Local TV deal doesn't hamper Twins payroll, team president says
MINNEAPOLIS—Lucky lottery winners weren't the only ones benefiting from Powerball this winter.
The Arizona Diamondbacks, heading into a 20-year deal for local television rights that reportedly will bring in at least $1.5 billion, shocked the baseball industry by landing free agent right-hander Zack Greinke. The Greinke deal includes significant deferrals, but without that local TV money, there's no way the franchise could have promised him $206.5 million over six years, a staggering average annual value of $34.42 million.
"It's a complete game-changer," said a front office executive from one of the half dozen or so clubs still waiting for its big cable TV payday. "Without that, it's tough to keep pace."
What about the Twins? Was their relatively quiet offseason, highlighted by a four-year, $24.85 million investment in Korean slugger Byung Ho Park but featuring little else of note, adversely affected by the widening gap in cable TV deals?
Twins President Dave St. Peter adamantly insists the answer is no.
"There's a lot of speculation always on local revenues," St. Peter told the Pioneer Press. "I would just tell you that there's more that goes into it than just television revenues. Television gets a lot of focus, but we outperform our market in a lot of metrics. At the end of the day, I'm more focused on the total local revenue, not just the television bucket."
While the Twins continue to find ways to squeeze revenue from Target Field, heading into its seventh season of operation, their Opening Day payroll projects at $104.5 million, down slightly from the $108 million club they took into 2015.
For accounting purposes, St. Peter said, the Twins will count the pro-rated portion of the $12.85 million they gave the Nexen Heroes of the Korea Baseball Organization to win exclusive bidding rights for Park. That's an additional $3.2 million over the next four seasons that wouldn't be counted against the luxury tax but indeed goes toward player costs.
"It's cash going out the door," St. Peter said. "In my view, it's part of an investment in a major league contract. That's how I view it, and I think that's how you need to view it."
THE "B" CLUB
Last July, the St. Louis Cardinals became the 10th member of baseball's Billionaires' Club in terms of long-term rights deals for local television.
Though located in the nation's 21st-largest television market, the tradition-rich Cardinals were able to secure at least $1 billion over a 15-year period (2018-33) for their local broadcasts. According to the St. Louis Post-Dispatch, the new deal also includes a minority stake in Fox Sports Midwest.
That ownership stake is a key component, because that portion is not subject to revenue sharing. The Diamondbacks, who had been pulling down $31 million a year from local broadcasts in the nation's No. 12 TV market, reportedly secured an equity stake in Fox Sports Arizona, as well.
The rebuilding Philadelphia Phillies, blessed with a location in the nation's fourth-largest TV market, are starting a 25-year, $2.5 billion deal this season that reportedly includes a 25-percent equity stake in Comcast SportsNet Philadelphia. After revenue sharing, the value of the deal could shrink to $1.65 billion over those same 25 years, but that's still an average of $66 million a year.
Where does that leave the Twins? They are in the midst of a second consecutive long-term deal with Fox Sports North, which took them back in May 2004 after an abortive attempt by the Twins to launch their own local broadcast network: Victory Sports One.
The first eight-year contract expired with the 2011 season. Estimates have placed the value of that deal as high as $12 million a season.
According to a person that has been briefed on the matter, the current deal runs through 2023 at an average of nearly $40 million annually. The Twins cite a confidentiality clause in their deal with Fox Sports North in choosing to keep that information private.
"We won't announce it when we do a deal because we've never announced a TV deal," St. Peter said. "And we've done one in the last five, six, seven years that we never announced."
A 12-year local TV deal for nearly $480 million would be nothing to lament, but it might appear modest in relation to those arrangements enjoyed by the top third of franchises. And that privileged group could soon expand again.
According to reports, at least half a dozen clubs are navigating the final years of below-market local TV deals hatched before the current boom.
The Tampa Bay Rays, plagued by poor attendance at Tropicana Field, will see their local rights deal end after this season. Their $20 million annual take is believed to be in line with that of the Colorado Rockies, who are under contract through 2020.
The resurgent Chicago Cubs are under contract through 2019, while the Cincinnati Reds, Miami Marlins, Pittsburgh Pirates and reigning World Series-champion Kansas City Royals are among those counting down to what they hope will be a game-changing windfall.
With eight seasons left on the Twins' current rights deal, fans probably shouldn't expect player payroll to increase drastically in the near term.
"I'm very comfortable with the fact our deal is close to market," St. Peter said, "and I think that people always evaluate television markets differently. They tend to look at Minneapolis-St. Paul as the 15th- or 16th-largest television market. That's the wrong metric to look at."
So, what is the right one?
"You need to look at the number of cable and satellite households within a television territory," St. Peter said, "and the bottom line on that front is we're bottom five in the league on cable/satellite households."
IT TAKES COMPETITION
According to a front-office executive from one of the clubs playing out the string in terms of local TV rights, "it takes competition" to fully leverage the sort of long-term windfall that begins with a "B."
