It's tough enough explaining the entrenched pay-TV carriage battle over SportsNet LA to adult trade readers. So I didn't really know what to tell my 8-year-old son, Reece, on Tuesday, Aug. 6, when his favorite player, Dodgers ace Clayton Kershaw, suddenly appeared on our DirecTV (NASDAQ: DTV) program guide after the Dodgers had been blacked out on our pay-TV service since late March.
The Dodgers were playing the region's other Major League Baseball team, the Angels, and we could actually watch Kershaw and the Dodgers play, since DirecTV does carry the Angels' exclusive regional sports network home, Fox Sports West.
Like every other L.A. sports fan, Reece wanted to know who's to blame for keeping the Dodgers blacked out from all but a few national games picked up by ESPN or Fox, or the blue-moon appearances on the RSNs of interleague rivals. For Reece, it's about more than fandom. It's vocation.
It's been about 45 days since the late-June event that colored his entire summer. His Pony League all-star team was up 3-2 over a really good squad from Bakersfield, Calif. Reece was pitching to the second baseman, nickname "Hollywood," up one ball, two strikes. Bottom of the sixth and final inning, two runners on. On the next pitch, Hollywood--real name "Aiden," according to my wife, the scorekeeper--sent a Reece fast ball over the right-field fence. Our season was over. Reece rebounded from what was easily the most tearful, traumatic evening of his young life with the kind of determination and grit you like to see as a parent and coach … well, actually it's been borderline obsession. He wants to back to the Pony all-star regional tournament next spring, play Bakersfield again, and humiliate Hollywood every time he comes to the plate.
And Kershaw, the reigning National League Cy Young honoree, has become Reece's pro guide, a prototype for how to pitch, how to eat, how to emote, how to walk, how to live. So, Reece wants to know, just who is responsible for keeping him from the vital, regular observational instruction he can only get from watching his hero pitch on television? Well, I told him, you can start with Kershaw himself. "Huh?" Like I said, it's complicated.
These days, fair or not, most of the blame for the Dodgers blackout seems to be falling on Time Warner Cable (NYSE: TWC), which paid the Dodgers' new ownership group, led by Guggenheim Partners, the unprecedented sum of $8.35 billion in January 2013 to lock up the team's RSN rights for 25 years.
TWC launched the Dodgers' new channel, SportsNet LA, in March in the 30 percent of L.A. region pay-TV homes that subscribe to TWC. Demanding what executives close to the negotiations describe as the high $4 per subscriber range, every other pay-TV operator in the region, most notably No. 2 service DirecTV, has balked at carrying the channel. They say not enough people in the region care about baseball--or the Dodgers--to justify a huge overall rate hike.
The impasse has dragged on. With the Dodgers in first place in the National League West, the August pennant stretch at hand, and most Dodgers fans still blacked out, a group of Southern California legislators got involved in late July, petitioning Federal Communications Commission chairman Tom Wheeler to do … something, like impose binding arbitration.
The FCC recently did, ironically enough, successfully arbitrate a carriage impasse involving DirecTV-controlled Root Sports Pittsburgh, ruling against the RSN. The ability to exert that kind of authority stemmed from 21st Century Fox's divestment of DirecTV several years ago--as a condition of approving the stock-based transaction between Fox and Liberty Media, the FCC could mandate "baseball-style," rule-in-favor-of-one-side-or-the-other arbitration in carriage disputes.
Strong words and TWC's pending merger approval with Comcast aside, it isn't exactly clear what sway Wheeler has in the SportsNet LA dispute. Responding to the SoCal lawmakers, the FCC chairman told TWC to, essentially, "Fix this mess you created," and "I'll be watching you."
And TWC did everything he asked, agreeing to nonbinding arbitration with DirecTV. The satellite carrier, in turn, rejected the proposal, saying it would only agree to "some kind of mediation" that would also involve other pay-TV operators in the region, as well as the Dodgers organization, which has so far laid low in the public relations battle. DirecTV wants no part of any binding arbitration that would remotely expose it to the risk of paying TWC's rate for SportsNet LA, which notably can't even offer operators multiscreen rights due to restrictions imposed by Major League Baseball.
So now that we're caught up on the dispute, Reece still wants to know, "Why is this happening to me? Is there a god? And who can I sue?" Again, it's complicated.
The easy scapegoat, again, is Time Warner Cable, which took the presence of not only the Dodgers, but their beloved play-by-play man of the last six decades, Vin Scully, and spirited them away behind an expensive RSN pay wall. TWC has been accused by DirecTV and others--myself included--of wildly overpaying for Dodgers TV rights, shelling out about four times as much as the $2.15 billion Guggenheim paid for the team itself.
