Billion-Dollar Ballgame
Why Regional Sports Nets Now Are Big-Ticket Purchases
By Mike Farrell -- Multichannel News, 8/19/2007 8:00:00 PM
In this story:
ON DECK
IN SCORING POSITION
HITTING HOME
AT THE PLATE
Sports programming is shaping up to be a hot ticket among dealmakers.
Three regional sports networks are scheduled to change hands this year as part of a deal between Liberty Media and News Corp. A 40% interest in another — the Yankees Entertainment & Sports Network (YES) — may be on the block, as well.
Purchasing a ticket won’t come cheap. Values of the major regional networks have been rising steadily over the past two years, because of stout licensing fees, growing advertising revenue and the promise of new revenue streams. Which means it’ll take lots of cash — sometimes ranging into the billions of dollars — to play ball.
“You’re looking at all these additional cash flows and opportunities beyond it,” said sports industry consultant Lee Berke. “You’re buying in anticipation of future growth. The reality is that the market can grow, the sub fees can go up the ad sales can go up. There’s growth that’s yet to come and that’s what you’re purchasing.”
Liberty got this game started in late December, when it announced a plan to swap its 19% voting interest in News Corp. for News’s 38.5% interest in direct-broadcast satellite provider DirecTV.
As part of that swap, Liberty would receive three of the media giant’s Fox Sports Net-branded regional networks — FSN Northwest, FSN Rocky Mountain and FSN Pittsburgh.
Although a small part of the overall $11 billion deal, the three nets are valued at about $700 million, according to SNL Kagan analyst Derek Baine.
The YES Network is the big player in the field, worth nearly $3 billion according to some estimates. Goldman Sachs, one of the original investors in YES, was reported this month by Fortune magazine to be shopping its interest in the network to a variety of possible buyers.
Which networks could be for sale remains to be seen. But even Madison Square Garden Network, which no longer has the New York Yankees or Mets in its lineup, could be worth $1.8 billion, based on recent cash flow. And Berke said most networks could be in play — at some point.
| The Scorecard | ||||||||
|---|---|---|---|---|---|---|---|---|
| How regional sports networks make money: | ||||||||
| Affiliate Revenue | Ad Revenue | Total Revenue | Rev./Mo. | |||||
| RSN | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | Affil. Sub | Ad Sub. |
| n/a = Not applicable. • * Estimates. • In thousands of dollars, except for per subscriber amounts. SOURCE: SNL Kagan |
||||||||
| YES Network | $277,200 | $291,540 | $44,083 | $48,816 | $321,283 | $340,356 | $2.15 | $0.36 |
| MSG Network | $183,117 | $178,766 | $73,512 | $78,215 | $256,629 | $256,981 | $1.85 | $0.81 |
| FSN South | $182,255 | $206,649 | $20,748 | $22,731 | 203,003 | $229,380.00 | $1.50 | $0.17 |
| CSN Chicago | $89,604 | $111,492 | $24,398 | $26,406 | 114,002 | $137,898.00 | $1.90 | $0.45 |
| MASN* | $1,620 | $20,475 | $5,400 | $7,200 | $7,020 | $27,675 | $1.50 | $2.12 |
ON DECK
Potential buyers could include cable operators in the local markets, private-equity investors and programming giants such as News Corp. itself.
While Liberty will have control of three networks once its deal with News Corp. closes some time this year or next, Liberty may not be an aggressive buyer. Each of its networks sits squarely within a Comcast cable market: Seattle, Pittsburgh or Denver.
Those networks could instead be fodder for a future sale to Comcast, which already operates nine regional sports networks under the Comcast SportsNet banner, including those in Chicago; Baltimore-Washington, D.C.; Philadelphia, Sacramento, Calif.; and New York (as part owner of SportsNet New York); and has pending deals to acquire a larger interest in networks in the San Francisco Bay Area and New England. In the past, Comcast executives have said that growing its regional sports presence is a key strategy for the company.
By growing such networks “in markets where Comcast has existing operations, we have a unique opportunity to reinforce our brand image and capitalize on our local presence,” said Comcast programming group president Jeff Shell in a statement after the Bay Area and New England deals were announced.
Regional networks are valuable for several reasons: healthy affiliate fees (YES tops the list with $2.15 per subscriber per month, followed by SportsNet New York at $2 and Comcast SportsNet Chicago at $1.95) and solid advertising rates.
