We live in a new era where television revenue has become vital to the long-term success of sports franchises.
The Houston Astros, based on a recent lawsuit filed by owner Jim Crane, appear to be finding out the hard way how precious that local TV money is because they apparently aren't getting as much as originally thought when Crane bought the team in 2011.
David Barron of the Houston Chronicle broke the news of Crane's lawsuit against former owner Drayton McLane, Comcast and NBC Universal with a variety of accusations, including fraud, civil conspiracy and "breach of contract in the purchase of a 46 percent stake in the parent company of Comcast SportsNet Houston."
The suit accuses McLane, who sold the Astros and his CSN Houston share to Crane in 2011 for $615 million, of selling “an asset (the network) they knew at the time to be overpriced and broken.” It also says Crane was “duped” when he bought McLane’s network interest based on what have been proved to be “knowing misrepresentations” and “falsely inflated subscription rates.”
The network was supposed to pay the Astros $56.6 million in rights fees for the 2013 season, but since it's only available in "about 40 percent of Houston households and cannot be seen on DirecTV, Dish Network, AT&T U-verse or Suddenlink," network revenues have been limited according to Barron's report.
Four Comcast/NBC Universal affiliates filed an involuntary Chapter 11 bankruptcy petition back in September.
Comcast and NBC Universal have released a statement, included in Barron's report, vehemently denying any wrongdoing, saying that "Mr. Crane is suffering from an extreme case of buyer’s remorse..."
The point of this, aside from the obvious potential fallout between the Astros and network regarding funds, is to point out how much Major League Baseball has shifted from being all about tickets sold and revenue generated at the park to valuable TV contracts.
A team like the Astros, which has slashed payroll dramatically in the last three years, will depend on television money in a few years when the farm system starts churning out prospects that get the franchise back to respectability.
They will need to offset some holes by dipping into the free-agent pool, which won't be easy without the television money coming in.
We won't see this situation have much impact on what the Astros are doing right now because there is no reason for the front office to start putting big money into free agency. They are going to be bad in 2014, but it is the long-term future that matters most to the franchise.
It is hard to miss stories about some team that has started a new television network, or agreed to a lucrative new contract that will bring in millions of extra dollars in revenue each year.
Case in point: the Prince Fielder-Ian Kinsler trade between the Detroit Tigers and Texas Rangers on Wednesday.
There was some skepticism from the Rangers' side of the deal because they were acquiring seven years and $138 million (subtracting the $30 million Detroit sent) left on Fielder's contract.
However, the financial aspects of the trade made more sense when you factor in the Rangers signing a 20-year, $3 billion contract with Fox Sports Southwest that goes into effect after the 2014 season.
There has been no team more frivolous with its money over the last 12 months than the Los Angeles Dodgers.
A new ownership group took control of the Dodgers in 2012 and wasted no time leaving a mark by increasing payroll from $105 million last year to $216 million in 2013.
How have the Dodgers been able to spend all that money in such a short amount of time?
Yes, having ownership with deep pockets and a desire to win at all costs is a good start. But there is also the insanely lucrative television deal the Dodgers have.
The franchise agreed to a 25-year, $8.5 billion dollar agreement with Time Warner Cable of which approximately $2 billion will be paid out in revenue sharing and the rest will be kept by the Dodgers.
No one will deny that the easiest way for an MLB franchise to make money is selling tickets, though it may not be the most practical. You want to bring people into the stadium, where they will buy team-specific merchandise and pay for beer, hot dogs, popcorn, etc.
With ticket prices escalating to the point where a family of four will spend an average of $210 in the park, it is no longer cost effective for people to attend games when they can get an experience virtually as good at home.
Ratings for television shows have been declining for years, thanks to the advent of DVR, Netflix and other streaming sites, but live sporting events have largely avoided the pitfalls of regular TV because there is a greater sense of urgency to watch them as they occur to know what happens and keep up with what everyone is talking about.
Last October, MLB signed new television contracts with ESPN, Turner and Fox worth a total of $12.4 billion.
Television contracts are becoming one of the most vital parts of an MLB team's revenue stream. Going back to the situation involving the Astros, there is a lot more at stake for them in this lawsuit than just lost revenue this year.
The Astros aren't a franchise that will have a lot of leverage negotiating any contracts right now, especially when Nielsen measured the team's TV ratings in Houston at 0.0 for a September game against Cleveland.
This lawsuit is about the Astros keeping up with the rest of Major League Baseball. It isn't a great time for the franchise, but eventually things will get better. In order to keep things moving upward, TV revenue will be of the utmost importance.
Note: All player contract information is courtesy of Cot's Baseball Contracts.
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