I recall how TWC paid the NBA's L.A. Lakers about $3 billion over 20 years to launch the original SportsNet in 2012, then experienced the drama of watching DirecTV wait until a month into the 2012-13 NBA season to make a carriage deal for the channel. Didn't that experience inform them that Dodgers network might be even tougher to sell?
The Lakers came into that season having won 10 titles over the previous 32 seasons, and having participated in roughly half of the NBA Finals tournaments conducted over that period. They had the splashiest new-player acquisitions of the off-season in Dwight Howard and Steve Nash. If the No. 2 pay-TV operator was going to hem and haw over that carriage deal, how in the world did TWC think they'd be an easy sell for an even more expensive RSN based on the Dodgers, who hadn't appeared in the World Series in the previous 25 years?
When David Rone, president of TWC Networks and TWC Sports, responded to my interview request by ringing through with a 212 area code, I was sure I had an out-of-touch-with-the-L.A.-market scapegoat to present to Reece. "Here's your bad guy, buddy." But Rone made some good points, too.
If DirecTV was so sure TWC's SportsNet LA demands were wildly off-base from the national RSN average rates TWC says its proposal is based on, why wouldn't DirecTV agree to binding arbitration?
"If they're so sure they're being reasonable, why aren't they willing to come to arbitration?" Rone wonders. He also takes umbrage with DirecTV's proposal that TWC sell SportsNet LA a la carte.
During his company's second-quarter earnings call on Aug. 6, Dish Network (NASDAQ: DISH) Chairman Charlie Ergen parroted this notion, explaining that non-sports subscribers shouldn't have to bear the RSN burden. Sports fans simply need to pay a premium of $10 or more if they want to see their teams, Ergen explained. But if this was really a practical business model--one in which a licensor could really recoup its rights investment--wouldn't DirecTV employ it amid its own carriage impasses in places like Pittsburgh?
Indeed, DirecTV's claims about serving fan interest ring a bit hollow, too, when you examine a similar RSN impasse in Houston. On Thursday, after refusing to carry Rockets and Astros channel Comcast SportsNet Houston for the last 22 months, ultimately sending it into bankruptcy, DirecTV and AT&T took over the network.
Making further sense, and making my easy explanation to the boy even less black and white, Rone notes that TWC--despite its carriage problems in the short term--has locked up cost certainty for 25 years for a key asset amid spiraling sports broadcast rights.
And here's another good argument--if TWC didn't pay top dollar to Guggenheim partners for Dodgers rights, competitive bidder 21st Century Fox probably would have. Getting big RSN money was part of Guggenheim's plan when they bought the Dodgers. Given Fox's content leverage--and position of not being a direct pay-TV competitor with a horrible reputation for customer service--it could be argued that Rupert Murdoch and his company were better equipped to execute on an expensive Dodgers deal. Maybe if and when Comcast (NASDAQ: CMCSA)--a company that enjoys the leverage of NBCUniversal--gets ahold of TWC, we'll find out if that would make a difference.
But until then, who should L.A. guys like Reece blame for a sports TV blackout that has no end in immediate sight? Who do we throw under the bus?
I'd describe my oft-referenced, baseball-crazed son as being typical of the emerging RSN market TWC and DirecTV are serving. But in a way, he isn't. Reece runs with a crowd of future jocks, who will undoubtedly be consuming plenty of sports programming--and associated advertising--by the time TWC's contract nears its end in two decades. But Reece's school chums are more into basketball than baseball, and they tend to shun the Lakers in favor of the Clippers, the local NBA team that's actually won far more games over the last two season.
I needed to ask Rone--but didn't--what does more than two decades of cost certainty mean when consumer taste can change dramatically in a single generation?
Me? I kind of blame this mess on the teams and their players for using the uncertainty of the media market--and the associated irrational exuberance over sports rights--to create unsustainable business models. And I blame fans a bit for not being more informed about it.
The grave fan disservice is an endemic part of carriage dispute rhetoric. "[INSERT RIVAL PAY TV PROVIDER'S NAME HERE] is keeping fans from the games they love!" is the common refrain. But I didn't hear one Dodgers fan complain when the team used its newfound SportsNet LA fortune to sign Kershaw to a massive seven-year, $215 million deal, while inflating overall team payroll for 2014 to nearly $230 million, far and away the highest in Major League Baseball. You want to keep up with the Giants in the National League West? Put your cable bill where your mouth is.
And didn't Kershaw's reps stop to kick the tires on the pay-TV market before making that salary demand? Didn't Guggenheim Partners think about it before they agreed to pay the money?
In the end, it's a carriage dispute that will just have to work itself out over time. I tell Reece just to keep doing what pay-TV operators often do in such content related disputes. Blame Hollywood.--Daniel