If you live in the Houston area, and Comcast isn't your TV provider, chances are you've been following the case of CSN Houston's fight with carriers in the region. Or you haven't, because years have gone by without meaningful changes -- until yesterday! We're here to break it all down for you in the coming weeks.
David Barron over at the Houston Chronicle has had his finger on the pulse of this case for quite a while, and he covered on Twitter yesterday's court session, originally thought to be the final day of proceedings in CSN Houston's Chapter 11 case. Both sides have rested, with closing arguments delayed until Tuesday so that the network can figure out how to transfer its furniture and computers.
Astros attorney Paul Basta says AT&T/DirecTV has some concerns about what will happen to network infrastructure – cables, computers, etc.— David Barron (@dfbarron) October 22, 2014
The teams are working on language for AT&T/DirecTV, but the buyers won’t be prepared to respond until next Monday.— David Barron (@dfbarron) October 22, 2014
After that, US Bankruptcy Judge Marvin Isgur is expected to rule in favor of a proposed sale of the network to DirecTV and AT&T. At that point, CSN Houston would be no more, and Root Sports Houston would rise from its ashes (with 96 fewer employees). So let's get into the particulars.
Back in October 2010, the Rockets and Astros decided to partner together to take their regional TV broadcast rights away from FOX Sports Houston and create a new regional network in partnership with Comcast -- Comcast SportsNet Houston. Back in 2006, Comcast had become the primary cable network in the area.
The deal made sense at the time; it was part of a continuing national trend of non-football teams attempting to gain the lion's share of profits for their broadcasts directly rather than through negotiated licensing fees. Without getting too boring, let's just say that since the money's being made in-house, it's easier to lie about how much is being made. Teams lying about how much money they make has tons of benefits - in labor negotiations, revenue-sharing agreements and so forth.
Any sports fan with a cable subscription anywhere in America can tell you about the fighting between cable providers and regional sports networks (RSNs). The formula always goes like this:
- RSN charges provider large fee
- Provider refuses to pay
- Public negotiation/slapfight ensues; each side blames the other, asks viewers to take a side
- Provider agrees to large fee; makes viewers pay large fee
The problem with Houston is that the last step never happened. NBC Sports (which operates all CSNs nationally, and is owned by Comcast) never got DirecTV, Dish Network and AT&T U-Verse to agree to its fees. This has left 60 percent of TV households in the Houston market without Rockets and Astros games for two years.
Part of the problem could have been that Comcast simply asked for too much -- their offer was reported to amount to $3.40 per month per subscriber. For context, in their 2006 agreement, MASN charged DC-area cable providers $1.25 per subscriber per month. Granted, that was only for Nationals games -- CSN carries Wizards games in that area -- but that's a bigger market in terms of revenue (if only just).
Another part of the problem -- perhaps the bigger part -- is that the wave of fan outrage that normally gets these deals done hasn't materialized. A petition that CSN put out to fans got 90,000 signatures. That's a lot, but not if you remember what 60 percent of the Houston region amounts to - nearly 1.4 million subscribers.
Matt Thomas of SportsTalk 790 said that fans' reactions went from "frustration to anger to indifference." Rival TV providers bet they could wait Comcast out without taking too harsh of a beating from fans. Multiple principals on the CSN side believed that those providers were betting that the relative weakness of the Rockets' and Astros' fanbases would allow them to take a harder line without losing too many customers. Turned out, they were right.
Though Comcast only owns 22 percent of CSN Houston (to the Astros' 46 percent and the Rockets' 31), they put up capital to start the enterprise, and thus were still one of the networks' creditors, which meant they had the power to file for bankruptcy under Chapter 11. Let me rephrase this, because it's a crucial point: Comcast forced the network into bankruptcy. It's called "involuntary bankruptcy," and it was essentially Comcast saying that since they weren't getting paid back quickly enough, they had the right to blow up the network and seize its assets (i.e. broadcast rights). Let's get through this next part quick and dirty,with a big thanks to David Barron and Bloomberg:
- Comcast claimed they were owed $100 million, and wanted to use the bankruptcy to gain more than 22 percent equity and/or sole distribution rights for the games
- The Rockets were in favor of the bankruptcy, but sought the court's protection from Comcast's takeover plan -- they wanted to negotiate with other TV providers
- The Astros were opposed to the bankruptcy filing and sued Comcast for bad faith in the initial negotiations to set up the network -- meaning Comcast set them up to fail so they could pull this maneuver
- Judge Marvin Isgur started with two actions: he dismissed the initial Astros suit, and prevented Comcast from grabbing assets or equity, instead favoring reorganization
- The Astros then joined with the Rockets in opposing Comcast's plan, but Astros owner Jim Crane filed a fraud lawsuit against Comcast and former owner Drayton McClane, which is still open
- The teams negotiated a sale of the network, and their broadcast rights, to DirecTV and AT&T
- Comcast opposes the terms of the sale, and wants more money out of the whole deal
Here's what's on the table now, as Barron sees it:
Under the plan proposed and supported by the Astros and Rockets, the network will be sold to DirecTV and AT&T, which will add carriage on DirecTV and AT&T U-verse in addition to Comcast. The teams and Comcast will lose their equity in the network, which was valued in 2010 at $700 million, and the teams will surrender their right to immediate repayment of more than $100 million in rights fees.
