Is there an upcoming TV bubble for MLB?

Gary A. Vasquez-US PRESSWIRE

Increased rights fees for baseball teams and sports has led to increased speculation that the current growth cannot be sustained. Should baseball teams be worried?

Last Tuesday, baseball fans around the country flipped on their PlayStations, turned on their computers, and scrolled through their iPads to watch Major League Baseball. They may have been watching the Indians play the Blue Jays, Rockies at Brewers, or the Cardinals at the Diamondbacks, but sometime after 10 p.m. Eastern Time, Twitter feeds started lighting up, and producers kept showing the out of town scoreboard down in Texas, the one with all the zeros, and fans made the switch. It mattered little that unknown Marwin Gonzalez prevented Yu Darvish from completing a perfect game. Baseball was back.

Describing tech savvy adults using their computers, video game consoles, and tablets to tune in to a potentially perfect game may not be nearly as poetic as Pete Kotz's recent description of 54 million people on the edge of their seats for the clinching game of the World Series in 1980, but it better encompasses both the present and future of Major League Baseball, showing the way fans devour baseball and the way owners reap the benefits.

Kotz argues that baseball's growth is unsustainable, and an upcoming bubble comparable to the housing crisis in the form of cable television rights is about to expose baseball's faulty economics. Kotz is not the first to make the argument, and he most certainly will not be the last, but his understanding of the game's finances and the way people consume entertainment digitally make for a flawed conclusion.

National television ratings are a poor indicator of popularity

As Craig Calcaterra noted, Kotz first erred in using national television ratings as a barometer of baseball's popularity. In 1979, there were 57 games broadcasted nationally. We will hit that number this year before the month is out. Every year around the All-Star Game, there are a round of complaints that the game is not as special. Undoubtedly true. But here is the tradeoff: instead of having a special All-Star Game, I can watch any team play any game on the schedule every single day of the season (Selig's archaic blackout rules excepted). I cannot imagine anyone loving the All-Star Game enough to give that up.

Local television ratings are a much better indicator of baseball's health and popularity. While overall, baseball's local ratings were down 6%, seven different teams boasted all time highs in ratings, five teams saw a ratings boost above 40% (no teams dropped by more than 40%), and a bulk of the ratings drop occurred in its largest markets (New York, Boston, Philadelphia), areas where the health of the franchise and television audience is not in doubt.

Kotz does mention the most popular reason for escalating television contracts; sports programming is one of the last refuges for DVR-proof watching. He discounts this argument for baseball, citing World Series ratings with more 50+ women than under-49 men. While the national ratings are a concern, they do not drive revenue for baseball nor are they indicator of baseball's popularity. If the 75 million fans in attendance last year and increases in each of the past two seasons did not help you figure it out, consider MLB.com. The site has 425 million unique visitors per year with over 19 billion page views. The demographics of these visitors tell a completely different story than World Series ratings. Of the portal registrants, 73% are the difficult to target males, and 70% are between the desired ages of 19 and 45. Baseball has fans. A lot of them. And they are part of a group advertisers love.

Television's business model has changed

As mentioned above, Kotz does recognize that advertisers love sports programming, but the bigger change in viewing has resulted from segmentation in audiences, networks and programming. Long gone are the days of "MASH," "The Cosby Show," "Cheers," or even "Seinfeld," shows that united a large chunk of the audience. Must-see TV no longer means all of America must watch. Proliferation of television shows outside of the traditional networks has taken viewers away from the major networks and changed the definition for a show's success or failure. Ratings alone do not tell the entire story. AMC, FX, and Bravo do not need "Breaking Bad," "Justified," and "Top Chef" to draw 20 million viewers to be successful for their respective networks. They only need fans of those shows to demand that those shows be placed on the basic tier of their cable programming.

Once those cable networks gain a loyal cadre of fans, they can begin to extract greater per subscriber rates from the cable companies, requiring them to rely less on ratings and advertising for revenue. Sports networks play a role as well. As Kotz notes, ESPN gets around $5 per subscriber, plus they are able to extract fees for many of the less popular networks that Disney owns. Viacom does the same with MTV and Nickelodeon. If there is a bubble, it is not limited to baseball. ESPN broadcasts, among others, NFL, NBA, and college football and basketball in addition to baseball. While acknowledging that viewers of Nickelodeon and MTV are subsidizing sports watchers through their cable bills, sports viewers are subsidizing the viewers of everything else. In 2012, three of the top four rated cable networks among adults 18-49 (ESPN, TBS, and TNT) offered sports programming (USA was number one).

Sports networks may be driving the increase in cable bills, but the actions of cable companies indicate that they desperately need those networks to retain subscribers. By paying $5 for ESPN and taking along unwanted channels, cable companies are indicating that ESPN is actually worth far more than $5 per subscriber. In recent years, the NFL owned NFL Network and the Big Ten Network, owned by Fox and the Big Ten Conference, have strong-armed their way onto cable's basic tiers.

Content is king

With the increased per subscriber fees for networks providing original programming as well as sports networks, cable providers have been confronted with an uncomfortable reality: people want content, not cable. If cable provides that content, people will pay for it. If people can find that content elsewhere, they will. Networks understand this reality. Hulu is owned by Fox, NBC, and Disney. They negotiate fees to put their shows on Netflix, iTunes, and Amazon. Major cable companies have taken notice as well. Directv pays a huge premium to the NFL to be the sole provider of NFL's Sunday Ticket. Comcast owns NBCUniversal. Time Warner, owner of HBO, TBS, and TNT, sold off Time Warner Cable four years ago. Now, Time Warner Cable is the company that is going to be paying $7 billion to the Los Angeles Dodgers over the next 25 years.