According to SNL Kagan, per-month, per-subscriber advertising fees can range from $2.12 (for MASN) to around 17 cents for FSN South. Those affiliate fees compare to what operators pay for national networks like ESPN ($3.26 per sub per month) and TNT (91 cents).
In turn, the sports nets have cash-flow margins in the neighborhood of 40%, meaning they generate 40 cents of usable cash for every dollar of revenue they pull in from affiliate fees and advertising. Not all regional networks have margins that high — some are in the 20% range — but many observers list the 40% figure as a general benchmark for RSNs and general-interest channels.
With potential new revenue streams on the horizon, such as video-on-demand over cable systems, Internet-streamed video and the availability of highlights and “shoulder” programming, rather than live games, over wireless devices, those valuations could go higher.
“It’s a growth market,” Berke said. “We’re not talking about residential real estate.”
Which means more regional networks could be coming. “I think right now any of the major-league teams in baseball, basketball and hockey, to a certain extent, either solely or in combinations, are open for developing [RSNs],” Berke said. “The valuations are tempting, the opportunities are substantial.”
But not every team that attempts to create a regional network is successful. The Minnesota Twins baseball club tried to form its own network, dubbed Victory Sports. But plans were scrapped in 2004 after cable operators balked at the high carriage fee the network was requesting — estimated at between $1.85 to $2.20 per subscriber per month at the time — and difficulties in obtaining winter sports programming from the NBA’s Minnesota Timberwolves.
Baseball’s Houston Astros and the National Basketball Association’s Houston Rockets also abandoned plans for a network that year, mainly because the teams were offered more money from FSN Southwest than they could have made with their own channel. And the NBA’s Portland Trail Blazers also mulled creating a network, but opted to sell the franchise’s TV rights to a newly created Comcast SportsNet outlet.
TV sports consultant Neal Pilson said that team-owned networks don’t always play.
“It doesn’t make sense in every market and in every situation,” Pilson said. “One issue is: Is there a dominant cable operator [in the market] who has the leverage to dictate the terms? Is the team in first place or last place? And then there is the issue of winter/summer — do you have year-round marquee programming?”
IN SCORING POSITION
Driving the growth are healthy increases in affiliate fees and advertising revenue. And according to observers such as TV sports analyst John Mansell, ad revenue represents a big portion of the upside potential in most of these networks.
In fact, ad revenue at some prominent services is growing faster than revenue from affiliate fees.
Overall annual revenue at the YES Network rose 5.9% to $340.4 million in 2006, from $321.3 million in 2005, according to a March research report by SNL Kagan.
During that same time, affiliate revenue rose 5.2% to $291.5 million while ad revenue increased by 9% to $48.8 million.
The most dramatic jump was at MSG Network, which actually saw a 2.4% reduction in affiliate fee revenue, from $183.1 million in 2005 to $178.8 million in 2006 — the year its contract with Major League Baseball’s Mets expired. Meanwhile, advertising revenue rose 6.4% to $78.2 million.
“In any given regional sports network that carries one team each of the three major sports, you’ll find that baseball accounts for over 70% of the ad revenue,” said Mansell, of Great Falls, Va.-based John Mansell Associates. “That’s partly because it gets higher ratings, so it has higher viewership and also partly because it has almost twice as many games as hockey and basketball.”
He added that the jump in MSGN’s ad revenue was likely due to its being in the largest media market in the country.
Mansell, who co-authored the SNL Kagan report in March, said that the gap between affiliate fee and ad revenue growth is normal for most regional networks. And he added as networks mature, the percentage of total revenue generated from advertising could increase substantially, adding to the value of the networks.
“In the first few years, a regional sports network, say even the first four or five years, generally gets under 25% of its revenue from advertising, in many cases under 20%,” Mansell said. “Over time, it inches up to the same level as the national programming networks, which is closer to 40-to-50%.”
