My colleagues Jim Peltz and Bill Plaschke both reviewed the ongoing fiasco of the Dodgers' TV rights deal this weekend. Both came to the same conclusion--that it's a disaster for the ball club and for the fans. Frankly, who could look at the facts and conclude anything else?
But the Dodgers debacle also holds a lesson for the Federal Communications Commission, which will have to rule on two mega-mergers proposed in the telecommunications market. The newest deal, announced over the weekend, would have AT&T acquiring DirecTV for $49 billion. Also pending is a proposed merger of Comcast, the biggest cable operator in the country, with Time Warner Cable, the second-biggest.
The lesson is that reducing competition in the pay-TV market inevitably will be bad for consumers.
Here's the background. Last year the Dodgers' new owners, led by Guggenheim Partners, reached a deal with Time Warner Cable to create a Dodgers-only cable channel called SportsNet LA. Time Warner, which will pay $8.35 billion over the life of the 25-year deal for TV rights to Dodgers games, plainly figured it could get much of that back by hawking the channel to the other pay-TV outlets in the region.
Time Warner has to cover an enormous nut. As my colleague Joe Flint broke down the price last month, Time Warner Cable is paying about $1.5 million per Dodgers game this season. Last season, it paid only $335,000 per game. And the price will rise in future years.
To make its money back, Time Warner is demanding such a high price for the TV rights that it has received a firm "no" from every other pay-TV firm in the area -- Cox, Charter Communications, the fiber services Verizon FiOS and AT&T U-verse, and the satellite companies DirecTV and Dish. Since Time Warner Cable serves only 30% of the pay-TV households in the region, that means Dodger games are blacked out for the other 70%.
There's no mystery about what happened here: The magic of the free market has been trumped by the black magic of greed. The Dodgers held out for the highest price they could get for the TV rights, figuring the team is such a jewel in the Southern California sports crown that the sky was the limit. Time Warner figured it could mulct the other pay-TV companies for every last dime because, really, what TV service would dare not carry the Dodgers, whatever the price?
But those other services turned out to be quite willing to risk the loss of subscribers; they figure that, at worst, the loss of subscribers will do less damage to their bottom line than paying Time Warner's price.
DirectTV proposed carrying the Dodgers as an add-on channel for which subscribers would pay extra, like HBO. Time Warner refused those terms -- offer the channel to all your subscribers, it said, or none at all. So DirecTV has said, "None at all it is."
That brings us back to those telecommunications mega-mergers. Already there's precious little competition in this industry. If you're a Cox or Charter cable customer in Southern California, you have no other option for cable service because cable franchise territories are always granted on a monopoly basis; you can't switch cable companies unless you move into a different company's service area. (See the map above.) So already Cox and Charter don't risk losing subscribers to Time Warner Cable over the Dodgers blackout -- their customers have nowhere to go to get the Dodgers.
The only competitive option consumers have if they're unhappy with their TV service is to switch between cable providers to satellite or fiber services--and the Verizon and AT&T fiber services aren't available everywhere. The AT&T/DirecTV merger obviously would shrink that option.
Some consumers today can move between AT&T and DirecTV. Theoretically, that gives Time Warner Cable the chance to play those firms off against each other, since AT&T or DirecTV might eventually judge that offering the Dodgers to their customers will give them a competitive advantage. The strategy hasn't worked so far, but as a Dodger-less season drags on, it might. (One reason it hasn't worked is that DirecTV is already a dominant player -- it serves nearly half of those 70% of Southern California pay-TV customers not served by Time Warner Cable.)
This is how the free market so beloved of Washington pundits and FCC Chairman Tom Wheeler is supposed to operate. But it plainly has worked lousily for Dodgers fans, and after an AT&T/DirecTV merger it will be considerably less free. Forget playing the two companies off against each other: AT&T and DirecTV would be acting in concert.
And if that merger is approved, brace yourselves for the next round -- Dish, Verizon and all the smaller cable companies will all be looking to mate up, confident that the FCC will bless their unions. The place for the commission to draw the line is right here.