Going to the Net Isn't Always Easy

Author:
Publish date:
Updated on

When the Yankees Entertainment & Sports Network aired the March 19 exhibition baseball game between the New York Yankees and Cincinnati Reds, it marked the most celebrated launch of a team-owned sports network in cable history.

Though it wasn't the first regional sports network launched by a professional team, the Yankees' YES Network has come to serve as the litmus test for teams looking for firm control of their own television-rights destiny.

With fewer network suitors and an unstable market that may not continue to yield lucrative deals, several professional teams are considering retaining their valuable broadcast and cable rights and running their own services. But industry observers — and even some team executives — admit that high start-up costs and an often unfriendly cable operator environment make for very long odds against most sports teams starting a network of their own.

"The advantages far outweigh the disadvantages of a team launching their own cable networks, but I'm not sure it's for everybody," said Henry Hutt, executive vice president and general manager of Action Sports Cable Network, owned by the National Basketball Association's Portland Trail Blazers. "This is not a get-rich-quick scheme."

Currently, only a handful of teams have either launched regional sports networks or made a public commitment to forming one. In the early days of cable, though, it wasn't unusual for pro sports teams to create regional television channels to exhibit their games.

Major League Baseball's Los Angeles Dodgers and San Francisco Giants, the NBA's Trail Blazers and the National Hockey League's Chicago Blackhawks all ran part-time networks during the 1980s. Most proffered live telecasts of team games, as well as attendant shoulder programming.

As regional sports networks matured, most teams sold their cable rights to these entities for up-front fees, rather than shoulder the cost of running a network.

BROADCAST RUNS DRY

Still, some teams remained financially autonomous during the early 1990s and offered home games through then-emerging pay-per-view technology. The NBA's San Antonio Spurs, Houston Rockets, Seattle SuperSonics and Trail Blazers all garnered significant revenue from PPV telecasts, particularly post-season games.

A decade ago, most teams' television portfolio featured a mix of cable and broadcast television telecasts. But in the late 1990s — as UPN and The WB joined their broadcast brethren in expanding their primetime lineups — the number of live sports game telecasts began to dwindle, leaving cable's regional sports networks as the primary outlet for most teams.

In 1996, broadcast affiliates aired an average of 65.5 MLB games per team, but this year, that average is down to 46 games, according to a survey by
Multichannel News
sister publication Broadcasting & Cable. Consequently, cable's average has increased from 50.9 games in 1996 to 82.6 games this season.

The broadcast/cable split for NBA and NHL teams is even more tilted toward cable, according to industry executives.

"Broadcast rights are starting to shrivel up, so a team seeking such rights may end up with a bad deal or you may end up on a weak outlet," Hutt said.

As such, teams have had little choice but to sell to the local regional sports network.

"As a team looking to market your rights, you really only have one point of sale," said Kevin Cattoor, president of Victory Sports, an upstart regional sports network owned by baseball's Minnesota Twins. "In any business, whether you're selling cars or baseball or selling homes, you want to have more than one buyer."

REGIONAL START-UPS

But in most markets, only one major cable buyer exists: Fox Sports Net has 18 owned or affiliated regional sports networks, while Comcast Sports Net runs services in the Philadelphia and Washington/Baltimore markets.

Rainbow Sports controls the Fox Sports Bay Area, Chicago, Florida, Ohio and New England services, while parent Cablevision Systems Corp. owns Madison Square Garden Network (once itself a team-owned channel) and Fox Sports Net New York.

For teams looking to generate additional revenue, launching a competing service may be a viable option, said team executives. But with a few exceptions, such ventures have fallen short.

HICKS HICCUPPED

In 1999, Tom Hicks, owner of the NHL's Dallas Stars and MLB's Texas Rangers, threatened to launch a regional sports network to compete against incumbent Fox Sports Net Southwest. After calculating start-up costs and assessing its carriage potential, Hicks eventually sold both teams' cable rights to Fox Sports for a reported $300 million.

