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The Baseball Revolution (of Money) Has Been Televised — A Look At Local TV Contracts

Hopefully Frank Coonelly is smiling this broadly after he finishes the next TV contract for the Pirates Photo by Charles LeClaire-USA Today Sports

Hopefully Frank Coonelly is smiling this broadly after he finishes the next TV contract for the Pirates
Photo by Charles LeClaire-USA Today Sports

Cash Rules Everything Around Me.

C.R.E.A.M.

Get the money. Dolla, dolla bill, y’all.

I’m not going to say that MLB teams don’t care if anyone shows up to the games or not.  Because without fans to fill the stadium, it would just be a workout between 50 guys wearing funny looking uniforms.  But in-person attendance has been de-emphasized, from a revenue standpoint, in recent years with the new 2012 national TV deals with FOX/ESPN/TBS that give each club approximately $54M per year and went into effect with the 2014 season.  On top of this, a bubble has formed for local TV deals that have enriched certain clubs fortunate to negotiate during this golden period of TV money.

The inflection point for local TV deals started with the Texas Rangers back in fall of 2010.  At that time, they signed a deal with Fox Sports Southwest for an eye-popping $85M/year over a term of 20 years.  So for the Rangers, before one ticket is sold, one hot dog eaten, one jersey purchased in the team store, they have $139M of revenue in the bank.  Just using a rough 50% of revenue goes to payroll rule of thumb, the Rangers have $69.5M of their payroll covered.  Now, not every team has been fortunate enough to reap the benefits of this TV largesse.  A signed contract in the world of business still means something, even if they don’t mean much in sports it seems at times, so some teams are locked in to pre-bubble deals.

How exactly are these TV deals negotiated?  There are a whole host of factors that deal with historical local TV ratings, but what I’d like to do is develop a rough model based on metropolitan population size to see if it can be used as a forecasting tool for upcoming TV deals.

PRE-BUBBLE TV DEALS

The vast majority of the local TV revenue figures below were obtained from Wendy Thurm’s Fangraphs article written in July 2013.  Recent TV deals that have been signed since then were updated, as needed.  In some cases, there were conflicting reports and more recent data was used.  Metropolitan populations are from 2014 Census figures.  Toronto’s population, obviously not in the U.S. for the Census, was from 2011.

TEAM METRO SIZE TV DEAL (IN M)
NYY 20,100,000 $90
SFG 4,600,000 $70
NYM 20,100,000 $65
BOS 4,700,000 $60
CHC 9,600,000 $50
CWS 9,600,000 $45.50
OAK 4,600,000 $45
CLE 2,100,000 $40
DET 4,300,000 $40
TOR 6,100,000 $36
CIN 2,100,000 $30
MIN 3,500,000 $29
BAL 2,800,000 $29
WAS 6,000,000 $29
STL 2,800,000 $25
ATL 5,600,000 $25
PIT 2,400,000 $20
COL 2,800,000 $20
KC 2,100,000 $20
TBR 2,900,000 $20
MIL 1,600,000 $20
MIA 5,900,000 $18

I’ve highlighted the local 9 for your viewing pleasure.  As you can see, they are tied with a host of other small market teams for the 2nd-lowest local TV deal, ahead of the shockingly-low $18M for the Miami Marlins.  After graphing all of these deals, with metropolitan population on the x-axis and local TV revenue on the y-axis, I laid a regression line on the data.  The results are shown below:
tv pre-bub

So what the regression line tells us is that if you multiply the metro population (in millions) by 2.78 and then add $21.6M, that should be what the team is receiving in local TV revenue.  By this metric, the Pirates should be receiving $28.3M/year from ROOT Sports.  Nothing has ever been officially stated (as with most things in baseball finance, this deal is kept in a black box), but it appears as if the Pirates are an undervalued asset.  On a certain level, for an organization that prides itself on striking bargains with players and extracting maximum value, there has to be a degree of wry irony.

In looking at the graph, both Boston and San Francisco are far above the regression line based on their populations.  Boston, by the equation, should be getting $34.6M rather than the $60M they receive from NESN (of which they have an 80% equity stake).  Similarly, San Fran should be getting $34.4M instead of $70M from CSN Bay Area (of which they have a 30% equity stake).

It’s also fun to see the Yankees (who own their regional sports network, YES) and the redheaded stepchild Mets on opposite sides of the regression line.  By this calculation, the Mets could be worth $77.5M and are undervalued in the largest media market in the U.S. by $12.5M.  That extra money would help pay Bobby Bonilla’s yearly $1M salary deferral.

BUBBLE TV DEALS

The same exercise was repeated for the eight deals signed after 2010, starting with the Texas Rangers’ game-changing deal.

TEAM METRO SIZE TV DEAL (IN M)
LAD 13,300,000 $340
LAA 13,300,000 $150
SEA 3,700,000 $115
PHI 6,100,000 $100
TEX 7,000,000 $85
HOU 6,500,000 $80
ARI 4,500,000 $75
SDP 3,200,000 $60

tv bubAnd again, I laid a regression line over these eight data points.  Surprisingly, even with a smaller amount of data points, the R-squared value for the Bubble Deals was similar to the Pre-Bubble Deals.

The Dodgers deal of $340M/year with SportsNet LA is so comical and such an outlier, that I almost considered leaving it out and running a different regression.  But then I remember that Pirates’ President, Frank Coonelly, told me in an interview that “rising tides lift all boats” when it came to TV deals, meaning that central MLB takes a cut of each deal and re-distributes it across the whole league as apportioned money.  So even though the Dodgers may be skewing the curve, the revenue they provide is important and helps raise the curve for future deals.

PROJECTING TV DEALS MOVING FORWARD

With more and more people cutting the cord on cable, it feels as if this local TV revenue bubble that we’re in is going to burst.  As fewer people subscribe to extended sports cable packages, the amount of money that teams can demand from providers will drop.  Who knows…maybe 20 years from now we’ll all be watching sports by hologram or some other Jetson-type format.

But for teams with current deals expiring in the short term of 1 to 3 years, the bubble should still be in effect.  An interesting test case for the Pirates’ next potential deal is the Cincinnati Reds.  Their current deal is up at the end of the 2016 season and they currently are getting $30M/year.  This is relatively right in line with what the regression line equation forecasts for them based on their 2.1M metro population ($27.4M by that equation).  The Rays’ deal is also up after this year and they currently make the same $20M/year as the Pirates.  Their market, as shown above, is slightly larger at 2.9M.

Based on the Bubble Deal regression equation, the Reds should be in line for a deal of $36.2M, which is not that much of an increase and could disappoint some people on the surface.  By the same evaluation, when the Pirates deal with ROOT Sports is up in 2019, they can potentially garner a yearly revenue figure of $41.4M.  For the Pirates, this is a substantial raise on their below-market rate of approximately $20M.  The additional $21M to the coffers could, theoretically, result in $10.5M more dedicated to player payroll.

It is possible, but not likely, that the additional $10.5M could help them decide whether to keep Andrew McCutchen long-term or not.  In 2018, if he’s not traded by then, McCutchen will earn $14.5M.  If you add $10.5M to this figure, you conveniently get $25M, which is the minimum I expect him to earn per year on his next contract.  Of course, knowing the Pirates’ luck, the TV bubble will have burst and they will barely get an increase over their current paltry $20M/year figure.

About Kevin Creagh (274 Articles)
Nerd engineer by day, nerd writer at night. Kevin is the co-founder of The Point of Pittsburgh. He is the author of Creating Christ, a sci-fi novel available on Amazon.