• Although the Marlins haven’t officially announced it yet, they’ve signed Hanley Ramirez to a six-year, $70 million contract extension. On a purely “what would he have gotten” basis, this deal is a steal, and for that it gets a thumbs up. But I will say that Hanley’s is going to be a bit overrated until he can either play a competent shortstop, or excel at a different position. But at 6/70 for his age-25-30 years, three of which he would have been FA-eligible, this is nitpicking. In fact, my first reaction was that Hanley needs a new agent. His market value in three years (or even two) could have been off the charts.

• 48 2/3 innings pitched, 18 strikeouts, 35 walks, .312 BABIP, 2.40 ERA. That’s Fausto Carmona’s season line after yesterday’s complete game shutout. No, he can’t survive if he continues down this path. But with that said, his groundball rate is even higher than it was last year, as opponents have hit just 24 flyballs in his eight starts. In other words, if there’s anyone who can walk this tightrope, it’s Carmona. But he may as well be tiptoeing a piece of dental floss at this point; look for him to get crushed very soon if he doesn’t revert back to last year’s peripherals.

• Joe Sheehan said it pretty well in assessing Jim Edmonds’ Hall of Fame chances. That aside, I hope this isn’t the end for him. Edmonds was one of my favorite players in his prime, a guy I defended to no end when compared to Andruw Jones from 2000-2005. He won’t make the Hall of Fame (if Ron Santo can’t make it, Jim Edmonds won’t), but he was certainly a HOF-caliber player for the first half of this decade.

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The failed MSFT-YHOO deal has had me thinking a lot about fiduciary responsibility and maximizing shareholder value, and how these concepts relate to MLB teams. Specifically, why is it that people don’t seem to realize that a sports franchise is just like any other company, in that it acts in its own rational self interest?

First, a brief recap for the uninitiated: on January 31, Microsoft offered $31 per share in an unsolicited bid for Yahoo, whose stock had closed that day at $19.18. Despite the heavy premium, Yahoo insisted from the beginning that their company was worth closer to $37-$38 per share, and refused to enter into any real negotiations. Last weekend, after bumping its offer to $33 to no avail, Microsoft officially backed out (for the time being at least), leaving Yahoo CEO Jerry Yang with an enormous bull’s eye on his head.

The question now is this: can Yahoo possibly reach $33 as an independent company (the stock closed yesterday at $25.93, but only remains that high because most feel Microsoft will eventually put some sort of offer back on the table)? If most shareholders believe the answer is no, Yang will most likely be out as chief executive.

Obviously, sports teams are in a slightly different realm, since they are almost always privately held. But whether a company is owned by an individual, a small private syndicate, a large corporation, or publicly traded, the goal is still to maximize shareholder value. This is often lost among fans and sportswriters, who speak of teams as if they were public entities whose main responsibility is always to put the best possible team on the field.

The Marlins, for example, have been castigated to no end, despite being one of three teams to win multiple World Series championships in the last fifteen years (with the others being the sport’s two super powers, of course). It’s said that the team’s owners are taking advantage of a revenue sharing system that allows them to take home significant profits without reinvesting in the big league roster.

Well, maybe that is what they’re doing. Or maybe they feel that this is the best way to build their next competitive team. Or maybe they’re trying to make money while that next competitive team is being built.

Regardless, if that is what management believes will maximize shareholder value, that’s their right.

Don’t get me wrong. It’s certainly true that teams are often best served by prioritizing winning above short-term profits, since there is no comparable way to build brand equity. If Forbes’s numbers are anywhere near correct, this is what the Yankees have been doing for years. Whether the team is really losing money or not, the owners are seeing massive gains in their holdings, largely due to greater potential for future earnings.

In essence, this is simply a different take on why teams should (and often do) sacrifice short-term margins if they are in contention. Winning championships builds brand equity, which, in turn, generally leads to long term growth. I believe in this as strongly as anyone, and if I ran a team, this would shine through very clearly.

But with that said, it’s still important to realize that winning in itself is not the primary goal of sports teams. Maximizing shareholder value is. That some teams take a different approach than others is natural, and should not be admonished by the press.

Side note: I’ll have more on the Hanley deal when we get more details, but for now I’m willing to give it a preliminary thumbs up.

