Archive for Business

The Uncertain Timetable for Cord-Cutting in Baseball’s Future

Major League Baseball has taken a number of small steps designed to make it easier for consumers to watch baseball, even for consumers in local markets. MLB.TV has been around for years, but for fans wanting to watch local games on mobile devices or through non-cable set-top boxes and devices like Apple TV, Roku, or Chromecast, there had been few advancements. This offseason, however, MLB announced that the Fox-owned Regional Sports Networks (RSNs) would finally provide local games on something other than cable to cable subscribers.

This small step was accompanied by a somewhat forced step in the Garber settlement to offer out-of-town fans the opportunity to purchase single-team packages at a reduced rate. A lesser publicized part of the settlement prevents MLB.TV from raising prices (capped at 3% per year) unless the non-Fox RSNs also offer streaming for local games by the 2017 season, which Commissioner Rob Manfred expects to happen.

These steps, along with burgeoning MLBAM technology and reports that ESPN is losing billions to cord-cutting viewers, have begun to raise more questions about when the sports right bubble might finally burst — when the current cable model might finally be unsustainable — and MLB fans will finally be able to purchase directly the rights to see the games of their local team (or in Iowa and Las Vegas, their six local teams) free from cable and the onerous blackout rules that accompany it. Unfortunately, nobody has an answer.

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How the Mets Could Afford Yoenis Cespedes

New York Mets ownership has come under increased scrutiny over the past few years. Lowering payroll in a gigantic media market and getting entwined in the Bernie Madoff Ponzi scheme will bring that kind of attention. Back at the trading deadline, there were many, including myself, wondering why the Mets were acting like a small-market team in New York. The team quieted many doubters by bringing Yoenis Cespedes at the trade deadline and making the World Series, but due to insurance for David Wright’s injury and the PED suspension for Jenrry Mejia, the payroll increase was not significant. As a result, calls for the Mets to spend were heard again during the offseason, and again, the Mets have silenced their critics with Yoenis Cespedes.

The Mets’ revenues are driven by many factors, including the massive New York market that affords them a fantastic television deal that nets them around $100 million per year. However, nothing drives revenue like success, and the Mets, despite significant ownership debts and upcoming payments totaling over $60 million related to the Madoff scandal, the Mets were able to raise payroll due to their on-field success in 2015 and the fan response to that success. Team sources have pegged the revenue due to the Mets World Series run at around $45 million, per the New York Post. Fortunately for Mets fans, it appears almost all of that amount is being invested back on the field.

Let’s break it down.

Regular Season Revenue from 2015

Additional revenue from the regular season was not included in the $45 million estimate, but it is helpful to note that, due to the increased number of fans, the Mets did substantially better at the gate in their competitive 2015 season than they did the prior year. In 2014, the Mets drew 2.15 million fans and had an Opening Day payroll below $85 million — both figures down more than 30% from when Citi Field opened in 2009, but within a few-hundred thousand fans of the previous three seasons as the payrolls dropped beginning in 2011.

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TV Dispute Might Be Hurting Nationals in Free Agency

In the offseason, teams are frequently characterized as “winners” and “losers” based on the players they’ve acquired relative to the players who have left. Often, the so-called winners are simply the clubs who’ve been most active, bringing in the most players — regardless of cost — while the losers often are those clubs which have been more idle, making smaller moves to improve their rosters. These characterizations do not always translate to the field, as the case of the San Diego Padres illustrates. The Padres followed an active 2014-15 offseason with a poor 2015 campaign.

With that caveat having been made, many have declared the Washington Nationals losers this offseason not simply because Ian Desmond, Drew Storen, and Jordan Zimmermann are gone — replaced by a relatively modest group including Shawn Kelley, Daniel Murphy, Ben Revere — but mainly because they failed to land Yoenis Cespedes, Jason Heyward, or Ben Zobrist in free agency. While the team might be hidden winners of the winter, the Nationals are claiming their failure is due to a tightened budget caused by the Baltimore Orioles’ refusal to pay market value for their television rights.