Basically, the Rockets and Astros want to wash their hands of the whole "owning their own RSN" business. They have, like so many of us, thrown their hands up and said, "screw Comcast." They owed a lot of money, and to avoid paying it, essentially cut their losses and gave away their broadcast rights. They will presumably go back to settling for licensing fees.
Comcast spent yesterday arguing that they would be screwed by the proposed deal -- which is nothing new. Their attorney, Craig Goldblatt, insisted, "There is value here. We are all seeking to obtain that share of the value to which we think we are legally entitled." (Via David Barron)
Part of that pertains to the network's debt. The teams are trying to erase it by releasing their equity, accepting much lower year-to-year increases in the rights fees they'd receive from broadcasts for the next decade, and giving up certain negotiating rights over the life of the contract. Of course, all of those concessions are to DirecTV and AT&T, which pisses Comcast off. They believe the Rockets and Astros still owe them money.
The teams dispute this, of course, claiming that Comcast blew up a favorable deal. The Rockets' lawyer, Rafael Stone, testified that Comcast did not pay a dime in rights fees to the Rockets or the Astros last year, and that agreeing to forfeit the repayment of those fees should be sufficient.
The teams also argued that Comcast drove down the value of the network, and thus the value of the teams' broadcast rights. They presented as evidence the gap in the values of their initial deal with Comcast and their proposed new deal with DirecTV and AT&T: $88.4 million less for the Astros, $73.6 million less for the Rockets at present value.
Laying the blame for the bankruptcy at Comcast's feet is key for the teams, because the biggest point of contention yesterday (and perhaps the key thing left for Isgur to decide) was a clause in the proposed sale exculpating the Rockets and Astros. That would mean that legally, the teams would be protected from lawsuits by creditors seeking repayment on the debts that drove the network into bankruptcy, on the grounds that they acted lawfully.
Basically everyone agrees that Comcast is going to be sued by creditors following the resolution of this case, and Comcast wants to be exculpated along with the teams. The court seemed to side with Comcast on this issue, according to Barron:
[Judge Isgur] wants everybody treated the same, and he wants it established that for breach of fiduciary duty by anybody is grounds to be sued.— David Barron (@dfbarron) October 22, 2014
Basically, it seems like either everyone will get exculpated, or no one will, with the court overseeing future lawsuits and each principal's culpability. The Astros and Rockets claim, however, that they don't stand to see a profit for the next couple of years under the terms of the proposed sale, so if the judge buys that claim, that case-by-case approach may not hurt the teams much.
The Tentative Plan
We say tentative because anything can happen in the late stages of this case, especially because Comcast is in many ways the devil itself. (Literally as I typed that last sentence, my internet cut out and I had to unplug and reboot my modem. I have Comcast, and I am now scared. Doubt me at your own risk.)
The elements of the case that still seem unsettled are the exculpation issue and the office computers, neither of which seem likely to derail the proposed deal. It still looks like the sale will happen, and Rockets and Astros games will be carried by Root Sports (which is to DirecTV what CSN is to Comcast) as soon as possible. As previously mentioned, this transition will mean layoffs to at least 96 of their 141 employees, as well as the shuttering of all programming not related to game coverage (including pre- and post-game shows), which happened last night:
Just finished last CSN show. Its a travesty watching everyone hugging and saying their goodbyes. Didn't have 2 end this way. So sad.— John McClain (@McClain_on_NFL) October 22, 2014
Reorganization is the name of the game, and with all the moving parts involved in the sale of the network, it's normal to see layoffs and arguments over who the chairs belong to. The delay to the conclusion of the case means this Rockets' season will likely begin how the last one ended: unavailable to the majority of Houstonians. Judge Isgur has expressed his desire to move the case along quickly, so with luck, the reorganization will begin in earnest soon after the closing arguments finish up next Tuesday.
Again, big thanks to David Barron of the Houston Chronicle (@dfbarron) for the courtroom play-by-play.