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June 15, 2005

Lies, Damned Lies

Forecasting the Future: Microculture

by Nate Silver

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Much of what we do at Baseball Prospectus is looking forward and making predictions about the future. Usually, however, we aren't looking very far into the future. We might look at an upcoming game or series (time horizon: three days). We might look at the conclusion of a pennant race (time horizon: one month). We'll certainly try and predict what's going to happen in the upcoming season (time horizon: six months). And occasionally, we'll even look at a 19-year-old prospect or a 5-year PECOTA forecast, deigning to predict events five or ten years in advance.

Rarely, however, do we go much beyond this.

A slight detour. I'm not nearly as prolific a web-surfer as some of my good friends. There are probably five or ten websites that I visit more than once a week; for a lot of people my age, that number is more like fifty or one hundred. Occasionally, however, the mood will strike me just right, and I'll go drifting to and fro between unfamiliar regions of the World Wide Web. A recent such excursion landed me at this strange destination, an article whose thesis is, among other things, that we tend to underestimate the rapidity of change within modern culture. In that spirit, I have decided to do a handful of articles trying to think about what baseball is going to look like not in the near future, but in the somewhat distant future--say fifteen or thirty years from now. (The next installment in the series might run next week, or it might run in August, depending on what else catches my attention).

The real problem with forecasting the future, of course, is the Law of Unforeseen Events. I got about a tenth of the way through the 9/11 Commission Report, and it would have been really, really nice if our government could have foreseen that a bunch of terrorists were planning on crashing commercial jetliners into buildings, but fundamentally the idea that something like that could happen was so far out of our collective worldview that it's almost impossible to imagine a well-intentioned policymaker giving such a scenario much credence, any more than an Incan emperor could have prepared for Spanish warships coming o'er the horizon. The really pivotal things are the really unexpected things, and those are exactly the things that one can't possibly hope to predict. If I took a very long nap and woke up thirty years from now and discovered that Brazilian shortstops were to 2035 what Dominican shortstops are to 2005, I could probably convince myself that it made some sort of sense, but I sure as hell couldn't predict something like that now. My sense of the future is too linear. All of ours are.

With that admission in mind, I am going to do the next best thing, examining some current, wide-sweeping trends within baseball, and thinking critically about how those trends are likely to resolve themselves in the future.

Trend: Franchise values are increasing rapidly.

Is it likely to continue? No.

According to Forbes Magazine, baseball franchise values have risen by some 71% since 1998, or better than 10% per year. This is a remarkable performance for a relatively low-risk investment, particularly in an economy where most other forms of investment have struggled to tread water over the same period. Franchise values, of course, are a pretty good indicator of the overall economic health of the sport; gate receipts and media contracts have increased, and so too have franchise prices. To be a bit more precise about it, franchise values represent predictions about future revenue streams to be enjoyed by the respective clubs, so the high valuations are not only a reflection of the happy economic climate of the game, but also an indication that investors expect the good times to continue.

In order to get this particular result--the growth in baseball franchise values has dramatically outstripped growth in the economy at large--some combination of these things has to be true:

  1. Conditions in the baseball industry changed especially favorably between 1998 and 2005.
  2. Baseball franchises were undervalued before.
  3. Baseball franchises are overvalued now.

Rather than looking forward, let's turn the clock back. Free agency began in earnest before the 1977 season, after Reggie Jackson, Bobby Grich, Rollie Fingers and others played out the final year of the contracts governed by the just-obliterated reserve clause. For all the noise that owners made at the time about free agency--and for all the noise that they've made about it since--you might expect some catastrophic impact on franchise values. Instead of operating a safe, low-overhead business, franchise owners could now be assured that baseball players would be bargaining for every last cent.

The San Francisco Giants were the first club to see a new franchise value established after the birth of free agency, as a result of continued machinations between Bob Lurie and various groups that intended to move the club to a new city. The Giants had originally been put up for sale in 1976; Lurie and his partner paid $8.5 million for them, matching a bit from Labatt's Breweries, which had wanted to move the club to Toronto. A year later in 1977, with the free agency era well in hand, another group attempted what was essentially a hostile takeover of the Giants, this time intending to move them to Washington. Lurie exercised his first refusal rights and matched the offer, upping his stake in the club and brining the franchise value to $10 million, about a 16 percent increase from a year before. Not only had free agency failed to harpoon interest in the Giants, but the club's value had increased virtually overnight.

Nor was this an isolated incident. According to James Quirk & Rodney Fort in Pay Dirt, baseball franchises increased in value by about 8 percent annually during the 1980s, a healthy return even in a healthy economic climate. (The information on the Giants' sale, by the way, is also scrounged from Pay Dirt).

There is another side to this story that needs telling, too. Prior to the competition between Lurie and Labatt's for the Giants in the spring of 1976, the franchise had been owned in some way, shape or form by the Stoneham family since 1919, which was responsible for moving the team from New York. The Giants were one data point in a long stream of sales from families to corporate or venture capitalist groups, a chain that might well be thought to have completed itself with the sale of the Brewers from the Selig family to investor Mark Attanasio this past winter. Although free agency was not the only cause for this transition, it surely helped to catalyze it: Within five years after the birth of free agency, the Cubs, Astros, Mets, Phillies, Red Sox, White Sox, and Rangers were all sold to corporations or syndicates, while the Mariners, A's, and Orioles were sold to wealthy individuals with no nepotistic connection to the club's former ownership.

