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The Los Angeles Dodgers formally announced a deal with Time Warner Cable on Monday to create a new TV channel that people familiar with the situation say assures the team more than $7 billion over 25 years. That is double what Major League Baseball thought the local TV rights were worth when the team was sold out of bankruptcy just last year.
The gap will be the subject of discussions going forward as the league attempts to haggle over how much of that extra money will go into a revenue-sharing pool to help out baseball's lower-revenue franchises.
MLB calculates that 34 percent of a team's local revenue, after subtracting costs, is available for redistribution throughout the league. When the Dodgers were mired in bankruptcy last year, the league agreed to value the potential TV rights of any future deal at $84 million the first year, rising 4 percent every year thereafter. Over 25 years, that estimated TV rights revenue of $3.5 billion.
The actual TV rights contract represents a huge mark-up from that initial forecast. It could be a boon to the league, depending on how much of that revenue its internal rules committee says is subject to sharing. The contract is also a big win for the owners, including Guggenheim Partners and Magic Johnson, who bought the team out of bankruptcy last year for $2 billion from Frank McCourt.
The broad strokes of the deal terms were confirmed by three people who requested anonymity because they were not authorized to speak about them publicly.
MLB spokesman Pat Courtney wouldn't comment on the deal, but said the league would need to approve it. "We are still awaiting further information," he said.
If approved, fans in the Los Angeles area and Hawaii would have to switch from watching Dodgers games on Fox Sports' regional sports channel Prime Ticket after the 2013 season.
The high price tag also means monthly TV bills are likely headed upward — in the Los Angeles market and elsewhere.
"There's no question that there's a huge problem with sports rights," said Derek Baine, a senior analyst with research firm SNL Kagan, adding that one big question is "when is this going to stop?" Baine also blamed higher TV bills on the proliferation of new channels and rising fees for once-free TV station broadcasts.
Time Warner Cable Inc., which agreed to pay the fees, is now aiming to cut deals with other local TV distributors to offset the cost, which could spread any fee hikes across the TV landscape, including in other markets.
The new channel, SportsNet LA, will be launched and operated by a subsidiary of the team formed in December called American Media Productions LLC.
Along with selling the channel to other TV distributors, Time Warner Cable will have the exclusive advertising rights and certain branding and programming rights. It will also offer production and technical services outside of regular game coverage, which will be handled by the team's subsidiary.
Ownership of the network was important, according to the people familiar with the situation, because the league allows teams to reduce their revenue-sharing contributions by the cost of running their own TV networks.
The contract marks the second major sports rights deal in three years for Time Warner Cable, which bought the rights to Los Angeles Lakers games in 2011 and launched regional sports networks covering them last year.
After paying an estimated $3 billion for the Lakers rights for 20 years, Time Warner Cable eked out higher fees from other TV distributors in Los Angeles, including DirecTV. The cable operator has said it is bidding for long-term sports carriage agreements to give itself certainty about rising sports costs.
"This deal, like our Lakers' deal, furthers our efforts to attain greater certainty and control over local and regional sports programming costs," David Rone, president of Time Warner Cable Sports, said in a statement.
However, Time Warner Cable is not the only network operator looking to recoup the cost of sports rights by hiking fees on other TV distributors.
The New York Yankees' YES Network, which is part owned by News Corp.'s Fox network, is also expected to seek a fee hike from Time Warner Cable when that agreement expires early next year.
Dodgers owner Mark Walter said in a statement, "we concluded last year that the best way to give our fans what they want — more content and more Dodger baseball — was to launch our own network."
Ron Blum contributed from New York.