By Adam Gajo
The drama over the Los Angeles Dodgers' network, SportsNet LA, in the Los Angeles market continues to play out. We all love risk in sports, which is part of what makes it so exciting to watch. When a player goes outside of the norm and puts his reputation on the line to do something great, that is at the core of what sports is all about. We do not, however, appreciate when the risk occurs in the board room and results in preventing millions of dedicated sports fans from watching their beloved team on TV.
Time Warner Cable Inc. took a big risk in its bid on the Dodgers regional telecasts that cost it $8.35 billion over the next 25 years. LA's largest cable provider outbid FOX for the local rights for the Dodgers in an effort to control rising sports costs. Ironically, it increased the monthly regional sports network spend for its distributor competitors after the launch of Time Warner Cable SportsNet/Deportes with the NBA's Los Angeles Lakers in 2012 and is doing itagain with SportsNet LA. The risk Time Warner Cable is making is further pronounced in that the new network is dedicated solely to the Dodgers — 24/7 year-round.
There have been many reports citing how the network is currently only available to roughly 30% of the team's TV market. Now, more than a month since the RSN launched and weeks into Major League Baseball's regular season, the news of impasses in negotiations are getting stale. But this battle is not just about the nation's second largest market and a franchise that could make a run for the World Series; it's the recent setting for a much larger war that is being fought between distributors who are trying to control their costs and RSNs that demand higher license fees to cover their rising sports rights payments.
SportsNet LA launched into a market that over the past few years has grown from two RSNs to the current five: FOX Sports West, Prime Ticket, Time Warner Cable SportsNet/Deportes, SportsNet LA and Pac-12 Los Angeles. Time Warner Cable has already been a source of frustration for the other distributors in the market, taking the Lakers from FOX's Prime Ticket and creating two new networks (English- and Spanish-language versions) and charging its competitors a blended rate in and out of market of $3.22 in 2014. Now, Time Warner Cable is asking them to fork over almost $5/sub/month in market with an average blended rate of $3.84 for a network that is 100% dedicated to the Dodgers.
Below is a table that shows the affiliate fees per sub per month for the RSNs in the Los Angeles market, 2012 versus 2014. Time Warner Cable's two RSNs are by far the most expensive, each north of $3.00 per sub per month. The impact of the additional sports networks increases the Los Angeles RSN monthly spend by 35% to $10.68, up from $7.91 in 2012. We arrived at an average of $3.84/sub/month for SportsNet LA after factoring in the reported $4.50 per inner market and $1.35 per outer market subscribers.
The table below shows the 20 most expensive RSNs in the nation in 2014, with SportsNet LA (Dodgers) ranked No. 5 and Time Warner Cable SportsNet/Deportes (Lakers/Galaxy/Spark) No. 14. It should be noted that the other RSNs on this list offer viewers live coverage of two or three sports teams.
We expect that by the end of 2015, SportsNet LA will sign a distribution agreement with Charter Communications Inc., Cox Communications Inc. and AT&T Inc. U-verse that will add roughly 1.5 million subscribers to the network and increase its overall reach to 3.4 million. By 2016, we estimate that DIRECTV and Verizon Communications Inc. FiOS could reach a deal, bringing the network's total subs to 6.0 million, or 88% of the team's market.
If these deals get done, the network would be profitable by 2016 with an estimated positive cash flow of $71.9 million. That year would also mark Time Warner Cable's first year of profitability in the Dodgers venture with positive cash flow of $67.7 million, after paying the team an estimated $4.2 million in missing subscriber penalties, as per the agreement between Time Warner Cable and the Dodgers. DISH Network Corp. will likely pass on the RSN, as the DBS has taken a minimalist approach to sports and still does not have a distribution agreement with Time Warner Cable SportsNet/Deportes.
Economics of Networks is a regular feature from SNL Kagan, providing exclusive research and commentary.
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