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February 12, 2007

The Ledger Domain

A Deeper Look at the Exclusive Extra Innings to DirecTV Deal

by Maury Brown

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Back in 2003, when I really started rolling up my sleeves and working directly in the business of baseball, I was fortunate enough to be working with David Kahn, the former General Manager of the Indiana Pacers, and now the owner of four NBA D-League teams in the southwest. Kahn was the head of the Oregon Stadium Campaign during the Expos relocation derby, and I was working on research for the material that would eventually be the final submission making Portland's case to MLB. In the midst of that roller-coaster process, David was always keen to mention in the press-and to those of us working on the effort-the need to be level-headed. "Remain dispassionate, if you can at all help it," Kahn would say. "This is business, and therefore, you have to try to remove your emotions so that it doesn't get in the way of making proper decisions." He was right, of course, but that didn't mean that emotions didn't enter the picture. In the span of two days, we saw state funding legislation die in the Legislature, prompting depression, only to see the bill resurrected the following day and passed, causing jubilation.

I bring all of this up now because for the better part of a month I have been immersed in research and correspondence with those who will be impacted by MLB's decision to make Extra Innings available only on DirecTV, and also discussing MLB's move with those that work in sports business or cover it from an analysis perspective. With the exception of three emails received, the fans that contacted me are flaming mad with the deal, and wish to still get out-of-market games through the existing carriers like cable and Echo Star's Dish Network, which will be dropped in America when the new deal is announced. (I will get to Canada shortly.)

Core Fans Most Upset

Understandably, the ones that would have the most interest in a package such as MLB Extra Innings are baseball's core constituency-their most loyal and dedicated fans. As noted in more than one correspondence, these were the fans that stuck with MLB when the '94 strike hit. With that in mind, how easy would it be for MLB to simply say, "This will blow over. The game has seen storms bigger than this, and will weather it." Many simply believe that MLB sees this as a money grab, given DirectTV's willingness to offer up $100 million over seven years when compared to a reported $70 million a year by the cable industry. As I will get to shortly, this is an oversimplification.

As for the fans, since space doesn't allow for all the emails that I have received to be displayed, below represent two examples from my in-box on the upcoming deal.

Keith Kudrycki of Washington, D.C. writes of the proposed deal:

As a displaced Yankee fan living in Washington and a cable subscriber I am outraged by this blatant money grab. This decision shows a complete lack of foresight and an absolute disregard for the fans. I subscribe to the Extra innings package every year and watch multiple games each day, until now. The predictable response that all of the games are available on the internet is completely unacceptable. Poor video and sound quality on a 14 inch screen is not what I am looking for. I expect to be able to watch baseball on my widescreen HDTV and that is now impossible, unless I want to deal with the mind-numbing coverage presented by Fox or ESPN.

Rob Matthews of Williamstown, MA brings up how creating a single carrier impacts how pricing may be impacted:

It's not just that an exclusive deal with DirecTV will cut off large portions of the Extra Innings consumer base who won't or can't switch to DirecTV satellite service, the problem is also that there is a single provider of the Extra Innings package. If the problem were simply that an exclusive deal on a service that is not universally available, one could argue that MLB.TV is an acceptable alternative that bridges the gap. While this is certainly true, the more important problem is that DirecTV will now have monopoly control over the EI package and will be able to set the price higher than a competitive market would otherwise. Add to that the fact that MLB.TV is actually a partner in the DirecTV deal, wants to ensure that it is profitable, and will not compete with the EI package. Considering this, it becomes clear that this a textbook case for anti-trust law.

Some emails were more brazen in their criticism, an online petition to stop the deal has surfaced, and the online polling I am conducting has "I'm Angry" and "That's It! How do I contact MLB?!?" with 78% of the votes. So, generally speaking, consumers are not buying into the proposed deal. It's not just the average fans that are having issues with the exclusivity of the deal. Here's what Jayson Stark of ESPN had to say in a recent interview I conducted for The Biz of Baseball:

I just think it's incredibly short-sighted. I find myself directly affected by that issue, but it's the bigger picture where baseball really gets hurt. These fans they're ticking off aren't just any fans. They're baseball's BEST fans-folks who are willing to do something we once thought people would never do: PAY to watch baseball games on television. Why mess with those people? ... Here's where this is especially short-sighted: If you limit your audience, you'll never know how many fans you would have made or could have made if you'd exposed your product to the maximum possible audience.

