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March 26, 2009

Changing Channels

Could MLB Network Go Commercial-Free?

by Shawn Hoffman

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According to the New York Times, advertisers are falling in love with the MLB Network. Despite the bad economy and a nationwide ad slump that is killing one old media company after another, MLBN is expected to hit its sales goals for the first quarter. That's not entirely surprising; big companies swear by sports marketing, citing desirable audiences and huge ROIs. But what the Times article doesn't mention is that advertising is only a small piece of MLBN's business, accounting for about one-quarter of the network's $200 million in projected revenue. In fact, it's entirely possible that MLB Advanced Media will do twice as much in ad sales this year, which seems like a very backwards split (analog dollars are supposed to turn into digital pennies, after all).

Subscriber fees have made cable stations the new gold standard in big media. Unlike broadcast networks, cable stations are paid a fee for every subscriber that has access to that channel. With the ad market getting pummeled, media companies are increasingly relying on these sub fees for incoming cash flow. NBC Universal, for one, makes far more money from its cable stations, which include USA, Bravo, and a bunch of others that you rarely watch, than it does from its flagship NBC network. Advertising is a solid secondary business for NBCU's cable properties, but it is the primary focus only for established networks that have already maxed out their distribution potential.

Despite having the biggest cable launch in history this past January, MLB Network is nowhere near being maxed out. It's currently in about 50 million homes, all in the United States, charging $0.24 per subscriber per month. ESPN is in hundreds of millions of homes worldwide, charging $3.65 per subscriber in the US. That may be an apples-to-bowling-balls comparison, but it's clear that MLBN still has an enormous amount of room for growth.

It also seems rather clear that this is where MLBN's focus should be, and the key is simply creating a product that cable subscribers will want (they can't threaten to pull other stations off the air, like ESPN or Viacom could). As is, MLBN has decent enough content, sort of, but it hasn't truly differentiated itself. But what if, in a bold stroke, the network decided that it was going to become a 'premium' channel on basic cable, cutting the great majority of its commercial inventory, and focusing solely on the quality of its product? This could create some serious buzz among casual and hardcore fans alike, and give nine-hour-a-night MLB Tonight a major leg up on Baseball Tonight. Even more importantly, it could distinguish MLBN's brand from that of the NFL Network, NBA TV, and all of the other sports stations that are constantly fighting for expanded distribution.

Could this actually be economically feasible? MLBN is making about $50 million from ads this year. Let's say it cut 80 percent of its ad space, leaving one short commercial break for every half-hour of airtime. They'd be able to raise their commercial rates a bit due to the sparse supply, and they could leave in-show sponsorships untouched. Being very conservative, this would probably leave them with about $15-20 million in revenue, and if they were to create all-inclusive sponsorship deals with a small number of big-spending advertisers, this figure could actually be much higher.

That's a near-term shortfall of $30 million, which is certainly significant, but MLB would make up for it very quickly if they could make any headway distribution-wise. At $0.24 per subscriber per month, MLBN would need to be added to about 12 million marginal homes, or closer to 10 million if we assume ad rates go up based on the audience numbers. In some cases, that could actually be done with just one deal (ahem, Dish Network).

Thinking further down the line, MLBN will likely end up broadcasting many live games at some point in the future-it has 26 Thursday night games this year-and possibly even playoff games. If it can gain greater distribution in the US by then, and hopefully Canada as well, it would probably be able to raise its monthly subscriber-fee rate to a more competitive figure (the NFL Network charges $0.88). Adding more games would also help on the advertising front, since there will always be commercials during inning breaks.

On the cost side, MLBN could either cut staff outright, or restructure so that resources are shifted out of the ad sales department. This wouldn't save all that much cash, but it could help the company boost efficiency. With less inventory, the network could focus on selling bigger packages to fewer customers. The network could then put more money into content production, or any other area it sees fit.

No doubt, this would be a very risky short-term play. In the midst of a bad recession, cash is generally king, and advertising is a dependable source of short-term cash for MLBN. But in the long-term, MLBN's limited distribution, not to mention its suboptimal locations on the providers that it is on, could severely stunt its growth. SNL Kagan expects the network to have 67 million subscribers in 2012, resulting in $300 million in revenue; about $200 million from subscriber fees, and $100 million from advertising. That's a drop in the bucket for MLB-less than five percent of its current business, and about half of what MLBAM will be making this year or next-and nowhere near what major cable networks bring in.

Cutting out ads might be a way to help boost distribution past any current projections. Shifting away from a previously unquestioned business model would be very bold, but the economics of media (and the rules that dictate them) are changing very quickly. In the grand scheme of things, $30 million is a small investment for MLB, which did $6.5 billion in sales last year. With a potential nine-figure upside and possibly even more, this could actually be a risk worth taking.

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 Network

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