A $300M Arbitration Ruling Gives Inside Look at the Cost of Televising Baseball Games

MLB  - Opening Day between the Miami Marlins and the Chicago Cubs - March 29, 2018 -Getty-H 2018
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The long civil war between two of Major League Baseball's clubs — the Baltimore Orioles and the Washington Nationals — continues in court. On Tuesday, setting up the next phase of the fight over what the Mid-Atlantic Sports Network (MASN) owes the Nationals for televising their games, the parties submitted a lightly redacted copy of an arbitration award delivered on April 15. The Orioles are challenging the $300 million decision, which includes a look at what other MLB teams throughout the nation are getting from regional sports networks, although the next steps in the battle are far from clear.

As repeatedly discussed in prior stories, this dispute dates back to 2005 when the Montreal Expos relocated to our nation's capital. The move upset Orioles owner Peter Angelos, already in a small TV market and concerned that the Nationals would devastate his own team's bottom line. The deal worked out inside baseball is that the Orioles would get a supermajority profit interest and control over MASN, which itself would have a perpetual license for Nationals games. After 2011, MASN would be obligated to pay the Nationals "fair market value," which became prelude to the current controversy over what is truly fair.

In 2012, both teams submitting their idea of "fair" to an internal MLB arbitration panel comprised of executives from professional baseball. The Orioles thought the appropriate license fee was $34 million, while the Nationals sought more than $110 million. The panel settled somewhere in the middle at $59.6 million — which led to the Orioles challenging the decision in court with cries of MLB bias. In 2017, a New York appeals court agreed with the Orioles to some extent. The arbitration award was vacated due to impartiality, specifically, because the law firm representing the Nationals was also representing MLB widely in other matters. However, the Orioles couldn't leverage the fact that MLB had advanced $25 million to the Nationals as cause to avoid the matter going back to that same MLB arbitration panel for a new decision.

Whereas the arbitration panel had once ruled that an average value of $59.6 million for Nationals telecast rights between 2012-2016 was appropriate, the arbitration panel has now ruled than an average value of $59.4 million is the right number. In other words, not much of a difference, perhaps buttressing the Orioles' view that the decision was a fait accompli.

How did MLB's decision-makers come to $59.4 million? 

According to the award (read here), the Orioles favored an approach that calculated license fees based on MASN's income statement while assuming a specific operating margin and specific percentages of revenue and expenses attributed to baseball. Stated a simpler way, the Orioles see MASN as its compensation for allowing the Nationals to move into their home territory and wanted to fix the inputs and outputs to ensure MASN's profitability.

The arbitrators don't entirely reject an approach that focuses on apportioning revenue, but then again, find that the old 2005 deal "has already provided the Orioles with substantial compensation, and the Agreement does not require that telecast fees be set at a level each year that guarantees MASN a profit, much less any particular amount or percentage of profit."

The Orioles pointed to the "bottom-up" methodology to value baseball telecasts developed by MLB consultant Bortz Media & Sports Group. The analysis was premised on the assumption that the margin between baseball revenue and baseball expenses (including license fees) would be 20 percent.

The arbitrators respond, "Weighing all of the evidence and taking into account the industry experience of the Committee members, the Committee concludes that it would be inappropriate to assign a significant portion of MASN’s revenues and expenses to anything other than baseball."

In short, MLB executives have decided that for a young regional sports network like MASN, it should be willing to allocate nearly all advertising income to secure valuable game rights.

Nevertheless, the Nationals wanted to go even further. This team favored an analysis that put weight on what other teams throughout professional baseball were getting in their own TV contracts. The team put forward the New York Yankees, the Los Angeles Dodgers/Los Angeles Angels, the Texas Rangers, the Houston Astros and the Philadelphia Phillies as "comparables" in its bid for a $110 million-per-year license. Even if four teams outside the top-10 market — the San Diego Padres, the Cleveland Indians, the Seattle Mariners and the Arizona Diamondbacks — were used as the benchmark, that still produced an average license fee of more than $128 million per year.

The arbitrators didn't buy into everything the Nationals put forward. They weren't satisfied with the way the Nationals were backwards-adjusting numbers to fit the time frame and agreed with the Orioles that the Nationals' sample of teams' TV deals was "selective." 

But pointing to the distinguishing feature how the Orioles and Nationals share a geographic region, the arbitrators identified the New York Yankees/New York Mets, Chicago White Sox/Chicago Cubs and San Francisco Giants/Oakland Athletics as the correct points of comparison, and after adjusting everything to further fit the regional context, they came to some results. 

States the decision, "Because the Committee’s two numerical analyses yielded such similar results, the Committee finds that the most appropriate measure of fair market value is the average of the two — the license fees produced by its bottom-up analysis and its comparable teams analysis, which yield the following license fees..."

Hence, the decision worth $59.4 million a year, or collectively nearly $300 million.

What now?

The Orioles want to pick up where the 2017 appeal left off. Now that the arbitration has concluded, they wish to go before the New York Court of Appeals to once again press the case that MLB has no business adjudicating a dispute wherein the league and its members hold a financial stake in the outcome. On Tuesday, they formally filed a new notice of appeal.

The Nationals believe there is no authority under state constitution to skip intermediate steps and have an appeals court decide factual matters. They don't believe the old 2017 decision is still ripe to be challenged to a higher authority. The team, citing the pressing need of meeting payroll and other financial obligations, wants a lower court judge in New York to confirm the arbitration award. In court papers, the team also discusses how it will need to go back for another round of arbitration for TV licensing money for the subsequent five-year period — 2017-2021 — and needs this older dispute resolved first.

That sets up a showdown between the Orioles and Nationals over whether the lower court proceeding should be paused for the attempted appeal. Both sides — and MLB — are bringing to the table some of the nation's top law firms to litigate a war that will ultimately be worth billions of dollars.

Meanwhile, looming over all of this is the expiration of the Orioles' lease at Camden Yards in 2021. According to the Baltimore Sun, Maryland Gov. Larry Hogan recently wrote MLB Commissioner Rob Manfred to express concern about the MASN dispute and even offered to help broker some resolution. At the moment, though, this ballgame seems far from over.