Digging Deeper Sees 24-Hour Baseball Channel as the Tipping Point

As I mentioned, there are financial considerations to take into account. The reasonings for MLB to choose DirecTV exclusively as the carrier involves several components:

  • DirecTV's Offering Compared with Cable: As mentioned, the deal with DirecTV totals $700 million over seven years. Determining what cable offered is a bit harder to define. As of this publication, and despite sifting through contacts and research of various broadcast, sports business, and mainstream media, what the total figures and contract length were offered by the cable industry is unknown. If $70 million a year was offered, for the same time period, then the simple answer is to say that due to this deal being related to the Central Fund, the difference of $30 million a year divided by the 30 owners comes to $1 million a year for each of those owners. It seems hardly worth the heartburn that MLB is creating with fans and members of Congress to warrant such action. But, if the deal offered by cable was for a much shorter duration, DirecTV's offer becomes more enticing.

  • "The Baseball Channel" as the Tipping Point: Probably the single most important aspect of why MLB would choose this route in favor of offering to both EchoStar and cable along with DirecTV is DirecTV's willingness to place a 24-hour baseball-only channel on their basic tier. This was something that cable was unwilling to do, and given MLB's high interest since August of 2004 in creating its own 24-hour network, it appears this aspect of the deal is the tipping point. As to why the channel means so much to MLB…

  • Content Control as an Asset: As witnessed by MLB Advanced Media's (MLBAM) overarching of all MLB's online content, including MLB.com, content control is of particular interest to MLB. There's good logic for this in the broadcast industry. As one NBA sports executive related to me, by controlling your content you remove the middleman in regional sports networks-your Fox Sports Networks, etc.-and create an asset that you, as an industry, control. The Baseball Channel affords MLB this option, and saves them money by removing RSNs from the equation, gives them better oversight into what content is delivered, and provides them with direct feedback as far as how well the channel is performing.

  • Could Making MLBAM an IPO be a Consideration? Ben Silverman, who freelances for Yahoo Finance through FindProfit.com, discussed the deal with me this past week, and he published an interesting aspect of the deal as it pertains to the baseball-only channel. Silverman wrote on Friday (Making Noise: Batter Up! Is Major League Baseball Prepping for an Interactive IPO?):

    Late in 2005, MLB scrapped the idea of taking Major League Baseball Advanced Media public. The reason, according to published reports, was that team owners did not want chests full of cash on their doorsteps as they were in the midst of negotiating a new labor contract. That excuse is no longer valid because MLB and the Major League Baseball Players Association reached a new five-year agreement last October. ... With the labor contract out of the way, MLB can now focus on taking Major League Baseball Advanced Media public. One of the key assets of the company is, of course, its MLB.TV product. See where I'm going?

    Where Silverman was going is that MLBAM's value increases for IPO purposes, by artificially forcing consumers to MLB.TV. It's an interesting point, and as I added in conversation, the timing of the IPO would seem best suited for a day when MLB's revenues flatten or drop. The IPO, in my view, is a very valuable rainy-day fund for MLB. With the 24-hour baseball-only channel slated to launch in 2009, it would seem that MLB is either priming the pump for an IPO, or sitting back and setting the stage to allow an asset to grow in value by creating a side benefit to the exclusivity of the DirecTV deal.

Does the Deal Make Long-Term Business Sense?

Back to the overall structure of the deal, is it a good or bad move? As mentioned, MLB will be restricting the consumer visibility of their key product, and in doing so, the restriction is done after making the product available to a broader audience. In this sense, it's far different than what the NFL and DirecTV did with their exclusive deal for Sunday Ticket. In that instance, Sunday Ticket had never been made available beyond DirecTV, so the negative PR impact of removing customers on cable and EchoStar was never felt.

There's another issue at play in this deal, however. Take the restrictive move out of the equation. Take the 24-hour baseball-only channel out of the mix, and this move by MLB (or for that matter, any content provider looking to go to Direct Broadcast Satellite, or DBS) might be ill-advised. Why? Analysts predict a decline in subscriber growth, which is tied to the per-subscriber aspect of any long term relationship when contract renewal comes up. Why the decline in the DBS industry? Analysts tie the already-slowing trend in housing growth to predictions of a further decline. In terms of growth for DBS, the entire PayTV industry is expected to drop 650,000 homes in terms of growth from 2005 to 2007. With that slower housing growth there will be slower revenue growth and slower EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). So, as some have mentioned, MLB maybe simply forsaking the long-term business strategy in exchange for near-term financial gain based in DirecTV's willingness to offer more cash than cable.