For those who might not be aware, the Orioles — principally Peter Angelos, through regional sports networks MASN and MASN2 — air the Nationals broadcasts. The Orioles control the Nationals broadcasts as a result of negotiations with the team when the Nationals moved to Washington, D.C., thus encroaching on the Orioles’ television territory. Nathaniel Grow characterized the situation like this after the last major decision in the legal dispute between the teams:

In order to alleviate the Orioles’ concerns, MLB structured a deal in which Baltimore would initially own 87 percent of the newly created Mid-Atlantic Sports Network (MASN), the regional sports network that would air both the Orioles’ and Nationals’ games. In exchange, the Nationals were scheduled to receive an initial broadcast rights fee of $20 million per year from MASN, an amount that would be recalculated every five years.

Jump forward to 2012, when Washington requested that its rights fee be increased to $120 million per year. MASN and the Orioles refused, and as a result the dispute ended up in arbitration, with a panel of MLB team executives – the Mets’ Jeff Wilpon, the Rays’ Stuart Sternberg, and the Pirates’ Frank Coonelly – ultimately awarding the Nationals roughly $60 million per year in broadcast fees.

The Orioles believed they should pay the Nationals roughly half the amount the arbitrators awarded and appealed, getting the decision thrown out due to conflicts with the Nationals’ counsel. (For more on the decision, read Grow’s full piece linked above.) The case is still ongoing without a resolution and the Nationals are pushing the Orioles to head back to arbitration. The Nationals retained new counsel, and have filed a motion to compel the parties to arbitrate the case and set a value for the television rights. In their recent motion, the Nationals indicated that the Orioles’ failure to pay fair-market value for television rights has hamstrung the team in signing free agents to multi-year contracts.

“MASN’s underpayment of rights fees has already required the Nationals to fund payroll and other expenses from its own reserves, and further delay could require the Nationals to seek new financing,” says the team’s memorandum. “This is not only burdensome in its own right, but it places the Nationals at a competitive disadvantage to other baseball clubs, which typically receive fair market value from their regional sports networks for their telecast rights. Without this added income, the Nationals are handicapped in their ability to invest in efforts to improve the team. For instance, without this added and steady income, the Nationals cannot bring full economic confidence to investments in multi-year player contracts to keep up with the fierce competition for top players — especially when such control over finances is in the hands of a neighboring club.”

This might sound a bit like whining coming from a billionaire owner who just one year ago signed Max Scherzer to a seven year, $210 million contract, and reportedly made offers to Jason Heyward for roughly $200 million and Yoenis Cespedes $100 million, but those claims do have some merit.

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This Year’s Free Agent Class Was Incredibly Good

We have seen a lot of money thrown around this offseason, particularly on the pitching side. Players at the top end like David Price and Zack Greinke have received $200 million contracts while mid-tier pitcher like Mike Leake, Jeff Samardzija, Wei-Yin Chen, and even Ian Kennedy have received contracts approaching nine figures. On the hitting side, the market moved considerably slower, but Jason Heyward got nearly $200 million, including close to $80 million over the first three seasons before a pair opt-outs become available to him. Justin Upton still got more than $130 million with a favorable opt-out clause, and it appears that Yoenis Cespedes will do just fine as well after some talk that both he and Upton might have to take one-year deals. Describing this year’s class is one thing, but compared to the classes over the last decade, it might be the best we have seen.

A brief look at this year’s class reveals a collection of high-end players who produced strong 2015 seasons. Consider the players in the table below, sorted by projected contract value per FanGraphs Crowdsourcing and featuring both 2015 performance and the total dollar amount of the contract signed.

