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February 19, 2009

Riding High

Baseball's Place Under the New Media Sun

by Shawn Hoffman

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The mainstream media really seems to think that the sports business is in trouble. Check out this piece of doom-casting from the Wall Street Journal:

During the Great Depression, baseball did take a significant hit: Attendance dropped 40 percent from 1930 to 1933 and didn't return to pre-Depression levels until 1945. Player salaries declined 25 percent. But no teams went belly-up.

Matters might be different this time.

That's a pretty bold statement, considering how healthy the major sports leagues (and MLB in particular) have been over the past few years. BusinessWeek got into the act as well, calling pro sports a "lousy business" that big corporations (i.e. News Corp, Disney, Time Warner) were foolish to enter, and smart to exit. But is all this negativity really warranted? MLB has averaged 11 percent annual revenue growth over the last decade, a pretty solid number for a 130-year-old business with the same core product that it had in the 1870s.

Part of the logic goes something like this: big media companies are falling apart; sports leagues are now big media companies; therefore sports leagues should be falling apart as well. The first part of that syllogism is certainly true, as the internet is killing many of the old business models, along with the companies that rely on them. Run a local television station? Your ad revenues could drop as much as 50 percent this year. A radio network? Good luck with that. Operate a newspaper? Not for long. The downturn is only accelerating the process, as advertisers are drastically cutting their spending almost across the board. Since sports leagues rely on these channels for a rather sizable chunk of their revenues (especially television), it stands to reason that they could be affected by the fallout.

No doubt these are real concerns, and Bud Selig, more than anyone, has preached caution. But Bud should actually feel good about MLB's current situation, since the ongoing shifts in the media business actually favor sports. In fact, there may not be another media company better positioned to withstand this recession than Major League Baseball, and few will be as strong coming out of it.

TiVo-Proof Television

It wasn't so long ago that sports seemed to be losing their appeal to television networks. NBC let the NFL go to CBS in 1998, and didn't make much of an effort to renew the NBA or MLB either. Ratings were down, and the leagues were still looking for higher prices. Most analysts believed that the networks that did win sports-broadcasting rights would be stuck with a 'Winner's Curse.'

But then a funny thing happened with the arrival of TiVo and the birth of the digital video recorder, something that changed the core elements of the television business. All of a sudden people were skipping through commercials, and the networks had to find new ways to pay the bills. Product placements, less commercial time, sponsored telecasts-the networks have thrown everything they can at the wall, hoping that something will stick. So far, there's only been one runaway winner: sports.

It makes a lot of sense, because where pre-produced shows can be watched the next day, or the next week, or the next month, sports are very time-sensitive. Maybe you'll wait until you have some free time during the weekend to watch Heroes, but you're not going to DVR the Super Bowl and watch it on Monday. Sports games are as TiVo-proof as it gets, which also makes them advertising-friendly. The networks are clearly responding, and ten years after Dick Ebersol had said that the model was broken, broadcasting rights are still going up, with NBC back in the NFL. Add in that the cable companies like ESPN and Turner are becoming bigger players, and the leagues have even more leverage than they did before.

Even though television advertising has been taking it on the chin recently, the demand for sports programming is only going up. On a local level, this bodes well for teams with expiring contracts. Teams that own their own RSNs (or those that sell the advertising space for their TV or radio broadcasts) could see more of a slowdown, but they'll still have a major leg up on cable networks that only feature pre-recorded programming.

Digital Distribution

Perhaps the biggest difference between sports leagues and other major media companies is that the leagues actually have content that people will pay for. I've written about how MLB.com can and should boost its online advertising business, but unlike NBC or CBS or Viacom, this is secondary for MLBAM. Even if the internet cannibalizes broadcast and cable television over the next ten years (as it has music and newspapers over the last ten), MLB may actually stand to benefit.

Think about a world where there are no more regular television stations; everything is broadcast through the internet, and you can watch it either on your PC or on your television (which, at that point, is basically just another PC). We'll call this a Murdochian dystopia. In this new world, it'll be almost impossible to advertise for more than 15 seconds at a time on a sitcom or drama; competition will inevitably drive ad-time down, almost to the point of irrelevance. With sports, however, ad-time is built in since games naturally have breaks, and since sports games are time-sensitive and almost always watched live, the advertising surrounding them really won't change much.

That's a pretty amazing thing in itself, but it doesn't end there. It's true that if television stations and cable networks cease to exist, MLB and the other leagues won't be getting those fat rights fees anymore, but if all content was distributed via IPTV, the leagues could actually distribute the games themselves, and they would therefore control all of the advertising revenue. Given how few mass-distribution methods there would be in this new world, the leagues would probably make even more than they do under the current system.

A Diversified "Butts-in-Seats" Business

Media is a huge part of the industry now, but for all of the money that teams make from television, advertising, and the internet, it's still largely a butts-in-seats business. Live events are the ultimate digital-proof industry (at least until we reach ubiquitous virtual reality), as are the $8 hot dogs that go with it, and regardless of how many media businesses that MLB controls, ticket sales and game day-related items are still the sport's core products. After all, without the games, there is no media business.

Not to get too rosy in this doom-and-gloom era, but baseball should be very pleased with where it stands. Aside from the general economy, almost every major trend in media is strengthening MLB's position. So while other companies chase their own tails and see analog dollars becoming digital pennies, MLB may just end up being the ultimate 21st-century media company.

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

Related Content:  Major Leagues,  Media,  Business

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