How the Dodgers TV Rights Could Generate $8.5 Billion (Analysis)

This story first appeared in the Aug. 17 issue of The Hollywood Reporter magazine.

Live sporting events are arguably the most valuable content on TV. They deliver a consistent audience, are largely DVR-proof and can be a decisive reason to maintain a pay-cable subscription. There are just a handful of superpremium franchises, the rights to which rarely hit the market. For these reasons, Dodgers rights should command an extraordinary price. The team’s new owners have three options when its deals with Fox Sports and KCAL expire after the 2013 season:

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Sign a Rights Deal
Most Major League Baseball teams license about 150 regular-season games a year for regional telecast. The Dodgers can extend the license arrangements with Fox and/or KCAL, make deals with other stations in the market, contract with the two Time Warner Cable sports networks that launch Oct. 1 or license a new entity or some combination of these alternatives. Given the competitive marketplace for Dodgers rights, we estimate average annual rights fees between $175 million and $225 million. Assuming a 20-year initial term — the length of a deal recently inked by the Los Angeles Angels of Anaheim — this low-risk arrangement could be worth $4.5 billion.

Start a Network
The Dodgers could start their own regional sports network. In this scenario, they would essentially “sell” the rights to themselves and compete with their jilted suitors. The team would control production, ad and sponsor sales integration, team-related support programming and distribution of its product. But it would also undertake far greater risk, effectively “doubling down” rather than outsourcing the risk. Several teams have successfully launched such networks (the New York Yankees/Brooklyn Nets YES Network, Boston Red Sox/Bruins NESN). However, others have been unsuccessful in such endeavors in the past decade (Minnesota Twins, Kansas City Royals). Because of the wide range of potential distribution outcomes, we estimate average annual revenue from as little as $125 million to as much as $425 million. Over 20 years, if everything were to go very well, this could be worth $8.5 billion, including rights, profits and equity value.

The Hybrid Model
The Angels, San Francisco Giants and Texas Rangers have partnered with Fox and Comcast regional sports network operators to license their rights and obtain a share of equity ownership. The risks of obtaining distribution are effectively mitigated, and a large entertainment company provides the financial backing. The Dodgers could make such a deal with Fox or TW Cable. They also could take on production, sales, financial and/or distribution partner(s) to gain greater control but with lower risk and upside. With predictable distribution, the difference in value turns on the ownership percentage the team might obtain, the rights fee and the network’s profitability. We estimate the annual value to the Dodgers of $225 million to $375 million. A 20-year deal could be worth $7.5 billion in rights, profits and equity.

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Valuation methodology/assumptions
To simplify the analysis, we have made a number of assumptions in order to permit an “apples to apples” comparison of the three scenarios. In reality, the Dodgers will have the ability to carefully customize the alternatives to best suit their organization, ownership style and financial situation, and the video programming marketplace for live sports. Here are the major assumptions our methodology employs

Term
Typically varies from 10-25 years. We assume a 20-year initial term.

Packages
Can allocate games into one or multiple packages and separate languages or medium. We assume a single exclusive package including all language rights.

Games covered
150 regular season and 20 spring training; no playoffs (due to MLB national deals).

Distribution region
Los Angeles, Santa Barbara, Bakersfield, Palm Springs, Honolulu, Las Vegas and Fresno.

MVPD packaging/penetration
Expanded Basic business model maintained with consistent household penetration ratios for regional sports networks. (Note: This is an additional element of future risk.)    

Audience delivery
Consistent with existing levels, growing modestly with regional household formation. Ad loads, pricing, sell-though, growth rates, paid programming: Per live regional sports industry standards.

Rights fees bonuses
Signing and performance bonuses are spread over the term pro rata.

Rights growth rates
4 percent annually. Rights fee portion of compensation lower in hybrid and team scenarios.

Game production equipment complement and staffing levels
High end of major league network norms.

Nongame team-related programming production and distribution
Heavy commitment

New media
BAM continues to control and limit in-market digital exploitation. To the extent that the business evolves in this direction, we assume these revenue will offset traditional sources.

Subscriber wholesale zone pricing, growth rates, roll-out period, network MVPD penetration
DSM estimates

Network staffing, G&A, overhead, operations, non-Dodgers rights and production, league fees
Per DSM analysis

Network valuation metrics
Midterm value multiple method pro rata over license term.

All revenue figures reflect net media revenue and related equity and profit distributions without consideration of taxes on the network or team.

(New York- and Chicago-based Guggenheim Partners, which has an ownership interest in the Dodgers, is co-owner with Pluribus Capital Management of Prometheus Global Media, the parent company of THR.)