Report: Phillies To Sign New TV Deal within the Next Month

Manna from heaven - Howard Smith-US PRESSWIRE

Howard Megdal reports the Phillies are on the verge of signing a huge new TV deal.

A little over a month ago I wrote a two-part primer on the landscape surrounding the Phillies pending television deal. The super condensed Cliff's notes version was that the Phillies are in line to get a lot more money than the approximately $35 million dollars a year they get from their current deal, set to expire after the 2015 season, though there's are a lot of confounding variables that make a precise prediction quite difficult. (The non-Cliff's notes versions are here if for some unfathomable reason you want to re-read them: Part 1, Part 2)

Initially those posts were going to be laying the groundwork for an eventually third update to the series, in which I would break out the Excel charts correlating the size of historical television deals with media market size, year the deals were signed, television ratings, etc. to come up with some sort of projection for the likely deal. I figured I had a while to get that done because, well, the fall of 2015 is still pretty far away. I may not have that time after all.

Yesterday Howard Megdal dropped a relatively unreported but important bomb, at least with respect to the Phillies and their plans for the upcoming off-season. Megdal's sources are telling him that the Phillies are set to finalize their new television deal within the next calendar month:

It's been known for some time that the Philadelphia Phillies, on a below-market local television deal, could see their financial circumstances change dramatically once a new deal is signed.

According to a source with knowledge of the talks, the deal is expected to be completed within the next 30 days. That's going to matter a great deal for how the team operates this winter.

Big if true. Megdal is well tapped into the financial side of baseball, and has written extensively on the dire financial situation facing the Mets organization. I have no reason to doubt his sources.

Both the Phillies and their cable broadcasting suitors have incentives to get a deal done early. The Phillies would certainly benefit from the financial security that comes with signing a market-level deal and would not have to worry about the bottom falling out the cable television deal market (discussed here). The cable broadcaster would also be receiving cost certainty. Locking up the Phillies now may stave off a last-minute bidding war, or allow that broadcaster to secure basic programming around which they might build a national sports network. Signing now also eliminates the possibility that the broadcaster gets caught up in the ever growing "cable TV bubble." For years pundits and prognosticators have been predicting a collapse of the cable TV bubble, yet the deals have done nothing but grow over time. Signing now takes that possibility off the table.

What kind of money are we looking at here? It's hard to say, but the bounds on the low end are probably the $150,000,000 per year the Rangers and Angels are getting. Texas is a good starting point, as they're also in a single-team media market, and have a similar media market size. Their deal, however, was signed nearly 3 years ago, during which time we've seen the market reset itself at a much higher baseline.

For more accuracy, the best we can do on short notice is to look at comparable deals in comparable sized markets.

TEAM

BROADCASTER1

YEAR SIGNED

TV MARKET SIZE2 (DMM)

ANNUAL RIGHTS FEE1

LA Dodgers

SportsNet LA

2013

5,613,460

$340,000,000

Texas Rangers

Fox Sports SW

2010

2,588,000

$150,000,000

LA Angels

Fox Sports W

2011

5,613,460

$150,000,000

Seattle Mariners

Root Northwest

2013

1,818,900

$115,000,000

NY Yankees

YES Network

2002

7,384,340

$90,000,000+

Houston Astros

CSN Houston

2010

2,215,650

$80,000,000

NY Mets

SNY

2006

7,384,340

$65-75,000,0003

PHILLIES

???

2013?

2,949,310

???

Sources linked in superscripts: (1) Wendy Thurm, Fangraphs; (2) Maury Brown, The Biz of Baseball; (3) Howard Megdal, Twitter & Wendy Thrum, Fangraphs

There are a few caveats to these numbers. First, you'll notice that both the New York teams and Los Angeles teams share a media market, so while their designated media markets (DMM) are much larger than Philadelphia's, they're also splitting that viewership. Philadelphia actually has the largest single-team DMM in the country. Second, those numbers are not completely representative of the deals these teams have because of the complexity of the contracts. Most of these TV deals include equity stakes in the regional sports net which are not included in the annual rights fee. These ownership stakes contribute to the value of the deal, but obfuscate the actual money changing hands. The Yankees, for example, clearly bring in more money from YES than the listed $90,000,000 per year, but as it stands these are the numbers we have to work with.

Working out a simple linear regression, the R2 value between TV market size and annual rights fee rewarded is a terrible 0.002 (stats refresher: a 1.0 R2 is a perfect correlation, a -1.0 R2 is a perfect inverse correlation. R2 is a measure of the strength of the relationship between the axes, with 1.0 being perfect correlation and 0 having no correlation. An R2 of .8, for example, would mean 80% of the variation in the Y-axis is explained by the variation of the X-axis). Basically, in this tiny sample size of the 7 largest annual rights fees deals DMM has no correlation to the size of the TV deal signed. That might change if you divided the huge media markets by two to account for multiple teams in those markets, or better accounted for what the Yankees actually receive from YES, but that's getting further into speculative territory while I'm trying to keep it simple so let's not do that. The relationship between TV contract size and year in which the contract was signed is much more significant. It looks like this.

(Click to embiggenate)

Chart_medium

The coefficient of determination is still a weak .30, but that's leaps and bounds better than the relationship between market size and rights fees, so we'll go with this as a really rough and dirty estimate. Emphasis on really rough and dirty.

