Joey Votto's New Contract Is Like A Mortgage-Backed SecurityS

Reds first baseman Joey Votto officially signed a big contract extension today. A big, honking deal: 10 years, $225 million, on top of the two years and $26 million the Reds already promised him for 2012 and 2013. There's an option year for 2024.

If you're a Reds fan—and, really, who isn't—this might be welcome news. Your best homegrown player in years has committed to your backwater, vowing never to spurn your folksiness for slick coastal suitors. But for all the rest of us, the Votto extension is the latest sign that MLB is heading down an unwelcome (and unsustainable) path of bludgeoning everyone with cable rights fees.

Dave Cameron explains it well at Fangraphs:

To do this deal now and absorb the extra risk of guaranteeing him 2014-2023 while Votto is still two years away from being able to negotiate a deal on the open market, the Reds are essentially saying that his fair market value is somewhere around $300 million.

A few months ago, that would have sounded absurd. However, since the off-season began, we've seen the Angels flex their financial muscle after agreeing to a television contract that promises to push significant new revenues into their organization. Just a few days ago, we saw the Dodgers get purchased at a valuation that was dramatically higher than expected, and with their own television deal coming up for renegotiation, they also look to be in a position to push a lot of cash into the industry. Put simply, we're seeing some positive shocks to the game's economy, and the result looks to be a significant uptick in willingness by teams to borrow from their own futures to finance talent acquisition in the present.

The Reds don't yet have a giant television deal, not like the Angels' 20-year, $3 billion contract. Instead, they extended Votto with a theoretically big TV payout in mind. Because TV is going to make everybody rich.

Right now, there are two kinds of regional sports networks (RSNs). Some are team-owned, like the Yankees' YES Network, and some are independent, like most Fox Sports Net and Comcast Sports Net channels. They make their money by charging a monthly per-customer fee to cable and satellite providers in the team's market, and the providers pass that fee onto their customers. All of their customers: nearly everyone with a cable subscription in New York, New Jersey, and Connecticut paid an average of $33.60 to the Yankees' network and $28.56 to the Mets' network last year. And those networks get to sell advertising on top of those fees.

It's a great scam. So far, TV networks have provided their teams with tremendous cash flow—as with the Angels' deal—or equity. The Wilpons have borrowed $450 million against the value of SportsNet New York, the channel that carries Mets games.

But this rights-fees boom is premised on the assumption that cable and satellite providers will forever squeeze their customers at the whims of RSNs, and that the customers will forever tolerate it, and that the FCC will forever endorse it. All that happening seems highly unlikely.

We're now learning that that cable providers are tired of RSNs' bullshit and perfectly willing to yank telecasts. Non-fans—against their will—subsidize telecasts for fans. Consider the MSG-Time Warner standoff in winter (and what's going on in San Diego now). According to reports (because none of this is transparent), Madison Square Garden wanted Time Warner customers to pay a 53 percent increase on its $4.65-a-month fee. That's $7.11 a month—or $85.32 a year, from every Time Warner subscriber in New York—for the Knicks, Rangers, Islanders, and Devils. Time Warner naturally balked, and might have held out longer if not for Jeremy Lin. In San Diego, Fox Sports San Diego is reportedly seeking a 400 percent fee increase from Time Warner Cable. Time Warner wisely has said no.

MLB could also face competition from First Row Sports or some other outlaw streaming enterprise. The pirate feeds don't cut out nearly as much as they used to, and, so far, the feds haven't been able to sue them out of existence.

As for a customer revolt: One gets progressively likelier, as cable prices climb while the economy lags and the market develops viable alternatives. One doesn't need cable anymore to fall under a screen's spell. There's Netflix and Hulu, video games are better than ever, and there's all kinds of other stuff to watch on the internet. Why should someone who buys cable just for the occasional movie write the Knicks such a big check? As the bills get bigger and bigger, people will check out. As for FCC intervention—forcing à la carte cable, or some such thing—it's not likely, but it's not impossible.

The cable-riches scheme is quite fragile because of the already-big fees charged to people who don't care about sports. And the networks that carry MLB's teams are asking everyone in that system to pay more and more. The cable companies are fed up with it, and every fee increase they condone will further vex their customers, perhaps leading to revolt or desertion. Really, how many San Diegans will switch cable providers because they can't get the Padres? Most of them will just be thankful to have been spared another giant rate increase.

But the cable-riches scheme needs those unfettered giant fee increases, just like Wall Street relied on ever-increasing housing prices. Once the blips start, the whole scheme's doomed to collapse. And then this apparently good story, of the homegrown Votto getting a deserved payday from a beloved, old small-market franchise, will become the darker and more familiar one, of middle America making a financial promise it couldn't afford.

Joey Votto's Massive Extension Changes the Game [Fangraphs]