Another annoying twinge of envy directed toward the St. Louis Cardinals.

Isn’t one of the benefits of being 23.5 games out of first place supposed to be semi-detachment? If Reds fans have sworn off the 2015 pennant race and pledged our focus to the development of promising young pitching arms and the glory that is Joey Votto, shouldn’t we be spared daily, grudging resentment?

But those old irritations made a cameo appearance at the end of July when we learned of the Cardinals’ new local television rights agreement with Fox Sports Midwest. For a billion dollars. Billion with a “b.”

Envy, then anxiety.

There’s no organization in the world, maybe other than the Iranian government, that I’d less rather see with a hefty infusion of cash. And even that’s a close call. Both groups are bent on malicious destruction of things held dear. But come to think of it, only one of them has ever employed Chris Carpenter and Tony LaRussa.

The Cardinals deal covers the 2018-2032 seasons and is valued at the aforementioned $1 billion plus an undisclosed signing bonus. The agreement, which was applauded as great for the eighth smallest market, is projected to more than double the club’s annual broadcasting revenue. Wonderful.

Envy, anxiety, then questions.

The Reds current broadcast agreement with Fox Sports Ohio runs through the 2016 season and pays our team $30 million per year. New negotiations and then revenues are due for Cincinnati. But how will the Reds agreement stack up against that blankety-blank deal in St. Louis?

Well, it depends.

Regional Sports Networks

The answer starts with understanding regional sports networks (RSN). Fox Sports Ohio is one of those. RSNs produce and buy shows to run on a television channel. Their essential programming is live sporting events. Other shows, like poker tournaments and fishing competitions, fill in.

FSO pays the Reds for the exclusive right to the visual broadcast of Cincinnati Reds games in this region (WLW pays for radio broadcast rights). Fox Sports Ohio, like other RSNs, makes money two ways. The most straightforward is by selling advertising on their shows. The more people who watch a given program — and more to the point, who might watch that program’s commercials — the more FSO can charge for its advertising time. Advertising revenue accounts for 10-20% of regional sports networks (RSN) income.

It’s easy to see why live sporting events are the lifeblood of television. It’s the one type of programming where the delay inherent in recorded viewing makes it an inadequate substitute. Loyal and passionate sports fans want to watch their teams or favorite players in real time. Because sports fans are captive, real-time participants, they may actually watch commercials during a live event. Compare that to a recorded sit-com or drama where viewers fast-forward or don’t record advertising. As a result of this niche for live sports, sponsor spending for ads on those shows has grown rapidly.

But the majority of revenue earned by RSNs comes in the form of payments by content carriers — cable television companies like Comcast and satellite companies like Dish and DirecTV.

Content carriers select and pay for a group of networks and offer them, generally as a whole, to consumers. For example, content carriers believe many of their viewers want to watch news shows, so they buy programming from CNN, MSNBC and Fox News. Content carriers believe many of their viewers want to watch shows about lifestyles, so they buy programming from the Food Network and the Travel Channel. Kids content means Disney and Nickelodeon.

And content carriers believe many of their viewers want to watch live sporting events, so they buy programming from ESPN, the Golf Channel and in this region, Fox Sports Ohio. In theory, Dish or other carriers could refuse ESPN’s or FSO’s asking price. (This has happened with baseball RSNs in Los Angeles and Houston, leading the networks to suffer huge losses. They have agreed to pay the ball clubs regardless. It’s also why, every once in a while, you see a network warning that a carrier is about to discontinue their programming.)

Every network, from Animal Planet to VH1, charges the content carrier a certain amount per subscription. The content carrier adds up all those subscription fees and that produces your monthly cable or satellite bill.

The system works because networks are paid by household, not eyeballs that actually watch their show. Every CATV subscriber pays for the Food Network whether or not they watch Chopped. Every Dish Network subscriber pays for the History Channel even if they’ve never seen an episode of American Pickers. And every last subscriber to our region’s content carriers pays for Jim Day, Chris Welsh and Co., whether or not they watch Reds games.

That’s how Fox Sports Ohio can pay the Reds $30 million per year to battle the St. Louis Cardinals.

Recent Rights Agreements

Regional baseball networks do well because the sport of baseball tends to be watched locally and because the 162 regular season games offer enough live programming to anchor their networks. That’s why RSNs are major league fits with major league baseball. That match has led to many lucrative contracts between MLB teams and regional sports networks.

How does the Cardinals deal stack up? At first blush, it sounds gigantic because of the word billion at the end of it. But in the context of industry practice, the payment to broadcast the Cardinal Way is nothing special. Here are the broad outlines of a few other recent agreements:

  • Texas Rangers (2010) — 20 years, $3.1 billion
  • Los Angeles Angels (2011) — 20 years, $ 3 billion
  • San Diego Padres (2012) — 20 years, $1.2 billion
  • Los Angeles Dodgers (2013) — 25 years, $8.35 billion
  • Seattle Mariners (2013) — 18 years, $2.5 billion
  • Philadelphia Phillies (2014) — 25 years, $5 billion
  • Arizona Diamondbacks (2015) — 20 years, $1.5 billion
  • St. Louis Cardinals (2015) — 15 years, $1 billion

Not only do teams receive the above cash payments, they also typically receive an ownership (equity) share in the RSN. An equity share means the baseball team receives a cut of the television network’s profits. Fox Sports West gave the Angels 25% equity. The equity share for the Rangers doubled the value of their agreement. The Cardinals received a 30% equity share.