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Interesting article by Josh Peter about the economy’s effect (or lack thereof) on MLB attendance. According to MLB sources, attendance is up 2.6% from last year, a solid number in any economic climate. Peter points out a number of ways teams have become more effective in recent years at selling tickets and maximizing related revenue:

• Varied season ticket plans. I’m not an expert on the history of season tickets, but I am fairly certain that there are more types of these plans today than ever before. Teams try to create packages at various quantities and price points, turning a larger segment of fans into potential season ticket holders.

• More price differentiation. Along the same lines, individual game tickets are constantly becoming more differentiated. Most teams charge more for premium games (i.e. weekends, or if a popular team is coming to town), and the highest priced seat on any given night is generally several orders of magnitude greater than the lowest priced seat.

• Increase in corporate customers. This one is fairly obvious. With the creation of luxury suites and other high priced ticket packages, teams in every major sport have leaned more and more on corporations. For some NBA teams, individual consumers have effectively been priced out of most seats. We may see this taking shape in the two new stadiums in New York next year, at least for the lower decks.

These practices certainly help maximize sales, but they don’t answer the bigger question: why is baseball growing so fast, even in the midst of an apparent economic downturn? This is a bigger question for another day, but here are a few off-the-top-of-the-head factors:

• Availability. At every stage of its long history, Major League Baseball has resisted making itself more available, only to have its hand forced by competition, Congress, or overt logic. Decades ago, the sport’s brass and/or individual teams fought epic battles against radio and television, presuming that nobody would ever pay for a ticket if they could get the game at home for free. Decades later, they’re taking a similar approach with their restrictive online video strategies, as well as preventing all but a few sites from offering fantasy baseball games.

  But with that said, baseball is more available now than it has ever been, largely thanks to market pressures that have forced every big media company to open up. There are countless games on national television, and every game is available via cable or online subscription. Even on the web, where MLB has taken a fairly misguided approach, there is still much more freely available video than ever before. In keeping with history, as baseball becomes easier to access, and in turn reaches more eyeballs, more people become willing to pay for core products: tickets, concessions, and merchandise.

• Labor peace. This is more of a guess, but an extended period of labor peace certainly can’t hurt. If anything, it keeps the casual fan that could be affected by a major work stoppage (or the threat thereof) fully engaged. I generally tend to believe that strikes and lockouts have less of an effect than most in the media seem to think, but having labor relations be a non-issue can only help.

• National standard of living. Here’s one that isn’t talked about much, particularly in an election year where the candidates are busy arguing about exactly how badly Americans are doing financially. Say what you want, we’re much better off than our parents and grandparents were. Regardless of income levels, modern technology has significantly improved our productivity and reduced our costs. That entertainment companies like MLB can continue to grow during a downturn should be proof enough of this process.

There’s more to say on this issue, and I’ll try to get to it very soon.
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This is just about the funniest thing I’ve ever seen.

As a fan of free market capitalism first and foremost, I don’t enter like to enter into morally-driven, philosophical debates. There’s generally nothing to be gained from them, since there are never any objective answers for the questions being asked. Will Leitch was dragged into one of these debates the other night, facing off against a man who has never had any use for objective evidence.

Essentially it boils down to this: in the same sense that children feel they are entitled to get whatever they want, for no particular reason other than that they want it, Buzz Bissinger feels he and a few selected others should be the only ones entitled to write about sports.

He likely feels this way because he has never taken the time to learn about the modern technology in the field (he couldn’t differentiate between a blog post and a comment), and therefore has no conception of its value. Since he can’t possibly make a rational, objective argument on the subject (much like I can’t make rational, objective arguments about Ugandan cuisine), he resorts to calling his counterpart “full of shit.”

As Will said (and Will did a very good job, by the way), the blogosphere is a meritocracy. If you create value for people, you will be read. End of story, no philosophical debates needed. That is the essence of capitalism. Buzz’s sense of entitlement need not apply.

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Been a while, so here’s a quick catch up:

• I’m not sure what to make of the Wayne Krivsky firing, nor am I sure what to make of Walt Jocketty’s hiring. From an outsider’s perspective, it’s extremely difficult to make a judgment on an executive who doesn’t have a long track record. As much as we could criticize him for having a fetish for middle relievers at times, he did a lot of good things, and has left the team in fairly good shape going forward. That’s more than you could say for a lot of GMs. I’m fairly certain Krivsky will get another shot, and maybe we’ll get a better read the second time around.As for Jocketty, he’s about as old school as you get, and I believe was vastly overrated during his time in St. Louis. The Cards’ glory years were mostly due to three superstars, and the team disintegrated when two of those stars collapsed. And while it’s unfair to summarily dismiss the acquisitions of Albert Pujols and Jim Edmonds as pure luck… well, that’s just my opinion.

