Tuesday, October 01, 2013 4:46 PM ET 
Owning a regional sports network is not all fun and games.
While this fact has been made clear several times in recent years — especially during the drawn-out negotiations forTime Warner Cable Inc.'s RSNs in Los Angeles — the point is once again being hammered home by the recent battle over Comcast SportsNet Houston.
Three units of Comcast Corp. — Comcast Sports Management Services LLC, Houston SportsNet Finance LLC and Comcast SportsNet California LLC — plus National Digital Television Center LLC, have filed an involuntary Chapter 11 petition against CSN Houston, the regional sports network jointly owned by the Houston Astros MLB team, the Houston Rockets NBA team and Comcast that was launched in 2012.
The four creditors said there is a "fundamental disagreement" among the network's owners regarding the direction and management of the RSN and that as a result, the network "faces an urgent financial and corporate governance crisis."
At first glance, it might be easy to assume that if an RSN is facing bankruptcy, there is simply not enough demand for the network in its local market. But according to LHB Sports Entertainment & Media Inc. CEO Lee Berke, this is not the case for CSN Houston.
 |
"This is not a question of the appeal of an RSN or the appeal of a sport," Berke told SNL Kagan, adding that both the Astros and the Rockets are "popular teams perennially," even though the Astros have had a disappointing season this year. "The issue here is management and ownership and how the network is structured."
Under the 10-year deal the network owners signed ahead of the 2012 launch of CSN Houston, Comcast/NBCUniversal Media LLC holds only a 22% stake in the network, while the Astros reportedly hold roughly a 46% stake and the Rockets own about 31%. Berke noted that the court documents he has seen indicate all three owners of CSN Houston need to agree unanimously on major courses of action, such as license fees and distribution. "You have to have somebody in charge. And right now, it seems like no one is in charge because no one can reach unanimous agreement," he said.
He sees the bankruptcy petition as a move by Comcast to potentially take charge. "Comcast is the managing partner and yet they don't have majority equity control of the network," Berke noted. "If you read between the lines, Comcast is looking to potentially buy out the Astros."
Indeed, in a Sept. 28 filing, Houston SportsNet Finance LLC Senior Vice President Robert Pick said Comcast "believes the network's assets have meaningful value, and would be prepared to make a bid to acquire either the network (under a plan of reorganization) or substantially all of its assets." Pick added that if such a transaction were to close by the end of 2013, it would likely result in pre-petition creditors' claims and administrative expenses being paid in full, as well as a material distribution to equity holders.
"This is a pretty drastic step by Comcast to make this happen because it sounds as if they have been negotiating internally up until now. But maybe the bankruptcy filing will be the catalyst to getting the network restructured and on track," Berke said. "You've got to restructure, revamp, renegotiate the partnership going forward in order to make this network work better."
Other industry observers note, however, that the ownership structure is not the only problem CSN Houston faces.
"There are a lot of issues with this channel," SNL Kagan analyst Derek Baine said in an interview, noting that the Astros did not do well, leading to a "lack of demand from operators."
Additionally, he said, "It may be priced too high for what is on."
According to published reports, the network's owners had been asking for monthly affiliate fees of $3.40 per subscriber. Distributors, though, argued that fee was too high and so the network has struggled to strike deals with either of the satellite operators or telcos, or with the larger cable companies in the area like Time Warner Cable and Suddenlink Communications.
"What I understand is they have below 50% penetration and typically your RSNs achieve penetration rates within the inner market of 90% or more," an industry source said in an interview with SNL Kagan. "And so when you have a penetration rate that low, that obviously is going to affect the economics dramatically."
According to the source, the lack of distribution is a major red flag with respect to the affiliate fee the network is seeking.
"The license fee that a network gets is based on the fair market value of the product that it's distributing. And if you charge a license fee that is above that fair market value, you are going to have a problem," the source said.
"So that appears to be the crux of the problem — the license fee is too high and the other distributors aren't willing to pay it."
Berke, though, believes the affiliate fee question can be answered only after the ownership structure is changed.
"I think before they even address price, they need to restructure the partnership. That's what it really boils down to," he said. "Pricing here is a symptom of an ownership group that has reached an impasse."
Similarly, with regards to the Astros — which succeeded in breaking the major league record for having the most strikeouts by batters in a single season this year after losing more than 100 games — Berke said the team's disappointing season was not the primary cause of the network's troubles.
"The timing is bad, but teams are cyclical," he said. "They do poorly for a while, and they do great for a while.
That being said, the Rockets have a lot of anticipation for this upcoming season with the signing of Dwight Howard, and so that may give them some leverage in how they go forward on this."
Looking beyond just the future of CSN Houston, SNL Kagan's Baine noted that the bankruptcy petition against CSN Houston could make network owners more cautious about the deals that they sign for new RSNs.
"Deals have been migrating from short term to very long term," Baine said. "I think you have to be careful getting into long-term deals like this."
No comments:
Post a Comment