TV Economics of Baseball: Bubble of Money Will Drive Up Salaries And Burst

Your Dollars At Work To Fuel A Bubble

Unless you have been in a coma since 2008, you have heard that the U.S. Fed has employed quantitative easing (QE) to increase liquidity for their BFFs: the U.S. Banks. From investopedia:

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. 

Onto the MLB. The TV powers that be, have employed a similar type of quantitative easing, providing a huge liquidity bump for the 30 MLB teams bottom lines. (For the actual watching of Fox, TBS, or ESPN a fan can just watch with sound on mute while listening to someone more tolerable.)

The megadeals: ESPN will increase their contribution from $306 million to $700 million per year until 2021. Meanwhile, TBS and Fox were busy slicing and dicing the playoff schedule, weekends game slots, and otherwise, putting more into the collective TV revenue pie. From Fangraphs Wendy Thurm, their resident payroll specialist:

…a new national TV contract with Fox and TBS, which also covered the 2014 through 2021 seasons. Under that deal, MLB will receive $800 million per year in combined revenue from the two networks, in exchange for broadcasts rights for the Saturday game of the week on Fox, the Sunday game on TBS and all of the postseason games — save for the one that will be broadcast on ESPN. Fox also retains the rights to the All-Star Game.

As she calculated, this is $1.5 Billion per season for 30 MLB teams, or a more pedestrian $50 million per team, doubling the old amount that split up to only $25 million per team. TV broadcasters (acting as the Fed) has eased any MLB’s liquidity issues (as often espoused by any number of cry-poor billionaire owners). So what is the influence of such influx of fresh capital to MLB teams?

Anticipating TV Money

One saw the first signs of the QE-driven money growth in the land of big: Texas.  In 2010, the Texas Rangers were first to the money trough , garnering a hefty $80 million per year in local TV revenues from their $3 billion, 20-year deal. (Reflecting about a 40% cut to MLB of $1.4 Billion.)

The Angels (of the West Coast), just two weeks before Christmas 2011 doubled down on Albert Pujols and lefty C.J Wilson in lieu of their jackpot sized $3-Bill TV deal. I discussed the potential downfall of that acquisition/deal here. To quote myself:

Going back to the 1970s, the free agent market consistently (and by various more profound and professorial sources) has disappointed many teams – great big market franchises and the small markets shops. Small markets have been burnt the most. Colorado great shopping spree for Mike Hampton and Denny Neagle. Texas and A-Rod. Cincinnati and Ken Griffey, Jr. San Francisco and Barry Zito. (San Fran [then] hit big on Cain and Lincecum.) Chicago and Alfonso Soriano. Boston (so far) with Gonzalez and Carl Crawford, as we (the fans or the analysts) will have to give that buy some time. But time and again, to be cliché, these high-end (and long-term) deals get no where close to being a successful merger, turning out more like AOL and Time Warner than anything Apple touches lately.

At this holiday season, Pujols has to be smilling and saying, “Hey! Hey! Hey!” or “Ho! Ho! Ho!” to all his friends and family. Because, when you look at the history, the ghosts of contracts past, the evidence is fairly dooming for the Angels. The chains of cash, the debt load, usually snap, and ownerships that behaved like a reformed Scrooge giving Bob & Co. gifts galore, will soon be uttering “Bah humbug!!!” once again.

Ah, tis the hot stove season.

not to be outdone, in 2012  the LA Dodgers seemed to lose perspective by acquiring numerous over 30 players with heavy contracts. The massive August 25, 2012 trade by the Boston Red Sox put Josh Beckett, Carl Crawford, Nick Punto, Adrian Gonzalez, and cash in the hands of the Los Angeles Dodgers for players to be named later: Ivan De Jesus, James Loney and Allen Webster. The Dodgers later sent Rubby De La Rosa and Jerry Sands to the Red Sox. This trade maneuver has grown greatly out of favor among baseball’s new intelligentsia; the MBA-statistical clad front offices that populate the Majors from Boston, Tampa, to Texas and Chicago, and onward westward ho to Oakland, but just not LA LA.

The on-the-field reasons for the Dodgers likely laid in their arch-rival, San Francisco Giants, winning a World Series in 2010, who reupped the ante by completing the feat again in 2012.  Dodgers were sans championship status for nearly a quarter century, and just freed of the debacle of ownership that Frank McCourt brought in through a messy divorce from wife, CEO of the Dodgers. (At one point the crux of a settlement hinged on TV deal: that of Major League Baseball approving a 17-year television contract between the Dodgers and FOX Television. That fell through. But Guggenheim Baseball Management took over, buying the Dodgers north of $2Billion.)