The reason major league teams are so eager to negotiate for equity shares is because that income is not subject to MLB revenue sharing (34%). Revenue from owning a media company is considered media revenue not baseball revenue. The downside to equity shares is if the media company loses money, like in Houston and LA, the equity payment is reduced or zero.

Television Sets and Ratings

The size of a broadcasting rights deal depends on projected ratings and the number of television sets in the broadcast area.

Fortunately, the Reds have a history of strong ratings. Regular season Reds games are usually the #1 rated prime time show for content carriers in the region, drawing even more viewers than playoff games in the NBA and NHL. When the Reds were winning, their ratings (percent of households watching) were among the best in the league, along with St. Louis, Pittsburgh, Detroit and now Kansas City.

But ratings are highly sensitive to win-loss records. Studies show that over the past five years, eight more wins per season have translated into a one-point increase in ratings. That has certainly been the experience with the Reds. Notice on this chart of the Reds ratings dating back to 2007 how they peaked when the Reds were winning and declined the past three seasons as their wins were declining. But even at 5%, the Reds are in the upper half of MLB markets in terms of percentage of households.


As you can see, ratings have fallen almost by more than a third since the peak of 2012.

While the Reds do well on a percentage basis, Cincinnati is a relatively small market. But the Reds’ media footprint extends beyond Cincinnati. Fox Sports Ohio broadcasts to over 5 million households in Ohio, Kentucky, Indiana, western Pennsylvania, western New York and West Virginia. Fox Sports South also airs Reds games in Tennessee and western North Carolina. Fox Sports Indiana, which reaches 1.2 million cable and satellite homes, carries most Reds games.

Dayton, Louisville, Lexington, Indianapolis, Columbus, Huntington and Charleston boost the population to more than 7.5 million people living within a 100-mile radius of GABP. That compares to 7 million for Atlanta, 6 million for Houston and 4 million for St. Louis within that same radius. The Reds average number of households in 2012 was 78,000, which put them in the top half of viewership. But, as this chart shows, that number has tracked the Reds win-loss record and declined in recent years.


By the end of 2014, the Reds average number of households watching games had fallen to almost half of the Cardinals number.

Television’s Uncertain Future

Internet streaming is a threat to traditional cable and satellite arrangements. Consumers are learning that they don’t need to subscribe to massive bundles of television channels to watch what they want. Netflix and Hulu provide huge content for less than $10 per month. HBO, Showtime and ESPN have begun streaming their programming on the internet.

Cable and satellite bundling as we know it now won’t last forever. Once enough consumers practice or threaten to “cut their cords” content carriers will be forced to disaggregate their bundles, at least somewhat. When that happens, networks like FSO and the Food Channel will be offered a la carte and only people who actually watch their shows will pay for the channel.

The looming threat to subscription fees posed by internet streaming has led some to speculate that major league baseball is facing a market bubble when it comes to big regional sports network contracts. Soon, RSNs will realize that the structure of the television market 10-15 years from now is anyone’s guess. They won’t want to get locked into long term pricy contracts with baseball teams. Under this theory, the Reds may be negotiating at a bad time.

But there are compelling reasons to believe the bursting bubble theory is overblown, at least anytime in the near future.

So far, there is little evidence that the fear or uncertainty is affecting negotiations. The ink is barely dry on the Cardinals deal and they got paid in full (although the 15-year duration is short by comparison to recent industry standards and may be a tell that content providers are hedging on the future). Likewise, there was no sign of a bubble in the Arizona Diamondbacks’ 20-year agreement signed earlier this year.

While cord cutting will surely continue, a huge number of people — likely a critical mass for content providers — just won’t ever take those steps. If television loses 20% of its market to internet streaming, that’s a hit, but not a fatal loss of business.

And the bubble theory doesn’t account for a silver bullet MLB’s regional sports networks have at the ready.

In-Market Streaming

MLB makes live baseball available on several platforms beside television. MLB.TV Premium for computers and At Bat for mobile devices had a combined 3.5 million paid subscribers in 2014. That is by far the largest number of streaming customers for any professional sports league.

But a major drawback to those subscriptions is the local blackout policy. Fans can’t watch the games of their home town teams. If you live in Cincinnati, you can’t watch the Reds on MLB.TV or At Bat. The same is true for the 29 other baseball teams. That’s because of the legal rights owned by RSNs.

