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Is Comcast Angling To Rescue SportsNet LA?

Comcast Time Warner MergerYesterday, while everyone else in Los Angeles was talking about Donald Sterling (and generally missing the point), Comcast released the details of its plan to shed enough customers to make its proposed buyout of Time Warner Cable more palatable to regulators. One particular part of this plan, as detailed here in the L.A. Times, caught my attention:

Nearly 280,000 homes in Los Angeles that currently receive their cable service from Charter would be affected by provisions of the deal unveiled Monday.

Those Charter subscribers, in such cities as Long Beach, Malibu, Burbank, Glendale and Alhambra, would eventually become Comcast customers — perhaps as early as next year.

It’s not a huge number, but it would be enough to raise Comcast’s projected subscriber base in the L.A. region to nearly 2.6 million homes.

You don’t suppose that would have something to do with a particular pair of regional sports networks, do you?

SportsNet LA in a nutshell(Original photo posted by Tom Hoffarth)

As Comcast continues to maneuver toward approval, its buyout target continues to flail with its new cable channel dedicated to the L.A. Dodgers. The SportsNet LA standoff has now lasted well into the first month of the Major League Baseball season. Time Warner Cable continues to push fans into tweeting their displeasure at other pay TV carriers, and those carriers — most notably DirecTV, which set up this web site to explain its side of the story — continue to resist TWC’s reported carriage demands of $4 to $5 per subscriber per month.

Dodgers fans who don’t have TWC TV service are stuck going to bars or listening to the radio, while other residents say they don’t want to pay for yet another local sports channel. The press is up in arms, claiming that both the Dodgers and all the pay TV carriers owe them an apology and that the mayor should get involved to settle the dispute the way that New York state officials got involved to settle a dispute between YES Network and Cablevision a decade ago.

If you live in Houston, you can probably guess what’s going to happen next.

Claiming this mess is somehow DirecTV’s problem, however, is missing the point entirely. As it was in Houston, so it is in L.A. — the fact that other carriers won’t accept TWC’s demands really is nobody’s fault but TWC’s. Buoyed by the success of its shiny new channel for the L.A. Lakers, TWC SportsNet, which costs 6.4 million L.A. residents $3.95/month each, TWC promised the Dodgers $8.35 billion over 25 years to run SportsNet LA, putting itself in a position where it has no choice but to demand a $4-to-$5-per-month subscriber fee from carriers.

DirecTV, meanwhile, has already tacked on an RSN surcharge of nearly $4 per month for TWC SportsNet, and everyone knows that any carrier that accepts SportsNet LA will either have to eat that cost or make customers pay for it. They’ll likely choose the latter, which will anger customers and increase the rate of cord-cutting. Ultimately, DirecTV is merely looking out for its own best interests.

This all comes down to one key point: TWC’s mouth wrote a check that its ass couldn’t cash. TWC assumed that since the carriers caved on TWC SportsNet, they would do the same with SportsNet LA. That hasn’t happened, and now with only its own customer base of 2.3 million footing the bill for SportsNet LA, TWC won’t come close to paying the Dodgers the reported $240 million it promised them this season, nor can it cover the $334 million per year average over the life of this deal. Based on a $4.95/month subscriber fee in TWC’s 2.3 million homes in L.A., SportsNet LA would be more than $100 million short on its 2014 payment to the Dodgers — to say nothing of the costs of running the network itself.

So TWC appears to have two options:

  1. Write off that rights fee to the Dodgers as a cost.
  2. Default on its payments to the Dodgers and let SportsNet LA go bankrupt.

Consider this: TWC made a tidy profit of $479 million in the first quarter of 2014. That adds up to $1.70 per share, which beat analyst estimates of $1.68 per share. A quarterly write-off of $25 million would have cut those quarterly profits down to $454 million, or $1.61 per share. Hence, TWC would not have “beaten the street”, and its stock price would have dropped.

Ultimately, a corporation is beholden to nobody but its shareholders. If TWC had to choose between the Dodgers and its shareholders, the Dodgers would lose. Every time.

Which is why a third option — let Comcast deal with it — seems like the best bet for TWC for now. The fact that Comcast is trying to boost its customer base in southern California suggests they want to keep both TWC SportsNet and SportsNet LA up and running. Perhaps Comcast could come up with a plan that involves merging the two channels into one entity — CSN LA, featuring the Dodgers, the Lakers, and the L.A. Galaxy of MLS — with the second channel’s asking price being 60% that of TWC SportsNet, which is far less than the reported asking price for SportsNet LA. (This is not dissimilar to the Fox Sports West/Prime Ticket setup.)

The end result might look like this:

Channel
Subscribers
Monthly Sub Fee
Annual Sub Revenue
CSN LA 1
6.7 million
$3.95
$317.58 milllion
CSN LA 2
6.7 million
$2.37
$190.55 million
TOTAL
$508.13 million

Of course, the Dodgers, Lakers, and Galaxy all get paid on a sliding scale, but a subscriber fee increase of 5% per year would cover all those rights fees easily. Plus, this setup would create a two-channel RSN that would have huge appeal all over southern California. Reorganizing these two channels into one network and cutting the asking price for the second channel just might save SportsNet LA in the long run.

Then again, why should anyone at TWC care about proposing such a thing? Those executives are about to get the biggest golden parachutes ever. Might as well stand firm for now and let Comcast clean up this mess. They’re doing a heckuva job in Houston, right?

More importantly, this fiasco should serve as a warning to any major professional sports teams hoping for big paydays from RSNs — customers are reaching a limit on how much they’re willing to subsidize sports through pay TV. Pushing those limits any further could have huge consequences on the sports business. CSN Houston and SportsNet LA are just signposts on the road to upheaval in the TV market. We’ll see plenty more signposts on this road soon.

4 Responses to Is Comcast Angling To Rescue SportsNet LA?

  1. Well, Comcast has made clear from the start that its exchanging of markets would be with an eye towards creating geographic continuity, and the big LA market and TWC’s regional sports networks there were probably the single most desirable piece of the merger, so this isn’t really that surprising.

    • Also, TWC’s mistake – and this should have been clear at the time – was thinking that they could launch ANOTHER network after all the struggles they were already going through getting carriage for TWCSN. If you want to maximize carriage for an RSN, you want to put as many properties there as possible to energize as many fanbases as possible to create a critical mass that makes it hard for the cable companies to refuse. Fox and Comcast have always recognized this; even CSN Houston is a SINGLE channel for and partially owned by the Astros and Rockets. But no, TWC felt they had to split the difference and give the Lakers and Dodgers their own channel each to get the Dodgers on board, and now they’re paying for it.

  2. I partly agree with you and partly disagree with you. Baseball teams in areas that have multiple major cable providers are at a disadvantage because those other providers can turn down a deal. But there are areas where there is only one main media provider. For example, from DC to Philadelphia the main cable provider is Comcast. I think they control 95% of the cable TV market in Philadelphia and Baltimore and about 70% in the DC DMA.

    In those areas cable providers are discovering that they can really charge whatever they want because they have such a strong control over the market. That’s how you end up with CSN-MA charging $4.33 per month per average subscriber and CSN Philly charging $3.90 per month for an average subscriber.


     

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