The $700 Million Contract & the Death of Baseball

Shohei Ohtani signed the most lucrative contract in the history of sports over the weekend. $700 million to play baseball for the Los Angeles Dodgers through the 2033 season.

We subsequently learned that Ohtani will only be paid $2 million per year during his playing days with $68 million deferred until the 10 years following the end of the contract. In present value terms, the contract is only $460 million, which will be about the tax hit to the Dodgers.

The structure of the deal is unusual and the timing is especially interesting given baseball’s trajectory. Sports leagues in general are facing challenges as the cable bundle unwinds, but baseball is in an especially precarious position and Ohtani put himself in the center of the sport’s financial future.

Baseball and the Regional Network Collapse

The truth is that baseball runs on regional sports networks (RSNs). Ticket sales are great and the MLB deal with Apple for Friday Night Baseball is a nice headline, but the big money is in the 162 games per year filling cable’s airways. This is why big city teams have much higher payrolls than their smaller market rivals and the Dodgers know this better than anyone.

In January 2013, the Dodgers signed an $8.35 billion 25-year distribution deal with Cable SportsNet LA, an RSN that’s 50% owned by the team’s owners and 50% owned by Charter (Nasdaq: CHTR). The YES Network in New York paved the way for team ownership of the RSN and NBC Sports Chicago followed, so the Dodgers jumped into the RSN mix because they saw the money involved.

At $334 million per year, the Cable SportsNet LA deal makes up over half of the reported $605 million in revenue the Dodgers generated in the past year. It’s how the company could afford a $242 million payroll in 2023 and sign a $70 million per year contract for Ohtani.

But the $334 million check may stop coming long before the Cable SportsNet LA contract ends in 2039.

That’s because RSNs are collapsing. The number of cable subscribers peaked in 2016 with about 100 million subscribers and that’s down to about 60 million in 2023 with no end to the declines in sight. Cable SportsNet LA itself was reportedly losing $150 million per year before agreeing to terms with AT&T to have the channel carried on its cable bundles.

But Cable SportsNet LA revenue is still tied to the absolute number of households getting the channel and that number is in decline.

The Gravy Train (Probably) Won’t Last

In other words, the Dodgers signed a 25-year TV deal at the peak of the market and have been collecting on that position for years. But the underlying business that pays the bill — which is called American Media Productions, LLC — may not have the money to pay for much longer if cord-cutting continues. RSNs have squeezed carriage fees for all their worth and customers (most of whom don’t watch Dodgers games) are pushing back.

This is the downward spiral that left Diamond Sports, which ran Fox Sports and eventually Bally’s Sports networks that carried dozens of MLB, NBA, and NHL teams, bankrupt in March 2023. In bankruptcy, the company, the NBA, and MLB have kicked the can down the road another year, agreeing to extend terms for the next year. But both leagues will be looking to get out in 2024 and there’s already talk that Diamond Sports may simply liquidate any assets it has left.

Will Cable SportsNet LA and American Media Productions, LLC meet the same fate?

The Dodgers’ Ohtani bill technically starts coming due in 2025 when future payouts need to start going into escrow. By the time the playing portion of the contract ends, I’m willing to bet American Media Productions, LLC is bankrupt and the Dodgers may be in financial trouble…again!

Where do the leagues and local teams turn for revenue when the RSNs go bankrupt one by one? There are no easy answers, especially for the big market teams.

Abundance Comes to a World of Scarcity

What does this dynamic mean for companies and investors?

As I mentioned, regional cable deals are what drove growth for MLB, the NBA, and the NHL for decades. More cable subscribers combined with ever higher carriage fees meant an unstoppable money train that ultimately flowed to teams and player salaries. And “everyone” had cable, so they weren’t limiting their reach to new fans by hopping on the cable bandwagon.

That money train is over.

Cable is dying and RSNs are the first to feel the pain.

The cable companies (including Charter) and subscribers that are left are more cost-conscious and YouTube TV (the one growing cable service) has sold itself as a lower-cost option, eschewing RSNs altogether.

Younger fans have moved to streaming where sports are…hard to find.

The paradox of streaming today is that you can find almost any TV show or movie ever produced and be watching within seconds (abundance), but if you want to watch your local sports team you’re probably SOL (scarcity).

And this is where the biggest problem comes for the Dodgers. Viewers today —especially young viewers — don’t just want to watch their local sports team, they want to watch their favorite player no matter where or when they’re playing. If that team/player isn’t available, they’ll move on.

I’m watching this firsthand with my 6-year-old son. He loves football and we tape all NFL games on YouTube TV, so he’ll watch a random game from 3 weeks ago on a Tuesday morning because he wants to see Joe Burrow or Tyreek Hill play, regardless of when the game took place.

On Sunday afternoons, he couldn’t care less that the Vikings are playing live.

Viewership is changing and the sports leagues can change with it or die with the old model.

If leagues are smart, they’ll sign contracts with the biggest streamers possible to make every game available to anyone anywhere in the world. Lean into abundance. Make the pie bigger for everyone.

That would be great for a small market team like the Minnesota Twins, who don’t have the same RSN potential as the Dodgers. But it’s terrible for the Dodgers because the $334 million RSN check may be replaced by a much smaller national/global rights check.

Good for the many may be terrible for the currently fortunate few.

As the former Diamond Sports RSNs are negotiated in the next year, we may see baseball tear itself apart figuring out what the right path forward is. But given the losses at RSNs, it’s clear baseball needs to lean into abundance.

And who pulls together all of this content? Netflix, Disney, and YouTube are the logical options because of their scale and reach. It’s no coincidence two of those companies are in the Asymmetric Portfolio!

Ohtani’s Risk and the Contract Albatross

Over half of the Dodgers’ revenue is tied up in an RSN that may be bankrupt a decade from now. And by then baseball will be even more irrelevant to young people than it is today (attendance peaked in 2007) because they have an abundance of options when looking for sports and entertainment. Then there’s the Dodgers’ reported $400 million in debt with a 9% interest rate to worry about.

Maybe American Media Productions, LLC isn’t the only company that’s destined for bankruptcy in the foreseeable future because revenue is declining as costs stay the same or increase — and it wouldn’t be the first time this century the Dodgers headed to bankruptcy court.

The Dodgers may be getting in over their financial head like Fred Wilpon was signing Bobby Bonilla’s 25-year deferral deal in 2000. That would be the worst case for Ohtani, who is nothing more than a liability on the balance sheet in bankruptcy.

Everyone seems to be cheering this Ohtani deal as brilliant, but I think it is a mess for everyone involved. And Ohtani is taking financial risks on the future of the Dodgers RSN and a team with a history of financial trouble.

Ohtani will be fine, but I would have told him to take the money now, pay the taxes, and run!

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