The wizards from Time Warner Cable were the smartest guys in all of Southern California when they agreed to pay the Los Angeles Dodgers $8.35 billion over the next 25 years to distribute its regional sports network, SportsNet LA, outbidding Fox Sports by a rumored $2 billion.
This deal was predicated on a revenue model where TWC would distribute SportsNet LA and the Dodgers games to five million cable and satellite subscribers for a fee of $5 per month per subscriber. This would generate annual revenue of $300 million, more than enough to cover the guaranteed media rights fee payable to the Dodgers. TWC would also benefit from substantial advertising revenues targeting true blue Dodgers fans.
The anticipated result for Time Warner Cable: a massive, out of the park, grand slam home run.
But TWC is not laughing all the way to the bank as cable and satellite companies representing 70% of the market refuse to carry SportsNet LA as part of their basic service tier of channels. These distributors are rightfully concerned that the added cost of $10 a month (the $5 subscription fee plus the distributor’s 100% markup needed to preserve their 50% operating margin) to their basic service charge would encourage more of their subscribers to “cut the cord” and rely on streaming services such as Netflix, Amazon Prime, and Sling.
These distributors have offered to carry SportsNet LA as a premium channel at a cost of $25 a month, a nonstarter for TWC. Rather, Time Warner Cable argues that its pricing of $5 a month is reasonable given the loyal Dodgers fan base, the size of the Southern California market, and the price of other regional sport networks. But this view fails to take into consideration that a vast majority of the subscribers have no interest in watching the Dodgers, or for that matter, ESPN, the highest priced cable channel, or any other sports networks.
According to the Los Angeles Times, TWC lost $100 million in 2014 on this deal. However, from a corporate perspective, the swing between the projected profits and the actual loss was more likely in the range of $150 to $200 million.
Time Warner Cable is also having issues with SportsNet, its regional sports network that delivers the Lakers games to over 5 million subscribers. But the returns on this is 20 year, $3 billion deal are probably below projections as viewers have deserted the hapless Lakers who are on track to lose a record 60 games this year.
Of course, some will say that this is chump change for a company with $23 billion in revenue, $8 billion in operating profit, and an enterprise valuation of $65 to $70 billion.
Many people have suggested that the Dodgers recut their deal with Time Warner Cable to facilitate the distribution of SportsNet LA to 5 million subscribers.
But this is not in the cards as the Dodgers have leveraged the $8.35 billion commitment to make a significant investment in the team’s payroll, the highest in Major League Baseball, in their quest to win a World Series. The Dodgers have also invested over $150 million in modernizing Dodger Stadium which, along with a winning record, has resulted in league leading attendance of over 46,000 fans a game.
The Dodgers also need to maintain this revenue stream to support a $3 billion valuation that is the basis for a $370 million investment by international investors to purchase a 20% stake in the team. This valuation would not include the land surrounding Dodger Stadium or their regional sports network, SportsNet LA.
Many have argued that our elected officials should help find a solution to this standoff between Time Warner Cable, the cable and satellite operators, and the Dodgers. This includes having the California Public Utilities Commission withhold its approval of certain license transfers in connection with the $45 billion merger between Time Warner Cable and Comcast, the owner of NBC Universal and the nation’s largest cable TV operator and internet provider.
But this is a financial battle between corporate giants where the Dodger fans and cable subscribers are caught in the middle.
Should cable subscribers be forced to pay $120 a year for SportsNet LA when a vast majority of them have no interest in the Dodgers’ regular season games? Should Dodgers fans be denied the right to see the games in the comfort of their own homes? Should the Dodgers be forced to recut their deal with Time Warner Cable?
Time Warner Cable may have overpaid for the rights to distribute the Dodgers’ games. But that is TWC’s problem. Now its management must decide whether to cut their losses and write off a chunk of their investment or to play hard ball with the cable and satellite distributors. And maybe a few heads may roll in the meantime.
But the optimal solution is very simple: Dodgers win the World Series.
Cross-posted at City Watch LA.