Free agency required, in other words, that baseball teams begin to treat themselves like real modern businesses. With the exception of a Carl Pohlad here and there, they have been learning how to do that ever since. The stadium game has been an especially profitable manifestation of this; so too are the ever more cunning ways that baseball clubs have learned to optimize their media rights deals, and to market their brands.

The problem, I think, is that the learning curve is just about over. While baseball teams still make their fair share of personnel mistakes, they are rarely making the sort of counter-productive business decisions that they did thirty years ago. The best examples of this are probably the Cubs. Though the Cubs have been owned by Tribune Corp. since 1981, it is only very recently that they have begun to get away from the family business orientation of the Wrigley era. The team, long regarded as a dinosaur of sorts, is investing in its ballpark--a vibrant LED display below the center field scoreboard instead of the olde-timey monochrome display--in its lobbying efforts, and, at least up to an extent, in its team. The Cubs have increased ticket prices for two years running (not only that, but they're running their own scalping agency). They've found just the right balance in their television rights, keeping a healthy number of games on WGN while kicking Fox SportsNet to the curb this winter in lieu of Comcast. And they're making heaploads of money. The Cubs' franchise value has increased by some 95% since 1998.

But there isn't too much more for the Cubs left to do. Just about everything that a well-paid consultant might have begged them to do seven years ago, the Cubs have now done. The same can be said for a lot of clubs, especially in the substantial number of cities that have recently been "gifted" with new ballparks. So to answer the question from above, the most plausible explanation is that baseball franchises are gaining in value so rapidly now because they were undervalued before. Or, more properly speaking, they were undermanaged before, thus properly depressing their values.

So I don't expect the runaway growth in franchise values to continue. The question is if there is any risk of a collapse. It seems plausible to me that we're in something of a bubble, based on the streamlining effect that I've described before. Previous new owners have benefited from overhauling clubs that were not run efficiently, thereby enhancing the real value of the franchises, and reselling them at well-earned profit. But the new new owners might be in for a rude awakening if they are purchasing the clubs at prices that implicitly or explicitly assume continued high revenue growth as a result of continued "technological" advancements. You think if Arte Moreno gets bored tomorrow and decides to sell the Angels, the new new owner is going to do a materially better job than Moreno of marketing and enhancing the club's brand? The new owner should pay a premium based on the improvements that Moreno has made, but he should not pay a premium on that premium based on the assumption of continued streamlining in the club's operations. It might seem a trivial distinction, but it's one that could burst the bubble.

The other doomsday scenario is if baseball itself somehow loses cultural traction. The past seven years have been one of the real Golden Ages in the game's history. We've had an uncanny abundance of great postseason series, record-setting performances, great players, and great stories. We've avoided a labor stoppage. We've witnessed the development of new ways to experience the game, like MLB.tv. And consequently, attendance and revenues are higher than ever.

But there are some broader and more slowly moving cultural trends that are working in the opposite direction. Motion picture box-office revenues are down this year. Part of that is because there haven't been very many good movies produced lately. Part of it is because DVDs and plasma-screen TVs have made viewing a movie at home a more attractive option. But part of that too, I believe, is because of the erosion of mass culture into what I'll call microculture. Microculture, as I'm defining it, has two interrelated components, each of which work in the same direction from the standpoint of baseball's future:

  1. The proliferation of multimedia options, particularly including interactive-type experiences like the Internet and video games.
  2. Increasing economic, demographic, geographic, and political diversity within the United States.

Put more succinctly, a more diverse culture has simultaneously been exposed to a more diverse array of entertainment options. Twenty years ago, if I wanted to experience a Tigers game, I could go to the ballpark, listen on the radio, or perhaps watch it on television if the game happened to be on. Nowadays, I can certainly watch it on TV. I can also listen to or watch the game on the Internet, or follow it on my cellphone. I can TiVO the game and watch it later. All of these things are helpful for baseball. I can also say screw it and watch the Yankees play instead. That's helpful for baseball too, if not necessarily for the Tigers.

After that, however, the line begins to blur. Instead of following a real baseball game, I can play a highly realistic baseball simulation on my Playstation. That probably isn't bad for baseball. But what happens when I pop out the MVP 2006 disc and decide to play Grand Theft Auto? What happens when I flick between WGN, ESPN, ESPN2, TBS, all of which are broadcasting baseball games, and decide to watch the NASCAR race or the Food Network instead? What happens when I realize that I don't care for baseball at all, and that my real passion in life is quilt weaving, now that I can communicate with other quilt-weaving enthusiasts on my blog? In the near term, multimedia is good for baseball, because there are more ways to experience baseball. In the longer term, it could be devastating, because there are more ways to experience other things as well.

It isn't just the movie industry that has been altered by microculture. Of the ten highest-rated TV programs of all time, just one has come since 1986, and none since 1994. That's because of cable, of course. Cable makes it possible for someone to watch something that's more specifically in line with their "special" interest; that's good for the consumer, but bad for the networks. Pop records don't sell proportionately as much as they used to, because urban kids like hip-hop instead. Baseball is a mass cultural phenomenon in a nation that is drifting away from mass culture. What happens when I decide that all this baseball-and-apple-pie shtick is red-state stuff, and I'm a blue-stater instead? What happens when the broadcast is on in English, and my language of fluency is Chinese?

I don't think that there is going to be a sudden collapse in franchise values. But if there were a mutual fund indexed to baseball team values, I would sell it short.

Nate Silver is an author of Baseball Prospectus. 
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