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Wednesday, June 17, 2015

Why Sports Net LA Can't Sell A La Carte

With the Dodgers' $8 billion/25 year TV deal in the can but not realized (still), Time Warner taking on water to the tune of a $1 billion loss over the life of the contract, and the proposed merger with Comcast dead, it's been a terrible year for Dodger fans hoping to see their team on TV, and mostly without hope. Or it was, anyway, until Time Warner bid and won on the consolation prize of Charter Communications, immediately expanding the reach of SportsNet LA. For customers on that network, nine innings of Vin Scully is a reality again.

But the money drain continues for that channel; they still have less than half their projected audience, and there's no other sign of them getting to an agreement with the remaining cable and satellite carriers. It's interesting, then, to take a look at one of the more commonly suggested answers to the problem of rising cable costs, a la carte purchase. Despite a great deal of belief in the idea that live sports are the last redoubt of cable TV, the reality is somewhat more complicated; for instance, only 35.7% of those polled said they would buy ESPN if it were offered as a separate channel. Similarly, the economics become highly questionable, to say the least.

Let's dig in by first taking a look at a recent Times story on the ratings boost provided by the Charter acquisition. Charter serves 300,000 subscribers, while Time Warner has "four times" that number, making 1.2 million for that carrier, or 1.5 million in all. An earlier LAT story suggests the total number is closer to two million, but it's unclear whether that includes San Diego County homes that would be in the Padres broadcast area and would not get SportsNet LA; for this discussion, I use the lower figure. If we take Time Warner's subscriber base and reverse the calculation that they're 30% of the market, the overall subscriber base should be 4 million.

As a sanity check, let's look at the dollar figures from the contract to make sure we're not missing something. The first year of the deal required Time Warner to pay the Dodgers $210 million, which means if we were to assume they merely broke even, that would be

$210M/year / $5/subscriber*month / 12 months/year = 3.5M subscribers

(For the purposes of simplicity, I round up the $4.90 per subscriber per month figure to $5.) So we know we're on the right side of these numbers; Time Warner has to make a profit somewhere (that's the extra 500,000 subscribers from our earlier calculation). Now that we know the size of the market, we can look at prior years' ratings to give us an indication of the number of people willing to fork over their hard-earned dough so they can root for the Dodgers.

Ratings vary quite a lot depending on whether a team is winning or not, and the Dodgers are no exception. Their successful 92-70 2013 season resulted in average per-game ratings of 154,000 viewers, where the mediocre 82-79 2011 season yielded an average of 65,000, less than half. While the 94-68 2014 season was even more successful than the prior year, the cable TV impasse sent ratings even lower, to an average of 40,000 viewers per game, the lowest figures in nearly two decades. So let us assume that the Dodgers are capable of averaging around 100,000 viewers per game, even though we know the variance is quite large. Let us also assume that each and every one of those viewers will be willing to pay for a subscription to see the Dodgers. In an a la carte scenario, that means we're going to divide the expected revenue by the number of viewers.

Get ready.

$210M/year / 12 months/year / 100,000 subscribers = $175/month*subscriber

One hundred seventy five dollars per month per subscriber. This monthly figure is more than the price of MLB.TV for the year. Nobody's going to pay that, and hardly anyone could afford it. In short, this isn't happening, now, or ever, unless the Dodgers give up their current salary structure.

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the only thing I would add is that you're not including potential revenue from advertising... I'm not exactly sure what goes into that... is there some sort of split between the rcn and twc on those revenues, or does one party get it all (depending on who does the ad selling)?
I'm sure the entire point of this is to push ad sales off on the network. So far as I know, they get a big fat check that comes out of the overall revenue stream.
Good stuff, Rob. Others have said it and it makes sense: They should just take the loss. It's a sunk cost, like one of Ned Colletti's contracts.

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