These moves have forced cable companies to reconsider a policy they adamantly opposed and deemed vital to their survival: a la carte programming. Cable companies used large packages of channels together in order to provide viewers with the appearance they were getting more, but really providing channels that were of no cost and some that paid to get on in order for both parties to receive advertising money. Once realistic competition to the monopolistic cable market popped up, networks turned the table on cable companies by forcing them to bundle unattractive networks with their big moneymakers. Complaints from cable companies about this practice are a bit rich. Cablevision, former owner of AMC, is currently suing Viacom for its bundling practices. Viacom has called the lawsuit frivolous. As noted with ESPN above, Viacom's insistence on carrying lower rated networks with its popular MTV, Nickelodeon, and Comedy Central is an indication that those three networks could actually get more if sold alone.

Sports provide massive content

When Jim Delany and the Big Ten Conference welcomed Rutgers and Maryland into the Big Ten, they acquired two things. First, they obtained inroads to lucrative television markets on the Eastern Seaboard and the increase in per subscriber fees from the cable companies. Second, they provide more content. Twelve more football games and 30 basketball games add roughly 72 hours of content that the conference could sell or provide to its own network.

When it comes to providing content, nothing can compete with baseball. Taking away about a dozen games per team for national television games, that leaves 150 games. At three hours per game, baseball provides 450 DVR-proof hours of programming for networks that is unique and targeted specifically to every major market. Add in a 30-minute postgame show and Conan O'Brien would have to do two shows every single weeknight to provide the same hours of programming for TBS. Netflix just paid $100 million for 13 hours of programming in House of Cards. Person of Interest and Big Bang Theory may beat baseball in the ratings, but in providing a total 36 hours of content per year, those shows cannot provide the value of baseball, especially for niche networks that need to fill their lineups.

Long term contracts and digital rights insulate baseball

The Dodgers are negotiating a deal that will pay them for 25 years. The Yankees are getting paid through 2042. The Cubs can renegotiate with WGN in 2015. According to Forbes, the Phillies are already negotiating a long term contract that will replace the one expiring in 2015. These deals are subject to some revenue sharing that will go to the teams in smaller media markets. In addition, MLB just renegotiated their national television deals which will provide every team $52 million per year through 2021.

As Maury Brown and Jonah Keri have noted, small market teams are the most likely group to be affected by a potential bubble, as there are fewer channels devoted to sports in those markets resulting in less competition for rights. With the larger markets cashing in, revenue sharing helps the smaller markets. Even if a team can only negotiate a $20 million deal locally, the national money adds $52 million. If the top 12 teams make around one billion dollars collectively, a third of that money goes back into revenue sharing. Adding another $30 million or so for the bottom dozen markets still nets even the worst teams $100 million in television money before a ticket is sold.

Baseball's trump card is MLBAM, the organization that is responsible for MLB's online presence and digital media rights. Even if a bubble a pops, MLB is set to cushion the blow through control of its online presence. Forbes notes that the MLB At Bat app had 6.7 million downloads last year, making it the top selling sports app of all time (Hear that NFL?). They also sell MLB.tv directly to fans, a service that provides every game in every market but your own. MLBAM generated $650 million last year, and that money is shared equally among all teams. MLB.tv provides baseball with a cushion if cable subscriptions fall, and it also provides an alternative means of providing its product if cable negotiations prove difficult.

Changing technology will prove advantageous for baseball

If a bubble exists, cable operators are the entities most vulnerable. The technology already exists to provide sports content directly to fans in HD quality over the internet. WatchESPN provides all of the content of ESPN live on your computer, iPad, and, most importantly, on Xbox, making ESPN available on your television. Currently WatchESPN is only available to people who already have cable and subscribe to ESPN. If cable were to push back, ESPN could quickly increase the number of devices, open the service to everyone and charge a fee for its networks. ESPN would definitely take a sizeable hit, but at least it has an alternative. Without sports and the rest of the expensive content, cable companies would be left trying to sell worthless assets. So cable companies keep paying.

Baseball is further along than ESPN, both in accessibility and the devices available. Subscribers can link their MLB.tv subscriptions to their PlayStation, X-Box, Apple TV, Roku, Blu-ray player, and any number of smart television sets. These devices may not be in every home now, but they will be. Eventually, all new television sets will have capable technologies, and a Roku is priced at only $50. Even if baseball were forced to switch to a direct-pay model earlier than anticipated, the recent digital conversion provides a model to help convert the more staid fans. MLB.tv currently costs $125. If push came to shove, they could implement an add-on in order to see your market's games and charge accordingly, or charge it as a standalone service.

Baseball has its share of problems, including its treatment of amateurs, blackout rules, youth baseball, and Jeffrey Loria. And as Craig Calcaterra noted, revenues cannot be expected to infinitely fly upward without some correction. However, popularity is not among baseball's problems, and the sport has situated itself very well for the future. Local cable deals may be the cash cow now and into the near term, but baseball will have alternative sources of revenue should the need arise in the future.

More from Pinstriped Bible:

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