Regional network contracts — the exclusive right to visual broadcasts — stand in the way of home town fans watching their teams through streaming feeds. Absent sketchy individual tech solutions like virtual private networks or intervention by Federal courts, fans have no way to beat the local blackout. It’s unsurprising that blackout rules are intensely unpopular policies with fans.

Because of the public relations aspect (and because there’s a buck to be made) Rob Manfred, the new commissioner of baseball, has expressed an interest in providing a solution to the blackout problem. But any solution starts with MLB negotiating rights deals with RSNs. In-market streaming is coming and it will probably be tied to content carrier subscriptions. In other words, fans will be able to watch Reds games online, but only if they buy cable or satellite television. It’s possible that RSNs may cut out the content providers and make stand-alone deals. But either way, the RSN’s financial needs, and therefore those of the major league teams, get addressed. In-market streaming could easily make broadcast rights even more valuable than they are now.

When MLB does get into in-market streaming (maybe as soon as the 2016 season), they will be amazing at it. MLB’s Advanced Media (BAM), which began in 2000 as Bud Selig’s rag-tag in-house IT department tasked with creating respectable, uniform websites for the 30 teams, has become the most talented and reliable name in streaming video. BAM is BIG.

For organizations that want to stream a popular non-baseball event, BAM is the go-to option. BAM has won contracts to stream big ticket events like the World Cup and March Madness. It has recently been approved as a stand-alone media company reportedly valued at $8 billion. Remember, the 30 major league baseball teams own BAM and share the profits equally.

BAM recently signed the PGA and NHL as customers. As more sports organizations turn to BAM for its services, it doesn’t take much squinting to see the contours of a big, lucrative streaming sports bundle out there – one that won’t break a sweat compensating regional baseball networks like FSO for lost television revenues.

The Next Reds Deal

When the Reds do sign a new broadcasting deal, judge it not only by the annual payment figure, but also the duration, equity share and signing bonus.

RSN deals represent 25 percent of revenue for the average major league team. Because the Reds TV contract is old, their percentage isn’t that high. According to Forbes, the Reds annual revenue is $227 million. The $30 million the Reds receive from FSO is less than 15 percent.

While the Reds current contract doesn’t expire until the end of 2016, many RSN agreements get completed ahead of time. The Cardinals present-day contract doesn’t expire until the end of 2017. So it’s not out of the question that the Reds and FSO (if they win the bidding, more on that in a second) could announce a new deal any day.

A number of factors will influence the size of the Reds next contract. RSN profits depend on ratings. Ratings depend on wins among other things. Wins depend on players. That’s why this turns out to be the wrong time to trade away the Reds best and most popular players. Contracts like Joey Votto’s can partly pay for themselves through higher television ratings.

A scorched-earth rebuilding strategy may have a long-term, if uncertain, appeal. But such a course of action would have severe financial consequences that would reverberate back to limiting future payroll. Offering an RSN a leap-of-faith future where the team becomes competitive only in several years is a terrible negotiating position. While it’s fun to open up a window and shout Blow it Up!, it’s worth remembering that Howard Beale was killed because he had low ratings.

A second key variable is whether more than one RSN will bid for the Reds rights. Right now, FSO seems like the only viable option. But Time Warner is developing a small sports network that carries Cincinnati high school football, some college sports and Columbus Crew soccer games. A 162-game major league baseball schedule would fit right in. So maybe Time Warner makes a run at the Reds. Don’t forget, Time Warner Inc. is the same company that made the paradigm-shattering deal with the Dodgers. If TWC can put together a credible offer, it may trigger a Cincinnati-sized bidding war with Fox Sports Ohio, to the Reds’ benefit.

Based on number of households and ratings, the Reds next deal should fall somewhere between the one made by the Arizona Diamondbacks (2015) and San Diego Padres (2012).

The D-Backs new deal pays them $80 million/year from Fox Sports Arizona for 20 years, up from the current $30 million. The deal includes an equity stake as well. The Reds will get less than that.

San Diego is a larger city than Cincinnati, but with much lower ratings and therefore fewer households watching baseball. Under the terms of their 2012 deal, the Padres received $50 million per year, a $200 million signing bonus and a 20 percent equity stake in Fox Sports San Diego. The Reds should do better than that, especially considering a bit of inflation since 2012.

So expect something less than Arizona and more than San Diego.

That would put the Reds in the neighborhood of $70-75 million (which is consistent with other published estimates) per year on average. Look for the Reds to receive a sizable chunk of equity in the RSN, maybe 20-25 percent. An 8 or 9-figure signing bonus may be included. Higher annual payments are typically phased in over time. For example, for the Reds the new deal may start at $55 million in 2017 and grow to $85 million by the end of the contract.

The Reds agreement won’t pay as much per season as St. Louis’ new contract, but it will start a year before the latter deal kicks in. And it may be for a longer duration than 15 years. The Reds deal won’t quite match the Cardinals. But it won’t be far behind, either.

You can relax and go back to pondering the upside of Raisel Iglesias, Michael Lorenzen and Anthony DeScalfani.