Don’t Expect Big Changes in Philadelphia

Late last week, it was announced that the Philadelphia Phillies had reached a 25-year, $2.5 billion TV rights deal. The club will remain with its current network, Comcast SportsNet. The Phillies have reportedly upped their equity stake in the network to 25 percent and will receive some portion of the ad money. 2016 is the first season under the new contract and revenues are expected to escalate over time, starting at around $65 million. I assume that our own Wendy Thurm will offer her usual sharp analysis on the business components of this deal. Today, let’s focus on why this won’t immediately affect the team’s overall strategy.

First, it’s important to acknowledge that this was obviously an expected deal, so the Phillies have almost certainly factored their future windfall into their plans. As such, fans hoping that the Phillies will enter the bidding for Masahiro Tanaka due to the new television deal are likely to be disappointed.

The club’s payroll has declined in recent years, even as the aging core has become more expensive. Thurm estimated that the Phillies payroll fell from $172 million in 2012 to $159 million in 2013. Phil Roth’s payroll tool shows that the Phillies’ high water mark was in 2011. And back in December, Phillies’ GM Ruben Amaro Jr. noted that payroll was unlikely to increase  in 2014. Amaro is not always truthful with his comments, so we do need to take that with a grain of salt, but there’s reason to believe that the Phillies payroll won’t grow unexpectedly.

With the recent middling performance of the club, the team’s record attendance has trailed off. 2011 saw the highest turnout per game in club history*. That rate dropped slightly in 2012, when the club went 81-81 and then fell precipitously in 2013. Turnout went from 44,000 fans per game to just over 37,000 fans per game. The club has to be concerned that the trend will worsen too. Last season still saw the ninth highest attendance in club history despite the drop off. If ownership is feeling conservative, they may want to earmark a large portion of the new TV revenues – both local and national – to covering for lost attendance.

*The highest attendance season was actually 2010 when the Phillies had 84 home games due to a G20 summit in Toronto.

When the Phillies had payrolls over $170 million, club president Dave Montgomery would occasionally comment that the club was not making much money and even hinted that the club was in deficit. Owners have a vested interest in managing expectations about the club’s ability to increase payroll, yet it’s believable that the Phillies were taking in less profit than some other teams during their payroll expansion era. In 2011, it was released that the Phillies were one of nine teams out of compliance with MLB’s debt rules. Whether the club is still over-leveraged by MLB’s standards is not known, but it does support Montgomery’s assertion that profits may have been less than desired.

In recent history, clubs have spent between 50 and 60 percent of revenues on the major league payroll. Revenues also have to be used in other areas such as stadium maintenance, debt payments, various insurances, staff, minor league affiliates, and the myriad other costs that go into maintaining a major league franchise. And of course, the owners will want to take their slice of the pie.

It’s unclear how much of the new TV deals will go towards major league payroll, since they do feel like found money. For example, building a new stadium to increase revenue involves a ton of costs, financing, and maintenance. Reaching a new television agreement simply means hiring a few extra employees (probably lawyers). The cost of acquiring a TV contract is seemingly quite a bit lower than other revenue streams. This leads to an expectation among the fans that all or most of the new found war chest will go into player payroll, but this sounds doubtful. Especially in light of the luxury tax system and amateur spending limits put in place by the most recent Collective Bargaining Agreement, both of which serve to constrain the areas where MLB teams can spend excess revenue.

All of these factors taken together mean that the Phillies are unlikely to re-expand payroll in the next couple seasons. With the deal now reached, the club may even be more aggressive in pursuing a rebuilding phase, since they now know for certain that strong television revenues are guaranteed beginning in 2016. The payout for fielding a competitive roster will also be higher in 2016 due to the increased equity stake, so there is some incentive  to plan for that season.

The good news for Phillies fans and insiders is that they almost certainly won’t have to suffer through the pain felt in San Diego and Houston, where some local distributors have refused to pay high carriage fees. Comcast is headquartered in Philadelphia and has a strong local presence. They practically own the sports complex in Philadelphia, including the local NBA and NHL clubs and dominate the market as the top cable provider. Even if some local providers refuse to pay the carriage fee, it won’t be as damaging as it has been in other marketplaces.

Of course, this is all pure speculation. Short of being included in the club’s internal meetings, there is no way to know what the Phillies’ brass is truly thinking. If the organization has proven anything in recent years, it’s that they’re perfectly happy to make moves that baffle the analysts here at FanGraphs and on other similar sites.

Nonetheless, if you’re a Phillies fan, don’t expect instant gratification. You should rejoice that the club’s financial future is now more secure than ever before, but the effects of that security are likely to be subtle to outside observers – at least for the next few seasons.