In 1997, The Walt Disney Co. tried to start a network featuring its pro sports teams, MLB's California (now Anaheim) Angels and the NHL's Mighty Ducks of Anaheim. The network, ESPN West, failed to secure adequate distribution, however, and Disney eventually sold those rights to FSN's Fox Sports Net West 2.

"As a team owner I might say [launch a network], because it's a great bargaining tool, but there aren't that many teams that can complete the mission," Fox Sports Net president Tracy Dolgin said. "We had the situation in Texas where that was talked about, and we had the situation with Disney's ownership in Los Angeles that was talked about, but it's not something that I foresee happening on a wide-scale basis."

The Trail Blazers are one of the few franchises that hasn't made a deal with a regional sports network. The team, owned by Charter Communications Inc. chairman Paul Allen, produces Action Sports Cable Network in HDTV, offering not only Trail Blazers games, but local high school and college contests.

Hutt said the uncertainty of the marketplace and the desire to control all aspects of the team's television business made the debut decision easy.

"You don't sell your rights off and sit back and let someone else do your stuff — you're able to control how you look on the air, how you do your production, promote the brand and sell yourself on the street," he said.

Aside from controlling one's voice and leveraging one's rights, a successful team-owned regional sports network can provide value to the team. One prime example is the recent sale of the Boston Red Sox, in which the inclusion of the team's stake in New England Sports Network helped pushed the franchise's overall value to a record $700 million.

"When you look at the ability to position the value of games on your own network, you're able to control the marketing, the branding and the positioning of the product in the marketplace," Cattoor said. "It becomes a one plus one equals three effect."

YES AND NO

But for most sports-industry observers, the team-owned regional sports network concept was viewed as a phenomenon restricted to small and mid-size markets.

Launched with much fanfare, YES — featuring the most prized franchise in U.S. sports, the Yankees — changed all that. It now stands as the argument both for and against team-owned regional sports networks.

After 13 years of airing games on Madison Square Garden Network, the Yankees — under a new holding group, YankeeNets LLC — launched the network, headed by former AT&T Broadband president Leo Hindery. It has extracted around $2 per subscriber in monthly license fees for basic cable carriage from nearly all New York-area cable operators and direct broadcast satellite provider DirecTV Inc.

The one holdout at presstime remained Cablevision. With 3 million of the area's 8 million subscribers, the MSO wants to carry the network on a premium tier. Both sides have waged a very public fight to sway subscribers to see their side of the argument.

The battle is further complicated by the fact that the market already has two regional sports networks — MSG and FSNY, both owned by Cablevision. An operator who carries all three channel ponies up more than $5 per subscriber in combined license fees.

Hindery, who railed against expensive sports license fees while at AT&T, has argued that local sports — and especially the exalted Yankees — is worth the price for operators both in terms of viewership and ad sales.

But Cablevision believes its subscribers should choose to pay for such expensive programming, especially sports, which it says fewer than half of subscribers want.

AN ANOMALY

But one operator outside of the New York DMA who wished to remain anonymous said that the YES situation is isolated, mainly because of the high value of the Yankees. It's easier for a leading sports franchise to launch a channel in the No. 1 TV market than it would be for a lesser-known franchise in a smaller market — despite the strong draw of local teams.

"The Yankees are the Yankees. They have the leverage to launch a $2 network," said the operator. "But it would be much more difficult for the Kansas City Royals to do the same thing in its region or the Milwaukee Bucks to try that in Wisconsin.

"The market wouldn't support it, and the operators wouldn't feel as obligated to carry the network as they do in New York with the Yankees."

But even though the YES-Cablevision contretemps has generated a lot of press, Cattoor said the fact that the fledgling network has picked up as much distribution as it has also speaks to the strength and appeal of local teams.

"Everyone is focusing on the Cablevision situation, but the fact is they have entered into a number of significant deals and secured a lot of distribution in the marketplace," Cattoor said.

