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Analysis: TWC's Dodgers Deal an RSN Game-Changer

Pending Agreement Establishes New Precedent 1/25/2013 7:58 AM Eastern
 
 
The negotiating game around regional sports networks has taken a new turn with Time Warner Cable's pending deal for Los Angeles Dodgers' rights. The stakes – not to mention – the pricing continue to rise as the MSO nears its second major score in the nation's No. 2 DMA.
 
The MSO is said to be closing in on an accord valued at somewhere between $7 billion and $ 8 billion with Guggenheim Partners to present the club's games over a 20- to 25-year span. Not only would that level mark a record for a local/regional rights pact, but under its reported terms the nation’s fourth-largest distributor would pay the carriage fees – expected to be as much as $5 per month per subscriber -- for any video provider in the footprint that doesn’t pick up the new dedicated Dodgers’ service.
 
Fox Sports' Prime Ticket RSN, whose contract expires after the upcoming campaign, has been showing Dodgers game since 1997.
 
Guggenheim, which purchased the club last year for a record $2.15 billion would own the network, with Time Warner Cable handling management and operational duties for the service that would begin showing Dodgers’ telecasts during the 2014 MLB season. 
 
Neither party would comment about the proposed deal.
 
“It’s certainly an unconventional approach. It’s one we have not seen in the 30 years of the RSN business,” said one veteran sports TV executive.
 
A TWC win for the Dodgers would mark the second time it has snatched a high-profile team in Los Angeles from News Corp. Motivated to gain cost certainty by cutting out the middle man, TWC paid over $3 billion for Los Angeles Lakers’ rights over a 20-year span (some maintain the deal is for $5 billion over a quarter century), and launched a pair of RSNs last year orbiting the storied NBA franchise, Time Warner Cable SportsNet and Time Warner Cable Deportes, the latter is the nation’s first dedicated Spanish-language RSN. FS West and KCAL-TV were the Lakers’ longtime telecast partners.
 
The pending pact also comes at a time when escalating sports rights are being heavily scrutinized and distributors are taking action to defray some of the costs. 
 
Verizon Communications, starting next month, will begin charging new FiOS TV customers and those on month-to-month plans a $2.42 monthly fee for regional sports networks. Initially, the fee takes effect for the telco’s video customers in California, Texas and Florida in February, with all remaining states in March except Maryland and Virginia, where the fee will go into effect in April.
 
That move follows DirecTV’s implementation of a $3 monthly RSN surcharge in August 2012 for new customers in markets with multiple RSNs, such as Los Angeles and New York. At an investment conference this month, DirecTV CEO Mike White said the DBS leader will expand the surcharge in 2013 to market with high-priced RSNs.
 
For his part, TWC CEO Glenn Britt, speaking at the UBS Global Media and Communications Conference in New York last month, said the MSO is taking a harder line against programming costs and would drop some channels that did not deliver commensurate to their license fee. Arts proponents Ovation became a casualty on the operator’s systems when its carriage contract expired with the dawn of the new year.
 
The drop of the independent network and the high-price attached to the Dodgers may catch the attention of federal regulators and those who believe sports networks should be subject to special tiering or a la carte pricing.
 
“After Glenn Britt talks about controlling costs, Time Warner Cable drops a small channel, but then goes out and pays more billions for another sports channel in LA,” said a sports marketing official. “Time Warner Cable may have killed the goose that laid the golden egg.”
 
Bernstein Research analyst Craig Moffett used similar phraseology. "The incessant cost inflation in regional sports threatens to kill the goose that laid the golden pay-TV egg"
 
Indeed with the upcoming addition, the greater Los Angeles area will become home to seven RSNs -- the dedicated Dodgers' RSN;  the Lakers’ pair;  FS West (the Los Angels of Anaheim and the defending Stanley Cup champion Los Angeles Kings); Prime Ticket (Los Angeles Clippers and Anaheim Ducks); the Pac-12 national service; and its UCLA/USC sub-regional.
 
Before 2012, the two Fox RSNs -- for a combined monthly subscriber fee of around $5 -- basically offered much of the sports programming that is now being diffused across these varied services. That price has risen with the Lakers’ channels commanding a combined monthly license fee of $3.95 and the Pac-12 pair another dollar or more. Add $4 to $5 for the Dodgers and LA pay TV subscribers’ monthly RSN bill would approach the $15 mark.
 
The Dodgers' gambit to control their own channel is evidently being guided in part by the team’s desire to retain as much money as possible while still adhering to MLB’s revenue-sharing agreement mandating that 34% of each team's locally generated revenue, largely from TV rights and ticket sales, be entered into a pool.
 
