MLB Faces Antitrust Trial Over Telecasts: Are Small-Market Clubs Doomed By Cord-Cutters?

Game 1 of the Major League Baseball World Series - H 2015
Orlin Wagner/AP Photo

On January 18, roughly two months and 15 miles away from the time and place where Wade Davis struck out Wilmer Flores to give the Kansas City Royals a World Series championship, a trial will commence. At a United States federal courthouse in downtown Manhattan, Major League Baseball will do its best to lay wood on the equivalent of a spitball, a pitch with the potential of disrupting both the game of baseball and the television landscape. Lawyers for the league could harken back to that moment when the Royals beat the hometown New York Mets. After all, the event signified that it was indeed possible in professional baseball for a small-market team to prevail over a large-market one. Isn't that the essence of a healthy competition?

The question comes up because MLB, its teams, DirecTV and Comcast are on deck to defend the charge that they are colluding in their TV deals and harming competition. The league is teasing the stakes in court documents. As one of its lawyers wrote to the judge this past week, if the rulebook on television is overhauled by judicial fiat, it "would reduce the ability of certain small-market teams to invest in players and other resources, hampering their ability to compete on the field — and could, over time, prevent certain clubs from remaining viable."

The Kansas City Royals — from champions to out of business?

As things currently stand, the 30 teams that comprise professional baseball sell their telecast rights to regional sports networks (RSNs). That's about all those teams are allowed to do. For digital and satellite packages, the league is the handler, aggregating game telecasts and sharing the revenue with the ballclubs. Thus, a small-market team like the Royals enjoys the benefit of a financially vibrant league. But alas, there's a catch: To entice regional sports networks to pay hundreds of millions of dollars, the league ensures some exclusivity for them by blacking out home-market games from the streaming and satellite national packages.

The system works for many, but not for everyone. For example, the only way for a Florida-based fan of the New York Mets to see his or her favorite team has been to buy an expensive package of all out-of-market games. That fan might instead prefer to buy only Mets games directly from the team's website. (On the other hand, according to court documents, may be on the verge of offering fans the ability to purchase streams of single-team, out-of-market games.) Also, the system disadvantages cord-cutters. Someone who lives in San Francisco and wants to watch Giants games on is out of luck. The game will be blacked out. The situation almost begs this question: How many would-be cord-cutters are out there, handcuffed to cable and satellite subscriptions because they wish to see their hometown sports team play?

For a long time, the idea that MLB would go to trial over something like this was unimaginable. But in August 2014, U.S. District Judge Shira Scheindlin decided that MLB's nearly century-old antitrust exemption doesn't apply "to a subject that is not central to the business of baseball, and that Congress did not intend to exempt — namely, baseball’s contracts for television broadcasting rights."

Then, after MLB was denied the opportunity for an immediate appeal, the league suffered a second big setback when the judge agreed to certify a class action aiming to force MLB and its broadcast partners into changes. Thus, the stage was set for the trial opening later this month, but before this happens, the parties are exploring what kinds of arguments and evidence can be presented to judge during the January bench trial. (There will be no jury.)

In lawsuits that allege a violation of the Sherman Antitrust Act, courts often apply a legal doctrine known as the "rule of reason," wherein plaintiffs have the initial burden of demonstrating that a restraint on trade produces significant anticompetitive effects. In this case, the suing fans have pointed to the way in which ballclubs (and each of their broadcast affiliates) are divvying up geographic regions and agreeing to limit competition amongst themselves. There's a reason why the Yankees and the YES Network aren't selling independent streaming packages nationally, and these plaintiffs say that but for the rules in place, consumers would enjoy more choices, better pricing and perhaps even finer quality in sports programming.

That will be one end of the trial set to take place later this month, but under the rule of reason, defendants are allowed to retort by putting forward legitimate procompetitive justifications for restraints (with the plaintiffs then attempting to show there are less restrictive means towards accomplishing objectives). MLB has already signaled that it intends to argue that the rules set up for broadcasting have allowed telecasts of games to boom, but wait a minute: Are both sides really arguing that their respective positions means more output? Seems so.

The suing fans are poking the judge, seeking to limit MLB's presentation of the procompetitive impact of its system, which has caused MLB to respond with an explanation to the judge of just what exactly it intends to argue at trial — namely, that pulling one end of the string (territorial blackouts) could mean unraveling the whole ball of yarn.

"Specifically, in-market game exclusivity and out-of-market content exclusivity provide valuable incentives to invest in quality live game telecasts and the marketing of those telecasts," state defendants' court papers. "Losing this valuable game exclusivity and content exclusivity would decrease the incentives for RSNs to invest in and market their products, because other distributors could free ride off those investments."

It's hardly surprising that the defendants want to show that big-dollar television rights deals are sacred and that forcing a change to the system might back television broadcasters away from them. Almost anytime anyone in the content industry faces digital disruption, after all, there's talk about jobs on the line and the massive amount of money that fuels investment in programming. 

Perhaps more intriguingly, and possibly quite path-breaking, the defendants are also setting up a trial argument that presents competition on the field as mattering when balancing the scales of an alleged antitrust injury. For now, the defendants don't quite spell out the thesis — and if they do, it's hidden in trial memorandum under seal. For instance, will MLB lawyers argue that a forced change would result in the Royals not being able to afford a pitcher like Wade Davis? Time will tell, but for now, there's certainly strong caution being made that the fate of some of MLB's 30 clubs could be endangered by what is about to take place.

Take something that MLB Commissioner Rob Manfred said during his deposition in the case.

"[A] lot of New Yorkers go down to Florida, and we think that [if the Yankees] go down [it] would kind of destroy that market for Tampa," he said. "[T]here are certain iconic, generally large market clubs that I believe have national appeal that would put them in a position to present a threat to the viability of certain of our smaller market clubs."

Despite objection from the other side that what MLB is really doing amounts to an attempt to be protected from competition inside its league, MLB continues to pursue some kind of presentation showing how teams like the Yankees, potentially free from restrictions, could market a package of games in small markets and potentially undermine ballclubs in those territories.

As defendants' court papers say, "Plaintiffs’ argument for excluding evidence regarding competitive balance ignores that the sole alleged antitrust injury the Court permitted Plaintiffs to pursue on a class basis is 'lack of choice' — i.e., that the territorial rules allegedly reduce the live baseball programming options available to consumers. Whether all thirty clubs continue to exist has a direct impact on the number of choices available to consumers. Indeed, if eliminating the territorial rules causes individual clubs to fail, by definition consumers will have a reduction, not an increase, in choice. Competitive balance and the viability of individual clubs are therefore highly relevant to the only alleged antitrust injury certified for trial."

Read more from the defendants' memorandum here.