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TWC's Dodgers Deal Aims to Deliver Cost Certainty

MLB Has Yet to See Unconventional 25-Year Contract 2/02/2013 3:09 AM Eastern

Where the Los Angeles Dodgers are concerned, Time Warner Cable’s game plan centers on securing long-term cost certainty.

The Dodgers, as expected, on Jan. 28 announced their own regional sports network, SportNet LA, to debut with the start of the 2014 season, with Time Warner Cable in the dugout as the service’s exclusive affiliate and advertising sales agent. Although terms of the deal were not disclosed, published reports estimate TWC will spend between $7 billion and $8 billion -- a record for a local/regional sports pact -- over 25 years to control distribution, if not the rights, of the channel. It is guaranteeing the monthly subscriber license fee, expected to be north of $4, even if other distributors don’t reach a carriage pact

TWC chairman and CEO Glenn Britt, on a conference call with analysts on Jan 31 to discuss its fourth-quarter results, said the MSO’s sports strategy in Los Angeles – last year it agreed to spend an estimated $3 billion to carry Los Angeles Lakers National Basketball Association games for 20 years and formed another RSN, Time Warner Cable SportsNet  – has been to lock down its costs over a long period of time.

“We do not pretend that these deals are inexpensive or cheap,” Britt said on the call. “Our sense is if we are going to carry these games, they are going to be expensive. We think what we’ve done with these deals is to minimize and stabilize the costs over a long time period. But we’re not trying to pretend that the first year is really, really cheap or anything.”

He added that the rights to both the Lakers and Dodger games were essentially up for auction -- Fox’s FS West and Prime Ticket, which will air Dodgers during the 2013, were the incumbents -- guaranteeing that a high price would be paid.

Time Warner Cable CFO Irene Esteves on the call noted “our objective here, as it was with the Lakers, is to ensure that access to programming at a certain cost. We think over the long term this will be a lower cost alternative than if we had not guaranteed those rights for the 25-year period.”

Benjamin Swinburne, analyst at Morgan Stanley Research, is also taking the long view of TWC bleeding Dodger blue – if not green.

“The relevant metric for the new Dodgers sports network's impact on its own economics is not outright profitability. Rather, the RSN makes economic sense so long as the (risk-adjusted) cost of operating the network is less than TWC would have had to pay another RSN for Dodgers content over the next 25 yrs,” Swinburne wrote. “We believe TWC should be able to achieve this goal, particularly given the experience of the recent launch of two LA Lakers RSNs.” 

That’s if the Dodgers deal is approved by Major League Baseball, which had not seen the contract paperwork as of Jan. 31. MLB’s rules specify that teams must contribute 34% of local TV revenue to aid small-market clubs. Where a bankruptcy court settlement between the league and Dodgers assessed fair-market value of the club's local TV rights at $84 million per year, plus annual escalators, the agreement averages $280 million annually, meaning it must be determined how/if the balance will be divided

Should it pass MLB muster, key questions remain about how TWC makes this deal work financially -- sources say the contract assumes Dish will not be part of the SportsNet LA’s affiliate roster-- and whether it could become a model for other clubs to form their own networks by enlisting affiliate, advertising and technical support of an MSO, or another distributor.

“I’m not sure that this will be the template per se, but other owners will continue to look to distributors, investors and programmers in various capacities. There are many flavors to get deals done,” said Lee Berke, president and CEO of sports consultancy LHB Ventures.

However, the opportunities may be few and far between in the short and near term. “Fox has done a good job of locking up long-term deals with teams,” said one RSN source.

The size and scope of TWC’s Dodgers gambit could draw the attention of regulators as escalating sports rights have again become a hot button issue and with the launch of SportsNet LA there will be seven RSNs – the Dodgers service, two Lakers channels, the Fox pair and the Pac-12 Network national feed and its USC/UCLA sub-regional -- that could translate into as much as $15 per month in RSN license fees.

As such, TWC may have gained cost control over three services, but still has to pay Fox in LA, and a number of other markets home to the programmer's RSNs, not to mention other sports services in some others areas within its footprint.

In the meantime, the next RSN battleground will likely be revisited early this spring -- some 90 miles south of LA. A spokesman for FS San Diego said the RSN home to the Padres hasn’t had any meaningful carriage conversations with Time Warner Cable since last season. TWC was outbid in 2011 by Fox for the rights to San Diego Padres games that were previously held by Cox Communications, which has essentially exited the RSN business.  After sitting out FS San Diego’s 2012 rookie season, TWC is the only major distributor yet to reach a carriage pact with Fox.

Time Warner Cable’s LA sports moves appear to flow against another initiative by the company – to jettison what it believes are high-cost networks that its customers don’t watch. TWC dropped its first channel on Dec. 31, arts and entertainment network Ovation.

Britt said on the call that TWC will continue to scrutinize networks as they come up for carriage renewal, but acknowledged that it probably won’t have a big impact on costs or customers’ bills.

“The actions we’re taking are not going to dramatically change the trajectory of programming costs,” Britt said. “I do hope that we can over time improve the perceived price/value relationship though. Clearly consumers,  particularly people who are under economic duress, are looking at these big packages  and saying  ‘It costs more than I can afford’ No. 1, and No. 2, ‘There are too many networks that I never watch and that I don’t care about.’” That’s what we are trying to address. Obviously sports and other popular programming keep getting more and more expensive and that’s where most of the money is. But these networks that hang on and think they have a birthright to carriage even though hardly anybody watches them, those are the ones we are going to be taking a look at.”

Ovation executive vice president of distribution Brad Samuels said TWC’s Dodgers play “continues to feed into an area of the business that others are looking at: the rising costs of sports rights and license fees. The dollars are so big that our license fee seems almost insignificant by comparison. It’s hypocritical.” SNL Kagan estimates Ovation’s monthly subscriber fee a 7 cents.

Samuels said that since the network launched BringOvationback.com, more than 42,000 fans, viewers and various constituents of the arts communities have made their feelings known to TWC. Samuels says he doesn’t know if the MSO has been “surprised by that level of support and enthusiasm.” But Ovation has yet to gain any traction in getting a meeting aimed at reinstating the service, he said.

He said Ovation is gratified that "other distributors recognize the network’s quality of programming and its value. TWC] is an isolated situation."

 

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