Free Agents of 2015
Age 2015 WAR Contract
David Price 29 6.4 $217 M
Jason Heyward 25 6.0 $184 M
Zack Greinke 31 5.9 $206 M
Yoenis Cespedes 29 6.7
Johnny Cueto 29 4.1 $130 M
Jordan Zimmermann 29 3.0 $110 M
Justin Upton 27 3.6 $132 M
Chris Davis 29 5.6 $161 M
Alex Gordon 31 2.8 $72 M
Jeff Samardzija 30 2.7 $90 M
AVERAGE 28.9 4.7 $145 M

Assuming Cespedes signs somewhere in the $100 million range, the average will still be right around $140 million per contract, an increase of more than 50% from the top ten free agents last year. Thanks to the efforts of Carson Cistulli, we can take a look at the free agent classes in each of the past five years, and compare the top ten free agents according to the FanGraphs crowd.

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MLB Settles TV Lawsuit, Preserves Blackouts

Considering the potential ramifications of a victory by the plaintiffs in the Garber v. Office of the Commissioner of Baseball lawsuit, the odds always favored Major League Baseball eventually reaching a settlement in the case. Indeed, considering that the sport’s entire existing broadcast model was under attack – with the lawsuit alleging that MLB violates federal antitrust law by preventing its teams from competing in the local and national broadcast marketplaces – allowing the Garber case to proceed to trial would have been extremely risky for the league.

As a result, it was no great surprise to learn that MLB did in fact reach a tentative settlement agreement with the Garber plaintiffs on Tuesday morning, just minutes before a two-week trial was slated to begin in the lawsuit.

The terms of the deal will not be officially announced until after the attorneys have committed the tentative agreement to writing. Nevertheless, various media reports have revealed a number of details regarding the proposed settlement. In particular, it appears that by agreeing to create new viewing options for fans, and lowering the price for its MLB.TV package, the league has succeeded – at least for the time being – in preserving its oft-criticized blackout policy.

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Minor Leaguers Weigh Risks in Minimum-Wage Lawsuit

The minimum-wage lawsuit that a group of former and current minor leaguers is bringing against Major League Baseball could mark a paradigm shift in the industry. In a nutshell, a ruling in favor of the plaintiffs would fundamentally change the business model of the game, both at the minor league and major league levels.

As legal analyst Nathaniel Grow details as part of his running coverage of the suit, the plaintiffs contend that MLB violates federal and state minimum-wage and overtime laws by paying many minor leaguers as little as $3,300 a year. If plaintiffs were to obtain a favorable ruling, the cost of doing business for major league teams would increase dramatically. In all likelihood, major league clubs would try passing down that cost to minor league affiliates. In one extreme yet plausible scenario, we could see retraction in the minor leagues, which would have ripple effects on player development, the amateur draft and the international signing period. And that’s just the baseball side of it, saying nothing of the impact on regional economies that rely on their minor league franchises.

When a verdict is handed down, there will be plenty of time to assess its impact, the good and the bad. For now, I want to look at an issue that is getting less attention than the lawsuit’s hypothetical fallout: the risks that current minor leaguers must accept if they decide to join the lawsuit.

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The Impending Battle Over the Future of Televised Baseball

Next week, in a federal courtroom in New York City, the future of televised baseball will be at stake. On one side, attorneys representing baseball fans at-large will contend that MLB’s existing broadcast policies violate the Sherman Antitrust Act by illegally limiting competition and consumer choice, ultimately increasing the price we pay for televised baseball. On the other side, lawyers for Major League Baseball will seek to preserve the status quo by arguing that the league’s restrictions increase both the quantity and quality of games aired on television, to the benefit of fans.

The case — Garber v. Office of the Commissioner of Baseball — may not be the highest-profile lawsuit currently proceeding against MLB. But from the league’s perspective, it’s almost certainly the most important.

Long-time Fangraphs readers are probably already familiar with the Garber suit, as we’ve previously covered the case on a number of different occasions. By way of a brief recap, though, the lawsuit essentially alleges that MLB violates federal antitrust law by assigning its teams exclusive local broadcast territories (the same rules that also give rise to MLB’s infamous blackout policy).

Not only do the plaintiffs allege that the creation of these exclusive territories illegally prevents MLB teams from competing for television revenue in each others’ home markets, but they also contend the rules restrict teams from competing with the league itself in the national broadcast marketplace (preventing teams from signing their own national television contracts, for instance, or offering their own out-of-market pay-per-view services in competition with MLB Extra Innings and MLB.TV).

