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December 4, 2008

The Ledger Domain

MLB Meets the Recession

by Maury Brown

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Bud Selig and the executives at MLB headquarters must have breathed a sigh of relief. At the end of the 2008 season, baseball could boast that it had reached the second highest paid attendance in its history, that on top of another record year for revenues, all while just missing what would be the onset of one of the largest economic declines in US history.

A scant two months before the World Series would end, the government seized mortgage giants Fannie Mae and Freddie Mac, saddling the American taxpayers with $5 trillion in bad debt. That was just the beginning. Since September, the credit and banking markets have spun ever downward, while the auto industry has gone begging for a lifeline. The country, long believed to be in a recession, was officially labeled as such on Monday by the non-profit National Bureau of Economic Research, when the group confirmed that the US has been in a recession since December of 2007.

No one in this country is impervious to the gloomy economic news these days, and pro sports leagues are no exception. While MLB was able to skirt the edges of the deep dive in September, the NFL, NBA, and NHL are all in the midst of their regular seasons, and all have felt a decline and are taking actions in anticipation. The NFL, for example, has said that they are lowering the cost of playoff tickets this year by 10 percent. According to the SportsBusiness Journal, the Cowboys, a bellwether for the league, have recently looked to borrow $350 million during the worst credit environment in history, this after a $126 million loan that they acquired last year fell victim to the collapsing auction-rate securities market.

What is unclear is how deep the economy will influence how MLB does business. What is certain is that the entire sports industry will be paying serious attention to the 2009 season for baseball, as it will mark the first professional league to grapple with an entire season under the recession's full weight.

Because of the economy, MLB has been bracing itself this offseason to take a possible pounding in 2009, going so far as to have Paul Volcker, the former Federal Reserve chairman and current economic adviser to President-elect Obama, speak to the owners as part of their quarterly meetings last month. Commissioner Selig has attempted to stay out in front of the matter by talking to both the owners and general managers as they prepare to descend on Las Vegas for this year's Winter Meetings. "Don't get cocky with ticket prices" was one message that Selig delivered to the owners, and for the most part, they've complied. The Red Sox have consistently had the highest ticket prices in the league, but this winter they've frozen ticket prices across the board for the first time in 14 years for the upcoming season. To place that in perspective, the average price for a ticket at Fenway has jumped from $44.56 in 2005 to $48.40 in 2008, an increase of 17.1 percent, according to Team Marketing Report. Ticket prices will not only be the same at Fenway Park, but for spring training as well. The Giants have seen attendance plummet since Barry Bonds left the club, and have announced on Tuesday that they would use a dynamic ticketing structure, expanding their variable pricing options. In a unique experiment, the price of 2,000 upper-deck seats in AT&T Park will fluctuate based upon supply and demand, with the cost changing as often as daily.

The economic ramifications have begun to move well beyond how ticket prices will be set. The Diamondbacks released 31 employees from the front office in early November, and the Blue Jays announced this week that an unspecified number of employees in its media division would be laid off due to declines in revenues.

In terms of players being offered salary arbitration by their former clubs, there are also signs that the economy may be influencing the market for this year's free agents. As of Monday's deadline, 24 players had been offered salary arbitration. The real eyebrow-raiser was that the New York Yankees, the club with the most disposable revenue, declined to make any salary arbitration offers to their departing players. That list included Andy Pettitte, Bobby Abreu, Jason Giambi, Sidney Ponson, Carl Pavano, Ivan Rodriguez, Chad Moeller, and Mike Mussina, who announced that he was retiring. As Joe Sheehan noted yesterday, it may have been a misstep by the Bronx Bombers. Still, the number of free agents not offered arbitration was not that unusual in light of the longer-term trends; according to the MLBPA, 17 players were offered salary arbitration last year at the deadline, while 25 had offers made in 2006.

What seems clear is that there is a general trepidation felt by clubs as they look at the free-agency pool, which is this year comprised of 171 players. As of Wednesday, just eight of those players had been signed, counting pitchers Doug Brocail of the Astros and Ryan Dempster and Chad Fox of the Cubs re-signing with their former teams. Revenues that before were easily projected as coming into the club coffers by way of attendance are not nearly as easy to predict going into this year given the economic uncertainties facing consumers, and that has placed once trigger-happy GMs in a different position as ownership tightens their purse strings.

