The Chicken and the Egg of Big-Time Regional Sports Dollars

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The Chicken and the Egg of Big-Time Regional Sports Dollars

Chicago Cubs

kid-watching-tvThe Houston Astros are set to make $99 million this year, according to Forbes, a fact about which I am equal parts shocked and dubious. The 2013 Astros are a testament to the power (and, nowadays, value) of tanking, and they could finish as the worst team in baseball in a decade. How does such an abomination make as much money as the last six World Series winners combined (again, according to Forbes)? No payroll, and big-time TV dollars.

The article is an interesting read for those into the business of baseball, and how the Astros’ deep rebuild could actually help them financially. For their part, the Astros have said Forbes’ numbers are way off, so I’m not going to steer us too far in that part of the conversation.

Instead, the portion that grabbed my eye is the discussion of the Astros’ ownership interest in regional sports provider CSN Houston. The Astros’ current TV deal with CSN Houston pays the organization $80 million per year to broadcast Astros games (the Cubs, in contrast, are believed to be receiving around $50 million total for their games right now), which is a healthy sum for a terrible team. The deal comes with a huge HOWEVA: although the Astros are raking in big bucks from their TV deal with CSN Houston, they own a substantial portion of CSN Houston … which is, itself, is losing millions of dollars ($63 million last year, according to Forbes). Why? Well, cable providers don’t want to pay the massive carriage fee for CSN Houston because there aren’t a mess of Astros fans out there saying, “Come on, cable provider, get CSN Houston on the cable tier that everyone gets! I don’t care if it means I have to pay $3 more per month, just do it!!!” Just 40% of Houston homes carry CSN Houston, according to the Houston Chronicle.

And why aren’t Astros fans out there clamoring for more coverage? Well, obviously: the team is terrible.

Thus we reach the chicken and the egg of these big-time regional sports deals: the big money from the deal helps your team win, but you’ve got to do a little winning before the big-money deal looks attractive to the regional sports network. (Or, in the particular case of the Astros, before the network you own stops bleeding the very money that it’s trying to pay your organization to cover the big money deal you’ve already signed.)

Is there an issue here for the Cubs, as they look to negotiate the block of games that become available for bidding after next season?

Actually, the Cubs’ TV negotiation efforts come with a myriad of special issues – only half of the games are up after 2014, the organization has built a national following on WGN, the Cubs may have restrictions on whom they can offer their rights to, on and on – that will be addressed in a long-promised separate piece.

For now, I find the chicken and the egg problem of TV dollars to be an interesting issue for the Cubs.

The Cubs would like to have available more revenue so that they can put a better team on the field (theoretically augmenting a young, internally-developed core with pricey (but useful) free agents). The biggest source of new revenue these days is a new, big-money TV deal. But if a TV deal’s value can be held down by poor past ratings, and a crummy team drives poor ratings … what comes first? The revenue from a TV deal, or a good team to drive the TV deal?

The problem for the Cubs is that the TV negotiations are likely to take place after this season, even though the rights don’t come up until after 2014 (with other teams, these deals seem to be inked at least a year out). That means the Cubs will be negotiating from the standpoint of having fielded several consecutive bad teams, and from the standpoint of reportedly having declining TV ratings.

Because a little more than half of the Cubs’ games aren’t available for bidding until after the 2019 season, perhaps the Cubs already have their answer: they’ll seek to perform well over the 2014 to 2018 stretch, thus improving the value of the TV deal post-2019. That, of course, assumes the TV bubble doesn’t burst in the interim, but it wouldn’t be a terrible play, given the state of the rebuild (and the timing of the Wrigley renovation). We’ve often heard President of Baseball Operations Theo Epstein remark that the trajectory on the baseball side and on the business side are lining up, and it sure looks that way when you consider the upcoming TV stuff through this lens.

What do the Cubs do with the WGN portion of the games in the meantime? Well, they could just re-up with WGN for five years so that they can go to market with the full slate of games after 2019. They might not get big dollars for those games, however, in part because the team has been so bad over the past few seasons. The Cubs also likely aren’t going to see huge dollars from the Wrigley Field renovation for another couple years, as well, so big market payrolls might not be in the offing for a little while, even after the Cubs’ next TV deal comes online. In short, it could be more short-term pain in exchange for long-term gain on a number of fronts. I know everyone hates waiting, but a Cubs organization that’s been focused on building the farm system for years and then has a huge money TV deal/network in place by 2019 – not to mention an already completely renovated Wrigley Field – is probably a powerhouse of the kind we’ve always wanted to see the Cubs build. It could be sustainable, and it could be a very big spender.

I suppose I’ve digressed a little bit, but it’s difficult to narrow your focus, given how intertwined all of these issues are.

Ultimately, the Chicago market and the Chicago Cubs are probably “different” than Houston and the Astros, but the Forbes story at least brings up the issue of performance versus TV contract value. For the Astros, they’re willing to stomach the CSN Houston losses (which, by the way, the Houston Rockets – who also own a big chunk of the network – are subsidizing) while their baseball operations department gets the house in order. Slashing payroll to under $30 million helps on both fronts, even if you risk losing fans permanently at that level. Of course, the Astros already have their big money TV deal in place, and the dollars at CSN Houston will necessarily turn around when the team starts performing a little better. In the Cubs’ case, they’ve got to get their big money TV deal first, and they might have to do it while negotiating from a position of relative weakness – i.e., the terrible performances of the last few years.

At bottom, one thing is relatively clear: fielding an awesome team that consistently wins year-in and year-out is probably good for the bottom line.

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Author: Brett Taylor

Brett Taylor is the Editor and Lead Cubs Writer at Bleacher Nation, and you can find him on Twitter at @BleacherNation and @Brett_A_Taylor.