But lo, the Dodgers came out in early 2013 with a $8.5 Billion deal over 25-years with Time Warner Cable. After MLB gets its slice of the pie, the Dodgers were likely to retain in the neighborhood of $6 billion over that 25-year cycle. Calculate that: $240 Million per year into the LA Dodgers coffers.

As The LA Times reported, “In its first year of ownership, Guggenheim put $100 million into an initial round of Dodger Stadium renovations and took on more than $600 million in player salaries. The spending spree — and the record $2.15 billion Guggenheim paid for the team, stadium and land — was fueled partly in anticipation of the billions that would flow when the Dodgers sold their television rights.” This deal also created the SportsNet LA network. Money is flowing like LA lava out of the Tommy Lee Jones debacle, Volcano.

Players Salaries UP!

You don’t need to know much economic theory (hey I stayed at Holiday Inn, so I’m good) to figure this money will not just reside in the hands of those billionaire owners. Players have eyes; and their agents that smell money like Kanye West finds more ways to be more annoying. Chief among the super-agents, Scott Boras commented, “These days, a franchise’s No. 4 hitter is no longer in uniform. The No. 4 hitter is the guy who negotiates the contract for the TV rights.” Doesn’t that say it all?

As Jeff Passan reinforces, “baseball’s more than seven-fold growth over the last 21 years – from a $1.2 billion business to an $8.5 billion behemoth – first came on the backs of taxpayers with municipality-backed sweetheart stadium deals and today balloons thanks to consumers’ monthly television bills.” Again, one can thank a plethora of QE practice, as interest rates were held down several times (post-9/11) and since the 2007-9 Great Recession have been conveniently low so banks can get their balance sheets in order.
The sweatheart deals came at threats of leaving for a better marketing area. This in concert with increasing entertainment dollars spent to satiate an otherwise unhappy middle American, whose finances have been linked to a unholy triumvirate: mortgages as ATMs, stagnant wages, and debt over savings. But I digress.

Passan omens too the inflationary pressures and bubble-creating problems of these TV deals: “And some are wondering if the billions of dollars being tossed around are dangerous for the game’s long-term health. The most interesting debate in baseball these days isn’t Bryce Harper vs. Mike Trout. It’s bubble or no bubble with TV dollars.”

The economics of baseball is so important to the game’s functionality, that those eager-quantifying MBAs are now every bit as important (if not even more vital) as those scouts, and coaches, and managers who generate reports on a players’ potential and abilities. You see, on one hand, the locking up of players earlier, to avoid slightly over-priced arbitration years, and high-priced free agent seasons as LHP Martin Perez just got a cost-controlled contract; and then, on the other, the Money Bowl of Free Agency, an action-packed hot stove struggle between the hedge fund MLB teams and the super-agent shilling for his star client as the answer to everything up to cancer’s cure for a .500 team that got a new TV deal.

The San Franciscans were the first out of the box in late 2013 to plunk down their chips on over 30 players, signing Hunter Pence to 5yr/$90M and Tim Lincecum 2yr/$35M contracts. The analytical types who feel this is antithetical to say a Tampa Rays Model of success (trade before expensive or close to 30), forget the market is influenced by perceived ability to pay for and obtain solid contributions from marketable players.

Agents, like Boras, are pumping prices for Jacoby Ellsbury and Shin-Soo Choo to average annual salaries to $22-24 million for 5-7 years, matching the low-end of the top 100 paid CEOs in 2012. Last I checked, neither of these men, are Babe Ruth, Lou Gehrig, Ted Williams, Willie Mays, or even, Sandy Koufax.
Not to be outdone, Ervin Santana desires $100 million and Ricky Nolasco north of $80 million. The latter, I made a rather harsh analysis of his stuff back in July of this year.  But they are just following the TV market trend, ample money for 30-year olds that look like they can hold up for 5 more seasons. The 2012 FA market for pitching saw Edwin Jackson and Anibal Sanchez, roughly .500 pitchers with mid 3.00- to mid-4.00 ERAs getting paid handsomely (yes, I know about advanced metrics such as xFIP; that’s a different conversation.)

So believe, I say, earn all you can: but I would say also, “at what price will this trend be a detriment to the game, the economics of which is unsustainable?”