That could mean huge future upside for many of the regional sports networks. For example, in 2006 advertising sales made up about 14% of YES Network’s total revenue; 30% for MSG and about 10% for FSN South.
| NET'S WORTH: Regional Sports Networks | ||||
|---|---|---|---|---|
| Figures assume 40% cash flow margin and multiples of 15 times-20 times cash flow. | ||||
| (in millions of dollars) | ||||
| RSN | 2005 Cash Flow | 2005 Valuation | 2006 Cash Flow | 2006 Valuation |
| SOURCE: Multichannel News Research |
||||
| YES Network | $128.50 | $1,927-$2,570 | $131.14 | $1,967-$2,622 |
| MSG Network | $102.65 | $1,539-$2,053 | $102.80 | $1,542-$2,056 |
| FSN South | $81.20 | $1,218-$1,624 | $91.75 | $1,376-$1,835 |
| CSN Chicago | $45.60 | $684-$912 | $55.16 | $827-$1,103 |
| MASN | $2.81 | $42-$56 | $11.07 | $166-$221 |
HITTING HOME
Cash flow, however, is the main benchmark used when valuing regional sports networks.
And on that measure, the networks’ growth is healthy. Using revenue data from Kagan and assuming a 40% margin, Multichannel News research shows that cash flow at YES grew 2.3% in 2006.
The network with the most dramatic rise in cash flow was MASN, the Mid-Atlantic Sports Network, majority-owned by MLB’s Baltimore Orioles. That network — which launched carrying games involving its minority owner, the Washington Nationals — nearly quadrupled its cash flow in 2006 to $11.07 million from $2.81 million in 2005. However, that increase was largely due to a huge increase in subscribers — from 425,000 in 2005 to 1.8 million in 2006 — and the inclusion of Orioles games on the channel.
“MASN has grown tremendously,” Mansell said. “They have both of the baseball teams; they really have two networks now on most cable systems.”
Other regional networks that had big cash-flow increases in 2006 are Comcast SportsNet Chicago (21%), FSN South (13%), FSN Southwest (6.9%), FSN Bay Area (6.7%) and FSN New England (6.6%).
Also on the rise: cash-flow multiples. When dealmakers step to the plate, they typically pay a price that is a multiple of the annual cash flow generated by an enterprise. Berke said that valuation multiples have almost doubled in the five years since the YES Network launched in 2002.
“The valuations are indicative of the fact that there is substantial cash flow and it is growing,” Berke said. “The multiples you’re looking at are 15 [times] to 20 [times]. When YES first started, the multiples being looked at were 10 [times] to 12 [times].
That translates into big values for sports networks — led by YES with a value of as much as $2.6 billion (based on 2006 estimated cash flow); MSGN at $2.1 billion and FSN South at $1.8 billion.
But YES is a different animal in that the Yankees are in the largest media market in the country, the team has a wide fan base and it is one of the most valuable sports franchises in history. But Berke said that if YES is sold, it could at least boost the valuations of other networks is even higher.
“It pulls the entire market along with it,” Berke said. “Granted, there is Yankees money and there are other markets and other teams’ money. But that ratchets up the entire market.
“A smaller market isn’t necessarily going to get the same as a larger market, but if there is a competitive situation and if the Yankees move from X to Y, maybe your team and your market goes up by the same multiple.”
Berke believes that most sports franchises that don’t already have their own network are contemplating starting one. And, as rights deals with other regional networks expire, the likelihood that new regional networks are created increases, he added.
AT THE PLATE
Most regional sports networks “weren’t financed the same way as YES was with hedge-fund money and investor capital,” Pilson said. “To get money out of regional sports and at the same time retain control, you may see pieces of it sold off to investors who would have the opportunity to participate and then flip it two, three or five years later.”
Pilson was less optimistic about on-demand opportunities, adding that the demand for highlights and shoulder programming is light.
Though the leagues retain VOD rights to game telecasts, some networks routinely rebroadcast games. For instance, YES replays games a few hours after the initial telecast and again at 9 a.m. the next day.
But both Berke and Mansell believe that die-hard fans will have the appetite and the willingness to pay for watching their teams, in some fashion, on demand.
Mansell said that there is “absolutely” an opportunity for VOD regional sports programming, adding that some networks already have deals with NFL franchises for highlights and other programs. And he said the opportunity extends itself to baseball, even if the games themselves are not included in an on-demand library of programming.
Mansell pointed to the YES Network’s airing of a live batting-practice show, Yankees Batting Practice Today, prior to games, which he said could “certainly be an opportunity” for on-demand programming on the network.
Batter up.
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