The Dodgers are a hit -- at least for TV
If those who laughed at what Guggenheim Partners, Magic Johnson and longtime sports executive Stan Kasten paid in March for the Los Angeles Dodgers knew what the partnership was really buying, they might have applauded.
Sure, $2.15 billion seems like a stunning sum for a team with a huge mountain of debt and a mediocre recent record. But it may not be for a team about to negotiate a local TV deal that could be the largest in sports history, making the new Dodgers ownership the first of perhaps many to come that based a bid for a team, then the team's payroll, almost entirely on local TV money.
The NFL's national TV contracts and salary cap mean this business model won't likely change the fortunes of franchises in our richest sport. But in MLB, which has no salary cap, and the NBA, which has a cap but allows teams flush with TV money to stockpile stars for a tariff, the new model could again jolt the balance of power toward teams in the richest sports-TV markets.
Here's what it entails:
Step 1: Know where the real money is.
Despite a slew of bidders for the Dodgers, no offer was within $600 million of what the new owners bid. The lower bids seemed logical given that the Dodgers' deal with Fox, which expires after the 2013 season, brings in only $40 million per year.
Yet before he sold, beleaguered former Dodgers honcho Frank McCourt negotiated a $150 million per year TV deal that hinted at how hot L.A.'s sports-media market is getting. (It was ultimately rejected by Bud Selig because he felt the cash would be spent on McCourt's personal debts.)
Now that the ownership has stabilized, that number seems low to Ed Desser, a Los Angeles–based media consultant who believes the next Dodgers deal is worth up to $225 million a year.
That's if the team sells the rights rather than starting its own network, which suddenly looks like a far more profitable option. In talks between McCourt and MLB during the league's attempt to get the team sold, they agreed to peg the market value of the Dodgers' local rights at a preposterously low $84 million a year, escalating at 4 percent every year.
An MLB team normally has to give up a third of its TV rights fees for revenue sharing. But if you own some or all of your own sports station, that third is applied only to the amount MLB determines your ownership is worth. Hence the Dodgers' opportunity. Desser estimates that a Dodgers-owned network -- a la the Yankees' YES -- could earn up to $425 million a year. If so, the team could pocket all revenue above the first $84 million without sharing, assuming MLB doesn't change its mind about the valuation. You can see where this is going.
Desser, who advised an aborted Dodgers bid from billionaire Rick Caruso and former manager Joe Torre, now says he might have undervalued the TV earnings potential. He helped the Lakers negotiate a deal with Time Warner Cable to launch two new channels -- one in English and one in Spanish -- on Oct. 1.
"I saw what a successful new network could look like," Desser said. "This isn't just a television channel. It's the key ingredient to a team's marketing."
Step 2: Spend now and count the profits later.
The same people who gasped at the sale price did so again in August when the Dodgers acquired Adrian Gonzalez, Josh Beckett, Nick Punto and Carl Crawford in a trade with the Red Sox, adding $262.5 million in commitments between the 2013 and 2018 seasons.
Whether that particular trade was worth it is beside the point. What matters is that the Dodgers clearly are willing to bet that their anticipated TV cash will cover a ballooning payroll. That's the bottom line for fans, especially in L.A.
The $2.5 billion over 17 years that Fox ponied up last year to televise the Angels is why the team had enough to give Albert Pujols the second-largest contract in baseball history. And the Lakers' new 20-year, $3 billion deal with Time Warner Cable is one reason the team didn't flinch at bringing in Steve Nash and Dwight Howard, tens of millions in potential new luxury taxes be damned.
No wonder Kasten is confident. "We think we bought it at a very convenient time," he says. "It's why we paid what we paid, and we're confident that we're going to get the return that we all foresaw when we bought the team."
Insiders like Barry Frank, IMG's executive vice president of sports media, who arguably has negotiated more sports television deals than anyone else in history, are now praising the Dodgers' gamble. "I think they calculated it correctly," he says.
Who's laughing now?