MLB: An Over the Top Home Run

The MLB must cut out middleman broadcasters like ESPN and distribute content directly to viewers

Striking Out – Cable Television

“Cord-cutting” occurs when a subscriber to media or television services cancels their subscription to traditional cable television packages. In recent years, this growing phenomenon has devastated the cable television industry, causing every major cable television company to lose subscribers in Q2 of 2016. Despite this, one category of content has remained remarkably untouched by cord-cutting: live sports. In a recent study, 43 per cent of cable television subscribers stated that the key reason why they won’t cut the cord is because they “can’t live without sports.”

Cable companies such as Rogers and Comcast have aggressively invested in sports-focused channels such as ESPN and Sportsnet to retain viewership. This is evidenced by recent record-breaking content rights deals signed with the NHL and the NBA. In particular, the nine-year NBA deal signed with ESPN and TNT is estimated by the New York Times to be worth $2.7-billion per year. Media companies have been increasingly reliant on the attractiveness of live sports to keep their viewers subscribed. Evidently, it seems that even in the face of cord-cutting, live sports have persisted with immunity.

That paradigm has since been shattered. In October 2016, global marketing research firm Nielsen released a report indicating that ESPN had lost an alarming 621,000 subscribers in the month of October alone. This kickstarted a vicious cycle in which advertising agencies are now unwilling to pay high premiums on commercials that broadcast to a dwindling viewership. After a 16 per cent downturn in their NHL broadcast viewership, Rogers was forced to provide its advertisers with free ads to account for the smaller audiences. Consequently, the next sports league to re-negotiate TV rights is not likely to get the record-setting deal they desire.

Stepping up to the plate: Major League Baseball.


It’s Game Time

The MLB is operating at a critical juncture in which they could decide the future of content distribution. An urgent decision must be made as negotiations with sports broadcasters on the next national television rights deal are slated to begin in 2018/2019 as the current deal expires in 2021. National television rights correspond to 69 popular national regular season games, the all-star events and a minimum of 26 postseason games.

There are two options for the MLB to consider. They could continue with a status-quo strategy of distribution through the struggling cable channels, which may very well lead to a deal that generates less than the current $1.2- billion generated under the current contract. Alternatively, they could radically reshape the model of sports media distribution by attempting the unattempted. The MLB should become the first major sports league to bring broadcasting production of nationally televised games entirely in-house and distribute to viewers solely through their own proprietary “Over-the-Top” platform.

Hitting Homers – “Over-the-Top”

While cable television has experienced significant losses, over-the-top (OTT) platforms, which refers to content that is distributed over the Internet as opposed to traditional cable distribution, such as Netflix have experienced exponential growth. This trend is further emphasized by the recent launch of YouTube TV. OTT refers to any content that is distributed over the internet as opposed to traditional cable distribution. The rapid proliferation of OTT platforms can be attributed to two main factors.

Externally, the rapid trend towards mobile technologies and livestreaming has led consumers to trade in their bulky television sets for portable laptops and mobile devices. People no longer see value in subscribing to a bundle of channels on cable, many of which they may never watch. Instead, they would prefer to effectively proportion their consumption of media to be exactly what they want, when they want it, wherever they want it to be.

In October 2016, the Canadian Radio‑television and Telecommunications Commission (CRTC) reported that for the first time in history, the amount Canadians spent on Internet had surpassed what they spent on television subscriptions. People now receive their news through Facebook, watch their sports highlights on YouTube and binge their television episodes on Netflix. It is solely a matter of when, not if, live sports will join the trend of OTT media consumption.

Internally, OTT is typically cheaper for content owners and broadcasters to distribute due to the bypassing of traditional cable television infrastructure investments and operating expenditures. While professional sports leagues have historically had to rely on cable companies to distribute their content to a large audience, OTT provides relatively cheap, direct access to the consumer without the need of a middleman. It is only a matter of time before the orthodoxy of viewing sports through cable is broken by a sports league that is well positioned to adopt modern OTT distribution.

The MLB is in an ideal position to adopt a wholescale OTT distribution model as they possess a hidden asset that sets them apart from the other major sports leagues. Their competitive advantage is their subsidiary company MLB Advanced Media (MLBAM), deemed by Forbes as the “Biggest Media Company You’ve Never Heard Of”. MLBAM has significant experience with developing and running OTT platforms. On top of building MLB.TV, which currently distributes regional MLB games, MLBAM has also built the top platforms for HBO (HBONOW) and for the Professional Golf Association (PGA TOUR LIVE). MLBAM’s expertise in streaming technology and media distribution will allow the MLB to build an OTT platform in-house with minimal infrastructure investments, allowing for streamlined positive returns on the project.

MLB.TV Exclusive – A Perfect Pitch

Given the external consumer trend towards OTT platforms in conjunction with the MLB’s internal capabilities with MLBAM, the MLB should look to vertically integrate the production and distribution of its nationally televised games. The MLB should develop “MLB.TV Exclusive” which will be the sole distributor of 97+ nationally-broadcasted games, effectively removing these games from cable television. This would only involve the games that are currently broadcasted nationally, not regional games as those are controlled by local teams. With this hybrid model, casual fans will still be able to watch their local teams on television, but the most popular national and playoff games will only be viewable through MLB.TV.