"You need two or three cable outlets to compete for those rights," the executive said.
That approach could yet turn perilous amid a national trend of "cord-cutting" and "over-the-top" programming offered directly to viewers. It also bears mentioning that the 30 major league teams share equally in an eight-year, $12.4 billion national television deal that runs from 2014-21 with ESPN, Fox and TBS.
That's an average of $51.7 million per team before selling a single ticket or hot dog.
"In my time with the Twins, I've been involved in multiple negotiations for local television rights," said St. Peter, who is in his 27th year with the organization and succeeded Jerry Bell as team president in November 2002. "There has never been a time that we haven't signed the deal and felt really good about the deal and then within three to five years felt like other teams have leapfrogged you.
"That's the nature of the beast, and that's what's going on now. Our time will come to get back to the table with Fox (Sports) North, and when it does, I trust that once again we'll be at or above market in light of our television deal."
While St. Peter notes that Comcast already holds "a significant percentage of the market" in the Twin Cities, he also points out Charter Communications and Mediacom are players, as well. When it was mentioned that perhaps a bidding war could break out for Twins TV rights should the team return to prominence, St. Peter waved off the suggestion.
"I don't even go down that road," he said. "We enjoy and really are thrilled with our partnership with Fox Sports North, and that's our singular focus at this point. Would we love to get to a point where we could increase our TV deal? Yes, and we will."
In the interim, the Twin Cities will be one of 15 MLB markets where fans will be able to stream live broadcasts of games on their smart phones, tablets or computers as part of a three-year experimental deal MLB struck with Fox in November.
That should help the Twins bridge a small portion of the gap between their local TV revenues and some of those recent Powerball winners at the top of the scale.
Local TV ratings for Twins games were up 24 percent last season, according to Fox Sports North. Twins telecasts drew an average rating of 4.12, which converts to roughly 72,000 viewers a game.
Mike Dimond, senior vice president and general manager of FSN, said in a statement after last season that the network was "very encouraged by not only the performance on the field, but also the upward trend in ratings, and expect both to continue in future seasons."
DISPARITIES NOT NEW
Legendary baseball executive Tal Smith has seen both sides of the revenue coin, having spent the bulk of his career with the Houston Astros but also experiencing a 2 1/2-year stint in baseball operations for the New York Yankees in the mid-1970s.
That was the start of the George Steinbrenner era, along with the dawn of free agency.
Now 82 and still leading Tal Smith Enterprises, a baseball consulting firm, Smith observes the explosion in local TV rights fees and gives a figurative shrug.
"Whether it's this day and age, with TV, or earlier days, there's always been financial disparity and clubs have always had to manage their payroll and manage their finances," Smith said. "We've seen examples, even in recent years with growing revenues, of those that perhaps don't have an equal share of the revenue that have been able to succeed."
The Royals and the Pirates would be current examples of that.
"It makes your job more difficult," Smith said. "If you have a lot of financial resources, you can tolerate and get over mistakes or you can compensate for that. If you don't have the benefit of a big TV deal, you have to hit for a better average."
While the Royals, gunning for a third straight American League pennant, surprised many this offseason by retaining free agent left fielder Alex Gordon ($72 million over four years) and luring right-hander Ian Kennedy ($70 million over five years), their window appears in danger of closing after 2017 unless they can parlay their success into a massive local TV deal.
"The playing field is never going to be level from a financial standpoint," Smith said. "I just think you have to find a way to adjust for it."
And while Smith calls the Diamondbacks' $1.5 billion-plus local TV deal "an example that the so-called 'have-nots' are becoming fewer," he also sympathizes with those clubs that are hanging on until the end of the decade, waiting for the rising tide to lift their yacht as well.
"I think you acknowledge that and you just have to make it work," Smith said. "Obviously you're not going to be able to compete in the market for the high-priced free agent, but that's not the only way to build a club. It enhances your chances when you can do that, but sometimes you've got to find another way to do it."
The Twins, coming off an 83-win season of retrenchment and preparing to ride a multiyear wave of some of the best young prospects in the game, would seem to be among that group. Their player payroll tends to be right around 50 percent of total team revenue, as former Commissioner Bud Selig traditionally put forth as the best scenario for all teams.
"Commissioner Selig used to tout that," St. Peter said. "We've veered from that. We kind of still have it as a guideline, but there have been many years we've been above it. There have been some years we've been below it. I tend to look at it as more of an average over the course of five to 10 years.
"I certainly wouldn't say it's a hard-and-fast rule, that it's a formula-driven business, because it isn't. (General manager) Terry Ryan has the flexibility from a payroll perspective to exceed that if he so chooses."
And when Ryan chooses to hold the line on payroll, as he did this winter with six arbitration-eligible players, the Twins aren't about to use the disparity in local TV revenue as a shield.
"We don't publicly announce our television deals, unlike some other teams," St. Peter said. "So I would just say that the concern over our television agreement has been greatly exaggerated. I'll just say that."