Thus, the Garber suit presents a direct challenge to MLB’s existing television business model, one that could revolutionize the way in which baseball is broadcast in the future.

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An End-of-the-Year MLB Legal Update

It’s been a busy year in the courtroom for Major League Baseball. From its minor league pay practices and fan safety rules, to its scout hiring and television broadcasting practices, MLB spent 2015 defending itself from a variety of different lawsuits across the country. While I’ve covered many of these cases throughout the year, I’ll provide a final, year-end status update on three of MLB’s on-going lawsuits: The Payne suit challenging MLB’s fan safety protocol; the MASN broadcast royalty dispute between the Baltimore Orioles and Washington Nationals; and the Wyckoff suit contesting MLB’s scout-hiring and pay practices.

Payne v. Office of the Commissioner of Baseball

The issue of MLB fan safety was front and center in 2015 following a series of incidents in which fans sustained serious injuries after being struck by foul balls or broken bats. In light of these events, MLB announced earlier this month that it was issuing a new set of non-binding safety recommendations to its teams, encouraging the league’s franchises to take steps to install additional netting between the dugouts, while also making it clearer to fans at the time they buy their tickets whether particular seats are shielded from flying objects.

Despite these recommendations, MLB continues to face a lawsuit that seeks to force the league to take even greater steps to protect its fans. As I noted in July, in Payne v. Office of the Commissioner of Baseball, a California federal court has been asked to order MLB to mandate that all 30 of its teams install foul-pole-to-foul-pole netting in their stadiums. As I also noted at the time the case was filed, though, the suit faced several substantial legal hurdles — not the least of which was the fact the lead plaintiff in the suit appeared to lack the requisite legal standing-to-sue, since she had never been injured while attending an MLB game.

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Did Mike Ilitch Accidentally Suggest Possibility of Collusion?

On Monday, the Detroit Tigers held a press conference to introduce their newest acquisition, Jordan Zimmermann. As has become customary on these occasions, Tigers’ owner Mike Ilitch attended the media session and fielded questions from reporters. Most of the attention following the press conference centered on Ilitch’s comments that he doesn’t “care about the money,” and instead simply “want[s] the best players.”

Of potentially greater significance, however, was a related statement Ilitch made in response to a question about whether he’d be willing to allow the Tigers’ payroll to surpass the $189 million luxury tax threshold:

“I’m supposed to be a good boy and not go over it,” Ilitch said, “but if I think there are certain players that could help us a lot, I’ll go over it. Oops, I shouldn’t have said that.”

Admittedly, there is probably nothing to this statement. Ilitch was likely just speaking casually, acknowledging that while the team’s payroll would ideally stay below the $189 million level, he could be willing to eclipse that mark for the right player.

At the same time, however, Ilitch’s choice of words was rather odd. By stating that he’s “supposed to be a good boy” and not exceed the luxury tax threshold, Ilitch’s statement would seem to suggest that he is under some sort of external pressure not to allow the team’s payroll to cross the $189 million mark. Along these lines, Ilitch then appears to quickly realize that he may have spoken a bit too loosely, leading to his “Oops, I shouldn’t have said that” line.

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The Potential Benefit of a Salary Cap for MLB Players

Let’s begin by acknowledging the obvious: the entire premise of this piece is probably absurd. Considering that the Major League Baseball Players Association’s top priority over the last several decades has been to resist the implementation of a salary cap, it is highly unlikely that the players will reverse course and seriously consider agreeing to a cap on team payroll anytime soon. Opposition to the very notion of a salary cap is simply too deeply ingrained in the union’s culture.

But even if the players are unlikely to agree to a salary cap in the foreseeable future, there is a legitimate case to be made that they should at least consider the possibility during their upcoming collective bargaining negotiations with Major League Baseball.

Indeed, in many respects, the players have been subject to a de facto salary cap for quite some time without receiving any of the accompanying benefits.

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