If you look to the 2013 area of the X-axis you'll see two entries along the vertical axis, the Mariner's new contract at $115m annually, and the monstrous Dodgers contract at nearly $350m annually. The best fit line threads those two, coming in just under $200m in annual rights fees. That can serve as our rudimentary starting point. Simply adjusting for market size (Seattle = 61.7% of Philadelphia's DMM, LA = 190% of Philadelphia's DMM) you might calculate a Phillies TV contract falling between $183-186m annually. Now, again, this is a terrible estimate and the error bars are huge. Adjust as you see fit. (For example, if you think that only 2/3rds of LA-area baseball fans will watch the Dodgers with the other 1/3rd dedicated to the Angels while 100% of Philadelphia area baseball fans will watch the Phillies, then you can do this: ((5,613,460 x .67)/ 2,949,310), giving the LA Dodgers an effective media market only 28% larger than that of Philadelphia. If you think, therefore, that the Dodgers' TV contract is going to be commensurately 28% larger than the Phillies' contract you'd expect the Phillies to get nearly $275m annually.)

The above calculations do not account for population growth rates in those markets, equity stakes in the broadcasting networks, commercial revenue ownership, multiple teams in the LA market, and myriad other variables. But it's something, though the former estimate may be low if one considers Philadelphia being the largest single-team media market in the country and the recency of the higher-fee deals. The Phils are certainly closer to the Dodgers than the Mariners in terms of market penetration and fan base size. Megdal also says this in his column:

Their new deal will be for many times what they are currently making.

While vague, this gives us a little direction. $200m would be nearly 6 times what the Phillies are currently estimated to be bringing in. $275m would be 7.85 times their current deal. Both of those numbers qualify as "many times," but there is no real upper limit here. These numbers are all poor guesstimates, but useful as simple guides that I whipped up in the middle of the night, upon which you can build your own models if you are so inclined.

There are a few other issues to contend with here when thinking through the ramifications of such a deal.

If the Phillies sign a huge television contract, does that necessarily mean they'll be active or productive in bringing in talent? At least one Phillies beat writer isn't so sure.

Frankly, I don't fully buy that. Teams with huge payrolls have the ability to make more mistakes when it comes to player/personnel evaluation than can low-payroll teams. Money allows teams to compete despite "overpayment" contracts. Nobody thought taking on the Beckett, Crawford and Gonzalez contracts was an efficient move, and it's universally acknowledged that those players combined will not produce at a level equal to the salaries they're earning. The monstrous financial advantage that the Dodgers possess, however, allows them to get better than average production out of those guys despite overpaying for their services, while still fielding a quality team around the rest of the diamond. Excess money allows for depth that teams operating on the razor's edge do not have, and to eat "mistake" contracts without being crippled. They can also spend more on international free agents and posting fees, along with being able to more money into their scouting, analytics, injury  prevention, and player development budgets.

Second, the Phillies have shown a recent tendency to spend up to their capacity so long as they have the revenue to do so. As the annual attendance figures crept up, fueled by increasingly successful teams (at least in the regular season), so did the payroll. Whatever managerial and executive level mistakes the Phillies organization has made over the last half-decade, one would have a hard time making the case that they've been overly frugal. There are no guarantees, but if the Phillies land a large television deal recent history suggests they'll be willing to put a good portion of that money back into the team.

What kind of length of deal are we looking at? If the bidder(s) are worried about the economic landscape of cable television look for a shorter length deal. This may not be a legitimate concern, as the Dodgers' recent pact was for 25 years. If the Phillies ink a similar length deal for, say, the $275 million/yr estimate above, that would put the total contract value at nearly $6.9 billion dollars. Seven billion dollars can buy a lot of cheeseburgers (or 56 Ryan Howard contracts).

Fourth, it will be interesting to see who the high bidder is here. The consensus assumption has been that Comcast, being the dominant cable provider in the greater Philadelphia area, will re-sign the Phillies, though rumors have circulated that Fox Sports wants to acquire the rights to another baseball team in the northeast. If Comcast is the winning bidder, attention should be paid to the drama playing out in Houston-area courtrooms. CSN Houston has filed for bankruptcy, claiming that they're losing money as they have been unable to reach carriage fee agreements with local cable providers. As a result CSN Houston has not paid the Astros their agreed upon carriage fees.

"[Houston Area Sports Network] failed to pay the Astros media rights fees in July, August and September, and we have invested additional money in order to keep the network viable through our season."

The Astros are contesting the bankruptcy claim, arguing that Comcast is merely trying to do an end-run around their shared ownership of CSN Houston in order to acquire the network free and clear of the equity stake that the Astros and Rockets currently hold in the network (the Astros are the majority owner of CSN Houston, with Comcast only owning 22% of the network). In other words, the Astros claim that CSN Houston is falsely claiming bankruptcy in order to gain majority control of the network through bankruptcy court. CSN Houston is saying they can't get carriage agreements with other cable providers in order to recoup their expenses. It's a fascinating battle, and if the Phillies re-sign with Comcast it'll be interesting to see if they gain an equity stake in the network, and how that's structured. If the high bidder isn't Comcast it'll be interesting to see what kind of contract enticed the Phillies to abandon their long-time carrier, and how the winner (Fox?) will use the broadcast rights of the Phillies to potentially anchor their national sports nework.

Finally, keep an eye on the number of "free" games offered on local over-the-air stations like PHL-17. It's very likely those games decrease in number over the life of this upcoming deal.

We're in for an interesting and potentially exciting month or so.

*Edited 10/22 10:30 am; grammatical and continuity errors fixed.

*Edited 10/23 11:50 pm; corrected R2 definition.

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