Saturday, July 26, 2014
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The incredible vanishing TV contract, or, why rich people hate socialism

They say economics is the Dismal Science, which means it has a lot in common with writing about sports. I guess what i'm trying to say is: party, prepare to be pooped. You may have heard that the Phillies recently signed a new television contract with Comcast SportsNet. Given the terms of the deal -- at least $2.5 billion over 25 years, according to reports -- you might be wondering whether it was actually the Phillies who signed Comcast SportsNet to play first base. But as far as we can tell, this thing is legit.

The incredible vanishing TV contract, or, why rich people hate socialism

Phillies general manager Ruben Amaro Jr. (File photo)
Phillies general manager Ruben Amaro Jr. (File photo)

They say economics is the Dismal Science, which means it has a lot in common with writing about sports. I guess what i'm trying to say is: party, prepare to be pooped. You may have heard that the Phillies recently signed a new television contract with Comcast SportsNet. Given the terms of the deal -- at least $2.5 billion over 25 years, according to reports -- you might be wondering whether it was actually the Phillies who signed Comcast SportsNet to play first base. But as far as we can tell, this thing is legit.

So what's the dismal part? Well, as usual, it's the reality part. If you are a realistic person, it's probably not so dismal. But if you are a person who thinks the Phillies are now poised to spend money on salaries like the Dodgers and the Yankees, well, you might be disappointed.

Without a doubt, the numbers are eye-popping. When the Phillies' new TV contract expires after the 2040 season, I will be 58 years old, a mere 48 years from social security eligibility (thanks mom and dad!). I'll also have a lot less money than $2.5 billion. Thing is, so will the Phillies. 

The temptation is to divide $2.5 billion by 25 years and decide that the organization will have $100 million more dollars to spend in 2016. But that's not the case at all. Because of inflation, the contract is not structured to pay the Phillies $100 million per year. If it was, they'd receive less than $55 million in real dollars in the final year of the deal. While we don't know exactly how the payments are structured, we can take an educated guess. Our good friend Ben Bernanke recently stated that the Federal Reserve has set a long-term inflation target of between 1.7 and 2.0 percent. That means the Fed is aiming for, or planning on, average annual inflation at that rate. To make things easy, let's assume that average inflation ends up being 2.0 percent per year between 2016 and 2040. So by the time the Phillies' new deal even begins, that hypothetical $100 million annual payment will only be worth $96 million in 2013 dollars. But let's work in 2016 dollars.

From the Phillies' perspective, the optimal scenario would land them all $2.5 billion in 2016, when it would be worth $2.5 billion in real money, and could then be invested in order to negate the effects of inflation. From Comcast SportsNet's perspective, the optimal scenario would be to pay all $2.5 billion in 2040, when it would be worth about $1.3 billion in real dollars (again, assuming an average annual inflation rate of 2.0 percent). Let's assume both sides agreed to get dinged by inflation evenly, spreading out the money so that it pays a steady rate in real dollars over the life of the deal. Such a set-up would make the rights payment to the Phillies in the neighborhood of $78 million for 2016. Over the life of the deal, that would leave the Phillies collecting about $1.9 billion in real dollars.

So the Phillies already have $22 million less in liquidity for the 2016 payroll year than we might at first have figured. And we're just getting started.

Because of Major League Baseball's revenue sharing plan, the Phillies must contribute 34 percent of that $78 million to a pool that gets distributed evenly to all 30 clubs. In 2016, that's about $26.5 million, leaving them with about $51.5 million. In reality, the total will be less, because the CBA allows teams to deduct ballpark operating expenses from their gross local revenue. But that does not really matter for our purposes, because all we are trying to do is figure out the maximum extra spending money the Phillies have, and we can assume that the amount they spend on operating their ballpark will not decrease moving forward. So let's just stick with the figures we've already mentioned and assume ballpark costs remain level. 

So that's $51.5 million. But keep in mind the Phillies are already receiving a reported $35 million per year in rights fees, which, minus the 34 percent revenue sharing contribution, would amount to about $23 million. They are also receiving a significant portion of the advertising revenue from the broadcasts. The new deal also includs an unspecified cut. But let's not worry about that, because, again, we're just trying to figure the maximum increase in spending power they will experience. So if their disposable TV income from the new deal amounts to $51.5 million in 2016, and their disposable TV income from the old deal in 2015 is the equivalent of $23 million (assuming the old deal was also structured to pay in real dollars), then they will really only experience an increase of about $28.5 million in disposable TV income in Year 1. Meanwhile, they will increase the disposable income of the rest of the teams in the league by 29/30ths of $14.5 million (the difference between their $12 million contribution under the old deal to their $26.5 million contribution under the new deal). So while the Phillies could theoretically spend $28.5 million more on the various talent markets, that spending power is mitigated by the fact that they will be increasing demand across the rest of the market, which they will be bidding against, by $14 million. 

Obviously, this is a simplified version of some complex stuff (for instance, the Phillies will likely end up contributing more than 34 percent of their net local revenue to the revenue sharing pool because of a supplemental pool that bigger revenue teams must pay into, but we aren't even going to get into that). 

All of this comes with the caveat that unless we see the actual signed particulars of the contract, which reportedly includes a 25 percent equity stake in CSN, we won't really know how much money the Phillies are reaping from the new deal. It is certainly in their interest to downplay the dollar amount given the pressure that is already on them to spend on payroll. The only point here is to show that the actual impact of TV dollars is probably significantly less than a lot of fans and media folk have portrayed. 

Table 1: Gross/Net rights money assuming $2.5 billion paid evenly over 25 years with 2.0 percent annual inflation (in millions of dollars)

Year Rights Fee Percent Shared Total $ Shared Total $ Kept
2016 78 .34 26.5 51.5
2017 79.6 .34 27.1 52.5
2018 81.2 .34 27.6 53.6
2019 82.8 .34 28.2 54.7
2020 84.5 .34 28.7 55.7
2021 86.2 .34 29.3 56.9
2022 87.9 .34 29.9 58.0
2023 89.7 .34 30.5 59.2
2024 91.5 .34 31.1 60.4
2025 93.3 .34 31.7 61.6
2026 95.1 .34 32.3 62.8
2027 97.1 .34 33.0 64.1
2028 99.0 .34 33.7 65.3
2029 101.0 .34 34.3 66.6
2030 103.0 .34 35.0 68.0
2031 105.1 .34 35.7 69.3
2032 107.2 .34 36.4 70.7
2033 109.3 .34 37.2 72.1
2034 111.5 .34 37.9 73.6
2035 113.7 .34 38.7 75.1
2036 116.0 .34 39.4 76.6
2037 118.3 .34 40.2 78.1
2038 120.7 .34 41.0 79.6
2039 123.1 .34 41.9 81.2
2040 125.5 .34 42.7 82.9
TOT 2.5 bil   .850 bil 1.65 bil

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David Murphy Daily News Staff Writer
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