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Why Time Warner Cable Must Convince The Dodgers and Lakers That They Need Each Other

SportsNet LA Cartoon courtesy of Stop The CapThe folly that is SportsNet LA continues apace.

Last week, in a last-ditch attempt to get carriage for the Los Angeles Dodgers’ regional sports network (RSN) on TV services other than its own — and Charter’s, for obvious reasons — Time Warner Cable announced that it would lower the carriage fee of SportsNet LA for one year, from $4.90/month per subscriber to $3.50/month.

The answer from DirecTV, Dish Network, Verizon, and Cox? Still no. Carriers suggested to the Los Angeles Times that the one-year discount wasn’t a good bargain, and they expressed buyer’s remorse over TWC’s other LA-based RSN, TWC SportsNet, which carries the LA Lakers and the LA Galaxy, costs subscribers $4/month, and hasn’t been a huge success.

The end result is that only 1.8 million homes will carry SportsNet LA in this, Vin Scully’s final season as the voice of the Dodgers. At $4.90/month, the RSN will collect $105.8 million in carriage fees in 2016, the third year of TWC’s 25-year, $8.35 billion deal with the Dodgers — a deal that leaves TWC on the hook for roughly $225 million this season. Industry estimates suggest TWC has been losing $100 million per year on SportsNet LA, which prompted layoffs and cost-cutting on both its RSNs last year.

As big as that loss is for Time Warner Cable, though, it really shouldn’t have that much of an impact for TWC’s LA operations. TWC SportsNet collects $4/month from 6.4 million homes in southern California. That’s $307.2 million per year. This year, that channel will pay the Lakers roughly $130 million and the Galaxy about $5 million. If we presume advertising covers the operational costs, that’s a profit of more than $175 million. Surely, that would be enough to help TWC absorb its losses with the Dodgers deal, yes?

Here’s the problem with that — TWC does not own SportsNet LA. The Dodgers own the channel and lease the management rights to TWC. That prevents TWC from fully combining SportsNet LA operations with TWC SportsNet.

If TWC wants to rescue SportsNet LA, that has to change. Fox has some synergy with its two SoCal-area RSNs, Fox Sports West and Prime Ticket; TWC does not, likely because the Dodgers’ ownership of SportsNet LA prevents it. If the Dodgers really want to get the MLB team’s games into more homes, their best option is to let TWC combine their RSNs and show Dodgers games on TWC SportsNet. This would allow TWC to repackage SportsNet LA as SportsNet 2, an overflow channel that would cost, say, $2.40/month — still a lot, but no more than Prime Ticket costs, and much easier for other carriers to swallow.

This would be the perfect year to do that, too. The Lakers will miss the playoffs by a mile, so their season will end on April 13. What will TWC SportsNet have to show until November but an MLS game once a week? Aging Steven Gerrard might be a legend in Liverpool, but he is not exactly must-see TV for the vast majority of SoCal.

The end result would be two RSNs carrying two iconic teams (and one that wants to be) in 6.4 million homes, collecting a combined $6.40/month. That’s $491.5 million in carriage fees. The Dodgers would receive $225 million this year, the Lakers would receive $130 million next season, and the Galaxy would get its $5 million. If advertising covers the operational costs, TWC would have an operation with a $131.5 million profit in 2016, rather than one with a $100 million loss.

And if Time Warner Cable really wants to make this happen, there’s only one man who could help them…

Magic Johnson

Magic Johnson won five championships as a player for the Lakers. He now owns a piece of the Dodgers as part of the Guggenheim Baseball Management group that bought the baseball club for $2 billion four years ago. If anyone can convince the Dodgers and the Lakers that they need to work together to get the most out of their TV deals, it’s Magic.

The only other option for SportsNet LA? A messy CSN Houston-style bankruptcy, which serves nobody and makes a mockery of a legendary announcer’s final season. Given the recent rises in cord-cutting and the escalator clause on the Dodgers’ contract, however, bankruptcy just might be the only way TWC gets out from under this deal — and given the billions in debt that Charter is prepared to heap on the merged cable company, anything that loses $100 million per year seems like a prime candidate to be shut down.

In the meantime, expect this fiasco to get worse before it gets better.

4 Responses to Why Time Warner Cable Must Convince The Dodgers and Lakers That They Need Each Other

  1. Why would Time Warner possibly cannibalize its TWC Sportsnet Profits? There are two simple solutions that would work far better then doing that.

    The first is to simply offer the other carriers that channel at $2.40 with reasonable increases for the length of the contract while still charging its own customers for $4.90 with reasonable increases. If advertising revenue is enough to cover operating costs, then the station should roughly break even. Not good, but at least they get to keep their TWC Sportsnet Profits. This of course requires Time Warner to overcharge its customers, but I doubt that this would really bother them. After all, they’re getting the money.

    The second is for Time Warner to sell the right to manage the company to DirecTV and perhaps Dish or a different provider. This consortium of broadcasters agrees to pay Time Warner $500 million or so and take on responsibility for the signed contract. In return, Time Warner/Charter agrees that its 1.6 Los Angeles subscribers will pay $4.90 for the channel. It’s a win/win. Time Warner gets out of a bad situation and gets compensated for its prior losses. DirecTV/Dish/Cox walk into a situation where all providers agree to pay highly inflated prices for programming that they control. If it all works out, they can earn profits of about $160M (presuming ad revenue covers operating expenses and that the average subscriber and not average LA subscriber pays $4.90 for the channel). If so, giving Time Warner $500 million isn’t a huge deal if you’re projected to earn $3.7B over the next 23 years. This solution also requires all of the cable providers to hose their customers. Think they’ll do it?

    The more complicated solution is to just let the station go bankrupt and hope to get out from under the deal.

    • Hrmm… I suppose it is too much to hope for TWC to do the right thing and combine these channels into one big RSN. The first option is a break-even option at best, which is better than nothing, but I have my doubts that Charter will price the network that low once the merger is approved. If anything, they’ll see bankruptcy as a better option here.

      • I don’t think the first option is particularly likely either. It’s more of a last resort. But I’m also not sure bankruptcy is an option.

        The Dodgers own the station, so it’s not like Time Warner can decide to make the station bankrupt. All Time Warner/Charter can do is stop paying the management fees that they’re currently paying. But then what? Presumably, the Dodgers sue due to non-payment and I’m not sure why they wouldn’t win eventually. I guess it depends on the language in the contract, abut it seems like the Dodgers have the upper hand.

        • Which gets back to why I believe TWC needs to convince the Dodgers and Lakers to let them combine the channels. One, it’s a great PR move for the team, because it instantly makes Dodgers games available in far more homes, and two, it lets TWC turn a losing proposition into a winning one — for now, at least, but quarterly balance statements are all about the short term, right?

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