February 9, 2013
by Greg Katz
On January 28, the new ownership group of the Los Angeles Dodgers, Guggenheim Baseball Management, revealed its plans to partner with Time Warner Cable to launch the Club’s own regional sports network, SportsNet LA. The announced twenty-five year deal, which is reportedly worth over $7 billion, is the most lucrative of a recent string of multi-billion dollar MLB media rights contracts. Since taking over less than a year ago, Guggenheim Baseball Management has not been hesitant in taking advantage of its anticipated pay day as the club has
Magic Johnson, member of Guggenheim Baseball Management (Photo by Damian Dovarganes, AP)
assumed an additional $600 million in payroll, and currently has a 2013 opening day payroll in excess of $225 million with an additional $8 million-plus in luxury tax liability—the Dodgers’ luxury tax liability in 2013 is equal to 17.5 percent of its payroll exceeding $178 million (see MLB CBA, Article XXIII-Competitive Tax Balance, § (B)(3)(b)(i)). As all things are relative, such a mammoth payroll is well within the means of a Club expecting roughly $280 million in TV revenues alone. The Dodgers, however, may have overestimated the Club’s share of its own network’s revenue by underestimating how much of that revenue would be subject to the League’s Revenue Sharing Plan.
Major League Baseball’s Revenue Sharing Program
Article XXIV of Major League Baseball’s 2012 Collective Bargaining Agreement (“MLB CBA”) provides a Revenue Sharing Plan in an effort “to promote the growth of the Game and the industry on an individual Club and on an aggregate basis” by among other things, improving smaller market teams’ performance on the field and thus making the League more competitively balanced. The Revenue Sharing Plan comprises three separate schemes, including its “Base Plan.” The Base Plan, as defined under Article XXIV § A(10) of the MLB CBA, requires each Club to “contribute 34% of its Net Local Revenue . . . to a putative pool [which] is then divided equally among all Clubs.” Included in Net Local Revenue are the Clubs’ local media contracts, and for good measure too; Los Angeles’s new contract would generate more revenue by itself than twenty-six franchises net from all of their revenue streams.
Many teams have begun to launch their own broadcasting networks, however MLB has evolved its Revenue Sharing Plan to ensure that smaller market teams are still getting their fair shares. In such cases, MLB determines the fair market value for the broadcasting rights, and the team is obligated to share 34% of that value. All revenue above the fair market value, so long as the team is assuming the risk of ownership in its broadcasting network, is not subject to revenue sharing. To note, any local broadcasting contracts are separate and distinct from MLB’s central media rights contract which is included in the Revenue Sharing Plan’s Central Fund (see MLB CBA, Article XXIV § A(4)). Coincidentally, MLB recently inked a new media rights contract with Fox and Turner Sports worth $6.8 billion over eight years.
Background of the New Deal
The new ownership group purchased the Dodgers out of bankruptcy in April of 2012. The record $2.1 billion purchase included an agreement that established the fair market value of the Dodgers’ media rights at $84 million per year, with annual increases of 4% (The fair market value of the media rights, according to this settlement, would be roughly $224 million in the 25th year). MLB, as it has with other teams, also agreed that if the Dodgers took significant risk in starting its own network, any TV revenues above the settled fair market value would not be subject to the League’s Revenue Sharing Plan.
Understanding the purchase agreement, and less than eager to share 34% of the network’s revenue with the rest of the League, the Dodgers structured their new network to effectively shield a portion of the revenue from being subject to the Revenue Sharing Plan. Similar to the New York Yankees and Boston Red Sox who both own their own networks, the Dodgers will own SportsNet LA which will be run by a wholly owned subsidiary called America Media Productions. Although the Dodgers would own SportsNet LA outright, Time Warner Cable has reportedly guaranteed the Dodgers cable and satellite fees. Although the deal seems like a homerun for the Dodgers, MLB has recently questioned whether or not the Dodgers are actually taking any risk in their new network. Because Time Warner Cable has guaranteed them the subscription fees, MLB seems to be taking the stance that the Dodgers are in fact not taking any risk, and MLB is looking to subject a much higher percentage of the deal’s $280 million yearly revenue to the Revenue Sharing Program.
What’s at Stake?
The Dodgers’ announced deal is reportedly worth $7 billion over 25 years, or an average of $280 million per year. If the Dodgers can enforce the bankruptcy purchase agreement’s settled fair market value of $84 million (plus 4% a year) a year, the Dodgers will be able to save over a billion dollars over the next 25 years. Although the Dodgers have showed a willingness to pay a little more than the settled amount, the two sides seem to be worlds apart. The bankruptcy settlement, however, enables the Dodgers to appeal any MLB evaluation back to the bankruptcy court. If the Dodgers and MLB cannot agree on a fair market value in the near future, it is highly likely that both parties will find themselves back in court where they started.
The outcome of the Dodgers and MLB’s disagreement and potential litigation will likely have a sizeable and immediate impact on the economic landscape of the league. In 2015, the Philadelphia Phillies, Seattle Mariners, Arizona Diamondbacks, and Washington Nationals all have expiring or re-opening contracts, and it is safe to say each team is chomping at the bit to sign a billion dollar plus deals of their own. If the Dodgers are able to shield over a billion dollars from the Revenue Sharing Plan, despite taking little to no risk, it is probable that each team singing a new deal will look to follow suit and structure their deal accordingly. The impact of the outcome, however large it may be in the near future, will most certainly be addressed after the 2016 season in the new MLB CBA, at which time MLB can look to revise its revenue sharing program to address any gaping holes that teams have exploited.