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January 29, 2009

Way Above It All

Is Baseball Really Recession-Proof?

by Shawn Hoffman

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"I've lived through a lot of economic recessions in my day. I've never seen anything like this. And neither has anybody else. ... And so while, in the past, I've felt baseball was recession-proof, this is different."
-Bud Selig

Like movies and the mafia, baseball is usually considered recession-proof. Not because the industry isn't affected by the greater economy-no business is completely immune-but while other businesses crash, baseball presumably will hold its ground.

Just don't tell Bud that. He's gone out of his way to make sure the owners know just how bad it is out there, stressing extreme financial prudence until the economy stabilizes. That means keeping costs down and reducing debt as much as humanly possible. And in case they didn't think he was serious, he brought in Paul Volcker and George Will as backup.

Overboard? Maybe. But Bud and the owners have every right to be cautious. Now in its fourteenth month, the current recession is projected to be longer and deeper than its recent predecessors. We're already in some pretty rarefied air, considering that only two recessions since the Great Depression have been longer. Both of those (from 1973-1975, and the second of back-to-back downturns in 1981-1982) lasted sixteen months from peak to trough. The current one will end up being at least 18-20 months, and that's just if things break right and get turned around in the second half of this year.

So what will this mean for baseball's business in 2009? Can previous downturns give us some hints?

The Great Depression

We only have limited financial data for the '30s, but the numbers we do have are quite chilling. More than anything, they should give us some serious perspective as to how much worse things were then than now. From 1929 to 1933, league-wide operating revenue fell 43 percent, from over $11 million to just under $6.5 million. For context's sake, an equivalent drop today would have baseball's revenues down to $3.7 billion by 2012, which is about what the NFL makes from television alone.

The players didn't do much better. Over the same four-year time period, player payrolls fell nearly 41 percent. Not that that's a surprise, considering the owners could more or less unilaterally choose what the players made. But even with these drastic cost cuts, the sixteen teams went from being $1.3 million in the black to $1.5 million in the red. Had today's player market been in place in the '30s, with so many players locked into guaranteed contracts, it's very possible that a team (or teams) would have missed payroll, or worse.

So why did this happen? For one thing, baseball simply had too many eggs in one basket at the end of the '20s. Gate receipts, which fell by 41 percent in the Depression's first four years, accounted for nearly 80 percent of the teams' gross operating revenue in 1929, and that figure is even higher if you include revenue from exhibition games and non-baseball events. Today, gate receipts make up less than one-third of total revenues, as teams have learned the value of diversification.

That process began in earnest during the Depression, as crisis bred innovation. Teams grudgingly allowed radio stations to broadcast their games, and the Reds hosted the sport's first night game in 1935. On the other side of the ledger, several teams invested heavily in developing their farm systems for the first time as they looked to trim acquisition costs. Whereas almost every other expense was cut (including pretty hefty dividends), teams increased their investment in affiliates and player development by almost two and a half times from '29 to '33.

Those developments eventually paid off; while the Depression certainly took a serious toll on the industry, baseball recovered reasonably well, at least relative to other businesses. By 1939, the sport had surpassed its 1929 revenue numbers, while the general economy was still clawing its way uphill. Factoring in deflation, the sixteen teams took in 32 percent more than in their last pre-depression season. A big chunk of that growth (almost one-third) came from radio, which by that time had gained a pretty strong foothold.

So while it wasn't a whole lot of fun, baseball was able to withstand the blows and come out stronger. All sixteen teams survived (no small feat), and the downtime accelerated both innovation (the farm system) and diversification (radio).

Recent Recessions

The data is much more thorough since 1971, and it gives us a more objective way to answer our original question. The quick and dirty numbers: excluding the major strike-affected seasons (1981, 1994, and 1995) baseball grew 6.2 percent on average from 1971-2007. In recessionary years, that number shrank to 3.3 percent. That's not statistically significant, since there were only five years in the latter sample (1974, 1980, 1982, 1990, and 2001), but it does give us a sense of how much (or how little, depending on which way you lean) the greater economy has affected MLB's business.

Clearly, baseball is better able to withstand outside headwinds now than it was in the '30s. The simplest reason is increased diversification, be it through television, luxury suites, team-owned regional sports networks (or RSNs), or MLB Advanced Media. This lesson should have been learned and acted upon immediately following the Depression, but baseball's owners were characteristically slow on the uptake. When the next major recession hit in 1974, MLB still relied on gate receipts for over 60 percent of its income.

It wasn't until multiple crises hit at once (the shrinking economy and the beginning of free agency that the owners finally took to the challenge. By the mid-'80s, baseball was far more focused on maximizing their intake, since they no longer had total control over the sport's cost structure. Television revenues skyrocketed, as did attendance and gate receipts when the economy turned around, and in the early '90s, the stadium construction boom began, helping give teams the means to wring out that many more dollars from each fan attending a ballgame.

Here's a fairly good illustration. The chart below shows MLB's three-year rolling growth rate, adjusted for inflation. Since struggling in the early '70s, baseball hasn't had an extended period of negative growth. The few dips that are there have more to do with labor issues (i.e., that big dive in the mid-'90s) than the economy; look at the surge in the early '80s in particular:

chart 1

So while baseball might not be recession-proof, it does seem to be recession-resistant. The key has been finding new, robust growth engines to feed off of, even if traditional revenue streams (like gate receipts) stagnate. This is why MLB Advance Media and, to a lesser extent, the MLB Network are so crucial to the sport's short-term financial future. Even if attendance dips a bit due to the economy, those two companies could go a long way toward canceling out the losses. Bud will no doubt continue to be cautious, but his business actually looks to be in a very solid position heading into 2009.

Note: Financial data taken from Rod Fort's indispensable Sports Business Data Pages.

---

Shawn Hoffman writes about business and baseball at Squawking Baseball.

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

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