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February 5, 2007

The Ledger Domain

The Effect of Regional Sports Networks

by Maury Brown

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I have been getting a lot of mail lately asking about how television revenues impact MLB and the 30 clubs. Whether it's regarding the proposed deal to make MLB Extra Innings exclusively available on DirecTV, or how someone like John Kerry might try to derail that effort, there seems to be more interest than ever in how sports-or more correctly, MLB-is impacted by the boob tube.

To that end, one of the single biggest influences over television has been the increased growth in regional sports networks, or RSNs. Every club is now broadcasted on an RSN, with some clubs being partial owners of them. Doing some research, here's a list of some RSNs that are controlled, or partly controlled, by MLB clubs:

Regional Sports Network                        Franchise Association
NESN (New England Sports Network)              Red Sox, Bruins
MASN (Mid-Atlantic Sports Network)             Orioles, Nationals
YES (Yankee Entertainment Sports Network)      Yankees, Nets
RSN (Rogers SportsNet)                         Blue Jays, Raptors
TBS (Turner Broadcast Station)                 Braves
Comcast SportsNet Philadelphia                 Phillies, 76ers, Flyers
Comcast SportsNet Chicago                      White Sox, Cubs, Bulls,
RSTN (Royals Sports Television Network)        Royals
SportsNet NY                                   Mets
SportsTime Ohio                                Indians
WGN                                            Cubs

With the advent of the RSN, the questions are, 1) are they profitable? and, 2) are they considered to be part of the revenue-sharing equation? The answer is yes to # 1 and no to #2.

With that in mind, there have been echoes of MLB clubs using what is called "transfer pricing" to help shield baseball-related revenues in controlled RSNs to keep them out of scope of the revenue-sharing process. As an article from CFO.com outlines, such accusations raise the ire of MLB executives. As the article points out, "under the current CBA rules, PricewaterhouseCoopers performs a separate revenue-sharing audit on every team based on 'aggressive' rules defined by a committee of owners and other staff, and reviewed by the players' association."

The article also mentions that shielding revenues does occur.

"Ask baseball CFOs about related-party transactions and see if they don't turn pale," suggests Ray Schaetzle, former executive vice president of finance of the New Jersey Nets, which merged with the Yankees to form the YankeesNets organization.

"When you have related-party transactions, you have a lot of opportunity to reduce costs through economies of scale-or to hide things and make the franchises look less profitable than they are," explains Schaetzle.

Which brings us back to the RSNs and their financial states. With data obtained from the Sports Business Journal, we can see the following:

rank*  Network       Team**    No. of games   2006 rating  Avg. households
1      NESN          Red Sox        150        10.6        252
2      FSN Northwest Mariners       108        8.9         101
3      FSN Midwest   Cardinals      107        8.6         105
4      FSN Detroit   Tigers         112        7.1         138
5      FSN North     Twins          119        6.7         110
6      Cox Channel 4 Padres         140        6.5         66
7      FSN Ohio      Reds           115        5.5         48
8      CSN Philly    Phillies       93         4.8         139
9      FSN South     Braves         25         4.4         93
10     YES           Yankees        126        4.3         317
11     Turner South  Braves         54         4.1         87
12t    FSN Pittsb.   Pirates        118        4           47
12t    FSN Arizona   Diamondbacks   70         4           67
14     STO           Indians        130        3.8         59
15     FSN Southwest Astros         130        3.6         71
16     SN Chicago    White Sox      95         3.1         106
17t    SNY           Mets           124        2.9         211
17t    FSN North     Brewers        123        2.9         26
17t    FSN Florida   Marlins        149        2.9         44
17t    SN Chicago    Cubs           72         2.9         99
21t    SN MidAtlant. Orioles        83         2.8         31
21t    FSN RM        Rockies        126        2.8         40
21t    FSN Bay Area  Giants         97         2.8         66
24t    FSN West      Angels         100        1.7         91
24t    FSN P-Ticket  Dodgers        101        1.7         96
24t    FSN Southwest Rangers        81         1.7         40
27t    FSN Florida   Devil Rays     77         1.6         28
27     FSN Bay Area  A's            73         1.6         37

*2006 rank
** Data not available for the Blue Jays, Royals, and Nationals.                                

