Article: The Bubble in Pro Sports

[Willihammer]

http://deadspin.com/5932500/the-value-of-the-san-diego-padres-grew-300-million-in-three-years-because-baseball-owners-are-stupid

 

Any economics minds have thoughts on the bubbles being created in pro sports by these gigantic TV deals? Is

another taxpayer funded bailout looming?

[kab21]

I really don't understand why the TV contracts are exploding. I didn't think a lot of people watched baseball and I would have guessed that it would go down as multimedia keeps expanding.

[drivlikejehu]

Yeah, no one watches baseball, that's why it has over $6 billion in revenue per year.

[Willihammer]

That's a circular argument though. Baseball has huge revenue because of the t.v. contracts. The Dodgers just inked a 25 years 6+ billion deal. 25 years! Do you think 10 or 15 years from now, people who don't give a damn about the Dodgers are going to keep paying $50 a year (or whatever it works out to) for Fox Sports LA just so they can get the cable package that allows them to watch whatever post-reality postmodern ultra high def 3d Real Housewives that's on a different channel? I seriously doubt it.

[drivlikejehu]

The total numbers are misleading because of the contract length; due to the time value of money, the actual present value is far below the stated dollar figure.

[kab21]

Yeah, no one watches baseball, that's why it has over $6 billion in revenue per year.

 

this is a pretty poor argument since it includes all kinds of stuff from ticket sales, concessions, apparel and everything else in addition to TV revenue. I guess I just don't think of many of my friends and family back home making it a priority to make it priority to watch a baseball game on TV after work or staying inside on weekend. And imo it falls far behind the other multimedia choices that people have.

[Willihammer]

Some napkin math because I'm curious. The Dodgers and angels tied for the worse rating in 2011 at about 1.2. Rating is percentage of households tuning in. They jumped 70% in 2012 however, so let's say they stick at 2.5% for the next ten years. 3250000 households in LA, so that's roughly 812500 households tuning in for a game for the next ten years.

 

The Fox deal with the Dodgers is between 6 and 7 bil (no exact figure yet). Say 6.5 bil. Over 25 years, at an average inflation rate of say 3%, that works out to about 6 billion even in today's money, that's guaranteed.

 

I don't know the specifics of the fee schedule, but if its close to linear, that would work out to about 240m / year in fees charged. TimeWarner is the big fish in LA I think, with 1.7m subscribers. Asssume they are the one to ink a deal with Fox. Assume further, that Time Warners subscription go up to an even 2m as an average over the next 10 years. That's $2.4 billion to be charged to 20 million yearly subscriptions for Fox Sports. Works out to a $120 fee per year per subscription over the next 10 years just for that channel.

 

As stated above, only about 812,500 watch a game. Barely a third.

 

Time Warner (assuming the reach an agreement with Fox) would quickly have to adjust their packages if they are going to keep those 1.2 million subscribers who aren't tuning in to watch the Dodgers. They'd have to make Fox Sports an opt-in, or break it down into a partial package type deal. Whatever Time Warner does, they're going to have to raise the rates on the people who are subscribing for Fox Sports.

 

Just as a comparison, its like $160 for the full mlb.tv package right now. Although I hardly think MLB will let MLBAM ever charge less than what the networks are charging to cable providers, so that price will go up too.

 

The net result, I think, is that people just tune out, ratings fall, and Fox can't make its payments. Especially if the Dodgers aren't perennial WS contenders.

[drivlikejehu]

That's not how you discount cash flows. For one thing, 3% per year is way too low (the discount isn't really about inflation per se).

 

I assume the payout increases over time. But for a simple example, let's say the Dodgers get $250 million per year, every year for 25 years. The present value would be around $4.35 billion.

 

Using industry-standard discount rates, and assuming the payments are at least a bit graduated, the present value of the deal is $3 billion or so, maybe as little as $2.5 billion if there is some back-loading.

 

There is a lot more to the economics of the deal itself, but the general trend is that cable companies, premium channels, and other media entities are worried about their ability to hold onto a strong subscriber base. Sports rights are very valuable because they are exclusive, perpetual, largely unaffected by pirating, and require no real promotion on the part of the media entity. The math is way more complicated than dividing dollar amounts by households.

[kab21]

The problem is that I don't think they are adding new viewers or they are going to be adding new viewers in the future. where are they getting the extra revenue from to pay these ridiculous contracts? Are these deals setting up future bankruptcies in the future? Who was competing with them for these big contracts?