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Owning Regional Sports Cable Networks Makes MVPs of the Red Sox, Yankees

Posted on: Sunday, 2 October 2005, 21:00 CDT

By David McPherson, The Providence Journal, R.I.

Oct. 2--Baseball may be a game of wins and losses, strikeouts and double plays.

But it also is a game of dollars and cents, with television being the Big Papi driving home the important runs.

That is one reason the New York Yankees and the Boston Red Sox rank as the two most valuable teams in Major League Baseball as they head into today's final game of the regular season.

The American League rivals both own big stakes in the regional sports networks that carry the bulk of their games and annually generate hundreds of millions of dollars in revenue for each team.

The Red Sox, under former owners, helped pioneer the idea of a professional sports team owning a cable-TV operation with the founding of the New England Sports Network. The Yankees refined the model with the establishment of the Yankees Entertainment & Sports Network, which by some estimates is now worth more than $1 billion.

In some respects, the Yankees and Red Sox could be viewed as media companies masquerading as professional baseball teams.

The money the networks pump into the teams is one reason the Sox and Yankees are able to pay for top baseball talent and finish at or near the top of the standings year after year. Structured properly, the cable operations also are a way to shield earnings from baseball's revenue-sharing system.

The success of both NESN and YES has other teams looking to emulate these models. The Baltimore Orioles and Major League Baseball established a new network this year that for now carries Washington Nationals games, while the New York Mets have teamed up with some cable heavyweights -- Comcast Corp. and Time Warner Cable -- to start their own next season.

In Chicago, the White Sox and Cubs joined with Comcast Corp. and hockey's Black Hawks and basketball's Bulls last year to form Comcast SportsNet Chicago.

"There are obviously major benefits from a team having an interest in a regional sports network," explained Tracy Dolgin, president and chief executive officer of YES.

A team-owned network is a great platform for promoting the team, Dolgin said, but there are risks, given high start-up costs and the danger of prolonged losing spells.

"You're increasing your bet on the team," he said.

Traditionally, sports teams sold the rights to television games to the highest bidder and left the production work to somebody else.

Dolgin said he would be surprised if more than a quarter of Major League teams come to own regional sports networks. "Unless you're in a really big market with a powerhouse team and brand, it's a hard risk to take."

Said sports television consultant Lee H. Berke: "Every team is going to look at it. Not every team is going to do it."

Betsy Goff, a former ESPN executive who now teaches in the University of Massachusetts sport management program, sees NESN and YES as the forefront of an evolution in sports and advertising.

"I think these guys are breaking ground in a significant way, but again I have to emphasize, these guys can afford it," Goff said.

Forbes magazine, which annually estimates the value of professional sports franchises, in the spring ranked the Yankees first at $950 million and the Red Sox second at $563 million.

Established in 1984, NESN started out as a premium channel for which subscribers had to pay extra. The original owners included the Red Sox, the Boston Bruins hockey team and Channel 38, the Boston television station that at the time broadcast most Red Sox games.

Over the years, the number of games that could be received for free over the airwaves decreased, while the number on NESN increased.

Eventually, the Red Sox and Bruins bought out Channel 38, which now only carries Friday night games in the Boston area. This season, NESN televised 122 games in Greater Boston and 150 in the rest of New England.

When the Yawkey Trust sold the Red Sox for a record $700 million in 2002, many outside observers concluded it was NESN that accounted for a big part of the price tag.

The buyers, led by principal owner John W. Henry, included two partners with media ties, television producer Thomas C. Werner and the New York Times Co., owner of The Boston Globe newspaper.

The interest in NESN could also be seen in the cable television ties of two other Red Sox bidders -- Charles Dolan, founder of the New York-area cable provider Cablevision Systems Corp., and a group that included Comcast, now the nation's largest cable television provider.

Under the Henry ownership group, Werner serves as chairman of NESN, while the Globe uses NESN to showcase its sports writers and promote the newspaper.

Werner and NESN president Sean McGrail refused to be interviewed for this story.

According to New York Times Co. disclosures to investors, New England Sports Ventures -- the Red Sox parent organization -- owns 80 percent of NESN. The Boston Bruins control the remaining 20 percent.

The New York Times Co., in turn, owns about 17 percent of New England Sports Ventures.

A big reason the new Sox owners placed so much value on NESN was a change in its subscriber model.

As a premium channel, cable customers had to pay about $11 a month extra to receive NESN, which had about 1.2 million paying customers before 2001.

But NESN persuaded cable operators to carry the network as part of their expanded basic cable lineups beginning in 2001.

For dedicated Sox and Bruins fans that was a bargain, as the monthly cost dropped substantially and was wrapped into the expanded basic package.

