February 12, 2007
Limiting Supply
Dave Yeager and I corresponded over the weekend about the pending DirecTV deal that will give the satellite company an exclusive on MLB extra-innings. The contract would hurt Phillies fans particularly hard, since Comcast has an exclusive on the team's games, and doesn't make them available to DirecTV at all.
Dave sent me this article from Yahoo Finance today, which is the best I've seen at explaining the reasons for the deal:
If MLB has done nothing else right in the past 50 years - and let's be honest, the only other thing they've done right in the past 60 years was integrating the game - they've done the Web right.
Late in 2005, MLB scrapped the idea of taking Major League Baseball Advanced Media public. The reason, according to published reports, was that team owners did not want chests full of cash on their doorsteps as they were in the midst of negotiating a new labor contract. That excuse is no longer valid because MLB and the Major League Baseball Players Association reached a new five-year agreement last October.
With the labor contract out of the way, MLB can now focus on taking Major League Baseball Advanced Media public. One of the key assets of the company is, of course, its MLB.TV product. See where I'm going?
By shifting the Extra Innings package to DirecTV, MLB has now vastly expanded the market for its own offering. Fans like myself who have cable and no interest in switching to satellite television, are left with only one alternative to watch out-of-market games: MLB.TV.
Thus, by contracting the market for Extra Innings, MLB would be expanding the market for its MLB.TV. It's addition by subtraction.
So MLB is trying to increase the value of its online property ahead of an IPO, which doesn't make the deal any better for fans shut out of games, but at least makes a lot more sense than a few extra millions from DirecTV. The IPO is going to be big. I also found this nugget interesting, because it's the first time I saw how the subscriber base is distributed:
It should be noted that MLB only has about 300,000 Extra Innings subscribers who get the service through cable or Dish Network, compared to about 270,000 already on DirecTV. If MLB can win these customers back, they'll do so at a higher margin (one reason Extra Innings costs more than MLB.TV is that the cable companies had to pay rights, something MLB obviously doesn't have to worry about).
So, it seems DirecTV delivers a higher percentage of viewers than cable. Only 0.46% of homes with cable subscribe to Extra Innings, while 1.69% of DirecTV customers get the package. That probably has something to do with people switching in 2001, the last time the package was exclusive to the satellite provider. So it just wasn't a huge win to bring the package to cable.
So MLB is willing to take the risk of alienating some fans to make a lot more money in the future. And with time, online viewing will get as good as TV viewing. At that point, DirecTV will likely be shut out as well.
Posted by David Pinto at
10:36 AM
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This does, finally, make sense of the money issue.
Although different reports were estimating different amounts of net profit for the teams involved in the DirecTV deal, none of them seemed enough to justify the bad press.
This, on the other hand, looks like it could be huge.
You're right, We all knew it was about the money but looked at from this point of view the pieces fit much better.
One thing I still haven't seen, and I admit I haven't looked to hard, is WHEN this might go into effect? As a Dish subcriber am I looking at having to make a change for this season (and yes, I'll switch to DirectTV), or is this still something coming down the road?
~Mark
The deal is not finalized. I'd hold off on switching until you hear otherwise. They may be getting enough of a bad reaction from fans to rethink the exclusive.
I still think this is a bunch of ill-considered speculation. The problem with taking MLBAM public is and has always been that it would open the books on MLB because of the disclosure process. Even without labor negotiations going, it seems it would make no sense for the notoriously secretive owners to give up a cash cow, unless they think growth is about to stall.
I've heard that the time GM started it's great decline is when the chairman Thomas Murphy said "General Motors is not in the business of making cars. General Motors is in the business of making money.". I see the same thing happening with MLB. The focus on increasing revenue may work in the short-term, as it did for GM decades ago. But in the long-term losing focus of what's best for the fans may lead to a decline.
So are you all saying that the report that MLB is more willing to give Extra Innings to DirecTV rather than cable has nothing to do with their desire to have their Baseball Channel placed on basic cable, which supposedly DirecTV has promised to do, unlike cable which at this point would only say that it would put such a channel on a premiumn sports tier?
Phils fans are not completely blacked out on Direct TV. My brother is out of market, uses DirectTV and basically just watches the feed of whatever team the Phils are playing. Unfortunately he never gets to hear Harry the K's sweet pipes, but it is better than nothing...
It could be more DirecTV subscribers (as a percentage) than cable subscribers purchase the baseball package because sports fans, who would be more likely to buy Extra Innings, are more likely to have DirecTV because of its NFL Sunday Ticket exclusive.
I think the Directv "exclusive" is partially because they came up with the extra dough and partially because the others are attempting to lowball -- under the false assumption that MLB would favor universal availability to customers vs. profit margin.
Personally, I don't see the reason to double your market by halving your price to distributors/providers. If cable and dish stepped up at the same rate Directv offered, do you think MLB would turn them down?
I don't think MLB.tv can be viewed as an acceptable alternative to anyone but very avid fans.
I still don't understand how watching the grainy, often interrupted MLB.tv feed will replace watching almost every baseball game on my 60" HDTV. That argument seems far fetched.
This deal will be great for DirecTV, but I'm not sure it will be good for anyone else, including MLB. The only good that can come out of this is Extra Innings in all HD, since it will be awhile before cable can support that and even longer before MLB.tv will.
DirecTV was always sports oriented so when people chose satellite they went with DTV. Cable subscribers choose cable because satellite isn't an option. This doesn't mean they aren't sports viewers.
I'm not much of a sports viewer. I'm a baseball viewer.