Ratings for 10 of the top-rated RSNs declined or were flat last year, but in the overall context of the industry, this is not seen as a concern. Eight of those ten declines have seen overall ratings increases since 2003. With ad deals normally being structured in three-to-five-year increments, a dip this year hasn't raised the concerns of most in the RSN business, as outlined by the overall health of ratings in comparison to a three-year span of time.

rank     Network        Market        2003 rating     2006 Rating
1        NESN           Boston        2               3.4
2        FSN Detroit    Detroit       1.5             2.4
3        FSN Midwest    St. Louis     1.8             2
4        FSN North      Minnesota     1.3             1.9
5        Cox Channel 4  San Diego     1.1             1.6
6        SN Philly      Philadelphia  1.6             1.5
7        FSN Northwest  Seattle       2.1             1.5
8        FSN Ohio       Cincinnati    1               1.2
9        YES            New York      0.8             1.1
10       FSN Southwest  Houston       0.9             1.1
11       SN Chicago     Chicago       1.1             1
12t      FSN North      Milwaukee     0.6             0.9
12t      FSN Arizona    Phoenix       1               0.9
12t      FSN Pittsburgh Pittsburgh    1               0.9
12t      FSN Bay Area   San Francisco 1.4             0.9
16t      SN MidAtlant.  Baltimore     NA              0.7
16t      SNY            New York      0.5             0.7
16t      FSN Florida    Miami         0.9             0.7
16t      SportSouth     Atlanta       1               0.7
20t      FSN West       Los Angeles   0.8             0.6
20t      FSN Rocky Mtn. Denver        1               0.6
20t      FSN Southwest  Dallas        0.9             0.6
23       FSN PT         Los Angeles   0.4             0.5
24       FSN South      Atlanta       0.7             0.4
25       FSN Florida    Tampa         NA              0.3

NA: Not available
Note: Turner South was rebranded SportSouth in October 2006
Source: SBJ research

In relationship to total households, the declines from 2005 include:

Network        Team*        Change in HHs vs 2005

NESN           Red Sox        -10.40%
FSN Northwest  Mariners       -4.80%
FSN Midwest    Cardinals      -6.70%
FSN North      Twins          -0.20%
Cox Channel 4  Padres         -2.10%
FSN South      Braves         -23.10%
YES            Yankees        -5.10%
Turner South   Braves         -31.10%
FSN Pittsburgh Pirates        -11.10%
FSN Arizona    Diamondbacks   -13.60%
STO            Indians        -42.60%
FSN Southwest  Astros         -8.40%
FSN North      Brewers        -33.20%
FSN Florida    Marlins        -32.00%
SN Chicago     Cubs           -24.60%
SN Mid-Atlant. Orioles        -30.30%
FSN West       Angels         -3.30%
FSN Southwest  Rangers        -31.80%
FSN Bay Area   A's            -5.60%

* Data not available for the Blue Jays, Royals and Nationals.

There were some increases, most notably FSN Detroit, which saw a 92 percent increase in average households from the year prior due to the Tigers' Cinderella run to the World Series, and an 87.20 percent increase at SportsNet New York due to the Mets.

Those with increases in total households include:

Network        Team*        Change in HHs vs 2005
FSN Detroit    Tigers       92.00%
FSN Ohio       Reds         29.70%
SN Philly      Phillies     16.10%
SN Chicago     White Sox    19.70%
SNY            Mets         87.20%
FSN Rocky Mtn. Rockies      69.70%
FSN Bay Area   Giants       3.90%
FSN PT         Dodgers      32.40%
FSN Florida    Devil Rays   6.20%

* Data not available for the Blue Jays, Royals and Nationals.

Overall, the data shows two things. It shows that revenues from RSNs have been up for the period leading up to the CBA. When that fact was tied to other revenue streams, it set up an environment where free spending in the off-season was ripe for an increase.

While the data shows increases over the past several years in ratings and the total number of total households with access to RSNs, the numbers in decline from last season may be a trend, rather than an anomaly. One might suggest that the steep decline in NESN viewership last season was due to the lackluster finish to the season. With the aggressive off-season activity by the Red Sox and the addition of Daisuke Matsuzaka, interest will be increased at the early part of the season, and then depending on the performance of the team over the course of the season, those numbers will fluctuate accordingly.

Lastly, there will be ebbs and flows in the RSN game. As an example, starting in 2008, the Kansas City Royals will increase the number of games seen on television to 140 in total. That's due to a deal with Fox Sports Midwest. It will also mark the end of Royals Sports Television Network (RSTN), the Royals attempt at a regional sports network. RSTN is expected to televise 114 games, including 14 over-the-air games, in 2007. As for additional RSNs, the Angels came very close last year to creating one before inking a deal with FSN West, and other clubs will surely investigate whether controlling an RSN is beneficial to them.

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

Related Content:  MLB Network,  The Atlantic

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