Welcome to Part III of my dive into Cub finances. It is time to talk about the nascent Marquee Sports Network.
Marquee is the Cubs’ new regional sports network (RSN) and will begin broadcasting Cubs games in 2020. It will replace the hodgepodge of television options of the past several years that included games on WGN, ABC, and NBC Sports Chicago and will carry original content as well as coverage of some other local sports.
The new network is a partnership between the Cubs and Sinclair Media, which also owns a share of the Yankees’ YES Network and 21 other FOX Sports RSNs spun of by Disney recently. It is unclear how much each entity owns, but I presume the Cubs (or the Ricketts family, I am not distinguishing between the two here) have majority control.
Last summer I posted that Marquee could potentially bring the Cubs an extra $100 million in annual revenue, an educated guess based on other recent TV rights deals and the size of the Chicago media market. Since then I have been researching everything I could find about Marquee, as well as the financials of RSNs in general, in order to improve my estimate. This section will serve as a general depository of all Marquee information collected to date.
Marquee in the TV Landscape
To begin, it is important to understand the financial relationships between RSNs, cable providers, advertisers, and viewers. The figure below (modified from this article) gives you a quick tutorial…
It is not necessary to understand everything in this graphic. What is important for our purposes is noting that money is being paid to Marquee from two different directions: carriage fees (called affiliate fees in this graphic) and advertising dollars.
Advertising revenue is fairly straightforward. Companies pay to have commercials play during games (or other programs), with prices based on viewership ratings. The better the ratings, the higher the ad rates. The Cubs routinely have some of the highest ratings in Chicago and baseball in general, so they should command top dollar.
Carriage fees are slightly more complicated. Marquee will set a price and then must convince cable and satellite TV providers to include the the channel in as many TV bundles as possible. More subscribers with a bundle that includes Marquee as a channel means more money for the Cubs.
Carriage fees account for 85% of RSN revenue, so getting them priced correctly is critical. If the carriage fee is set too high, TV providers will decline to include Marquee in many bundles. But if the carriage fee is too low, there isn’t as much money coming in. In this cord-cutting age, fewer consumers are willing to pay for high-priced bundles, so Marquee faces a tough road convincing TV providers to bundle the channel. The job will be further complicated by the fact that NBC Sports Chicago is an established RSN that is already bundled with most Chicagoland TV providers. This is all discussed at more length later.
Marquee and the Cubs
While the Ricketts own both the Cubs and Marquee, they are not the same company. Money will flow from Marquee to the Cubs through two independent channels. One is a rights-fee payment. This is the money an RSN pays a team for the rights to broadcast its games. The Cubs currently have rights fee payments from all three channels (WGN, ABC, NBC Sports) that broadcast games in 2019. Marquee will likewise pay rights fees to the Cubs.
Separately, the Cubs will also co-own Marquee, which means they will also be entitled to a share of Marquee profits. The remainder will go to co-owner Sinclair.
Rights fee payments count as baseball revenue and will be subject to revenue sharing. Thus, the Cubs will lose 10-15% of this money right off the top. Marquee profits, on the other hand, are not considered baseball revenue and will not be subject to revenue-sharing losses. But those profits must be a shared with co-owner Sinclair and I have no idea which avenue of revenue results in the Cubs keeping a bigger chunk of the money.
How Much Money?
We now reach the big question: How much money is Marquee going to bring in? Kenney Crane, Cubs president of business operations, recently told The Athletic ($ubscription) that “the team has a rights fee significantly higher than what they’re receiving today.” The present tense (and remainder of the quote) make it clear than the rights fee has already been agreed to by all parties. Kenney also made it clear these additional funds would be available for use next season (2020).
He stated that network “profits, if any…could also be used for investment in the team or other assets around the ballpark or other interests of the (Ricketts) family,” but added that those profits are “a little further down the road.” This sounds like the Cubs negotiated the rights fee to make sure the team has a strong initial cash flow, with profits more of a long-term bonus.
So how big is this rights fee? We know it is “significantly” larger than the ~$70 million the Cubs currently bring in. Looking at comparable recent rights deals should give us a clue. I previously addressed this question by looking at how much other teams have gotten for their TV rights. The most useful comparison was the Phillies’ 25-year, $2.5 billion deal in 2016, which also included a 25% stake in CSN Philadelphia, the RSN that negotiated the deal. The rights fees were for $100 million annually, although only $60 million in the first year.
Chicago is a larger, more profitable market than Philly, the “designated media market” of which is about 2.9 million homes. Chicago is 20% larger at 3.5 million homes and the Cubs draw stronger ratings than Philly. If Philly got $100 million, one would expect the Cubs would get about 20-30% more, perhaps in the $120-130 million annual range. The year-one payout might be in the $85 million range, a substantial increase from the $70 million the Cubs are earning in 2019.
The Cubs should also be able to supplement this with Marquee profits. In February, Sinclair announced they expect to generate “free cash flow” (i.e. profits) of $40-50 million annually from Marquee. If we knew what percentage of Marquee is owned by Sinclair, we would also know the Cubs’ profits. For example, if Sinclair owns 50% of Marquee, the Cubs would receive the same $40-50 million annually. If Sinclair only owns 20%, the Cubs’ share rises to $160-200 million.
Unfortunately, Sinclair’s ownership stake has yet to be revealed, so the best we can do for now is try and predict their stake based on other similar RSNs. The best comparisons are SportsNet LA, NBC Sports Chicago (formerly CSN Chicago), and the now defunct CSN Houston. All three involved a sports team partnering with a broadcaster to create an RSN. In each case the team provided the content, while the broadcaster provided TV know-how. SportsNet LA is 50% owned by Charter Media, CSN Chicago was founded with Comcast having a 20% stake, and CSN Houston gave a 23% stake to Comcast. So we have a range of 20-50%. That is a big spread.
