The Business of Baseball In 2013

Major League Baseball is awash in money. Lots and lots of money. Forbes reported last week that gross revenue for the league and its 30 teams will top $8 billion this year. And that’s before the new national TV contracts kick in. Next year, revenue could reach as high as $8.5 billion. As Forbes noted, total baseball revenue in 1995 was $1.4 billion. When adjusted for inflation, that figure rises to a bit more than $2.2 billion. That means we’ve seen baseball revenue grow an astounding 264% in just 18 years.

In 2013, the big story in the business of baseball is the exponential growth in league and team revenues, all while attendance is fairly flat and national TV ratings are down.

The sub-headlines tell the real story: where is all this money coming from; who is it going to; and how is it being spent.

National TV Deals and MLB Advanced Media

Starting in the 2014 season, and continuing through the 2021 season, ESPN, Fox Sports, and TBS will pay a combined $1.5 billion for MLB’s national broadcast rights. That figure is nearly double what the networks paid the league each season from 2006 through 2013 for essentially the same broadcast package.

Money from the TV deals is paid into MLB’s Central Fund, and then distributed equally to all 30 teams. The same goes for other league-wide revenue like sales of all MLB-licensed merchandise, All-Star Game festivities and everything from MLB Advanced Media. MLBAM operates MLB Network, the At Bat app, and MLB.tv. In October, Bloomberg estimated that MLBAM had yearly revenues approaching $600 million.

But the Central Fund is more than a pass-through. The Commissioner’s Office decides how much of the Central Fund to distribute to the teams. Colorado Rockies owner Dick Monfort recently told the Denver Post that he doesn’t expect the Commissioner’s Office to share all of the new national TV money with the teams, at least not in the first year.

Nevertheless, the new national TV contracts, when combined with growing revenue from MLBAM, is likely to result in at least $20 million more in revenue for each team next season. That doesn’t mean $20 million more in spending on players, of course. Unlike in the NBA and NHL, MLB owners are not obligated to spend a certain percentage of revenue on player salaries. And as I noted earlier this year, MLB payrolls have not kept up with the explosive growth in revenues since 2000.

Local TV Deals 

We kicked off 2013 with news of that the Dodgers were creating a new regional sports network with Time Warner Cable, to be called SportsNetLA. The deal was estimated to be worth more than $7 billion dollars over 25 years. There were questions about how much the new network would pay the Dodgers annually for the right to broadcast games versus how much the Dodgers would receive in the form of equity. The former is included in a team’s net local revenue — and thus subject to revenue sharing. The latter is not.

The Dodgers thought they had protection in a bankruptcy court order from the McCourt Era capping the amount the Dodgers would need to declare as local TV revenue subject to revenue sharing. MLB cried foul. There’s news that the details have been worked out, although they haven’t been reported. That will be a big one to watch in 2014.

The Mariners surprised the baseball world in April when they announced the purchase of a majority stake in ROOT Sports Northwest, a regional sports network previously owned by DirecTV. Forbes reported the deal as worth $2 billion over 17 years. There’s been almost no reporting on the deal since April. Like the Dodgers and SportsNetLA, the breakdown of the rights fee versus the equity stake remains unclear. One thing that is clear: the Mariners are acting like a big-market, big-money team now. Or are they?

The good news about Dodgers and Mariners TV deals (from MLB’s perspective) was tempered by on-going disputes involving the regional sports networks that broadcast the Orioles, Nationals, Padres and Astros. The Orioles hold a large majority stake in MASN, the RSN created as part of MLB’s decision to move the Montreal Expos to Washington to become the Nationals. The Nationals own a small stake in the network. Under the MASN agreement, the Nationals equity share and annual rights fee should increase each year, but the Orioles dispute how big that increase should be. The parties have been at loggerheads for months. Commissioner Selig appointed a committee to try and resolve it but so far, there’s been little progress.

The Padres inked a new rights deal with Fox Sports San Diego before the 2012 season. Two years into the deal, 40% of San Diego households still don’t have access to that channel, or Padres games. That’s because Time Warner and other cable/satellite operators have balked at paying the carriage fees the networks seeks to charge for each customer.

A similar situation blew up in Houston this year after the launch of Comcast SportsNet Houston, a new RSN owned by the Astros, the Houston Rockets of the NBA, and Comcast. Sixty percent of households in the Houston viewing area don’t have access to the new network due to disputes over proposed carriage fees. The parties are now embroiled in a bankruptcy proceeding, and state and federal court lawsuits, over who’s to blame.

The disputes in San Diego and Houston raise the question of whether we’re witnessing the beginning of a bubble burst in sports TV programming. I wrote about this issue a bunch in 2013; this post pretty well sums up where we are. Among MLB teams, the Phillies are the next one due for a new, lucrative local TV rights contract, followed by the Diamondbacks and Reds. The Phillies are in a major TV market, and may be less affected by backlash against high carriage fees. But the Diamondbacks and Reds — and the networks with whom they may negotiate — will most certainly have their eye on the situations in San Diego and Houston.

New Ballparks

The Athletics and the Rays need new ballparks. The A’s play in the Oakland Coliseum — named for the moment as O.co — which is the fifth-oldest ballpark in use in the majors, after Fenway Park, Wrigley Field, Dodger Stadium, and Angel Stadium. All of those have been significantly upgraded, save for Wrigley, which is awaiting final approval on its renovation plan. The Coliseum was remodeled in the mid-1990’s, when Oakland begged the Raiders to move back from Los Angeles. What had once been a pleasant place to take in a ballgame became a football-first stadium. Nearly twenty years later, the Coliseum is on its last leg.

Several years ago, the A’s settled on a plan to build a new, mostly privately-financed ballpark in San Jose, a city 40 miles of Oakland and 50 miles south of San Francisco. The Giants blocked the move with claims that Santa Clara county is within its territory. This year, the city of San Jose sued MLB with a challenge to the league’s antitrust exemption. That lawsuit has been dismissed. San Jose expect to appeal all the way to the U.S. Supreme Court. We’ve covered the ins and outs of the lawsuit in several posts here, here, here, here, and here.

In the last week or two, there have been reports out of Oakland about renewed interest in building a new ballpark. The city and county are exploring a project called Coliseum City, which would involve demolishing the existing Coliseum and building, in phases, a new football only stadium, a retail and housing complex, and a new baseball-only ballpark. Private developers have expressed interest and claim to have a significant amount of money to put towards the project. Our friends over at newballpark.org have kept track of everything about the plan, so check out this link if you want to wade into the details.

There’s a competing idea to build a baseball-only ballpark at Howard Terminal, on land currently held by the Port of Oakland. Oakand Mayor Jean Quan is reportedly backing a group of Oakland business types who are pushing for the Howard Terminal project. There were conflicting reports last week that the owners of the Golden State Warriors — Joe Lacob and Jon Gruber — are also on board with the Howard Terminal plan. But Gruber is a minority owner of the Dodgers and has publicly denied interest in a new A’s ballpark. Lacob has been harder to pin down.

All in all, there finally appears to be some movement from politicos and money people toward building a new ballpark for the A’s in Oakland.

The Rays play in Tropicana Field in St. Petersburg. Yet, despite six consecutive winning seasons, including four postseason appearances, the Rays find themselves in the bottom three in attendance every year. Tropicana Field isn’t easy to get to, especially for fans who live and work in Tampa. Unfortunately, the team is locked into a lease that doesn’t expire until 2027.

There is some talk in St. Petersburg, however, of allowing the Rays to at least explore the possibility of building a new ballpark in Tampa. A new mayor, who said during the election that he’d like to find a solution for the Rays, will be sworn in on January 6. Voters, too, seem committed to solving the Rays’ stadium problems.

And then there are the Braves. While the A’s and the Rays pine away for years for new ballparks, the Braves made the surprise announcement in early November that it had already reached a deal with Cobb County to build a new ballpark north and west of Turner Field, the Braves’ home since 1997. Just two weeks later, the Cobb County Commission approved the deal by a vote of 4-to-1. According to the Associated Press, the new ballpark will be financed as follows:

The memorandum of understanding between the county, the Cobb-Marietta Coliseum Exhibit Hall Authority and the Braves that was voted on by the commission calls for $300 million in upfront taxpayer support for the stadium. The payment would come from existing property taxes that now pay off debt for park projects and from lodging taxes, a rental car tax and levies on business in a special commercial district around the stadium site.

