When you’ve got $1 billion on the line, it’s generally smart to do your homework. That’s what the Dodgers appear to be doing, as they have yet to submit their historic $7 billion, 25-year television deal with Time Warner to Major League Baseball for approval.
The issue? How much of that deal will be subject to the league’s revenue-sharing plan.
Under the current collective bargaining agreement, the base portion of the revenue-sharing plan calls for teams to contribute 34 percent of net local revenue (which includes revenue from rights fees associated with local television contracts), minus actual expenses associated with its stadium, into a pool to be shared with other teams. That pool is divided in such a way that large-market clubs become payers into the system, with smaller-market clubs becoming recipients. However, the evolving model of teams having an ownership stake in regional sports networks has blurred the lines with regard to the portion of revenue that should be subject to revenue sharing.
When a team brokers a local television deal with a regional sports network with which it has no ownership stake, the calculation is easy: The entire rights fee is subject to revenue sharing. Under the Dodgers' current deal with Fox Sports, where the team has no ownership interest in the network, 34 percent of rights fee revenue is contributed to MLB’s revenue-sharing pool.
When a team has an ownership interest in a network, any rights fee received by the team is subject to the 34 percent local revenue sharing in the same way. However, carriage fees paid by cable providers to the regional sports network are not. For example, the Yankees own a minority share in YES Network. They receive an annual rights fee from the network, which is subject to revenue sharing. However, YES Network also receives carriage fees from cable providers. Those fees are not subject to MLB’s revenue-sharing plan.
Under the proposal as it is believed to stand currently, the Dodgers will own a new channel called SportsNetLA. Time Warner has agreed to be the channel’s charter distributor and has received the right to be the exclusive advertising and affiliate sales agent for SportsNetLA, along with managing the channel’s operations and handling distribution to other providers. All of that for the grand sum of $7 billion over 25 years.
Here’s the twist: MLB already agreed to set the fair-market value of the Dodgers rights fee at $84 million annually pursuant to a U.S. Bankruptcy Court settlement between MLB and former Dodgers owner Frank McCourt. The settlement allows for 4 percent annual increases. Those rights fees would be subject to MLB’s 34 percent local revenue-sharing plan.
The rights fees alone will generate $3.5 billion in revenue for the Dodgers. The problem is the other $3.5 billion that makes up the $7 billion deal. Sources told the New York Post that the Dodgers' revenue-sharing bill over the life of the deal could vary by up to $1 billion, depending on how much (if any) of that revenue is subject to MLB’s revenue-sharing plan.
What’s not known is exactly what that $3.5 billion represents. Forbes has reported that a “big chunk” of it will be paid to the Dodgers at the end of the 2013 season for calling the network SportsNetLA. No other MLB team has received such a payment based on the name of the RSN, and some argue it wouldn’t be any different than the fee received for stadium naming rights, which is subject to revenue sharing.
Another area of uncharted territory for MLB is the guaranteed carriage fees in the deal.
MLB allows teams who own RSNs to keep carriage fees out of the purview of revenue sharing, in part because the team is assuming the risk of owning such a network. Not only are there start-up costs, but it can takes years to sign carriage deals with the major cable and satellite providers. In the Dodgers' case, however, questions have arisen over whether the Dodgers are really assuming any kind of risk.
Time Warner is guaranteeing $4 a month from every eligible household in the Los Angeles area, regardless of whether that household receives SportsNetLA via their cable or satellite provider, and without regard to the success of the channel. In other words, if Cox doesn’t pick up SportsNetLA right away, there’s no financial loss for the Dodgers. Time Warner will cover the carriage fees of distributors who don’t sign on to carry the channel until such a time that a deal is reached with that provider.
It’s unknown whether MLB would treat this guaranteed carriage money in the same way it treats carriage fees for other team-owned RSNs, which are only generated when a channel is able to sign up and sustain carriers. It’s also unclear how much discretion MLB will have when dealing with this matter. The bankruptcy court settlement leaves authority over interpretation of the settlement’s terms, including the $84 million annual rights fee stipulated to be in the agreement, to retired federal judge Joseph Farnan.
Are the unique features of the Dodgers' deal with Time Warner, ranging from the branding fee to the guaranteed carriage fees, simply reflective of a changing marketplace, or are they an attempt to shield revenue from MLB’s revenue-sharing plan?
That’s the $1 billion question.