• In other news, the Pirates finally got sick of trying to make the best out of Dave Littlefield’s last incredibly odd mistake. There was some doubt last summer whether Matt Morris was truly done; there’s none now, barring a Troy Percival-like resurgence. You could this officially closes the book on Littlefield’s time as GM, but the Pirates will still be feeling the effects for the next several years. For those who have been bashing Krivsky, keep in mind that Littlefield had his job for over six years.

• I don’t think anybody thought Barry Zito would be quite this bad, so give Brian Sabean that much. 11 Ks and 15 BBs in 28 2/3 IP is very ugly, especially for a fly ball pitcher. This isn’t a completely sunk cost yet, a la Russ Ortiz or Matt Morris, as Zito could still be a passable starting pitcher at some point. But this is going to be a tough ship to steer over the next few months, and possibly years.

• My Google Reader is packed to the brim everyday, mostly with baseball, business, and technology news. I spent much of today skipping through articles about Miley Cyrus and Mindy McCready. I’m still deciding which story is more annoying, but this is a very tough call.

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If you’re a Yankees fan, you have every right to be horrified.

On one side is the shrewd, thoughtful, and, above all else, competent general manager, defending a perfectly rational decision that was made by people who know what they’re doing.

On the other side is a loud, nonsensical owner who sounds more like a Mike and the Mad Dog caller than a baseball executive. The apple doesn’t fall far from the tree, I guess.

I used to wonder about Brian Cashman, back when the Yankees were in their Carl Pavano/Jaret Wright phase. Was it Cashman making those horrendous decisions, or was it George Steinbrenner? Would a good general manager really put his name on such obviously poor moves?

I always figured we’d have to wait until he either had another job, or wrote a book. But as fate would have it, George valued Cashman enough to give him nearly full control of baseball operations, instead of seeing him walk away at the end of the 2005 season. After years of battling, Cashman finally had his chance to steer his own ship.

Since then, he has more than proven his wares, making the roster younger and cheaper while keeping the team in baseball’s highest competitive stratum. For the first time in over a decade, the Yankees introduced a string of young, homegrown players (Robinson Cano, Chien-Ming Wang, Melky Cabrera, Phil Hughes, Joba Chamberlain, Ian Kennedy) into their regular lineup. When needed, Cashman has been able to change on the fly, as he’s proven in each of the last two seasons.

But now, just like that, it could be over.

With George on permanent sabbatical, Hank seems intent on creating unneeded tension, inevitably leading to Cashman walking out the door at the end of the season. The fact that Hank is doing so in such an obvious manner (bringing internal conflicts directly to the press, and not for the first time) is laughable, and speaks volumes about the quality of businessman that now runs the New York Yankees.

Hopefully, Brian Cashman will end up in a new job where his abilities will be fully utilized and valued. He may not be the best general manager in the game right now (there’s no way to really know, given the circumstances), but he’s certainly in the upper tier. Whoever he ends with (whether it is in baseball or something else entirely) will be lucky to have him.

Good luck to Hank finding a replacement, one that I’m sure will be more amenable to following his whims.

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• We spent a good amount of energy discussing the Rays’ choice to send Evan Longoria to AAA, in order to control his services for an extra year. The plan seemed straightforward enough, and I was convinced it was the right move.As you know by now, the Rays were thinking even further ahead. In what may be an unprecedented deal, the team signed Longoria to a six year contract (with team options that run all the way through 2016) just six games into his Major League career. He will be guaranteed $17.5 million over the first six years, which includes 2008. This covers his three pre-arb seasons, as well as three of his four arb-eligible years (since he was sent down for only the first two weeks, Longoria would have been a “super two” after the 2010 season). The club then has an option on him for 2014 (his last arb-eligible year), and a subsequent one for 2015 and 2016 (his first two FA-eligible years).