The MLB should focus on developing an easy-to-use interface for the OTT platform that can be used on all devices to capture as many subscribers as possible. It is essential to make it easy for fans to adopt the new product with the goal of giving them the best user experience. The OTT platform will allow users to watch nationally-broadcasted games live in full resolution, and allow users to watch any past games archived in the platform.

There are more intrinsic benefits that the MLB must consider if they choose to distribute nationally televised games exclusively on MLB.TV. Firstly, by exclusively going OTT, the MLB will be able to maintain control of their content, which is their most important revenue-generating asset. Secondly, by distributing exclusively in-house, the MLB will be able to directly receive revenue from advertisers. This will result in full control of content distribution, and more importantly the full realization of advertising/subscriber revenues, without sports broadcasters slimming down margins.

Mitigating Potential Strikeouts

Given the novel nature of this proposal, the MLB must consider all potential risks and how they can actively go about mitigating them. One obvious risk is whether the current MLB viewers have both the technical capability and personal desire to switch to an OTT platform. Streaming high definition video live requires a strong wireless connection, and would only be cost-effective on an unlimited plan. Although over 50 per cent of the MLB’s viewership is over the age of 55, the 65 plus age bracket have had the fastest growth in Internet adoption in the past few years, growing from 28 per cent in 2005 to 58 per cent to 2015. Furthermore, the 55 to 64 age bracket also has a strong 81 per cent Internet adoption. Lastly, going OTT would appeal to the younger age demographic, a key segment that the MLB desperately needs to attain.

In addition, there is a valid concern that packaging a “one size fits all” 97 game bundle would deflect casual or bandwagon fans who purely want to watch select postseason games. To mitigate against this, two packages will be provided for different fan bases. Firstly, an all inclusive 97 game bundle will be created for loyal fans to watch games during the regular season and the postseason. Secondly, when the postseason begins, casual fans that are hooked to their teams can buy a postseason MLB.TV Exclusive ticket at a discount to watch only the playoff games. This will hopefully convert casual fans into loyal MLB.TV Exclusive subscribers.


The Financial Scorecard

A change to OTT distribution should generate at least as much, and preferably more revenue, than generated by current national television rights; revenue from these deals is approximately $1.2-billion annually. With an OTT strategy, MLB.TV will be able to generate both subscription and advertising revenue. Both sources of revenue, of course, are largely dependent on MLB.TV’s sustained viewership.

Since the OTT strategy will allow MLB.TV to monopolize national game viewership, they are in a price setting position. It is recommended that MLB price the platform at $180 for a season pass in order to encourage cable television subscription transfers and current MLB.TV customer upgrades. At $15 a month, cable television viewers would be enticed to pay since expanded basic cable packages cost $69.03. Conversely, current MLB.TV customers who are subscribed to regional games would be easily incentivized to upgrade their accounts as they would only need to pay five dollars more each month than the current $10 monthly fee for 97 more national games.

And on top of subscription revenues, the MLB will be able to capitalize on the incoming advertising revenue that they will now receive in place of the cable television companies. The cost of a 30 second commercial during a 2016 World Series game, which attracted an average of 23.4 million viewers, is more than $500,000. With an approximate average of 102 advertisements in a game, the World Series generates around $51-million, or about $2.18 per viewer, per game. It is assumed that advertising rates correlate directly with the number of viewers, so for a regular season national game where the viewership is closer to 3 million, the game would still generate around $6.5-million in advertising revenue.

Under these current assumptions, MLB.TV will need to transfer approximately 470,000 cable television viewers, upgrade their 3.5 million current MLB.TV viewers, and attract 140,000 pure postseason subscribers to the OTT platform to breakeven on the $1.2-billion they currently make on their national television deal. This is a feasible number as current nationally broadcasted TV games on Fox and ESPN receive upwards of 3 million views. As such, capturing approximately 500,000 viewers would be only 16 per cent of ESPN’s average viewer base.

It is important to note that the cost of developing the platform and broadcasting the games will be relatively inexpensive due to the ownership of MLBAM technology. Also, it should not significantly affect the profitability of the proposed strategy.

An All Star Strategy

In conclusion, current trends of cable television and OTT platforms will drastically affect the future compensation received for national television content rights. If the MLB fails to react in a timely matter, they will experience record low revenues for their content, while incurring the same fixed and variable costs.

Therefore, the MLB should strongly consider maintaining exclusive control of national television content rights and going OTT on their proprietary MLBAM platform. If implemented, this strategy can add defensibility to MLB’s business model and will allow them to maintain control over one of their most important revenue-generating assets.

With the rising trend of OTT distribution, proprietary streaming software technology (MLBAM) and the expiry of the content rights contract in 2021, the time is perfect for the MLB to step up to the plate and hit a distribution home run.