much. The replays of classic games are great fun and the instructional segments (I have forgotten its name) are very interesting. Incidentally, in a recent replay of a 1984 game announced by Kubek and ?, Kubek was making and remaking the point that BA is a highly overrated stat and that getting on base was more important. Even some of the cutesy type shows like the "9 greatest ...." type things are fun if not taken seriously.

Every once in a while a bit of more advanced analysis slips in, but that is rare, and it difficult to watch any of the shows on which the panel of "experts" say anything. My major criticism of the network is that as it is focused on baseball exclusively, it should be more cutting edge and find some time for serious discussion of the statistical advances being made and more bold thinking about the game and its issues. Instead, it recycles pap.

May 21, 2010 04:28 AM
rating: 0
 
cruzich

Is there any chance that, along with a Dish Network deal, the MLB Network might cut a deal for carriage on AT&T U-Verse?

May 20, 2010 10:10 AM
rating: 0
 
Hokieball

Have Verizon FIOS, and channel 86 MLBNet is right smack in the middle of the sports tier, channels 70-100, above ESPNs (70-74) but right before NHL 87, NFL 88, and NBA 89. Seems pretty prime placement to me ...

May 20, 2010 10:17 AM
rating: 0
 
pobothecat

I find the MLB show pretty much unwatchable. Never mind the stat-revolution --- they're just tedious. Lots of laughter at nothing funny and not a darned insight in sight. At least Baseball Tonight has Buster Olney and Tim Kurkjian and a very under-rated Buck Showalter.

Meanwhile, barely on topic, did anyone happen to see a mid-afternoon-last-week-of-the-preseason-I-forget-who-played game broadcast by John Sciambi and Buck Showalter? I've got the Extra Innings package and watch way more baseball than I should and that little broadcast was easily the most entertaining game I've seen in the last two seasons. Really good chemistry. Smart and funny. Wonder if anyone at ESPN even noticed.

May 20, 2010 12:52 PM
rating: 0
 
BP staff member Will Carroll
BP staff

Shawn - do you think the Google TV announcement is going to be significant in this space?

May 20, 2010 12:57 PM
 
BP staff member Shawn Hoffman
BP staff

TV-meets-web is inevitable. Only thing that's held it back so far is the fact that cable is a massive oligopoly, and people don't like installing additional set top boxes.

Google TV is a start, but I think what really needs to happen is some company (ahem) needs to build a web-based TV that is so good that they can manhandle the cable operators into accepting it. Sort of like what needed to happen in the phone industry a few years ago (AHEM).

May 20, 2010 13:30 PM
 
Brian24

Interesting article. A couple of questions: first, if the ratings for MLB Network are so much lower than for NFL Network, why would MLB be able to get higher subscription fees if the cable companies didn't have equity stakes?

Also, given those equity stakes, you would think the cable companies would have an interest in putting the network into a prime channel space. Why haven't they done so?

Finally--SSS alert of course, but in the last couple of months I've lived in Hollywood and on Long Island, and in both places my cable company had MLB placed in the same vicinity as ESPN and the other prime sports networks, so the bad placement isn't universal, anyway.

Finally, you'd think Baseball Tonight etc. would eventually put a stats analyst on the show along with the ex-jocks, if only because it would only help ratings to have the players mock the stathead's ignorance.

May 20, 2010 13:14 PM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

1) The ratings are about 30% lower, and MLBN's sub fee is less than half, so there would definitely be an "arbitrage" opportunity, if MLB hadn't locked itself in.

2) The operators' equity is worth very little, relative to their main businesses. The main prize was Extra Innings, which they obviously got back for the long-term.

3) Based on the comments here -- another SSS, obviously -- it seems like it's mostly had very poor placements, which is what I found when I went through some of the major cities' provider listings. But there are some places where it's been much better.

4) I feel like the token stathead would end up looking like boom goes the dynamite guy.

May 20, 2010 13:40 PM
 
misterjohnny
(925)

One big error in your column is with regard to operators passing along fees to customers. That is like saying Team Owners don't care about player salaries because they will just pass it along in the form of higher ticket prices.

Cable and satellite charge what the market will bear in terms of packaging. If ESPN raises its rates, the cable guys eat the cost. Cable and satellite raise programming prices every year regardless of which cable networks have rate increases. And what holds down prices is the competition between cable, Directv, and Dish Network.

The rate battle between networks and Multichannel Video Providers is a game of chicken. Networks ask for big rate increases, MVP threaten to take down the channel. Or the network threatens to pull the channel if the higher rates aren't paid. That is the only leverage that the parties have against each other. Observe the recent Versus/Directv battle. Versus (an upstart 15 years ago) was looking for a big increase in the rates it was getting. Directv said no, and Versus pulled their signal. It took almost 7 months for them to come to an agreement.

So what does this mean for MLB Network? It all depends on ratings. Can MLB get in the hearts and minds of cable/satellite customers, so much so that the MVP can't pull the channel? You either need a broad base of support or a smaller but fiercely loyal support group (fans that will switch providers if you don't carry their channel) in order to have sway over the providers. That is why ESPN costs $4 per customer. People will switch if ESPN is not carried.

As for Dish Network, MLB is not NFL. The fan base for baseball is smaller than football. Dish does not need MLB, they've never had the baseball fan who would switch to a different provider over a baseball channel (unless MLB pulls a ton of programming off the local Regional Sports Networks that carry the local games). So it is not in Dish Network's best interest to pay $3 million dollars a month out of its profits to MLB. And MLB can't cut the price to Dish, because all the other providers have MFN agreements (standard industry practice). So IMO, MLB is not coming to Dish in the next few years.

May 20, 2010 13:28 PM
rating: 3
 
BP staff member Shawn Hoffman
BP staff

Here's the difference: cable companies have kept jacking prices (sometimes fearfully), and people keep buying. Cable is just an incredibly inelastic business, far more so than baseball tickets.

If cable operators had any stones, they would go a la carte, lower prices massively, and increase their margins. They'd never do it though, b/c the content creators would revolt, and the operators would risk messing up their inelastic oligopoly empire.

May 20, 2010 13:34 PM
 
misterjohnny
(925)

Cable can't go a la carte until Congress makes them because most "big" networks like ESPN require carriage in the most common programming package and don't allow a la carte sales. So sure they could sell Home Shopping Network a la carte but anything anybody wants would not be available.

Cable may be inelastic, but it is competitive. Telcos are going after the high end customer by building out fiber in high revenue areas. Satellite has local channels in HD in over 90% of US households. So almost all of the country has 3 viable competitors, one of which likes to be a low price leader (Dish Network). And 50% of the country has a fourth provider, driving down phone/internet/TV bundle prices. Cable continues to raise prices, but they are also losing market share every quarter. They still make 65% programming margins, on their big packages, so 65% of $60 per month is still better than 90% of $30 per month. The cost to serve a customer isn't that variable with revenue, so the goal is to get as much programming margin (and ancillary margin from fees) out of the home as possible. A la carte doesn't get them there.

May 20, 2010 16:11 PM
rating: 0
 
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