Let’s take a look at how valuable Root Sports Northwest (Root) is to the Seattle Mariners.
Root has a near monopoly on regional television broadcast rights for major sports in the five states in the Northwest (Alaska, Washington, Oregon, Idaho and Montana). While the NFL and MLS have nationally syndicated broadcasts, Root has exclusive coverage for NHL (Kraken/Golden Knights), NBA (Trail Blazers/Jazz) and MLB (Mariners) games in the region. It even has rights to one of the largest revenue college basketball programs in the country (Gonzaga). The only other notable regionally available sports that it doesn’t have access to are Pac-12 college games, which also own its own Regional Sports Network (RSN) in the Pac-12 Network.
Now, Root’s financials aren’t available to the public, but there is enough information floating around for us to easily recreate the important metrics with a reasonable level of accuracy.
Let’s start with revenue. RSNs generate revenue via two primary means: (1) carriage fees and (2) advertising:
A carriage fee is a monthly fee per household that networks charge cable and satellite providers to carry their channel(s). Root is charging a carriage fee of $5.03 per household per month in 2022 and has roughly 3.2 million subscribers, which pencils out to $193 million in revenue from carriage fees for 2022.
While carriage fees generate the majority of revenue for RSNs, advertising revenues are significant as they have been rapidly increasing over the past few years. RSNs average a revenue mix of 70/30 between carriage fees/advertising, so we can add $83 million in revenue from advertising.
The combined $276 million sets a revenue floor for 2022, which interestingly enough is nearly equal to the median revenue from baseball operations for an MLB team, (note that this doesn’t take into account Root’s new contract with FuboTV that streams the channel through the five state territory as there details nor does it account for any other revenue sources).
Next, let’s look at company value. To get a fair value for the business, it’s standard practice to look at comparable companies that were recently sold to determine a multiplier that we can use to determine a valuation. It’s simply the ratio of the sale price of the business divided by annual revenue. The most recent RSN acquisition was when Disney sold 21 Fox RSNs to Sinclair Broadcasting for nearly $10 billion on $2.5 billion of revenue, which works out to a revenue multiple of 3.75X. Using this figure, (and our previous revenue estimate), a reasonable estimation of Root’s valuation is $1.03 billion.
In summary, Root makes more than $276 million per year and is worth over $1 billion.
Lastly, let’s look at the Mariners with this additional context from Root.
2022 Revenue isn’t yet available, so we can take a conservative approach and assume that Revenue is at least static from last year, so no growth from 2021 to 2022. While the Mariners have the 7th largest TV deal in MLB - a $1.8 billion television contract with Root that covers games through the 2031 baseball season (the payment for 2022 is estimated to be $96 million), it’s important to note that the deal is already included in the previously reported top line revenue. According to Forbes, Seattle had 2021 revenue of $313 million from baseball operations and a valuation of $1.7 billion. Therefore, Seattle would rank 13th and 16th amongst its MLB peers, respectively, which would seemingly align with the organization stating that it considers itself a the mid-market team.
But… there is always a but, and this one is a big BUT… the two figures above do not take into account the actual ownership of RSNs. So while the TV contract is included in the revenue, the profit sharing and valuation from the ownership stake in Root is not and needs to be included to fully understand revenue and true franchise value for the ballclub. There’s a larger margin for error when estimating income than revenue, but we can keep it simple by making the assumption that Root is a reasonably run business that is comparable to others in its industry (which, to be fair, is the assumption by many). Then, we can look some more industry comps to estimate its profit margins:
- MSG Networks (subsidiary of Madison Square Garden, broadcast NHL & NBA) - FYE 6/2022 Operating Margin of 45%, FYE 6/2021 Operating Margin of 30%
- Sinclair Broadcasting Group Local Sports Segment (Bally RSNs) - FYE 12/2021 Operating Margin of -10% (notes to the annual report indicate that this is low do to one time items and should return to prior year levels in 2022), FYE 12/2020 Operating Margin of 25%
We have some leeway here between 25% and 45% operating margins, which stretches income from $69-$124 million, so let’s use an operating margin of 30% and estimate operating income to be somewhere around $82 million for 2022.
The Mariners own 71% of Root, so we can calculate that its revenue increases by an additional $59 million and its valuation increases by an additional $735 million. When factoring in this majority ownership in Root, revenue is nearly 20% higher than previously reported by Forbes at $372 million and franchise value is nearly 50% higher than projected by Forbes at $2.45b. This additional information translates into the Mariners actually being the 9th highest revenue generating and the 7th most valuable franchise.
With all that said, rankings can be limiting because of the lack of context surrounding the magnitude of separation between the ranked teams. In order to understand this, we can drill down a little bit more to understand the distribution of those teams in the top 10. Here’s a tiered view of teams sorted by 2022 projected revenue:
- $287 million | $1.7 billion | n/a | $150 million
For context, the median team here represents a place between the ‘haves’ and the ‘have nots’ and essentially defines the mid-market team.
Tier 1 (2021 Revenue | 2021 Valuation | RSN Ownership | 2022 Payroll)
- LAD - $565 million | $4.075 billion | 50% | $271 million
- NYY - $482 million | $6 billion | 30% | $253 million
The Yankees and Dodgers are a cut above the rest. They both pull in ridiculous amounts of revenue, have decently sized stakes in their RSNs and show elite valuations.
Tier 2 (2021 Revenue | 2021 Valuation | RSN Ownership | 2022 Payroll)
- BOS - $479 million | $3.9 billion | 80% | $212 million
- ATL - $443 million | $2.1 billion | 0% | $183 million
- CHC - $425 million | $3.8 billion | n/a | $151 million
The next tier of Boston, Chicago and Atlanta are just barely out of reach of the top two. These teams are in smaller markets, but are well developed baseball organizations that can stretch their financial resources to compete above their tier and against anyone in baseball.
Tier 3 (2021 Revenue | 2021 Valuation | RSN Ownership | 2022 Payroll)
- HOU - $388 million | $1.98 billion | n/a | $183 million
- TEX - $387 million | $2.05 billion | 10% | $150 million
- SFG - $384 million | $3.5 billion | 30% | $161 million
- SEA - $372 million* | $2.4 billion | 71% | $116 million
- LAA - $331 million | $2.2 billion | 25% | $180 million
Now we come to the Mariners’ tier, which is essentially the ‘AL West, but with the better team from the Bay’. The teams are a step below the top 5, but are also something akin to a staircase above the median MLB team (aka mid-market teams). This group has teams that are only separated from nominal amounts of revenue. Revenue fluctuations year to year and/or income from their RSNs make all five teams in this tier interchangeable (note that (1) *changes to our operating margin assumption above result in a revenue range for Seattle stretching from $361 to $401 million and that (2) we’ve not factored in estimated RSN income streams outside of Root/Seattle, though since the others are, if anything, minority owners and, as such, would have smaller impacts to their revenue and valuations).
Overall, I think it’s safe to say that Seattle is a team that should have the ability to financially compete head to head with any/all teams outside of the top 5 in baseball and are not at all a ‘mid-market Revenue club’. The organization is welcome to benchmark its payroll against mid-market teams if it so desires, but it really should be truthful about having different payroll constraints than that of its financial peers.