By Sarah Barry James - November 4, 2014
Comcast SportsNet Houston is not a typical regional sports network, nor is the involuntary Chapter 11 petition filed against it a typical bankruptcy.
In the weeks since 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 first filed their involuntary Chapter 11 petition against CSN Houston, a number of important things have happened in the case.
First and foremost, Judge Marvin Isgur has not dismissed the petition out of hand, and given the circumstances in the case, an immediate dismissal certainly seemed like a real possibility. After all, the Houston Astros Major League Baseball team, which jointly owns CSN Houston along with the Houston Rockets NBA team and Comcast, pushed hard for the case to be dismissed, arguing that the petition was unwarranted and filed in bad faith.
"The involuntary petition is nothing more than a leverage play to detain the Astros in Chapter 11 for an indeterminate amount of time, and to let the passing weeks exert pressure as the 2014 Major League Baseball season approaches," the team said in an Oct. 28 court filing. "The integrity of the bankruptcy process cannot permit Chapter 11 to be abused in this way."
Douglas Baird, a Harry A. Bigelow Distinguished Service professor of law at the University of Chicago Law School, acknowledged that the reason the Comcast units decided to file an involuntary Chapter 11 petition against the network, rather than forgiving the debt or agreeing to an extension, is because the cable operator likely wanted to lay out all of the network's problems before a judge.
"What makes this case funny is it is an effort by the owners of the business to essentially use the bankruptcy forum as a place to sort out their disputes with each other," Baird told SNL Kagan. "It doesn't really have the flavor of what bankruptcy's supposed to be about. And just because the legal rules [allow you] to create a different negotiating climate, that isn't really what bankruptcy is supposed to do. So when there isn't really a genuine bankruptcy purpose behind the filing, sometimes courts will dismiss it."
But the federal bankruptcy judge instead ended up signing an order that authorizes the network to "investigate and negotiate the terms of carriage agreements, broadcast agreements, management agreements, lease agreements, equipment agreements, purchase and sale agreements, and debt and equity investments and other matters pertaining to the formulation of a business plan."
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Importantly, the order also names the Astros as lead negotiator, giving the team the power to "make such decisions and execute such agreements as are reasonably necessary in furtherance of its investigations and negotiations." Notably, any binding agreements for CSN Houston would need to be approved by the court before they could go into effect. Also, the Astros will be required to have weekly phone calls with both Comcast and the Rockets in order to provide the other owners with updates on any negotiations or proposals.
The court will then conduct an initial status conference Nov. 13 and then hold a follow-up conference Dec. 12. At that time, the order will expire unless it is otherwise extended by the court.
Following the order, NBC Sports issued a statement saying: "Comcast/NBCUniversal [Media LLC] and its affiliates are pleased with Judge Isgur's order, and believe that it preserves CSN Houston's assets and ability to provide its valuable programming. We welcome the Astros' efforts as lead negotiator to serve the network's best interests and look forward to an improved future for all partners."
The Astros declined to comment to SNL Kagan, but Astros owner Jim Crane told the Houston Chronicle that he was excited about trying to get "something done" for the Astros, the Rockets, their fans and the city. He added, "We're not looking for the best deal in the universe, just a fair deal that is good for the teams."
In many ways, the order makes sense. In filing their involuntary Chapter 11 petition, the creditors argued that there was 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." They complained that any major deals, such as those for license fees or distribution, required unanimous agreement among the three owners.
LHB Sports Entertainment & Media Inc. CEO Lee Berke previously told SNL Kagan that the network's problem was: "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."
With the Astros, which hold a 46.5% stake in the network, appointed as lead negotiator, someone is now at least nominally in charge.
"Since the launch of the network, Comcast Services has asked the network to consider a handful of informal proposals for affiliation agreements with lower base rates than those contained in the Comcast Affiliation Agreement," the Astros wrote in a court filing. "The Astros concluded that the proposals would lock the network into receiving low rates, which would not allow the network to operate profitably and would ultimately lead to the dilution of the Astros' equity in the network."
