In my last podcast, I answered a question from a listener regarding why he can’t watch the Kansas City Royals even if he pays for the MLB.tv package. He expressed frustration and dismay that is probably familiar to many of you.. I know that this question comes up each off-season and so I’m going to try and shed some light on why the Royals will let someone from Florida see their games, but not someone who is a couple of hours away from the stadium.
The whole issue begins with the territory map which is shown below.
If you enlarge the above picture you can see that each color represents an area that is controlled by one or more Major League Baseball teams. The Royals control all of Missouri (except the part in yellow), Arkansas, Oklahoma, Kansas, Nebraska and Iowa.
What that means is that the only way someone can watch a game featuring a team in the controlled area is if the game is broadcast by a local rights holder. In other words, if you live in the Royals prescribed area and don’t get Fox Sports Kansas City, it’s not possible for you to watch the Royals.
So, why do the Royals and the rest of Major League Baseball want to keep people who actually want to pay for their content from accessing it? The answer, unsurprisingly is money.
Fox Sports pays the Royals and every other team which they broadcast a certain amount of money annually for the exclusive broadcast rights. To make a profit they then sell advertising and extract fees from local cable operators to have access to their channel. The fees are paid on a per subscriber basis. So for every Time-Warner Cable customer in Kansas City who pays for cable a certain amount of money is sent from Time Warner to Fox. According to some 2009 research the cost for Fox Sports was $2.37 per subscriber.
If people were allowed to just buy MLB.tv wherever they wanted, then Fox Sports would not have the leverage to be able to force local cable providers to pay them that $2.37 for every household they have. Sports in general and baseball in particular are premium content. Having exclusive rights to broadcast that content is as good as it gets. The bottom line is that it’s much more lucrative to get $2.37 from every single person whether they watch baseball or not than to get $119.99 from people who only want to watch baseball.
It’s pretty clear why baseball as a whole would want to have these territories. However, in the Royals case, I believe they’d be best served to blow the whole thing up.
In 1990, the Royals had the highest payroll in baseball. They paid $14m more for their roster than the team at the bottom of the list. In 2011, the Yankees have the highest payroll and the difference between them and the Royals will be around $200m. In the past three decades, there has been a growing disparity between the large-market and small-market teams. That’s not news. The reason behind it has to do with the change in revenue streams over those decades.
In the 80’s and early 90’s the primary revenue stream for a baseball team was ticket sales. So while it was easier for a team in New York to sell out games and charge a higher ticket price, they weren’t at much of an advantage over a team like the Royals. Then came cable television. Local games began to be broadcast and draw high ratings. Suddenly a Yankee game could be seen by millions of New Yorkers on any given night. Advertising revenue and rights fees exploded.
The size of the market suddenly became exponentially more valuable than it ever was in the past and due in no small part to the exclusive territory map. The money which is distributed from the local rights holders to the teams as we’ve already pointed out is artificially inflated due to forcing every single subscriber to pay for the content whether they want it or not.
If suddenly there was a way to watch only the things you want without cable, then the playing field would suddenly become a whole lot more level. That exists, it’s called the internet. The MLB has created a company called Major League Baseball Advanced Media that runs the MLB websites, MLB Channel and MLB.tv. The important caveat is that the money from that venture is split evenly to all 30 teams. If a Yankees fan in Wyoming pays MLB to watch his teams games on the internet, the Royals get 1/30th of that.
If somehow the territory maps were to destroyed, then the leverage that the local rights holders have diminishes overnight. Fans who spent $50 or $100 a month on cable would suddenly consider getting rid of their subscriptions because they can watch their team on the internet or an internet-enabled device. Overnight, there would be fewer people paying the $2.37 but more paying the $119. More importantly there would be less money flowing into large market teams and more into the smaller ones.
These territory protection schemes also artificially prop up larger markets more than is reasonable. It’s one of many reasons that it’s comical when the owner of the Yankees Hank Steinbrenner calls the baseball system socialism or communism. It’s a plutocracy if it’s anything. The few teams with the vast amounts of money set up the system to benefit them the most and convince the smaller market teams that they’re also benefiting.
In the end, there are people who want to watch a baseball game, but due to archaic and backwards thinking rules, they are prevented. The Royals should be fighting to open up territories and then the poor fans in Iowa would get to watch a baseball game, a Royals fan in Arkansas would get to see his team and a nation of fans would suddenly be overjoyed at the ability to pay for something that they actually want to pay for.