If a regional sports network falls down and nobody is watching, does it make a sound?
Last August, this Forbes article covered how much Comcast would pay the Houston Astros for the rights to broadcast their games on Comcast SportsNet Houston — about $80 million per year. Combined with other revenue and a minimalist $21 million player payroll, the Astros were on pace to rake in $99 million in profits in 2013, making the worst team in Major League Baseball — the Astros finished the 2013 season with a record of 51-111 — the most profitable team.
Astros team president Reid Ryan was quick to deny the report, saying “There is no doubt that the numbers are wrong in the Forbes article.” This week, we found out just how wrong they were.
Comcast filed a petition for involuntary Chapter 11 bankruptcy on behalf of CSN Houston this week, and network president Matt Hutchings resigned from his position on Monday. In response to the petition, the Astros, who own a 46.384% share in the network, revealed that the network did not pay the team any rights fees from July to September, and that the team has “invested additional money in order to keep the network viable through our season.” Astros owner Jim Crane has said he will fight the bankruptcy petition in court. The hearing is scheduled for October 28.
So yes, the numbers in that Forbes article were, in fact, quite wrong.
This giant mess is a direct result of a giant overreach by the network. Claiming that the Astros and the Houston Rockets had wide appeal throughout the southwestern U.S., CSN Houston demanded carriage throughout Texas and four other states at a rate of up to $3.03/month per subscriber, according to Forbes. Carriers balked at both the price and the territorial demands, arguing that CSN Houston was a local network covering local sports. As a result, only Comcast subscribers in the Houston area received the network, which failed to strike deals with other carriers.
Making the situation worse was Crane’s strategy to gut the Astros’ payroll in favor of filling the farm system with prospects, which made the team the laughingstock of both the city and the sport. Houston fans were so angry at Crane and the team that they contacted carriers and told them not to carry CSN Houston.
So the carriers kept saying no, and only a million or so people within the city of Houston actually paid for CSN Houston, which couldn’t come close to paying the Astros $80 million in rights fees. Making the situation worse was the fact that nobody was watching. A late-September Astros-Indians game drew a 0.0 Nielsen rating, which prevented the network from collecting money from advertisers.
All this has led to Comcast’s bankruptcy filing, which has created a huge problem for Crane and the Astros. According to Awful Announcing:
Here’s where things get interesting: because the Astros hadn’t been paid rights fees in three months, they should have been able to acquire their rights back from Comcast and go in a different direction to distribute their games. The bankruptcy filing has blocked the Astros’ attempt to do that, and has put them between a rock and a hard place, leading to their motion to dismiss the bankruptcy filing.
How big a problem is this for Crane? According to Forbes, he took on $275 million in loans and debts to purchase the Astros. Clearly, he was counting on the millions from CSN Houston to pay those bills. The team claims to have a Plan B, but it has to put that plan on hold until after the court hearing on the 28th.
Caught in the middle of this are the NBA’s Houston Rockets, who signed Dwight Howard last July and, unlike the Astros, are clearly trying to build a winning team now. The Rockets own a 30.923% share of CSN Houston. Whether the team sees any money at all from the network this season remains to be seen. Either way, it seems quite likely that both the Rockets and Astros will soon end up with TV deals that will be worth far less than the ultimately unrealistic promises of CSN Houston, and that will make it more difficult for either team to build a winner — an ugly proposition in a city that hasn’t celebrated a major American sports title since 1995. (Unless you count the Houston Dynamo, who last won the MLS Cup in 2007. Not all Houstonians will.)
If the failure of CSN Houston teaches us anything, it is this: there are definite limits to how much pay TV subscribers are willing to foot the bill for sports. Regional sports networks are starting to crash into those limits, and national sports networks aren’t too far behind. As the TV market continues to evolve and carriers stand up to network demands for more money, we will see more stories like this. Houston is just the start. Los Angeles could be next.