As one highly placed AL executive stated, determining how active their club will be in the free-agent market might not be get sorted out until after the season begins, when the market may offer better deals. "Forecasting how attendance will be in June is like trying to predict the weather six months out. You pray for sunshine, but prepare for rain," the executive explained, in reference to sustained revenues through the gate. "If a good deal is there, we'll chase it. But we may be less likely to do so early in the offseason, and wait to see how our season is progressing."

How Television, MLB.com, the WBC, and New Stadiums Will Help Buffer the Owners From the Storm

While below MLB's initial projections, baseball enjoyed record gross revenues of $6.5 billion for 2008, an increase of $425 million from 2007. That increase was based in large part on the second highest paid attendance for the league at 78.6 million, down just 0.7 percent from the year prior. Heading into 2009 however, the question is can baseball sustain that trend in the face of the economic decline? The answer is... possibly.

Much of baseball's revenues are locked in via television agreements reached well before signs of impending economic doom loomed on the horizon. In 2007, MLB negotiated national broadcast deals with both Fox and TBS. Those deals, which run through 2013, will see Fox pay baseball approximately $257 million annually, while Turner will chip in $104 million per year. Add ESPN's deal brokered in 2005, and economic crisis or not, MLB will receive nearly $660 million from their national broadcast partners in '09.

On top of the locked in television revenues, a lucrative stream of centralized revenues continue to come in via MLB Advanced Media. MLB's digital rights arm brought in approximately $450 million coming into the 2008 season; a tidy sum. While much of the revenues from MLBAM are being reinvested back into the company, it still provides a steady flow of additional funds into the owners' coffers.

Another new revenue stream arriving for MLB that could help buffer the economic storm is the upcoming MLB Network, set to begin broadcasting less than a month from now on January 1. The fledgling cable channel's launch is the biggest in cable history, will reach 50 million homes. In an article in The New York Times in 2007, total cable subscriber fees of $112 million were projected for 2009, growing to $152.7 million by 2015, according to a presentation made to owners in Manhattan that year by the investment firm Allen & Company. MLB Network will also garner several million dollars annually in ad revenues, yet more money that has not been available to the 30 owners previously.

At the local level, some clubs will be able to tap other revenues not normally available. The Blue Jays, Padres, Marlins, and Dodgers will all partake of a little extra green from the upcoming World Baseball Classic. The Blue Jays are hosting six first-round games at Rogers Centre that will include the US, Canada, Italy, and Venezuela, with the Padres and Marlins each hosting six second-round matches, and the Dodgers garnering the semi-finals (two games) and the WBC title game.

The clubs that will enjoy the biggest revenue bounce in the midst of the cash crisis are in New York. With the Mets and Yankees both opening new stadiums, the honeymoon effect should be in full bloom in the Bronx and in Flushing Meadows. All of the $500,000 suites are sold out in the Mets' new stadium, and while suite sales have reportedly stalled since September for the Yankees, the word from the organization is that they expect to be sold out before Opening Day as well. For the Mets, the new stadium provides an additional silver lining. Last month, banking giant Citigroup announced that they would be laying off 53,000 workers-a staggering sum totaling 20 percent of their workforce. And yet, on the same day that the layoff announcement occurred, the Mets declared that their 20-year, $400 million naming-rights deal with Citi would remain intact. The agreement will assure the Mets that, even in what may be the worst of times for the league and Citi, they will receive $20 million annually, enough to offset any possible declines the Mets might bump into on the sponsorship front.

The Economy Should Hurt Some, But Not All

Large-revenue-making clubs may barely feel the recession's impact, while low- to mid-revenue makers might be bracing for a collision of major proportions. Even with strong centralized revenues, all of the clubs are approaching this season much more cautiously than ever before. Could the market rate for free agents be set lower under the auspices of the recession by some clubs, when in reality they may be relatively unscathed by the downturn?

MLB has been able to grow its revenues through prior economic declines, something the MLBPA has taken note of. "Baseball is historically resistant to economic downturns, but we will have to see what happens in the current circumstances," said Gregory Bouris, a spokesman for the players' union. "We will of course monitor the free-agent market closely, as we always do, for any indication of adverse effects of the economy, or for any other reason."

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

9 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

drmorris

The success of MLB Advanced Media has been an underreported story -- both in terms of its impact on baseball's revenues and as a more general digital-media victory. $450 million works out to more than 7% of the industry's revenues for 2007. Increasing iPhone/smartphone penetration throughout 2009 will open up a powerful new revenue stream for MLBAM, who have already delivered a killer app for handsets. (Apple thought well enough of the effort to devote a commercial to it.)

As is usually the case in any market conditions, innovation will out. Baseball has a first-rate digital arm to thank for a world-class effort in developing critical digital revenue streams.

Dec 04, 2008 13:28 PM
rating: 0
 
Bob Shore

"To place that in perspective, the average price for a ticket at Fenway has jumped from $44.56 in 2005 to $48.40 in 2008, an increase of 17.1 percent . . . ."

There's something wrong with the math here. That increase is less than 10%.

Dec 04, 2008 13:41 PM
rating: 0
 
Evan
(47)

I daresay, while the current economic events can correctly be described as a credit crisis", the severe contraction of the credit market was a major cause of the extension of the Great Depression.

So I think we're quite a ways away from this being the "worst credit environment in history."

I'll allow that this is perhaps the second worst US credit environment in history.

Dec 04, 2008 17:05 PM
rating: 0
 
Evan
(47)

Do you have any thoughts to how the collapse of one or more of the major US automakers will impact the Detroit Tigers?

Dec 04, 2008 17:08 PM
rating: 0
 
Matt Swartz

I don't think the MLB Network money or any of the MLBAM money will increase free agent salaries in any way. Free agent salaries are based on the marginal revenue of how many wins they had their teams. MLB Network money and MLBAM money is fixed revenue-- adding players will not add to their MLB Network money and MLBAM money which is going to be split between the teams evenly regardless of performance, I would guess?

Baseball teams may not always follow basic economic principles (especially since there is no entry of new teams into market to replace current teams if the current teams behave economically foolishly), but they should at least be expected to sign free agents under the assumption that they are trying to set marginal revenue equal to marginal cost. The economic crisis will only affect teams inasmuch as it affects the marginal value of a win. If the demand for bad teams' tickets is more income elastic than the demand for good teams' tickets, free agent salaries might actually increase in response to the economic crisis. The issue isn't budgets. These teams make money and liquidity is probably not much of an issue at all. The issue is whether it adds to their profits to sign new players. I would guess yes.

Dec 04, 2008 22:01 PM
rating: 0
 
ostrowj1

While what you are saying is for the most part true, but because the marginal value of a player is a random variable with a large degree of variance (since it depends on the players health/performance as well as the entire team's health/performance) you cannot expect the econ 101 marginal cost = marginal revenue. As a result of the risk, the formula now is more like marginal cost <= k* expected marginal benefit (for k < 1). The more money in the bank a team has, the less risk adverse a team has to be (allowing for larger values of k and, as a result, higher salaries).

Dec 05, 2008 05:41 AM
rating: 0
 
Matt Swartz

the rule under uncertainty is supposed to be expected marginal benefit equals expected marginal cost. i think what you mean is that the expected marginal benefit may be in the form of a risk averse utility function (benefit=utility) but multiplying the utility function by k does nothing but montonically transform the function and redefine what "benefit" means in a way that doesn't change actually change the meaning (i teach econ 101) or the decision at all.

in reality, nate silver's marginal value of a win curve (where teams with 85-90 expected wins have higher marginal benefit of a victory due to their stochastic nature of winnign) is a good starting point.

i was also pointing out the difference between how much people will pay for tickets for a .500 team during a recession and a downturn and suggesting the benefit of improving from a .500 team to a .550 is huge.

Dec 06, 2008 12:32 PM
rating: 0
 
Nick J

17.1???

Dec 05, 2008 10:43 AM
rating: 0
 
Maury Brown

Thanks, Bob, for pointing out the Excel gaff on the ticket prices at Fenway. The sentence should read:

"To place that in perspective, the average price for a ticket at Fenway has jumped from $44.56 in 2005 to $48.40 in 2008, an increase of 8.6 percent..."

Dec 06, 2008 10:31 AM
rating: 0
 
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