Tuesday, June 20, 2006

Baseball, Blackouts and Buyouts

This weekend I was finalizing our summer vacation plans, and noticed that the house we are renting in the Outer Banks has WiFi. "Cool," I thought, "I'll bring the laptop and watch the Nats on vacation." But then I hesitated -- a few weeks ago I was in Princeton, NJ and tried to watch the Nats on my laptop, but was told I was in the blackout area. Wondering whether Corolla, NC would be subject to Nats blackout, I found a relevant Zip Code and checked out "the list," and sure enough, the Outer Banks is part of the Nats' empire, which we now know stretches from Eastern North Carolina to the middle of New Jersey and to Central Pennsylvania. So it looks like I won't be watching Nationals' games on vacation this summer.

I am not alone. This story on Yahoo chronicles similar frustrations of fans around the country. As Capitol Punishment points out, the reason for the blackout rules is not to protect ticket sales (well, not anymore), it's to protect advertising revenue, which is still the predominant way baseball telecasts are paid for.

Most clubs earn revenue from telecasts of their games by selling exclusive rights to the local broadcasters; "exclusive" being the key for the broadcaster, who wants to make sure that if you watch the Nats, you see the advertisements it has sold. If you can watch the Nats without seeing those ads, advertisers will soon take their money elsewhere. Also, because the broadcaster is local, the area of exclusivity is measured geographically -- Koons Toyota would pay WDCA-20 to reach people in Arlington, Bethesda and Landover, not people who are "out-of-market" in far away places. So no one cares whether someone in Texas watches Nats games on the Internet -- the advertisements have little value to those viewers. (Blackouts can also theoretically protect the attendance at RFK -- if I can watch on TV I won't go to the park -- but most people agree that TV actually promotes attendance, rather than detract from it.)

But there are several areas where this theory gets mangled by practice in the case of the Nats and MLB.tv. First, of course, is that there are no local broadcasters who paid anyone anything for exclusive rights to Nats games in New Jersey, Pennsylvania and North Carolina. If there were, I'd be perfectly happy watching those games on the local TV like I do here in the D.C. area. The blackout lists for MLB.tv are, at this point, little more than a game of Risk, where the U.S. has been divided up in concept, without any real marketplace analysis behind the assignment.

Second, even here in D.C., watching the games on the MLB.tv, you would still see the advertisements from the local advertisers (assuming MLB.tv didn't cover them up or replace them). The problem for MASN and DC-20 is that those viewers don't get counted in the Nielsen ratings, and thus they won't get paid by the advertisers for those viewers.

But that leads me to my main point -- since this is all about money and not about spite, why can't I choose to "buyout my blackout", or pay extra to watch Nats games anywhere I want, regardless of the exclusive rights sold to a local broadcaster. That premium I paid could go mostly to the local broadcaster affected by my viewing on MLB.tv, to cover any potential "losses" from me not watching on television.

To help me understand why this option is not presented by MLB.tv, I tried to figure out how much that premium would cost. To do this, I started with the basic metric for selling ads, the CPM, which stands for "cost per thousand" (the "M" is the Roman numeral for 1000). According to one website, the average CPM for broadcast television is $20 for a 30-second spot -- in other words, for every 1,000 people that watch that ad, the advertiser pays the broadcaster $20. I think that is a little high for the Nats, but I'll use it here for simplicity.

So, with that $20 CPM, number we can figure out how much I'm "costing" the broadcaster when I watch a game on MLB.tv instead of television: 2 cents for each 30-second ad ($20 divided by 1,000 viewers, or "cost per one" -- CPI?). It sounds like a pittance, but wait, it adds up, because there are a fair number of 30-second spots during a single game. If there are 3 commercials each half-inning, that would be 54 spots (9 innings X 2 halves X 3 spots), plus there are spots in pregame and during pitching changes. A decent estimate is 75 spots (18 inning breaks + 4 pitching changes + 3 pregame/postgame breaks, all X 3 spots). Now, this will be a little high, given that many of the spots will be "house" ads for DC-20 TV shows and ads for the Nats themselves ("Let yourself go!"), so let's reduce our total to 50 ads that will be truly "sold". Thus, for any one game, I am costing the broadcaster $1 (50 x 2 cents) by watching it on MLB.tv instead of television.