Kagan Associates sports analyst John Mansell also noted that the presence of direct-broadcast satellite provider DirecTV Inc. and overbuilders such as RCN Corp — as well as the advent of spot-beam satellite distribution, which would allow DBS providers to offer specialized programming to a specific region — will encourage other teams to at least threaten to launch their own regional networks in an effort to generate additional TV revenue.

"It's to a team's advantage to create an auction-type atmosphere where there is more than one bidder for the rights, so that its options are not limited to the local Fox regional sports network," he said. "I think this limits the prospects of a regional sports network monopoly like never before," Mansell said.

NOT SO EASY

But Comcast Sports Net president Jack Williams believes that cable's regional sports networks have the experience and local relationships to provide teams with the support they seek

The network, which is cable-exclusive in Philadelphia, faces a potential competitor in the Orioles, which plan to launch a regional sports service once the team's deal with Comcast ends in 2006.

"Every team is going to look to maximize its revenues, but we feel that when it's all said and done, [regional] sports networks can provide the best deal for the [teams]," he said.

But Orioles Television Network president and former New England Sports Network chief John Claiborne begs to differ. A team-owned network is the best way for a club to maximize cash flow, he said.

OTN, which currently produces Orioles games for broadcast television outlets, has the infrastructure already in place to take on the responsibility of launching a network — one of the keys to making a network financially viable, according to the Action Sports's Hutt.

"If you don't have that capability already, logistically you would have to go out and lease a facility and hire a production staff," said Hutt, who added that it would take nearly $20 million to get a network off the ground without an existing production facility.

"In my opinion, if you're going to do this right, you need to have your own production facility, just like a Fox Sports Net would, and have the capability to do all the programming you want to do."

Given the challenges, even Hutt believes very few teams are ready to jump out on their own.

"I bet there are not five teams in America with the infrastructure to launch their own networks," Hutt said. "I don't see a lot of teams doing this."

Of course having the production infrastructure in place does not ensure affiliate deals, Hutt said. While ASCN now has a year under its belt and more than 300,000 subscribers, much like YES in New York, it has yet to reach a carriage agreement with the largest MSO in the market — AT&T Broadband, which has more than 500,000 subscribers.

Hutt said the network is in "friendly" discussions with AT&T.

"You're going to be dealing with a cable MSO that has a monopoly within your marketplace, which could provide a difficult scenario if you can't reach an agreement with them," Hutt said.

"I read stories where people call for government or the mayor to get involved, but what are they going to do? They can't force an operator to take the network — they answer to a local cable authority on those kinds of things, so you can't force them to take it," he noted.

Unforeseen problems can also short-circuit a launch. The Twins' Victory Sports is still waiting to see if there will even be baseball games to distribute next year, as the Twins are one of the teams on MLB's contraction list. Baseball hopes to eliminate some franchises in hopes of cutting costs.

TWINS RIGHTS FUED

Even if the Twins do play, the network is embroiled in a lawsuit with Fox Sports to determine who has rights to those games. Fox Sports last May sued the Twins and Victory's Cattoor for trying to end its long-term distribution deal with the network.

Fox Sports claimed its contract calls for an extension of its Twins deal through the 2002 and 2003 seasons if there is "an acceptable stadium solution, excluding a new stadium."

Cattoor contends that the team does not have an "acceptable" stadium deal.

Fox Sports has maintained that the franchise has a lease to play in its current stadium — the Hubert H. Humphrey Metrodome — through the next two seasons.

Cattoor said if the network prevails, Victory Sports could be up and running within a week.

"The key is to get affiliates to agree to pick them up on some basis," whether full or part time, he said.

"We understand that the affiliates are going to need time and we'll provide them time," he said. "We'll give them the games to place on a channel, and then work out long-term deals to get the network carried on a 24-hour basis."

Despite the potential pitfalls, Hutt maintains that network ownership is better for the team in the long run — as long as the club is willing to be patient.

"But if you can do this successfully, it provides the team with a great safety valve, in an unknown future, with broadcast rights," said Hutt.

Related