This year is the Nationals’ first opportunity under the agreement to appeal for a larger rights fee. It comes as the Nationals are headed toward their first winning season, one that has them in first place in the National League East with the best record in baseball. The teams’ deep divide over the amount of TV money the Nationals should be paid has called attention to their unusual television partnership, and to the question of whether the Nationals could get a higher fee on the open market.
“Essentially, to have a potential revenue source this important for a local team being run through another entity has got to be very concerning because you can’t always control your own destiny,” said David Carter, executive director of the University of Southern California’s Sports Business Institute.
The Nationals are asking the Mid-Atlantic Sports Network (MASN), which is controlled by the Orioles and broadcasts both teams’ games, for between $100 million and $120 million per year, at least three times the $29 million they received last season, according to one person familiar with the proceedings. MASN proposed paying $34 million this season, according to another individual, who also spoke on condition of anonymity because of the sensitivity of the issue.
With the two sides far apart, a panel comprising representatives of three other teams has been charged with reaching a settlement. The talks have dragged on for months and have missed two deadlines for a resolution.
MLB Commissioner Bud Selig has said little publicly on the matter, but during the All-Star Game in Kansas City, Mo., last month, he expressed frustration with the slowness of the negotiations. “We are in the middle of very intense discussions,” he said during a luncheon with the Baseball Writers Association of America. “Very intense. That’s all I can tell you at the moment.”
When asked for when he wanted the issue resolved, he replied, “A month ago.”
Orioles get exclusive rights
The source of the impasse is the arrangement hammered out by Selig and Orioles owner Peter Angelos to allow the Nationals to move into a territory that baseball has recognized as part of the Orioles’ exclusive commercial and broadcast region.
But its roots go deeper. When the Senators left Washington for Texas in 1972, leaving only the Orioles in the region, baseball awarded Baltimore exclusive rights for much of the mid-Atlantic. Back in cable’s infancy, few paid attention to the issue. Today, however, cable TV broadcasts are one of the biggest revenue engines for sports franchises, worth tens if not hundreds of millions of dollars.
The Orioles’ territory, as spelled out in the 2005 agreement between MLB and the Orioles, encompasses all of Maryland; Virginia; the District; Delaware; seven counties in West Virginia; 13 counties and three cities — York, Lancaster and Harrisburg — in central Pennsylvania; and most of central and eastern North Carolina.
So when MLB, which owned the franchise known until 2004 as the Montreal Expos, was trying to arrange the team’s move to Washington, the Orioles argued that they should be compensated for having to share their territory. MLB brokered an arrangement in which the Orioles would convert their existing Orioles Television Network into a larger one, MASN, and buy the Nationals’ television rights. The contract has no termination date, according to someone familiar with the deal.
The deal also stated that the Orioles would own the majority of the network; the Orioles’ equity stake in MASN would begin at 90 percent, with the Nationals’ stake at 10 percent. After a two-year start-up period, the Nationals’ stake would increase by 1 percent each season until it reached a cap of 33 percent. Also guaranteed in the contract: The Orioles are to be paid the same rights fees by MASN as the Nationals. Those rights fees can be revisited once every five years beginning this year.
“There would not have been a team in Washington” without the deal, said Tony Tavares, the Nationals’ team president when they were still owned by the league.
“We always knew it was a challenge,” said Jeff Smulyan, a former Seattle Mariners owner and Indianapolis media executive who led a group that lost a bid to buy the team, which was purchased by the Lerner family in 2006. “We had our eyes wide open and we went ahead. Even if you weren’t in media, it was going to be a challenge.”
The Nationals’ stake in MASN currently stands at 13 percent and last year’s equity stake payment is said to have been close to $7 million. MASN paid the Nationals $20 million in rights fees in the first two seasons of the deal, and it increased the amount about $1 million a year until it hit $29 million at the end of last year.
Even during their first years in Washington, when the TV ratings reflected their struggles on the field, the Nationals believed they could have secured higher rights fees on the open market than they got under the MASN arrangement, according to some team executives. This year, with fan interest and ratings on the rise, would appear to help their case.
Even more important than the team’s change of fortunes is that television rights contracts have skyrocketed in recent years, and the Nationals argue their fees should reflect the change.
“At the time, it made sense to handle the various needs of bringing in a team and the needs of the Orioles and Major League Baseball. It really struck a balance at the time given the marketplace,” said Lee Berke, a sports media consultant who worked on the New York Yankees’ YES Network and studied the Nationals’ TV deal for one group of bidders.
But circumstances have changed, Berke added, now that the market value of TV rights has grown so astronomically. “It’s almost like the situation that has outgrown this model,” he said. “And it has to be substantially revamped.”
Two executives on the committee discussing the dispute, which includes representatives from the Tampa Bay Rays, Pittsburgh Pirates and New York Mets, declined to comment. Rob Manfred, MLB’s executive vice president of economics and league affairs, oversees the committee. An MLB spokesman declined to comment or make Manfred available. The Nationals did not respond to requests for comment.
“We have great optimism, and correctly so, that contracts are honored by the people who signed them,” said Alan Rifkin, counsel to both MASN and the Orioles who represented the Orioles in the 2005 negotiations.
Exploding local rights fees
The 30 major league teams collectively earned $484 million selling local television rights in 2001, Forbes estimated in April. The number jumped to $984 million last year and it could surpass $1.5 billion by 2015.
Sports business experts point to a watershed deal the Texas Rangers struck with Fox Sports Southwest in 2010 worth a reported $3 billion over 20 years that also included an equity stake in the network. Dallas is the fifth-largest media market in the country, according to a recent study by Nielsen.
The Houston Astros — in the 10th-largest market and one roughly comparable to Washington, the eighth-largest market — struck a reported $80 million average annual rights fees deal with Comcast and the NBA’s Houston Rockets; the Astros own nearly 45 percent of their new network.
Even the San Diego Padres, in one of the smallest markets in baseball, struck a deal with Fox Sports worth a reported $1.2 billion over 20 years.
MASN and the Orioles say these numbers, on face value, aren’t comparable to their offer to the Nationals because of the length of the terms. While the Rangers and Padres negotiated 20-year deals, the Nationals’ offer can be reset every five years.
Extrapolated over the next 20 years, MASN and the Orioles have offered the Nationals a deal in which the rights fees would increase about 7.7 percent each year, according to the person familiar with the contract. In total, the 20-year average for their proposed deal calls for a rights fee average of approximately $71 million a year.
With the increases in their equity stake in MASN, the Nationals would receive an average of about $100 million each year, giving the overall proposal a value of more than $2 billion, according to the person familiar with the proposal.
One potential way to help solve the dispute would be to allow the Nationals to buy into a larger equity stake of MASN, up to a 50-50 split between the teams. That way, both teams would be equally invested in the network and profits would be split evenly, according to Michael J. Cramer, a former president of the Texas Rangers and NHL’s Dallas Stars who is director of the Texas Program in Sports and Media at the University of Texas.
“That’s what I would do and I can’t imagine that isn’t what [will] happen in the future,” Cramer said.
Added Tavares: “My best guess is that they’ll find a deal that no one will be happy with.”
Angelos, he said, “will be thinking he’s paying too much and the Nationals will be thinking they didn’t get enough. By definition, that means it’s a good deal.”