But for nonfans it meant paying for a network they did not watch.

When the switch was made, NESN charged cable systems around $1.40 a month per subscriber, a cost they pass on to customers.

The switch from premium to expanded basic cable benefited NESN by tripling its subscriber base. That allowed it to collect extra subscription revenue and charge advertisers more for the larger audience.

Now, NESN's subscriber base in New England tops 3.8 million, and ratings are higher than ever after last year's World Series victory.

NESN does not disclose any information about its finances, but according to Kagan Research LLC, in Monterey, Calif., NESN in 2004 generated $104.6 million in revenue, with $78.8 million from subscribers and $25.9 million from advertising.

On average, NESN last year charged cable systems $1.80 a month per subscriber to carry the sports network, Kagan reports.

Smith College sports economist Andrew Zimbalist -- author of May the Best Team Win: Baseball Economics and Public Policy -- estimated that in 2001 NESN made $14 million on $50 million in revenue, representing a very healthy 28-percent profit margin.

The Red Sox share of that profit -- $11.2 million -- would have been shielded from Major League Baseball's revenue-sharing system, according to Zimbalist.

He estimated the premium-to-expanded basic switch had meant an extra $11 million in NESN revenue in 2001.

"They realized early on you had a great opportunity to eliminate the middlemen, to tap into two revenue streams, both advertising and subscriber revenue and create your own standalone assets," explained Berke, president of LHB Sports, Entertainment & Media Inc., in Scarsdale, N.Y.

The YES Network taps into similar revenue streams.

In 2004, YES took in $227 million in revenue, according to Kagan. That includes $188.5 million in subscriptions and $38.5 million in advertising revenue.

The average monthly subscriber charge for YES last year was $2.10, according to Kagan.

The ability of Yankees owner George Steinbrenner and his YES partners to collect that $2.10 a month from more than 10 million housesholds in New York, New Jersey, Connecticut and Pennsylvania did not happen without a fight.

Launched in 2002, YES operated for its first year with a big hole in its core market. Nearly 3 million New Yorkers could not watch Yankees games during the 2002 season when the city's largest cable operator, Cablevision, refused to carry the YES Network.

Cablevision owns a rival regional cable sports channel -- the MSG Network -- that had carried Yankees games and now faced competing with YES.

It argued that its customers should not be forced to pay for YES as part of a basic cable package, while YES accused Cablevision of anticompetitive behavior.

The dispute was finally resolved in 2004 when an arbitrator ruled in favor of YES.

The owners of YES include Steinbrenner's Yankee Global Enterprises LLC, the investment bank Goldman Sachs and Providence Equity Partners, the Providence-based private equity firm that invests in media and communications companies.

Based on the $340 million Goldman Sachs paid for its 40-percent stake in YES, the network at launch was valued at $850 million. Berke and others estimate it is now worth more than $1 billion.

As a result of the YES success, many teams are looking at creating regional sports networks, said Berke, who advises professional sports teams looking to break into the television business.

Once a team is done building a new stadium, television remains one of the few avenues for boosting a team's value, he said.

Dolgin, a former Fox Sports Net president hired a year ago to run YES, said the passionate fan bases enjoyed by both the Yankees and the Red Sox are critical to the success of their cable networks.

"You go to other markets, and it's just not this way," he said.

YES has elevated the Yankees' image in the New York area and operates with a pinstripes point of view, according to Dolgin.

"It's clear we're happy when they win and sad when they lose," he said. "We want fans to know we care as much as they do about winning."

In addition to Yankees games, YES also carries New Jersey Nets basketball games and other programming including the Ultimate Road Trip, a reality series featuring Yankees fans who attend all 162 Yankee games this season.

"The real mark of success is to create successful programming outside the games," Dolgin said.

That success must include attracting advertisers to the nongame programming.

The Ultimate Road Trip places sponsors' products into the show.

NESN's non-baseball programming includes the Bruins, Stories from Red Sox Nation,and a popular fishing program, Charlie Moore Outdoors.

With its New York advantage, YES is the most-watched regional sports network in the country. It recorded its highest ratings ever when the Yankees and Red Sox faced off on Opening Day this year.

That feat could be repeated with today's game should it decide who wins this year's American League East title or advances to the playoffs as the wildcard.

"Both teams actually help each other's television business," said Dolgin.

Berke, the sports television consultant, worked on the business plan that led to the formation of YES and is not surpised by the success he sees today.

Recalling his work for YES, he said, "You could see the money cascading out of the computer screen."

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To see more of the The Providence Journal, or to subscribe to the newspaper, go to http://www.projo.com.

Copyright (c) 2005, The Providence Journal, R.I.

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Source: Providence Journal

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