With PayTV on the decline, telecommunications companies seem to be on the verge of finally pushing past that point where consumers buy into the convergence of television and broadband. Microsoft is still pushing heavily in the set-top box arena, and Apple just recently launched iTV, which allows iTune video content to be displayed on televisions. Also, the Comcasts and Time Warners of the world are becoming more of a factor in content delivery.

What's the Silver Lining for Consumers?

There are upsides to the deal for the consumers-or rather there are upsides for current DirecTV subscribers, or those that will make the jump to the satcaster. Before delving into those that have access to DirecTV, it was thought that all of Canada would be blacked out of Extra Innings due to the fact that DirecTV is not available in the country. An email from Rogers Communications this past week reveals that Extra Innings will be made available on cable, even when the deal goes through.

Other considerations involve High Definition content. One other upside for MLB with the Baseball Channel is the fact that DirecTV looks to expand its HD offerings in the second half of 2007. The Baseball Channel provides DirecTV content to fill these HD needs, gives MLB something else to look forward to, and it gives you, the consumer with HDTV, a chance to take in more sports content via HD, truly the best content out there for the technology.

For those that will make the jump to MLB.TV, you will see an increase in the quality of the feeds this season. Game video will be streamed at a rate of 700 Kbps compared to the 350 Kbps to 400 Kbps rate of last season. In addition, under the new deal, MLB and DirecTV will offer a reduced rate package for those that chose to do both MLB.TV and Extra Innings on DirecTV. While the cost for the reduced-rate package for the pair has not been released, Extra Innings cost $179 last year for approximately 60 games per week while MLB.TV cost $79 and provided every available out-of-market game. However, as ever with MLB.TV, blackout restrictions may apply.

Final Thoughts-Prepare Yourself

I know that there has been some talk about how Senators John Kerry (D-MA) and Arlen Specter (R-PA) fit into the picture. Both have made it clear publicly-and in the case of Kerry to the FCC-that they view the deal as a hit to consumers nationwide. While this may very well be true, don't look for them have any pull when it comes to actually stopping the deal. As Arlen Specter said to the New York Times last week, "Since I found out about the baseball deal, I've asked my antitrust people to do research to confirm my preliminary judgment that it's an antitrust violation. But I don't think I'll be able to stop it." He then added, "You can't charge baseball with an antitrust violation." Specter did mention, however that Congress could preserve baseball's antitrust exemption, but only on the basis of the industry's not doing deals like the one proposed with DirecTV in the future.

At the beginning of this article, I talked about how being dispassionate in sports business allows one to see things clearly. In my case, I find the move to be short-sighted, but that determination is not based entirely on the views of the many fans that will be shortchanged in the deal. While their problems weigh heavily on my thoughts, when you roll in the decline in growth projected for the direct broadcast industry, and the fact that short-term financial gain is being achieved through limiting consumer access and thereby limiting product growth at every turn, the plan to put Extra Innings on Direct TV exclusively really just doesn't make sense to me.

Commissioner Selig needs to be mindful of comments that he's made in the past regarding the proposed deal. At the announcement in New York for the 2008 All-Star Game, Selig was asked about the deal. "[That is] a matter for another day," Selig said. He then added, "I really haven't heard that much criticism." Clearly, Selig must not be reading the press, his emails, or the phonecalls coming into the Commissioner's Office. Either that, or bluntly, in MLB's eyes, the concerns of their core fans do not outweigh a short term financial gain. Sadly, we've seen this before, and that's a shame.

As I said at the outset, remaining dispassionate is needed when it comes to sports business. Let's hope that MLB hasn't become so dispassionate in their efforts to increase revenues that they miss the fact that baseball, at its heart, is a game built on emotional moments that the fans wish to tune in to. Taking away the ability for some of MLB's best fans to enjoy as many games as possible is where MLB may need to focus on how the value of passion outweighs a dispassionate business decision.

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

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