The Phillies May Be About to Get PAID
This is something I’ve written quite a bit about over the past two years– the Phillies’ looming local TV deal.
Their current deal with CSN doesn’t expire until after the 2015 season, but Howard Megdal of Sports On Earth is reporting that a new deal may be finalized in the next month or so [a guy named Megdal reporting on mega deals is awesome!]:
According to a source with knowledge of the talks, the deal is expected to be completed within the next 30 days. That’s going to matter a great deal for how the team operates this winter.
The Phillies currently receive $35 million per season from Comcast, which is chump change compared to other big market teams. The Red Sox and Yankees get $60 million and $90 million, respectively, and have a significant ownership stake in their local network. The Mariners get $115 million and have a more than 50% ownership stake in their network. And then there are the Angels and Dodgers… who are getting silly money– $150 million (with 25% ownership stake) and $340 million, respectively. [These figures according to Wendy Thurn of FanGraphs.]
The Good Phight used a lot of words and math to estimate what the Phillies’ deal might look like based on the current market. Their conclusion:
If you look to the 2013 area of the X-axis you’ll see two entries, the Mariner’s new contract at $115m annually, and the monstrous Dodgers contract at nearly $350m annually. The best fit line threads those two, coming in just under $200m in annual rights fees. That’s a good starting point. Simply adjusting for market size (Seattle = 61.7% of Philadelphia’s population, LA = 190% of Philadelphia’s population) you get a Phillies TV contract falling between $183-186m annually. Now, again, this is a terrible estimate and the error bars are huge. Adjust as you see fit. (For example, if you think that only 2/3rds of LA-area baseball fans will watch the Dodgers with the 1/3rd dedicated to the Angels while 100% of Philadelphia area baseball fans will watch the Phillies, then you can do this: ((5,613,460 x .67)/ 2,949,310), giving the LA Dodgers an effective media market only 28% larger than that of Philadelphia. If you think, therefore, that the Dodgers’ TV contract is going to be commensurately 28% larger than the Phillies’ contract you’d expect the Phillies to get nearly $275m annually.)
The above calculations do not account for population growth rates in those markets, equity stakes in the broadcasting networks, commercial revenue ownership, multiple teams in the LA market, and other variables. But it’s something, although probably low if one considers the Philadelphia being the largest single-team media market in the country. The Phils are certainly closer to the Dodgers than the Mariners in terms of market penetration and fan bases.
Basically, it’s very difficult to pinpoint a figure because there are so many factors to consider besides market size and ratings. New York and LA have two teams, so, in theory, their markets are split, making it hard to draw any conclusions from those deals (though I suspect that, in negotiations, teams like to pretend that people are people and they are potential viewers regardless of rooting interest). And most of the major market teams all have an ownership stake in their network, meaning that their per-season figure is greater than the listed rights fee. You can assume that the Phillies will get a higher fee based upon the fact that they don’t have any ownership stake in CSN. The Phils also have the passionate fan base and largest single-team market thing working in their favor.
But figure, based on The Good Phight’s projection, that the Phils get somewhere between $180 million and $275 million annually. That’s a significant increase from the $35 million they have been getting. Plus there’s the additional $27 million per season in national TV deals that every team will get starting this upcoming season.
This all means that, at some point in the next two years, the Phillies will be getting as much as, if not more, than their entire payroll in additional revenue. All of a sudden, the attendance and ratings drops don’t seem to matter much.
But does that mean they’ll start spending more?
Since 2010, the Phils have seemingly been operating under the assumption that they have a lot of money coming. They spent (in millions) $138, $165, $172 and $159 over the past four seasons— always staying under the luxury tax threshold. In 2014, that threshold will be $189 million, and, according to Megdal, the Phillies have no plans to go over it, regardless of whether they have a new deal or not:
While the Phillies aren’t likely to blow past that $189 million luxury tax threshold, the line serving as de facto salary cap for every team east of Los Angeles, that still gives the Phillies plenty of room to get involved in the bidding on players like Jacoby Ellsbury and Shin-Soo Choo in the outfield, or even rotation pieces like Tim Lincecum.
So, yeah, with a new TV deal, the Phillies can feel free to spend around $30 million more per season. But that’s, like, one superstar– it’s not franchise altering spending. And it also doesn’t mean that Ruben Amaro will know what the fuck to do with the money. I can see him blowing $30 million on Roy Halladay, Carlos Ruiz and a setup man (I’m only half joking). Though perhaps the Phillies will get involved in the Masahiro Tanaka sweepstakes:
According to George A. King III of the New York Post, the Yankees are going to be “serious players” for the 24-year-old right-hander this winter as they attempt to fill holes in their starting rotation. The team has done their homework here, as they sent assistant general manager Billy Eppler and scout Don Wakamatsu to watch him extensively this season. It’s safe to say they liked what they saw, as Tanaka went 22-0 with a 1.23 ERA during the regular season for the Tohoku Rakuten Golden Eagles of Japan’s Pacific League.
They’re going to get more money, if not now, then soon. But they’ll still stay under the luxury tax threshold and they’ll still have to spend it wisely.
So, why might a deal get done now? And with whom will it be?
Well, there’s a lot going on in the TV industry. We’ve already written about the unbundling of cable TV packages. Networks like ESPN and CSN get carriage fees from every cable subscriber who gets their channel, even though every subscriber doesn’t watch sports. [There’s a fight in Houston between the Astros and CSN Houston over that matter– CSN can’t reach agreements with local cable companies.] There’s a very real possibility that, eventually, cable subscribers will have a la carte choice of their channels (or, worse, they’ll just stop subscribing and start watching Netflix, which just leaped ahead of HBO in subscribers). This all means that, eventually, regional sports networks will spend less on rights fees. If you’re the Phillies, you want to get a deal done before that happens. Obviously.
And there are other things that will affect the industry in unknown ways. The NBA is about to reach an agreement to live stream games to local markets. If you have MLB.tv or another similar service, then you’re well aware of the local blackout rules that restrict you from watching local teams through any means other than your local cable provider. A shift in this paradigm could change the market.
There’s also a class-action lawsuit being brought by two Philly lawyers against sports leagues, teams and cable companies which just cleared its first major hurdle. It contends that, by forcing sports fans to pay for expensive cable packages, the leagues and cable companies have basically formed an illegal cartel. From a great article on Philly.com last week:
Sports teams should be allowed to sell their games to sports fans in any TV market. This would bring down the price of sports content on the Internet and cable for tens of millions of consumers, Diver said.
A goal of Diver’s suit would be to allow a sports fan to strike a relationship with a favorite team or teams without having to buy a cable package or a league package of unwanted games. Another goal would be to dismantle the restrictions on how teams distribute their games on pay-TV systems.
The leagues and other defendants have lined up powerful firms to defend their practices and called the suit’s claims meritless.
That would certainly impact local sports rights fees.
So now you see why it is in the Phillies’ best interest not to wait. The TV landscape is changing, rapidly. Today, Apple might announce an update to Apple TV that could further disrupt the industry. This winter, Amazon is throwing its hat into the ring. Next year, Netflix may announce that they’ve taken over the world and are going to harvest your babies to power their yet-unannounced live-streaming capabilities. We really don’t know where it’s headed. But for now, live sports are cable TV’s lone barrier from total destruction. Networks willing to pay, and teams, like the Phillies, are eager to take the money while it’s still available.
We can assume that, if a deal were to get done this early, it would be with CSN. But FOX Sports has thrown its name into the ring. So we’ll keep an eye on what happens this winter.
Recommended reading on the matter: