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January 22, 2007

The Ledger Domain

Risky Business

by Maury Brown

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There's a lot more gambling going on this offseason than in some of the years prior. Yes, we all know about teams that busted the piggybank for players, but there are some other deals out there that are risky, and not all of them are on the field.

NBA commissioner David Stern will get the trophy for the biggest gamble that didn't pay off this season (the composite basketball that the players hated), but Major League Baseball is more ripe for gaffs than other major sports. See the All-Star game tie and Spiderman II logos on the bases for a couple examples.

The four risks I'm going to list aren't of equal caliber. Some are just part of the business. (In one of these cases, it's a business transaction with billions of dollars involved. When isn't there risk at that level?)

Enough teasing, here's some of the risky business in baseball these days:

Putting Extra Innings on DirecTV

While I went into detail on the proposed deal to make DirecTV the sole television outlet for MLB Extra Innings a couple of weeks ago, Richard Sandomir of the NY Times reported on the matter over the weekend and got more people buzzing on the topic. Here's one key aspect that had not been reported prior:

"...the new agreement will take it off cable and Dish because DirecTV has agreed to pay $700 million over seven years, according to three executives briefed on the details of the contract but not authorized to speak about them publicly.

InDemand, which has distributed Extra Innings to the cable television industry since 2002, made an estimated $70 million bid to renew its rights, more than triple what it has been paying. Part of its offer included the right to carry the new baseball channel, but not exclusively."

So while MLB has claimed that it wishes to grow the league's fan base and popularity, it is going to restrict television viewership in exchange for short-term financial gain. This seems like a huge gamble given that the difference between the InDemand offer and the DirecTV offer stands at just $30 million a year. Maybe this is a strategy to get those that can't get Extra Innings into MLB.tv. That's fine, I'll drink that kool-aid, but does it really make good business sense to force consumers into a product, as opposed to offering it up as an extended reach product beyond television? I'm getting e-mails that sound like Howard Beale in Network: "I'm as mad as hell, and I'm not going to take this anymore!"

The Sale of the Braves Tick, Tick, Tick

Since April of last year, Time Warner broke off dealing with any other bidders for the Braves besides Colorado-based Liberty Media. It's not just the Braves that are at stake, mind you - it's a complex deal based around dodging taxes. The Braves are a cog in a much larger deal where $1.35 billion in cash and the Braves go to Liberty in exchange for 107 million shares of Time Warner stock that Liberty owns. The deal has been sitting in the background of MLB's business dealings all this time, and we're coming up on a deadline to make it work.

By May 17th the deal has to be completed in total, as at that date tax laws that impact the entire affair change. After May 17th, the amount of monies that can be involved in the tax dodge will be lessened. This isn't some deal where Liberty or MLB or Time Warner sets a date and is pushed out. No, this is a deal that has outside forces in play, so the pressure to get the deal done by the deadline is huge given the loss of tax-free dollars that's in play. All the parties are making a gamble here (Time Warner, Liberty Media, and MLB). MLB wants to make sure that it can have as much day-to-day control as possible given to a local executive such as Braves president Terry McGuirk.

The problem is that the IRS has some strict guidelines surrounding how this type of stock-swap deal works, and they may not fit in with MLB's view of ownership. Since MLB is used to tight controls on who is and isn't within the ownership ranks, the deal will be interesting to watch. If the Liberty/Time Warner deal collapses, Falcons owner Arthur Blank and Atlanta real estate executive Ron Terwilliger have said they still have interest in purchasing the club.

George Mitchell Ratchets Up the Pressure

I hit on this for BP Unfiltered, but it's something that fits in well with the "risky business" aspect of this article, so I'll take on the topic again.

In Senator George Mitchell's remarks at the January 18th Owners Meeting in Phoenix, he put not only the players but the clubs on notice that if they don't cooperate with his steroids investigation, Congress may step into the picture. The gamble seems quite clear: officials within the clubs will have to step forward to give Mitchell information, or risk being subpoenaed by members of Congress when the time comes for him to release his report (no doubt a scathing tale outlining all the stonewalling).

As Mitchell said, "I believe that a report that is not credible and thorough will significantly increase the possibility of action by others, especially if it's the result of a lack of cooperation by the clubs, or by anyone who is or has been involved with baseball."

David Glass' Skipping Record Has More Meaning This Time

Each year before the season starts, the Royals have an annual "forecast luncheon" where owner David Glass gets up in front of the faithful and sells them on what the team is doing to compete in the coming season. Here's a sampling:

  • Before the 2004 season - "The high expectation levels are appropriate and I think the players will adjust to them because I think they believe they can compete, do well and get Kansas City into the postseason."

  • Before the 2005 season - "The reason I'm excited about this year is we're sort of going back to the position that I think markets our size have to be in, and the way you have to win in the way Major League Baseball is structured is you're going to have to go with young players in your own organization and sprinkle in a few veteran players to give you leadership and stability."

  • Before the 2006 season - "I think we'll be a much better team. Our pitching will definitely be better. I can tell you our defense will be significantly better. Pitching and defense are two main reasons why you win games, so logically we'll win a lot more games this year."

It should thus come as no surprise that the skip in Glass' record continued last week at the forecast luncheon. "I think all of us can look forward to a competitive team this year," Glass told those assembled. "We've not had good teams in recent years, but the fans have hung in there. All we want is to have a competitive team, where every time we go out to the park we feel we have a chance to win. And I think that's what we've got this year."

This year, however, is a bit different for Glass and the Royals. Maybe it's the fact that revenues in MLB are up and with upgrades to Kauffman Stadium on the horizon, the Royals are looking at increased local revenues to spend. Or maybe Glass doesn't like the fact that he was voted as the worst owner in MLB in a Sports Business Journal poll. Whatever the case is, the Royals took a gamble and dolled out a five-year, $55 million deal for Gil Meche, one of the bolder moves in the offseason. Maybe "bold move" and "Royals" don't sound synonymous, but it's either refreshing in the sense that they're aggressively involved in the free-agent competition this season, or it's a matter of overspending for overvalued talent. Like I said, it's a gamble, but at least Glass is at the table.

Will Glass' record skip again before the beginning of the 2008 season? For the sake of the Royals faithful, let's hope that's not the case.

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

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