Friday, February 18, 2005

New York Sports Media Market

1. New York/New Jersey

7.4 Million Television Households

For more than a decade, MSG and Fox Sports Net NY had a virtual lock on local sports programming through rights deals with all 6 NBA, NHL, and MLB teams. In 2001, Yankees owner George Steinbrenner rocked the cart by announcing intent to create a new regional network in partnership with IMG after its 12 year, $486 million deal with MSG expired in 2000. Litigation ensued. The critical sticking point was a "right of last refusal" clause in the old contract with MSG. MSG argued that an offer from an entity that would be 95% controlled by the team did not constitute an fair "third party offer". The terms of the new deal were to provide the Yankees with $838 million in rights fees over 10 years and CVC was loathe to match these blockbuster rights fees. Of course, this deal was constructed in part to divert revenue from the team to the Network in order to avoid revenue league sharing (a model that has attracted attention from other MLB teams), see Inside Pitch.

A judge eventually decided that MSG could carry 85 games for free in 2002, but added the stipulation that the Yankees could choose to either pay MSG $30 million to take back these rights, or force MSG to pay $37.5 million for the remaining 65 games. The Yankees bought their way out, but this struggle was far from over. YES still had to convince Cablevision to carry YES on systems serving over 4 million homes.

As an aside, Cablevision reportedly tried to purchase the Yankees in the mid 90's to try to keep this chain of events from occurring, but the two sides could never reach a deal. Imagine what the deal terms would have to be for George to part with his most prized possession. The intrinsic personal value he places on the team is undoubtedly higher than its true business value.

To support a full schedule of programming for the new YES network, Steinbrenner created the YankeesNets holding company with Lewis Katz and Ray Chambers, owners of the New Jersey Nets. Later, the partnership also acquired the New Jersey Devils and created the Puck Holdings division which was controlled by Chambers. This may have been ill-conceived since the TV rights to Devils games were locked up by MSG until 2007. Meanwhile, the partners lobbied jointly to get public funding for a new arena in New Jersey and a new Yankees Stadium. This short-lived partnership was essentially dissolved in late 2003 after the partners had no luck at persuading local officials to construct new facilities. Yankees Global LLC now owns the Yankees and 60% of the YES network. Goldman Sachs got the remaining 40% by investing $340 million. Consequently, the Devils were sold to Vanderbeek (who eventually got his Newark arena) and the Nets to Bruce Ratner (who is working on one in Brooklyn).

By most accounts, YES is generating at least $160 million in annual net profits for Steinbrenner, basically tripling the rights fees paid by CVC in their final year with them.

The second round of lawsuits between the Yankees and Cablevision commenced after Cablevision refused to pay what they deemed to be exorbitant affiliate fees for the network. The standoff lasted the entire 2002 season without carriage for the network. In 2003, an interim solution was reached to place YES on a pay tier with MSG and FSNNY with a $1.95 per month fee for any of the 3 or $4.50 for all 3. Both sides agreed to binding arbitration to resolve the issue over the longer term. The ultimate resolution was for Cablevision to move all three channels to the basic tier and guarantee a 90% penetration rate in exchange for a lower per sub affiliate rate of $1.85 vs the $2.35 YES was asking for. As a result, CVC raised its monthly basic price by 95 cents. Both Comcast and Time Warner offer YES on basic, although Time Warner customers have the option of dropping YES and taking $1 off their bill.

This deal was seen as a win for all RSN's, as it solidified placement of sports networks on basic tiers. Cable MSOs generally prefer placing these popular networks on digital tiers to support penetration of higher margin tier offerings.

With the loss of its flagship programming, CVC decided to move 50 NY Mets games to MSG to support the channel in the summer months. MSG networks are carried by other MSOs, and affiliate agreements usually stipulate that a minimum number of pro games be carried on the network. As such, the loss of 100+ Yankees games most likely resulted in some significant decreases for Cablevision in its affiliate rates. It certainly caused problems with Time Warner when CVC went looking for a rate increase to $4.10/mo for both networks with fewer desirable games. And it doesn't help that the Knicks and Rangers have had several poor seasons at the same time.

There is nothing like being kicked when you are down.

In early 2004, the Mets paid MSG $54 million to "buy out" of their contract after the 2005 season. MSG's hopes of a possible reconciliation were dashed when the Mets announced their creation of a new RSN in partnership with Comcast and Time Warner, with Comcast managing the venture. Now its deja vu all over again, with CVC in court to try and enforce a contract clause giving them exclusive negotiation rights until November. Odds are, the deal will proceed anyway and CVC will have another battle on its hands over affiliate fees for the Mets network.

As a small consolation prize, MSG did manage to sign the Devils to a 20 year deal for 75 games to keep them away from the Mets or YES. The Islanders are also under a long-term contract with the network for all of their games. At least CVC has hockey locked up for the forseeable future, but the scheduling ramifications of having 4 winter sports teams could prove messy. And that won't be a problem if the NHL can't solve their labor dispute.

So poor Cablevision (and Fox for that matter) have lost a significant amount of value in the past couple of years. What lies ahead? One could argue that they should consolidate the networks into one viable offering. But with so many winter games, this might be next to impossible even by placing some games on Metro. They will have to seriously consider sublicensing some games to broadcast, or even sublicensing one of the teams to YES or the Mets network (who may want some winter programming). Regardless, the summer months are sure to be lean for MSG.

Kaiser Predicition: Cablevision sticks with its two channel approach, by mixing games from all four teams on both channels with the occasional overflow to Metro.

A new scenario has been bantered about in the press recently, postulating that YES and NESN would join forces in a joint venture to get better leverage for ad sales and affiliate negotiations. A new Mets network could also join the fray.

Kaiser Prediction: Goldman Sachs sells its 40% stake in YES to Comcast and Time Warner for $400+ million in 2005. Comcast manages YES and the Mets network jointly.

Between the problems in New York and the problems in Chicago, I bet Rupert is rethinking his decision not to sell his stake in RPP when he had the chance.


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