Apparently, the deal’s structure would evade certain “back-end matching rights” that Prime Ticket holds relative to a rights deal or an agreement wherein TWC is an equity participant in the new network. Prime Ticket, whose exclusive negotiating window with the club ended last November, will pay the club $40 million in rights for the 2013 season. The programmer had been talking about a 25-year deal worth more than $6 billion that would have also given Guggenheim a stake in Prime Ticket. Some suggest that Fox might still pursue some legal action.
 
With the deal yet to be officially announced, it has generated reams of copy and speculation about how it can work financially for the cable operator.
 
“[TWC] may get a break in sub fees, a most-favored nation clause. The Lakers’ operation is in place, so there should be cost savings there and they proved skillful in negotiating deals for the two RSNs,” said Lee Berke, president and CEO of consultancy LHB Sports, Entertainment & Media. “There could be a sizable sponsorship sales component, payment for goods and services and/or an equity position. There are lots of ways to make it work and the deal again underscores the increasing value of regional sports networks.” 
 
One analyst, who asked for anonymity because the agreement had not yet been finalized, said that under a 25-year deal Time Warner Cable would allocate an average of $280 million of rights expense per year, plus operating costs.  If half of the rights cost were offset by advertising that would leave another $140 million to be covered by subscribers affiliate fees/ He calculates that if the MSO were to get half of the 4.9 million multichannel subs in the LA DMA, it would have to charge $4.76 per month.
 
At the same time, he pointed to the Dodgers’ RSN as “must-have programming to retain subscribers and a means to provide clarity on programming expenses going forward, which would also eliminate some cause of negotiation disruption in the future.”
 
But an affiliate sales executive questioned the tenor of the upcoming negotiating dynamics. “If Time Warner Cable is guaranteeing sub fees, the Dodgers will get their money regardless of how many customers get this channel,” he said. “Time Warner Cable may not have a whole lot of incentive to cut deals with other providers in LA. They could instead sit back and wait for customers to switch and increase market share.”
 
TWC counts about 2 million customers in the Dodgers’ TV territory.
 
Although the loss of the Dodgers, following the Lakers’ exit, certainly hurts Fox in the No. 2 DMA, there is no crying in baseball over rights and the programmer had already fortified its RSN roster elsewhere – seemingly at the expense of TWC, which still has to pay the programmer for its RSN duo in LA.
 
Late last year, Fox re-established itself the New York DMA by acquiring a 49% in YES Network in a deal that values the cable home to the New York Yankees and the NBA’s Brooklyn Nets at some $3 billion. YES also announced a new media rights deal to keep the Yankees on the network through 2042. The deal also paves a path for News Corp. to secure an 80% stake in YES after three years, based upon a $3.8 billion valuation for the RSN. YES, which reaches some 9 million subscribers in its TV territory, carries a roughly $3 per monthly subscriber fee. It is expected to look to increase that rate, with TWC -- which has an equity stake in SNY, the New York Mets’ RSN -- the major distributor within YES’s footprint.
 
Also late last year, Fox Sports Media Group paid a reported $235 million to purchase SportsTime Ohio, the cable home of the Cleveland Indians since 2006, as well as pay an annual rights fee of $40 million to the club. Before the team established its own network, the Tribe’s tilts had been carried locally by Fox Sports Ohio. TWC, which has a strong presence in Ohio, has been handling affiliate and ad sales for SportsTime Ohio.
 
TWC was also outbid in 2011 by Fox for the rights to San Diego Padres games that were previously held by Cox Communications, which has essentially exited the RSN business. After sitting out FS San Diego’s 2012 rookie season, TWC has yet to reach a carriage pact with Fox.
 
Earlier in 2011 with the Dodgers negotiations looming, Fox renewed its deal with the Angels for some $3 billion over 20 years. The deal ensured that FS West, which also televises Kings’ NHL games, had year-round live game programming. Contractually, Fox could possibly transfer some Angels games to Prime Ticket, following its Dodgers shutout.
 
Sources familiar with Fox’s strategy believe it will use some of the funds that had been allotted for the Dodgers to help launch what could be a trio of new channels this year.  Although not official yet, the programmer is committed to converting the 82 million home Speed into a broad-based national sports service. Fox Sports 1 is expected to include MLB, UFC and college sports programming in addition to NASCAR and other motor sports.
 
The company is also reported to be eyeing a second national cable sports from alternative sports proponent Fuel TV, which has raised its profile and ratings by becoming the de facto UFC channel.
 
Meanwhile, the 40-million subscriber Fox Soccer, which has lost key futbol rights, notably the Barclays Premier League, could become a second home for FX.  Reports indicate that Fox is contemplating aligning the network’s original comedies along with acquired movies and sitcoms, while dramas like Sons of Anarchy and Justified would remain, flanked by flicks, on FX. The move would be akin to how Turner has positioned TNT as the "drama" network and TBS as the "very funny" channel.
 
“News Corp., especially with the upcoming split of the company, has a lot going on,” said one company insider. “We can find plenty of uses for the $6 billion that was earmarked for the Dodgers.”