Market mysteries: The case of Extra Innings

Major League Baseball is reportedly entering a deal that would shift its Extra Innings product, which has been available to up to 75 million customers, to being available exclusively on DirecTV, which currently has only 15 million subscribers, for the next seven years. My primary reaction to this has been genuine sadness. Watching baseball games is my number one hobby, and my house can’t get DirecTV signals because of nearby trees. It did occur to me that if I chopped down my neighbors’ trees, I would probably do a year in jail, which would leave me six years to enjoy the games. More likely, I’ll have to find a new hobby besides watching baseball. Other alternative approaches to following the Mets — going to a sports bar, watching on my laptop — just won’t cut it.

But I’m also intellectually puzzled. How is it possible that it ends up being more profitable for MLB to sell Extra Innings as an exclusive franchise? Even putting aside possible loss of fans and thus revenue on other products (such as tickets), I would have guessed that whatever MLB could have received in nonexclusive deals for 75 million customers would be greater than what MLB could receive in an exclusive deal for 15 million customers. Obviously, that guess would have been wrong. What explains this?

A partial explanation is that the subscriber base for DirecTV is not fixed. If all cable Extra Innings subscribers could be expected to just switch over to DirecTV, then the initial subscriber populations would be irrelevant to the revenue calculation. But many people won’t — either because they (like me) can’t get satellite, or because they have some preference for cable over satellite. So, on reasonable assumptions, the Extra Innings subscriber base will be much lower in the future — and yet DirecTV seems to be able to pay more than everyone combined in a nonexclusive arrangement.

The answer to this market mystery probably has to do with branding. DirecTV expects to have a hipper brand by virtue of its exclusive deals on MLB Extra Innings and NFL Sunday Ticket. The exclusive contract thus sends a signal to consumers. I suppose that this could be an efficient result if consumers somehow underappreciate the virtues of DirecTV, or if consumers who still buy Extra Innings will value it more because others don’t have it. But I’m more inclined to think that the property rule protection that MLB has for its copyrighted shows leads to an inefficient result here, even if one that genuinely benefits MLB and DirecTV.

I generally believe in property rights, but this deal is creating a personal crisis for me that is making me challenge my views. Should the law in some way seek to discourage such deals?

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4 Responses

  1. If you’re interested in this, Gregg Easterbrook (TMQ at ESPN) has written on this topic many times with respect to Sunday Ticket. I suspect that a search for “Easterbrook” and “Sunday Ticket” will turn up some fodder.

    I think the explanation may relate back to simple monopoly pricing from Econ 101. With competition, MLB is $129 for 60 games a week (I think including HD), wherease a monopoly price for Sunday Ticket is for $225 or more a year plus $99 for HD for 11 games a week (at least 5 games are shown locally anyway).

    So, DirecTV is willing to pay a lot to:

    1. Charge 2x or more

    2. Attract more subscribers due to the exclusivity

    Thus, I tend to agree that the result will be inefficient.

  2. Salil Mehra says:

    There are two dynamics at work here.

    Like Michael said:

    (1) DirecTV values Extra Innings and Sunday Ticket more because there are many people who will subscribe to DirecTV seeking these products who would otherwise subscribe to cable. Cable doesn’t face the same marginal incentive. So DirecTV will pay MLB and the NFL more for the rights to Extra Innings and Sunday Ticket, respectively.

    (2) DirecTV is national in scope, unlike the cable companies. Despite some recent competition (like RCN in NYC), cable companies are patchworks, sometimes regional (e.g., Comcast from ME to VA, save NYC and some other holes) of mostly local monopolies. Both cable and satellite business models require that you get a certain number of subscribers to break even, after which marginal costs are fairly low, but marginal revenue may stay relatively high. However, DirecTV should have a higher value for national sports league programming like Extra Innings and Sunday Ticket than Comcast, which might be able to get away with showing (at lower cost) Atlantic 10 basketball and ECAC hockey to draw regional interest, and which can count on local affiliates showing most MLB games of local interest (e.g., Phillies, Orioles, Nationals).

  3. bluemontanaskies says:

    Isn’t a monopoly against anti- trust laws? For many a dish is not allowed, for others interference is too great. And who wants to watch on a tiny laptop screen? No one with cable will buy a dish & keep both. Cable providers will lose a fortune.

    I cannot believe Comcast and the other providers will sit back & watch mass revenue disappear. Perhaps contacting our cable providers & telling them we may switch because baseball is that important, they will fight MLB/ Directtv deal.

  4. james dougherty says: