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Clayton Kershaw vs Clark the Cub: The Importance of TV deals in baseball’s big money era

The Dodgers and the Cubs both have a storied history. The both play in a big market and they both have a dedicated fan base. But they are on opposite sides of the spectrum when it comes to television revenue.

Jonathan Daniel

Two teams from two of the biggest markets in baseball made headline grabbing moves this week that fall as far apart in both rationale and reaction as possible. The Los Angeles Dodgers fulfilled their destiny and made Clayton Kershaw the highest paid pitcher in history with a deal that tops 30 million in average-annual value. Despite L.A. handing over the GDP of a small Polynesian island to man whose profession places significant strain on his left ulnar collateral ligament, the reaction to this move has been extremely positive. Up North in Chicago, the introduction of the presumably Tailspin-inspired Clark the Cub did not go over as well.

With baseball's biggest payroll and what might be the closest thing to an iron-tight grip on a playoff spot for the 2014 season, the Dodgers look like the game's premiere organization. They aren't without flaws- their farm system is in dire need of a rebuild and they are headed for a frightening luxury tax hit- but with a colossal TV deal on the way and an ownership group that is willing to put giant chunks that money back on the field, even fans in the Bronx might cast an envious glance to the West. Meanwhile, in the game's third biggest market, the Cubs are on track for around a $30 million drop in payroll, following a 66-96 season and four straight years in 5th place in their division. So naturally, they have just introduced a new pants-less mascot.

Though Cubs owner Joe Ricketts deserves some of blame for the lack of spending this winter, the present level of talent on the field makes it hard to justify trying to buy a contender for 2014. That alone probably isn't stopping the Cubs from making some meaningful additions, however. The true difference between the Dodgers from the Cubs is all that TV money. While Los Angeles is operating with the security of a deal that will pay them between $7 and $8 billion over the next 20 years, the Cubs are stuck waiting to see if they can find a way to do better than the approximate $60 million they have been pulling in from their joint deal with WGN and CSN Chicago, according to Robert Channick of the Chicago Tribune. It is tempting to look at Wrigley Field and the rooftop seats around it, to conjure romantic notions of the diehard patrons out in the bleachers and reverent toasts made to "da Cubs" by corpulent, mustachioed men in sweaters and to conclude that Cubs are certain to get theirs soon. Sadly, that is not necessarily the case.

In November, the Cubs were able to opt out of their deal with WGN, likely ending their relationship with the channel that has been their broadcast partner since 1948. That opens up the possibility of a new deal, but there are still serious obstacles. The Cubs next TV deal is almost certainly not going to be par with the Dodgers deal with Time Warner, but looking at franchise value and market size, the Cubs should be able to match or even top the 20-25 year, $2.5 -$3 billion deal that the Phillies landed just after the New Year. However, CSN Chicago owns the exclusive rights to cable broadcasts of their games through 2019. This is causing the Cubs to seek a bridge deal with FOX that would put a number of Cubs games on the local FOX broadcast affiliate until 2020, when the team would launch their own channel, according to Patrick Mooney of CSN Chicago. Such a deal could bring the new wave of TV money to the North Side before the team's deal with CSN Chicago expires, but it is not clear exactly how that would happen given the complicated web of extending circumstances.

Image courtesy of Tyler Drenon

FOX is attempting to stake out their own claim in the cable sports market that is currently dominated by ESPN, an excellent strategy given in the current media landscape. At an estimated $40 billion value, ESPN is the most valuable media property in the world, according to Ken Badenhausen of Forbes, so if FOX can steal away a slice of that pie, they can make a fortune. At the heart of the sports media battle is broadcast rights, especially cable broadcast rights. The advent of DVR, On-Demand and second-run platforms like Netflix and Hulu have drained ad dollars away from scripted television and many reality shows, which don't require viewers to watch live, threatening the very existence of cable television. For both advertisers and cable companies, sports appear to be the holy grail, capable of granting them eternal life. Cubs President Theo Epstein explains (via Mooney):

"The biggest factor in all this is that there's less and less content on TV that you need to see each day without DVR-ing. So what makes baseball attractive to TV networks is the fact that you have to watch it each night if you're a fan. You can't tape a game and watch it two weeks later. It's already outdated. You can't speed through the commercials. It's daily content. And what's better content than the Chicago Cubs crawling their way to a World Series title?

"You would want to buy stock in the Cubs' TV rights."

Crawling is certainly the right word. Though Frank McCourt ran the Dodgers just about as poorly as an owner could, the Guggenheim Group bought a team in a far better position than the one the Cubs were in when Theo Epstein took over the reigns. The 2011 Dodgers were not great, but they posted a winning record and contained a small core of established major league players that they could build around, including Kershaw. Esptein took over a team weighed down by pricey, unproductive veterans like Carlos Zambrano and Alfonso Soriano with very little talent in the minors to help turn things around. Eyeing the big payday to come when they landed a new TV deal, the Dodgers new owners spent big out of the gate, trading prospects to the Red Sox for Adrian Gonzalez, Carl Crawford, Josh Beckett and Nick Punto during the 2012 season and then signing Zack Greinke heading into 2013. Epstein and GM Jed Hoyer have spent their two seasons in Chicago stripping away those bad deals and adding whatever young talent they can get via trade. That leaves them much further from competition that the Dodgers were went they made their deal with Time Warner and that can't help their value to potential bidders like FOX.

Also working against the Cubs is the leverage that CSN Chicago gains through the ownership stake the Cubs have in the cable network. By moving games to a local Fox affiliate now, the Cubs would appear to be taking a valuable asset away from a company they are invested in. Therefore, CSN Chicago is the only possible bidder who can get the maximum value out the games now available in the wake of the team's split with WGN, giving them leverage. Should the Cubs move to FOX, they could be devaluing their own CSN Chicago shares, draining away dollars from the new deal and the two new partners would have to wait six years before consolidating everything at one channel. The accounting in such a scenario is extremely complicated but it seems safe to assume that this detail would raise the cost for FOX above what CSN Chicago would need to pay for the same deal.

All of this means that Cubs quest to join the Dodgers, Rangers and other clubs in the TV-money-sponsored champagne room of baseball free agency bidding is probably going to crawl right along with their current rebuild. As the farm system begins to payoff and the end of the CSN Chicago deal approaches, their leverage with both bidders should only increase. FOX could make a move before then, but for that to happen, the offer might need to be overwhelming. The team risks leaving hundreds of millions of dollars on the table by forcing the issue too soon. If Fox won't pay a premium for a limited number of games now to get the rights after 2020, waiting out CSN Chicago might be the best option. That could mean a bigger deal in the end, but it would probably limit spending in the near future.

This is baseball's new reality. Market size is far less relevant now then ever before. The teams that can spend are the teams that can count on income from the league and income from a sweet deal with their local cable channel, as Maury Brown recently demonstrated at Forbes. Right now, the Cubs are in an uncertain position and until that changes, they won't be playing in the same league as the Dodgers, financially speaking. Brown sees the Cubs deal happening soon, but I am skeptical. Obviously, there are reasons for FOX and CSN Chicago to submit strong bids and for the Cubs to push for a deal now. Maybe that will be enough. Given the Cubs stake in CSN Chicago, the potential FOX deal looks like a negotiating strategy rather than a serious possibility. Television executives are used to losing money over several years to cash in when a series hits syndication, but even they might balk at betting billions on the Cubs in their present state.

After all, their biggest offseason addition is a cartoon bear, rasta-fied by about 15 percent or so.