Pirates missing out on televised sports' 'golden age'
By Bob Cohn
Published: Sunday, April 15, 2012
Major League Baseball economics used to be about putting fannies in the seats. But for a growing number of teams, the important number is eyeballs on the screens.
Local and regional TV rights fees are skyrocketing in college and professional sports, especially baseball, providing huge revenues. Media consultant Chris Bevilacqua calls this "a golden age" for regional sports networks and the teams whose games they carry.
"I've been involved in this business for a long time," said the CEO of Bevilacqua Media Company, which advises teams, leagues and conferences in negotiating their media-rights deals. "There's never been a period like this."
The changing marketplace benefits ballclubs whose contracts recently have expired or soon will. But the Pirates, who extended their contract with Root Sports (which is owned by DirectTV) before the 2010 season, will have to wait to cash in like some other clubs.
The team is in the third year of a 10-year deal and will receive about $18 million this year, according to industry sources. The fee increases annually, but in this era of expanding revenues, the Pirates apparently missed the boat, if not the gravy train.
"The Pirates' deal is likely undervalued," Bevilacqua said.
Pirates rights fees should rise substantially when they get a new TV deal, said Bevilacqua, especially if cable challengers like Comcast and Fox compete with Root for the rights.
The Pirates' deal was completed before the Texas Rangers finalized their massive cable package in September 2010 in what proved to be the tipping point for the industry. It changed the economics of local TV packages and paved the way for large-market clubs to financially compete with the likes of the Yankees and Red Sox, who for years have reaped huge profits from their own cable networks. For smaller-market clubs, any added revenue streams still help considerably.
"It's always difficult to predict the future, but certainly you're seeing an alignment of the stars in the media and sports worlds that are enabling creative and clever franchises to fully exploit the value of their media rights," said former Rangers CEO Chuck Greenberg, an Upper St. Clair graduate and sports attorney with Pittsburgh-based Reed Smith law firm who with Bevilacqua helped put together the Texas deal.
The Rangers' $3 billion, 20-year deal officially begins in 2015. But early payments helped fund the $111.7 million investment in ace Japanese pitcher Yu Darvish. The Angels' 20-year, $3 billion cable deal helped finance an offseason shopping spree for superstar first baseman Albert Pujols and All-Star pitcher C.J. Wilson.
The Pirates' big move was extending the contract of center fielder Andrew McCutchen for six years at $51.5 million. For an organization that adheres to fiscal restraint, this is a major investment. When the Washington Nationals needed to lock up their own so-called face of the franchise, third baseman Ryan Zimmerman, the club shelled out nearly twice that.
Coincidence or not, the Nationals' local TV revenues figure to increase dramatically next year after their cable deal expires.
"What's been going on is that teams in primarily large markets are having their television contracts coming up (for renegotiation) and have been using that to extract large amounts of money," Chicago sports economist Marc Ganis said.
The Astros are expecting greater revenues from the new cable network they launched along with the Houston Rockets and Comcast. The two teams will control 77.5 percent of the network. Other clubs, including the Phillies, Mariners, Tigers and Diamondbacks, expect their own windfalls over the next few years.
Even the San Diego Padres, who play in a TV market smaller than the Pirates', are capitalizing by launching a regional sports network with the NHL's Anaheim Ducks. The 20-year deal with Fox is reportedly worth an average of $50 million a year along with a signing bonus worth as much as $200 million. Last season the club made a reported $15 million from local TV.
Then there are the Dodgers, recently sold for a record $2.15 billion. A big reason for the jaw-dropping price is that the club is expected to end up with the granddaddy of all cable deals when its current contract expires after the 2013 season. The figure rattling around the business is $4 billion over 20 years.
Why the explosion• Bevilacqua said "a confluence of events" helped drive up rights fees across the board in various sports. Technological advances have turned PCs, tablets, smart phones and game consoles into major platforms for streaming video. Consumers gravitated there and devalued other forms of entertainment like standard TV.
However, live televised local sports which viewers are less inclined to record on DVR not only remained mostly unscathed, Bevilacqua said, they also became more valuable.
"If you want to watch your local baseball team, all you've pretty much got is your (regional sports network)," he said. "There are a lot of people who buy cable TV because it's pretty much the only place to get your sports."
The Pirates last season ranked ninth in local TV ratings among MLB's 30 teams. But the club is hampered by its relatively small viewing audience, which to a large extent dictated the terms of its deal with Root. Pittsburgh is the 23rd-ranked market, according to Nielsen Holdings NV.
"I am very pleased with our partners at Root," Pirates owner Bob Nutting said. "I hate to say anything's a fair deal or a good deal. I think we have a very good deal that puts us in a solid position moving forward."
Not only is cable money providing an increasingly large portion of clubs' income, it also is adding to revenue-sharing, to which teams contribute roughly 31 percent of their local funds. Small-market teams like the Pirates will realize added benefit, but the gap between the haves and have-nots is likely to widen.
"I think there always will be a gap between the economic realities of New York or L.A. and Pittsburgh," Nutting said. "That's part of the game. We'll never use that as an excuse. We need to be efficient and smart when we allocate our resources. We walk in here every day believing we can create a winning team within this economic system, and we're going to. We're going to succeed."
Staff writer Rob Biertempfel contributed to this report.
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