Why MLB Has Every Right to Be Furious with the Dodgers' New TV Network Deal
Kirby Lee-USA TODAY Sports
The Los Angeles Dodgers have frequently exceeded expectations since the Guggenheim Baseball Management group took over ownership of the team.
The Dodgers were expected to spend big money on players, competing with the New York Yankees for the highest payroll in MLB. But as the Los Angeles Times' Steve Dilbeck reports, the team's Opening Day payroll is projected to surpass $213 million, which will be the highest in baseball history.
When the Dodgers were purchased last year for $2 billion, the understanding was that a new contract for television broadcast rights to the team's games or the opportunity to create a regional sports network was a major factor in the sale price. At the time, estimates for the Dodgers' new TV deal ranged from $4 billion and $6 billion.
But yet again, the Dodgers have blown away early projections. The team agreed to a deal with Time Warner Cable that could be worth between $7 billion and $8 billion over the next 25 years. However, the details of that agreement have caused some concern among other MLB owners and the commissioner's office, according to the L.A. Times' Bill Shaikin.
The primary issue is how much of this new TV money should go to MLB's revenue-sharing fund, which distributes money to smaller-market teams in baseball. Under the current agreement, teams must give up 34 percent of their local broadcast income for revenue sharing.
This year, the Dodgers will get $39 million in the final year of their contract with Fox Sports. That amounts to $13 million that has to be contributed to the revenue-sharing pool.
Obviously, those numbers are going to change significantly with the Dodgers' new TV agreement with Time Warner Cable and the creation of a new regional sports network called SportsNet LA.
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As Shaikin explains in his report, if the Dodgers are to receive $7 billion per year over the next 25 years with this new contract, MLB's revenue-sharing arrangement calls for the team to contribute $280 million.
However, under the terms of a settlement that MLB and former Dodgers owner Frank McCourt agreed to through the U.S. Bankruptcy Court, the fair-market value of the team's local television rights was determined to be $84 million per year with an annual increase of four percent.
At the risk of making a completely obvious statement, there is a major difference between $280 million and $84 million.
Yet because of the bankruptcy settlement, MLB is obligated to stick to the $84 million figure. That provides the Dodgers with a whole lot of extra cash to hoard for itself. As you might imagine, that isn't making baseball very happy.
As USA Today's Bob Nightengale explains, MLB's revenue-sharing agreement also states that if a team takes the risk of owning its TV network, it can keep the additional income derived from its TV contract after paying out the fair-market obligations.
But how much risk are the Dodgers actually assuming with SportsNet LA?
The team owns the regional sports network, according to its arrangement with Time Warner Cable. But TWC is funding the endeavor, paying the Dodgers a guaranteed $7 billion.
Additionally, as reported by the L.A. Times' Joe Flint, TWC agreed to cover subscription fees from other cable and satellite providers even if those operators don't carry SportsNet LA.
As Flint explains, if DirecTV didn't carry the Dodgers' new network initially, TWC would pay for the subscription fees until an agreement was worked out. That could work out to $5.00 per subscriber, resulting in a considerable amount for TWC to take on.
Kirby Lee-USA TODAY Sports
Suddenly, it's becoming clearer why the Dodgers signed on with TWC rather than Fox Sports for its new TV deal.
As could be expected, MLB is arguing that the rules allowing teams to keep TV revenues after fulfilling the revenue-sharing obligation don't apply to the Dodgers as it appears that TWC has truly assumed the risks involved with creating and running a new network.
That could take MLB and the Dodgers back to U.S. Bankruptcy Court. As ESPN's Darren Rovell explains, if the court rules that the Dodgers haven't taken on much risk with their new network, MLB can vastly increase the amount that the team has to contribute to the revenue-sharing pool.
In other words, the league could charge the Dodgers $280 million per season and could also get a piece of whatever subscription fees TWC had to cover.
Naturally, this could result in a rather nasty dispute between MLB and the Dodgers. It could also stir up problems with other owners in baseball.
The commissioner's office also has to contend with the small-market owners in baseball who would want a piece of a possible $1 billion pie created by the Dodgers' revenue-sharing obligations. If those owners miss out on that money, that could cause major tensions between them and MLB commissioner Bud Selig.
Everybody wants their slice of the Dodgers' new and extremely wealthy pie.
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