The Braves’ initial contribution to the project would be $280 million. The remaining $92 million would come from debt the county assigns to the team, bringing the Braves’ share to $372 million, or 55 percent of the total.

The Braves have promised to cover construction cost overruns. But the team also reserves the right to reduce the total cost of the project by $50 million, absorbing all the savings without reducing the public contribution.

Not so fast, says the Cobb County Tea Party. The anti-tax group with strong ties to the suburbs north and west of Atlanta has threatened a lawsuit to try and stop the deal from moving forward. The Tea Party is joined by environmentalists and public transit advocates who say the new ballpark will exacerbate the already miserable traffic conditions in the Atlanta metro area. These sorts of lawsuits are filed all the time in an effort to stop new development, and while they may delay certain projects, they are rarely successful in stopping them completely.

So the A’s and Rays — which could really use new ballparks — wait and wait some more, while the Braves — who have played in Turner Field less than 20 years — get new digs financed with public funds in a heavily conservative region. Go figure.

New Posting Agreement with NPB

MLB and Nippon Professional Baseball announced a new agreement last week governing the transfer of players from Japan to MLB. Dave Cameron analyzed the new agreement in a post that considered whether a similar system could be implemented within MLB:

Under the old posting system, the move of a player from Japan to MLB was somewhat akin to a trade, only with MLB teams using cash instead of players as the currency to acquire the player’s rights. The system wasn’t that different from what we see in minor trades between MLB teams, where a player’s rights are transferred from one club to another in exchange for a small cash payment. In the last year, players such as Chris Nelson, Mike Carp, Casper Wells, and Travis Blackleyhave all been traded for cash, as their rights were sold from one team to another in exchange for monetary compensation. The posting system was basically just this kind of trade, only magnified, because the players getting posted were usually quite good.

–snip–

The new system isn’t really like that at all. In fact, MLB isn’t even calling the payment to NPB teams a “posting fee” anymore; it is now a “release fee”, but a more simple description of it would just be a sales tax. No longer are teams buying exclusive rights to a player, as the agreement essentially allows posted players to become free agents, negotiating with any team who agrees to pay the release fee if he signs a contract with them. Because the release fee is only due after a player signs his contract, there is no actual barrier to gaining negotiating rights with the player, and the expectation should be that every team with even passing interest in acquiring talent will agree to the release fee for pretty much every player posted. There’s no cost to gaining those rights, so it should be expected that a posted player will be able to negotiate with any team he wants.

One of the motivations for the new agreement was, ostensibly, to give smaller-market teams fair chance of signing a top player out of Japan. With the release fee set at only $20 million, every major league team has the financial resources to at least participate in the bidding for the high-talent player.

But the new agreement has already proven to be problematic for teams in the NPB which expected a much larger return in the form of a high posting fee. When the Nippon Ham Fighters posted Yu Darvish before the 2012 season, they were rewarded when the Texas Rangers agreed to pay $51.7 million just for the right to negotiate a contract with the star pitcher. The Rakuten Golden Eagles, which own the rights to start pitcher Masahiro Tanaka, have yet to decide if they will post Tanaka for the $20 million release fee.

Jay Z

No year-in-review of the business of baseball would be complete without at least a mention of Jay Z and Roc Nation Sports. The MLB and NBA players associations officially certified Jay Z and his new sports agency in July, just a few months after Robinson Cano famously fired agent Scott Boras and hired Jay Z.

When Cano’s negotiations with the Seattle Mariners appeared to hit a bump in early December, there were plenty of folks ready to pounce on Jay Z as too inexperienced and too flashy to be a successful agent. But Jay Z got the job done when the Mariners inked Cano to a 10-year/$240 million contract. It will be interesting to see how many other players sign up with Jay Z and Roc Sports Nation in the next year or two.

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Money is never too far from whatever baseball issue we’re discussing. TV contracts, revenue sharing, luxury tax considerations, ballpark financing — they provide the backdrop for each team’s scouting and player development, major-league roster construction and, ultimately, performance on the field.

I’ve had a blast writing about these issues in 2013. I hope you’ve enjoyed it as much as I have. Together, we have a lot to look forward to in 2014.