Amid front office turnover, Orioles also have big week in MASN dispute with Nationals

Jon Meoli
Contact ReporterThe Baltimore Sun

A dispute that has dragged on for the better part of this decade between the Washington Nationals and the Baltimore Orioles over revenue from the Orioles-owned Mid-Atlantic Sports Network (MASN) could end this week as the two teams go before an MLB arbitration panel.

At issue are tens of millions in television fees for teams in one of the most unique situations in sports: in exchange for the ability to move into Washington, D.C., which was in the Orioles' territorial rights, the new Washington franchise would have its games broadcast on an Orioles-owned television network. The Nationals would see their stake slowly increase, but the teams haven't been able to agree on how much MASN (and thereby the Orioles) will pay the Nationals for their broadcast rights for years.

The litigious nature of the parties involved mean much of it has played out in court records and behind closed doors, leading to a slow leak of information on what has transpired and an even more limited understanding of what it all means for the Orioles.

The arbitration panel comes as reports have surfaced that the Orioles are poised to name Mike Elias, the Houston Astros’ assistant general manager, as their top executive to replace Dan Duquette, who was let go in October.

We address some key questions about the MASN dispute.

Why is this hearing happening?

Since 2014, the Orioles and Nationals have been locked in litigation over Washington's share of the revenue from MASN, the network established in 2005 as part of the agreement that let the Montreal Expos move into Washington, D.C.

The initial deal tilted in the Orioles' favor because of the potential impact on their fan base and both in-person and television audiences, with the Nationals starting at 10 percent ownership of the network and increasing by one percent each year until 2032, when their stake would be 33 percent.

But the boom in television broadcast rights earlier this decade meant the Nationals wanted a bigger piece of the pie more immediately, and the arbitration panel ruled that MASN pay the Nationals approximately $60 million per year instead of $40 million when it was first convened in 2014, making that period worth nearly $300 million for the Nationals. The Orioles challenged on the basis that MASN wouldn’t be economically viable with an extra $20 million per year going to the Nationals. They also charged that the panel, comprised of three MLB owners, had a conflict of interest because the Nationals' counsel at the time, Proskauer Rose, had represented MLB and the three owners' clubs in other legal issues.

A New York judge sent that decision back to arbitration, and a new panel has been convened to hear the issue this week (the case will be heard after the owners meetings, which wrap up Thursday). In the interim, the Orioles have pitched settlements that even take the Nationals' stake in the network above what has been argued in court to put this behind them. That they've arrived at this week's hearing without an agreement speaks to the success of those overtures.

How has the regional sports network landscape changed since this all began?

When the Nationals first claimed a bad deal, it was in the middle of a boom in live television rights fees across all sports. With the rise of recorded and on-demand television, live sporting events became crucial in the sense that they provided regular primetime content in which viewers couldn't fast-forward through commercials or record it for later.

This current dispute began over the five-year period beginning in 2012 that calls for a reset in broadcast fees to the Nationals from MASN every five years. That's where the approximately $60 million fee the first iteration of the panel set as opposed to the $40 million fee the Orioles initially sought comes in, and not only does the new panel have to settle that, they also need to address the current period that began in 2017.

That period has seen rights explode on both the high and low end: the Los Angeles Dodgers' $8.35 billion, 25-year deal in 2014 tops the market, while even the smallest-market team in baseball, the Milwaukee Brewers, signed a deal worth an estimated $24 million per year in 2013.

The next-smallest market in Cincinnati saw the Reds get what COO Phil Castellini called a "nice increase" on the previous number of $30 million per year from Fox Sports Ohio when their contract came up in 2016, according to the Cincinnati Enquirer, though an exact figure wasn't known.

The rights fees explosion has slowed some on several fronts due to cord-cutting, in which people are increasingly cancelling bundled cable services for internet-based streaming services and a la carte offerings. It's unclear whether the panel will be tasked with using all of this context for the two different periods or just what the landscape was in the respective starting years.

But the market simply won't stop changing around this dispute. Even last week, Sports Business Journal reported bids were due for the 22 regional sports networks owned by Fox Sports, which were sold off as part of 21st Century Fox's assets worth over $70 billion but need to be spun off as a stipulation for the deal to be approved.

With Disney, which owns ESPN, and NBC essentially out of the running for monopoly reasons, SBJ reported Fox is trying to buy them back at a discount, further depressing the market for regional sports networks and possibly impacting the long-term valuation of MASN. Or, the opposite could be true and the market could be reset again on the high-end for RSNs. It's all in flux.

What are the consequences of this on the field?

This dispute has, in the Orioles' minds, marred what has been the most successful run of managing partner Peter G. Angelos' ownership of the club. It didn't necessarily impact their on-field product — the Orioles set a club-record in payroll every year from 2014 to 2017, and the 2018 Opening Day payroll of $148.6 million was the second-highest in franchise history.

Every contract approved — from the ill-fated Ubaldo Jiménez deal worth $50 million in 2014 to the massive, $161 million contract for Chris Davis in 2016 and the last-gasp deals worth a combined $73 million for Alex Cobb and Andrew Cashner to get the 2018 team over the hump — was done so knowing that tens of millions of dollars the team hadn't forecasted going to the Nationals from their MASN revenue could head south.

It's easy to infer some consequences for the Orioles by their actions in recent years. As major league payroll swelled, former executive vice president Dan Duquette implied when making the Manny Machado trade to the Los Angeles Dodgers that the team had poured much of its resources into major league payroll at the expense of other aspects of the organization like scouting, staffing, and player development.

As the Orioles look toward a different reality with a new, holistic approach to organization building, they do so not with over $40 million in future payroll shaved off for 2019 and 2020 with the trades of Kevin Gausman, Darren O'Day, and Jonathan Schoop on July 31, possibly allowing them to more comfortably invest in all the neglected aspects of their baseball operation to build a more sustainable organization and farm system.

Knowing the MASN ruling could come may have some impact on the finances of the baseball side, but the Orioles' massive payroll cuts at the last trade deadline could protect against some of the consequences — as it stands, they're carrying $71.45 million in estimated Opening Day payroll, barely half of last year's.

As for the Nationals, who paid the competitive balance tax in the last two seasons and according to the Washington Post just offered Bryce Harper a 10-year, $300 million contract, they've certainly not spent like a team waiting for what could be a lump-sum payment. The Post also reported that a portion of whatever is awarded to the Nationals will go directly into MLB's revenue sharing fund, as they haven't participated while the dispute has been ongoing.

How has this impacted the team off the field?

Many point to the fact that the Nationals hosted this year's MLB All-Star Game when the perception is that it's time for that event to come back to Baltimore as proof that this dispute is chilling relations between the Orioles and the league. MLB has countered with the notion that if the Orioles want to host it, they have to apply like anyone else.

That's seemingly just an avatar for whatever has happened to the relationship between the Orioles and MLB. Such are the consequences of two teams under one league umbrella in litigation like this. The Orioles are trying to protect the agreement that was put in place to willingly cede some of their fan base, with the Nationals and MLB trying to find ways not to honor it.

The Orioles' state of flux off the field doesn't help matters. With Angelos in declining health, his sons John and Louis, who hold the titles of executive vice president and managing partner, respectively, have controlled the team for at least the last year. However, the fact that both generations of the Angelos family have sought to end this dispute only goes to show the drag this has been on the organization as it has progressed.

Baltimore Sun reporter Jeff Barker contributed to this article.

jmeoli@baltsun.com

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