$1 doesn't sound too bad, does it? But remember, there are 162 games, so in theory, the premium I'd have to pay to cover the "costs" to the local broadcaster is $162. Now that's probably way too high in reality -- for example, if the Nats are drawing only $15 CPM on only 35 spots per game, then the cost drops to $0.525 per game, or about $85 per season. You could probably think of other ways to whittle that number down, but ultimately my point is that the premium in the end would be a not insignificant number -- a number I'd probably still be willing to pay, but perhaps one that many would not. Now, I still shouldn't have to pay extra to watch in North Carolina or New Jersey or Pennsylvania or anywhere else where the local broadcaster is not showing Nats game. But there is value for where such games are televised.

But even if the number is big, there should still be an incentive to offer it to consumers. Why isn't it? There are transaction costs that must be considered -- it probably would cost something to keep track of my extra payment and make sure I could get the games I paid for -- but given those are probably absorbed in great part by MLB.tv generally, I doubt they would be very high. The real transaction costs is probably the fact that the deals with the broadcasters have already been struck, and don't allow for such a buyout. MLB.tv would have to repoen the deals with MASN and DC-20, and they probably don't want to do that. At least, it seems the additional revenue from allowing buyouts of blackouts isn't enough to make it worth their while.

Another important obstacle is fear of the unknown. Neither MLB.tv, the broadcasters or anyone else really knows what the demand is for Internet-based viewing of games -- it sure seems high, but judging such things is often harder than it looks. Going through the trouble of redoing the basic television deal, pricing the buyout premium, keeping track of additional payments, etc. may not be worth it if demand is lower than expected. But maybe when they have more experience with how people enjoy games on the Internet, there will be a better base on which to build new customer options.

But they'd better figure it out quickly. Because consumers like me can be impatient, and there are other solutions available to us, as the Yahoo story describes. I have heard of, but never used, technological tricks that help you get around the blackouts -- as demand increases for blacked out games, use of these tricks, which entail payment to no one -- will increase. Also, independent companies, such as Sling Media, will offer me a Slingbox to allow access to my Tivo recordings of the games from any Internet connection, even ones in the Outer Banks. I'll have to pay them some money for the technology and maybe a service fee, none of which will go to MLB, the Nats or the broadcaster. Both of these options may be of dubious legality, but that uncertainty cuts both ways. Again, if demand for blackout games increase, so will use of devices and technology like these. It's your choice, MLB.


At 1:50 PM, Anonymous Simon Oliver Lockwood said...

Of course, it isn't just MLB or the Lernastens that would have to renegotiate the TV rights to take into account the new Blackout Buyout option, the other 29 teams would have to do so as well. Because they all have different "exclusive" arrangements with their various TV carriers.

That's one of the problems caused by MLB swallowing up all the internet content under one MLBAM roof -- it makes it almost impossible to try innovative ideas because a single team can't test-market them to see if something works or not.

At 2:11 PM, Anonymous BristowNats said...

okay, really weird but Bristow (20136) is not on the list. I want my games now #$%&it!

At 2:12 PM, Blogger DM said...

Simon, That's a good point. I think ideally MLB wants a setup like the NFL, where the league controls all rights to all games, and MLBAM is a start of that on the Internet. But those kinds of things don't work halfway, and their either need to get control of the local TV rights (which will never happen, thanks to NYC) or let teams strike their own deals on Internet transmission.

Conceivably they could let MLBAM serve individual clubs by allowing blackout buyouts on a team-by-team basis, but I suspect some of the other clubs would complain if those premium payments went only to one club and its local broadcaster, given that MLBAM is supposed to be shared revenue among all clubs.

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