LA WATCHDOG-Comcast’s decision to terminate its $45 billion acquisition of Time Warner Cable may be good news for the 3.5 million Southern Californian households that have been deprived of the right to watch the Dodgers from the comfort of their own homes.
Underlying this blackout of 70% of the market is the unwillingness of DirecTV, Charter, Cox, and other cable companies to pass along the $5 a month subscriber fee associated with TWC’s over-the-top offer to pay the Dodgers $8.35 billion over the next 25 years to distribute SportsNet LA, the Dodgers regional sports network. Assuming five million subscribers, the public would eventually be tagged for $600 million a year when you factor in the 100% markup that is needed to preserve the distributors’ 50% gross profit margin.
TWC has been reluctant to lower its price per subscriber because it may trigger a substantial write-off of its investment, probably in the range of $500 million to $1 billion. But TWC has been concerned that this sizeable hit to its financials would have an adverse impact on the market’s perception of its proposed deal with Comcast.
But now that the deal with Comcast is history due to the opposition of the Federal Government, TWC is in a position where it can write-off not only its costs associated with the failed merger (probably in excess of $100 million), but a portion of the Dodger contract associated with a lower subscriber fee, probably in the range of $1 to $2 per subscriber, or $500 million to $1 billion.
This write-off, while substantial, represents at most 2% of TWC’s $45 billion market value. Furthermore, sophisticated investors, including Charter Communications which is interested in buying TWC, will see through the smoke and value the Dodger contract based on more rational assumptions.
Consequently, it would be in everyone’s best interest for TWC to lower its price to around $3 a subscriber. Unfortunately, life has become more complicated since early in 2013 when TWC inked its deal with the Dodgers.
According to several newspaper accounts, the independent distributors may be trying to offset some of the high costs and low ratings associated with the TWC’s 20 year, $3 billion contract with the Lakers by lowering the subscriber fees for the Dodgers. There may also be efforts to tie the fees of both the Dodgers and Lakers to their performance, thereby increasing TWC’s risk profile.
The cable and satellite companies are also experiencing the increasing loss of subscribers as consumers are “cutting the cord,” embracing streaming services such as Netflix and Amazon in an attempt to lower their overhead. This is forcing the distributors to become more cost conscious as can be seen by their reluctance to overpay for the Dodgers.
There is also considerable pressure for distributors to “unbundle” their basic offering which would allow consumers to choose channels on an a la carte basis. This is particularly true of the sports related offerings which comprise an estimated 50% of the cost of the basic cable TV package, but are only viewed by only 25% of the subscribers.
This effort to “slim” down the basic offering is playing out in a lawsuit as Verizon, the sixth largest pay TV provider, is attempting to offer a basic package without ESPN, contrary to its contractual arrangement with the channel. As a matter of interest, ESPN, along with its affiliated offerings that are forced upon the distributors, is by far and away the most expensive network.
TWC is in an interesting predicament of its own making.
Does it continue to lose $100 to $200 million a year by holding out for a $5 subscriber fee or does it take the $1 billion hit to its financials, recognizing that in its exuberance that it overpaid big time for the Dodgers’ media rights, cut its losses, and lower the subscriber fee to $3?
If it is worried about its reputation, it is time for Time Warner Cable to take the hit for the home team. It is time for Dodger baseball.
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, The Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. Humphreville is the publisher of the Recycler Classifieds -- www.recycler.com. He can be reached at: email@example.com)
Vol 13 Issue 35
Pub: Apr 28, 2015