The Billion Dollar Media Baby to Burst

MLBTradeRumors put together a nice snapshot of current payroll outlays at present:

Clearest Booms: the Dodgers have over $500 Million on their books through 2020. The Angels, only at $400 million, with San Francisco and Detroit in the high 300’s. Then, you drop to Cincinnati at $300 million flat. But all of that barely tickles the projected revenues going forth as Bloomberg related in the annual, “we are guessing, but its good,” MLB revenues/valuation piece.

The graph of the valuation of all 30 teams is up above. Note: None are below $500 million in estimated value.

Currently, per the Bloomberg Model, 10 teams are above $1 Billion in potential selling price. (Which would of course be financed by acquiring a lot of debt, with slim equity, so as to enhance returns on investment under the U.S. Tax Code, a.k.a. the Leverage Buyout.)

So, the health of the real estate of baseball seems very good. But, like the boom market in real estate in 2001-2006, what goes up, will, eventually, at some point, go down, and hard. Even in the make believe land of this closed sports system, something will give. Such TV deals are hinged on viewership and marketing to them products via those lovely 2 minute and 2 second breaks.

The media world is also going through cataclysmic time: print is out, iPads in; network out, on-demand in; old-school cable out, Sat TV, or Youtube-streaming, in. And this is from someone that liked the old, as much as the new. It is not that MLB will not continue to see attendance at their games. Or won’t acquire a foothold in the new ways to do things, MLB.TV and minor leagues on separate channels, being apart of that. But those pieces are small parts of the revenue puzzle.

Again, Passan, puts this scenario together:

“The thought goes like this: When a network pays huge money for a sports team’s TV rights, it hikes its carriage fee for cable providers. The best regional sports networks (RSNs) cost upward of $3 a month for cable and satellite providers to provide to each household. With monthly TV bills already exorbitant and more options to provide entertainment, from Netflix to Hulu and beyond, consumers could rebel against the single-payment system and choose what they view a la carte. One executive who has negotiated TV deals worries that the sport will find itself embroiled in litigation and needing an entirely new method of distribution to cater to the on-demand generation.”

That hasn’t stopped anyone yet from going to the TV money trough. The Chicago Cubs and Philadelphia Phillies are next up for renegotiating their deals from whatever TV dosey-doe partner they choose from. They will get in on the action, drive up the FA prices, as they both have plenty of room to get to at least Detroit levels of payroll. (Chicago might not seem as eager; debt loads from the Ricketts purchase and a $300 million renovation, held up by their rooftop neighbors, seems where the funnel of cash will flow first.)

The final problem is: Can these long-term deals (remind you of those sub-prime mortgages then packaged up) actually hold up under the dispersion of people’s eyes to other places not baseball. (Or the cheating the system to watch things free – streaming is very popular: ask Game of Thrones fans.) And once people tire too of hearing about Robinson Cano’s getting anywhere near $30 million; or five-seven years hence, the $40 million per year wunderkind who tosses a fastball 100MPH for 7 innings; or hits a ball 500 feet once a month, those revenue shortfalls will affect the game. (Not today, but soon, maybe 2020-2023, as you can only print money so long before inflationary pressures began to take tolls on the greater economy.)

Unless China, Africa, or Europe, start giving big love to the bigs, and furthermore, want to indefinitely support the United States debts and entertainment complex thereof, this Model for Money to Multi- Millionaires and Billionaires (MMMB) is gonna to blow up like the housing bubble. Not that many non-baseball fans will care. But, others will – like me – who feel the sport has just become a MBA-Marketing project designed to sell me Coke, iPads, Samsung phones, and whatever vehicle gets me to their ballpark best, will suffer.

Though, once the game breaks down, a dearth of the money, maybe like politics, it might become a brave new sport all again. To quote Craig Calcaterra, “It’s a new world out there. Or will be soon.”
Just don’t expect all the glitters to become TV gold.

As Shakespeare wrote in the Merchant of Venice:

“All that glitters is not gold;
Often have you heard that told:
Many a man his life has sold
But my outside to behold:
Gilded tombs do worms enfold
Had you been as wise as bold,
Your in limbs, in judgment old,
Your answer had not been in’scroll’d
Fare you well: your suit is cold.’ Cold, indeed, and labour lost: Then, farewell, heat and welcome, frost!” 
As the National League approaches its seven score existence, we should wonder what those founders would think.
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One Response to TV Economics of Baseball: Bubble of Money Will Drive Up Salaries And Burst

  1. Reblogged this on Deepcenterfield MLB and commented:

    Touched on the TV Model changing…worth a read, given the recent FA spending noted at and others.


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