Based on its conclusions, the Astros rejected those agreements, leaving CSN Houston with limited distribution more than a year after its launch.
As lead negotiator, the Astros can seek out their own proposals. And even if the team does not find any that meet its approval, Baird said that experience could still be valuable. "If the Astros try to do negotiations and they don't go any place, they'll understand what's realistic," Baird said.
Also, Baird noted that the bankruptcy judge may be hoping that by appointing the Astros lead negotiator and giving the network more time to strike new deals, the owners of the network will be able to reach an agreement without the judge ultimately having to rule on the bankruptcy itself.
"The overwhelming [preference] that bankruptcy judges have is for the parties to reach an accommodation among themselves. A judge would much rather have the parties come to their senses and reach an agreement than have to make what would be a hard decision based upon existing law," Baird said. "So it doesn't shock me that the judge hasn't acted yet, and it also doesn't shock me that he ... is trying to create an environment where negotiations can go forward. The motion ... seems to be one that is trying to accommodate the different constituencies by making the Astros the head dog when it comes to doing the negotiations."
Looking ahead, though, Baird said it remains unclear whether the Astros were likely to succeed in striking new, profitable distribution deals for the network. He noted that the team would likely be hampered by its own weak performance during the 2013 season, saying, "If the Astros were a better team, they wouldn't have this difficulty."
Paul Haagen, a professor of law at Duke University's law school, agreed that the Astros' 2013 season is likely having a negative impact on negotiations. "Houston may have a particular set of issues because the Astros are so bad and so unwatchable that selling media rights may be incredibly difficult now," he told SNL Kagan. "How do you sell a product that basically the average Houston viewer doesn't have any interest in watching?"
The Astros ended the season with 51 wins and 111 losses in 2013 and set a major league record for having the most strikeouts by batters in a single season. On the plus side, the Rockets are off to a strong start this season, having won all three of their games thus far. Plus, there is a lot of excitement around Dwight Howard, a player who came to the Rockets this year from the Los Angeles Lakers.
Haagen acknowledged that the Rockets show a lot of promise this year, but said it may not be enough to make CSN Houston attractive. He noted that the most successful regional sports networks have a major, well-loved franchise attached to them. "The Yankees lead the YES Network. The Red Sox lead the New England Sports Network. I'm not sure in the Houston market that you've got that marquee team," he said. "The Astros are terrible and nobody watches. And I'm not sure it's a place where an NBA team can be the lead team. So I think some of it is just the peculiarity of what's going on in Houston."
Baird also is not sure how much the Rockets' strong start this season will help CSN Houston with distributors. "It ought to be the case that these major players, likeDISH [Network Corp.], are capable of looking at the long term, and they are not going to get deceived by a sudden flurry of interest now," he said. "These are guys who are in it for the long haul."
He noted that it would be different if viewers had previously had CSN Houston and then lost it. "If you are talking about how consumers respond, what really bothers consumers is when they've got something and it's taken away from them," he said. "If you've never had it, it might be nice, but it's not as if you have to have it."
As such, viewers may not put much pressure on their distributors to get CSN Houston added to their lineups.
Complicating matters, according to Haagen, is the RSN business is going through an evolution, and teams, network owners and distributors are still trying to figure out what models will work going forward.
"The development of these regional networks is a major play right now where people are trying to figure out various ways to capture the value of the fact that sports is immediate, and that's what this is essentially about," Haagen said. "Teams are trying to figure out better ways to capture the value, so you're seeing the rolling-out of various kinds of ... platforms, generally in connection with cable, but just a whole series of ways of trying to capture a bigger audience or a bigger chunk of fees. One of these ways is regional sports networks."
He continued: "The industry doesn't entirely understand which models are going to work. And there are various kinds of misjudgments. Another one you have there in Texas is the Longhorn Network. And so I think this is an iteration of an industry that's in quite a lot of flux."
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