Unfortunately, we have no way of knowing, for now, whether Sinclair is a 20% partner or a 50% partner. The low end would have the Cubs pocketing $160-200 million annually, while a bigger share would drop that to only $40-50 million. So this make a big difference.
Furthermore, profit data of a few other independent RSNs from 2012, shown in the table below, suggests that either number is possible.
That $200 million number would definitely be on the high end of this table, but the Cubs are a ratings juggernaut and this profit data is seven years old. So it’s within the range of possible.
At some point in the near future, details of the Cubs’ rights fee with Marquee should leak out and provide further clarification. If the rights fee is huge, it signals a smaller Cubs ownership share in Marquee. A more modest rights fee would indicate the opposite.
It is also important to note that CSN Houston went bankrupt, severely hurting the Astros. The Cubs would not leave their existing broadcast situation and risk the failure of Marquee unless they were in a position to pocket the lion’s share of the rewards. One way or another, I suspect the Cubs will have $160 million annually flowing to them through a combination of rights fee and profits.
Even if Sinclair is a minority owner, a question remains: Why are the Cubs sharing any of the revenue? Put another way, why did the Cubs need Sinclair? I suspect one major answer is carriage fees.
Every cable TV subscriber knows that consumers are not offered the option of picking individual channels on cable. We are forced to purchase bundles. Each bundle contains a larger number of channels, some of which we want…many of which we do not. Yet we pay for all of them. Every single channel charges the cable company a carriage fee. For example, CNN charges $1.00 per month per customer. The most expensive channel is ESPN, which charges a whopping $7.21, a cost passed along to consumers in their cable bills.
In order for channels to make money, they need to convince the cable company to carry their channel to begin with. To make even more money, channels need to convince cable companies to include their channels in the most popular (or default) bundles.
Regional Sports Networks (RSNs) have among the highest carriage fees in television, and these carriage fees account for a bulk of an RSN’s revenue. NBC Sports Chicago, the Cubs’ soon-to-be former carrier, charges $4.20. The Yankees’ YES network (now also partially owned by Sinclair) charged $5.36 as of 2016. And Cubs Insider posted in January that the Cubs are expected to price Marquee as high as $6 per month.
Yet in recent years, both consumers and cable companies have been resisting these price levels. The average American is now familiar with “cord-cutting,” the act of giving up pay television in its entirety. Even among those who still subscribe, there is a growing demand to pay for smaller, more personalized channel bundles. Non-sports fans are sick of subsidizing ESPN and local RSNs. As a result, cable and satellite TV providers are resisting carrying them.
For example, the Dodgers signed a 25-year deal worth $8.35 billion in 2014, but 50% of the LA television market is unable to watch Dodgers games because DirecTV and several other providers refuse to pay the $4.50 carriage fees. CSN Houston went bankrupt when it was unable to convince cable companies to carry the channel beyond the immediate Houston area.
One effective way to convince a cable company to carry a channel is to force its acceptance as part of a package that includes other popular channels. For example, Disney owns ABC, ESPN, the Disney Channel, A&E, the History Channel, and Lifetime. Disney requires these channels be purchased as a group and usually requires they be placed in the default cable bundle. As a result, Disney is able to extract carriage fees for all of these channels from almost every cable customer in America.
The partnership with Sinclair may provide Marquee with similar leverage since the conglomerate owns 193 local television stations around the country. These are the stations that re-broadcast the big networks in local areas and host the local evening news. Many of these stations are dotted around Illinois in places like Champaign-Urbana, Springfield, Peoria, and Bloomington. Sinclair also owns numerous stations in Indiana, Iowa, Missouri, Wisconsin, and Michigan, all states that house significant Cub-cheering populations.
People like having access to the local evening news and other local programming. The Cubs hope Sinclair can package access to local affiliate broadcasts with Marquee, thus providing a broad base of consumers all paying the hefty carriage fee.
The broad base is important. For one, the more cable companies carry the channel, the more money Marquee makes. Additionally, TV access creates new generations of fans, as WGN’s nationwide broadcast of Cubs games proved. Yet CSN Chicago (the forerunner to NBC Sports Chicago) failed to gain carriage in large swathes of Illinois, Iowa, and Indiana, as shown in this figure using 2012 data (the X’s are regions without carriage). And CSN Chicago hosted four different teams in three sports.
Consumers in Chicago proper and northern suburbs might be willing to pay $6 per month for Cubs games. But consumers (and cable companies) in the southern suburbs and downstate may decline to pony up for a new station that carries only a single team. Sinclair’s local stations, however, provide Marquee with leverage in these more distant markets.
Speaking of NBC Sports Chicago, Marquee does have the good fortune of facing off against then at just the right time. The three teams now shown on NBCSC (Bulls, Blackhawks, and White Sox) have collectively failed to make the postseason the past two years. Meanwhile, the Cubs have four consecutive winning seasons and Marquee may also include Bears content just as they are returning to prominence. Marquee may be able to convince some cable companies to simply replace NBC Sports Chicago with Marquee. It should be noted that carriage deals run year-to-year and can be canceled at any time, so there is nothing preventing such a switch.
Sinclair also just agreed to purchase 21 former Fox RSNs from Disney for $10.6 billion and may be able to bundle various RSNs in overlap regions to further broaden the carriage fee base, but this is pure speculation.
What is not speculative is that Sinclair has a reputation for profitability and would not be getting into the RSN business without a strong belief they will make money. Sinclair also has a reputation for ruthlessness, such as forcing local news to carry corporate-approved editorial content. The Ricketts presumably hope Sinclair will use that muscle — sans propaganda — on Marquee’s behalf.