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June 19, 2006

The Ledger Domain

MLB's Landscape Leading Up to the CBA, Part One

by Maury Brown

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Part I: Player Payroll, MLBAM revenues, and Franchise Values

Marriage, like money, is still with us; and, like money, progressively devalued.

--Robert Graves

If you're past the age of 18, then you've probably been presented with this uncomfortable scenario: You're at a social gathering where a married couple has decided that right here, right now, they're going to get into it. You look at your feet, try to search for all the exits, and more or less get embarrassed for the two people locked in a particularly nasty, painfully public argument.

I'm willing to bet more than a few of you have seen a recurring topic at the center of this sort of dispute: money. Baseball has its version of soured marriage, except that there are not one but two fights in play: the always-tense relationship between the owners and the Players Association, and the uneasy relationship between large market and small market clubs.

Today, I'll dig into the financial state of MLB as we approach the next round of collective bargaining, to see if there are particular sources of tension on that score. There are always going to be disagreements in these relationships, but it's a matter of kissing and making up in the morning, or deciding to make things worse--divorce isn't really an option for these parties.

Turning $418 million in operating losses to a projected $450 million in earnings for 2006 - Player Payroll, MLBAM revenues, and Franchise values

When the current CBA was brokered at the beginning of 2002, MLB was saying the system was broken. As it was structured, MLB was awash in red ink. Recall that leading up to the 2002 CBA, Bud Selig had gone before Congress and presented the Blue Ribbon Panel's findings that showed that baseball was in a depressed state, and management was threatening to dissolve two clubs via contraction.

In 2001, operating losses were shown to be $232 million, which rose to a staggering $418 million in losses the following year. It was reported that of the 30 clubs, only five were showing a profit. At one point, it was reported that the Tigers would be unable to make payroll--this has since been viewed by many as a ruse for collective bargaining purposes.

In combination with the events of 9/11, the losses suggested that if MLB and the MLBPA were to go into a work stoppage, damages to MLB would be considerable, and possibly irreparable. Fans would be lost, much as they had in 1994 after the strike and the cancellation of the World Series. We are just now seeing MLB climbing out of that hole (more on that later).

At the end of 2003, several factors started to turn matters around: revenues increased dramatically, and player payroll increases started to level off. On the latter, the average for player payroll at the end of the 2003 season was $2,372,189, an increase of 3.3%--the smallest increase in total player compensation since 1996. Owners claimed that the overall economy was to blame. The union responded by mentioning a specter from the past: collusion. It was a charge the union has never been able to prove.

In the meantime, revenues increased dramatically. Between 2003 and 2004 revenues increased 16 percent from $3.7 billion to $4.3 billion. There was a dramatic shift in MLB's overall financial health in 2004, which continues to this day. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) figures for 2004 showed that MLB had moved from $250 million in losses in 2003 to $100 million in earnings--a $350 million one-year swing. That upward trend continued in following years: $300 million in 2005, and a projected $450 million for 2006.

chart one

How did this financial miracle occur?

While the Players Association might have merely mentioned "collusion" in 2003, it ramped up to shouting the term in 2004, after the average for player compensation dropped to $2.49 million, a 3% decline. It marked the first time the average had dropped since 1995.

This tone of restrained spending on player payroll has continued to the present. While revenues have continued to climb, player compensation has, for the most part, remained flat. Any increases have really only been in line with the rate of inflation. In 2001, total player payroll accounted for $2.1 billion, while today that figure sits at $2.6 billion, a 24% increase over the period of the current CBA.

The biggest reason for the shift in overall revenues, however, has been MLB's effort to centralize their internal structure, which started in 2000. Prior to that time, MLB's business operations were fragmented. By pulling in international and television businesses, merchandising, licensing, and sponsorship efforts under one umbrella, MLB business operations have operated in an efficient manner, allowing revenues to continue their climb.

Another key to the turnaround has been the centralized funds that have come out of MLB Advanced Media (MLBAM).

chart two

Started in June of 2000 with a paltry $5 million investment by the 30 clubs to create MLB.com, it has grown into a revenue juggernaut with projected revenues of $300 million by the end of the year. This arm of MLB continues to diversify its holdings by acquiring non-baseball related businesses such as MLSnet.com, World Championship Sports Network (WCSN), CBS SportsLine.com's March Madness on Demand, and music related holdings such as Rehearsals.com.

Another reason for MLB's turnaround has been due to fan interest in the game. In 1993, MLB showed an overall attendance of 70,257,938. That figure dropped to 50,010,016 in 1994 due to the strike that wiped out 920 games. Since that time, MLB has continued to try and work out from the hole that the strike created.

chart three

The increase in attendance can be attributed to a number of factors. Certainly the interest in Cal Ripken breaking Lou Gehrig's consecutive games played streak is one, as was the 1998 home run record chase of Mark McGwire and Sammy Sosa. But perhaps the biggest reason has been the advent of the Wild Card in 1995. The addition of the Wild Card created interest when more teams were offered the chance at the playoffs, ostensibly creating races for Wild Card spots throughout the regular season.

With the exception of a dip between 2001 and 2002--largely attributed to impacts in the overall economy along with possible anxiety over a potential work stoppage at the end of the last CBA--attendance growth has remained steady. How has attendance impacted the bottom line? Total gate receipts for 2001 were $1.38 billion. Last year, that figure was $1.8 billion, with projections for 2006 coming in at $1.95 billion.

Another indicator that MLB is in better financial shape has been the increase in franchise value. While these numbers are always disputed by MLB, Forbes' annual valuation of the MLB clubs shows that there have been consecutive years where the average value of MLB franchises has increased 15 percent, to $376 million at the beginning of this season.

chart four

These increased valuations have been due to new stadium construction, (based off construction start year Cardinals - 2004, Phillies - 2001, Nationals - 2005), the sale of seven clubs in which the buyers paid double-digit increases over the prior purchase price, and increases in sponsorship, naming rights, and broadcast deals. This trend will continue with the planned new stadia for the Yankees and Mets, as well as the sale of the Braves on the horizon.

Conclusion to Part I

MLB is no longer a poor example of a sports business model. While the option of contraction is an option in the current agreement, the concept has been shelved due to MLB's robust growth.

This article doesn't tell the whole story on how MLB has turned the corner. Broadcast revenues, MLB's diversified revenue streams, controls on the amount of debt a club can carry, improved marketing of MLB as a brand, and revenue sharing are all subjects that I'll cover in upcoming installments leading up to the next Collective Bargaining Agreement. MLB and MLBPA have drawn their daggers eight times before, and now we'll see whether the current debate will prompt a ninth.

Maury Brown is an author of Baseball Prospectus. 
Click here to see Maury's other articles. You can contact Maury by clicking here

Related Content:  MLB,  Mlb.com

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