  Given how uncertain I was about the Chris Young contract due to his lack of performance to date, I feel strange supporting this one outright. But make no mistake, this is a tremendous deal for Tampa Bay. Sky has the math on it, but it’s really very simple: if Longoria turns into Abraham Nunez, the Rays will be out ~$10-15 million in terms of value. If he turns into an all star-caliber player (a much more reasonable scenario), they would be looking at a surplus that dwarfs that previous figure.Like with Young’s deal, much of that potential surplus comes from the club option years, which the Rays take on with almost zero added risk (there is a $3-4 million buyout if the team declines the 2014 option). Even if Longoria hits all of his escalators, he would be looking at just $7.5 million in his last arb-eligible season, and then $25 million for his first two free agent years. That is exceedingly cheap in 2008 dollars, let alone 2014-2016 dollars.

  Also, for all the consternation it caused, two weeks of Willy Aybar (who hit .292/.370/.500) saved the Rays several million dollars in the latter years of this contract. The minimum figure we can point to is $3.5 million, which is the difference between his last arb-eligible salary in 2014 and his first FA-eligible salary in 2015. But really we should be looking at the difference between his 2014 salary ($7.5 million) and what would have been his salary in 2016 had it been his third FA-eligible season instead of his second. That number is likely closer to $10 million.

• As for Frank Thomas, this scenario wasn’t entirely unpredictable. His option for 2009 would have kicked in at 350 plate appearances, and the Jays wanted no part of it. Apparently they figured they could simply bench a first ballot Hall of Famer coming off back-to-back good years without causing any internal commotion. Surprisingly enough, they scrapped that plan after one day, releasing Thomas and eating the rest of his 2008 salary.The question now is, what’s next for the Big Hurt? We could repeat this exercise to try to find his best possible fit, but I don’t think it would give us a perfectly obvious solution. Thomas can still hit, but he is not nearly in Bonds’s class, and I’m not sure there is a contending team that could use him everyday. The Angels are the most obvious answer, but even if they had the good sense to throw Garret Anderson aside, Vladimir Guerrero will still need some days off from right field. Tampa Bay is also an option, although that would likely mean Jonny Gomes having to play right field. It’s certainly possible that Thomas could end up with a second division team, but without the lure of a major milestone, I’m not sure who would be that interested.

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It’s a tradition unlike any other: Major League Baseball executives (particularly the one to your right) criticizing Forbes’ estimates of the industry’s finances.

Tango had a pretty good take on it yesterday:

At the very least, it gives you a starting point and historical perspective. Any baseball executive that allows himself to be quoted by the press that what Forbes does is cr-p is full of the same thing himself. Either you are part of the problem or part of the solution, and giving reasonable numbers as a starting point for bright people to manipulate is far better than not giving any numbers at all.

That’s basically the point. They’re certainly not exact, but they’re also not total crap. In a very big picture sense, while the numbers shouldn’t be used to analyze or castigate a specific team, they can give us a good picture of the industry as a whole.

This last point is especially true with franchise valuations, since they are our only real reference point. John Beamer has written a bunch on how to value teams and whether Forbes’ methods are reliable, so I won’t rehash. But I do believe that they do a fairly decent job (although it’s possible that the numbers become self-fulfilling prophecies, since these articles have become so high profile the past few years).

Consider that MLB’s total P/E ratio is 28.74, which is pretty steep for an industry whose profitability actually fell in the previous year, and whose revenues are likely growing somewhere in the 8-10% range (generally, stocks trade at a P/E 1-2 times the company’s growth rate, in terms of profits).

But this high multiple actually makes plenty of sense, given the extenuating circumstances. For one thing, owning a baseball team isn’t the same as owning a bond insurer; the glamor that comes with it is priced into the P/E. Also, for an owner that controls related assets (i.e. television stations, marketing firms, etc.), a team’s net income is often vastly understated, since it doesn’t take into account the value it creates for those other properties.

We can also see these effects amongst individual teams. I mentioned yesterday that the Nationals, Marlins, Rays, Rockies, Twins, and Padres were amongst the most profitable teams in 2007, while the Yankees and Red Sox were the only teams that took significant losses. Unsurprisingly, this shows up in the multiples. The former six were all among the bottom eight in P/E, with the Marlins bringing up the rear at just seven times last year’s earnings. The Yanks and Sox, meanwhile, were first and third in the league in franchise value, despite their seemingly poor financial performances.

I will say that the disparity between Forbes’ revenue estimate and MLB’s is somewhat annoying, if not necessarily troubling. This year’s gap is more than $500 million, while last year’s was about $300 million, with MLB on the high end of each.

I tend to trust MLB a bit more than Forbes on this one (I don’t really see MLB’s incentive to lie), but there may actually be a couple of logical explanations. The most obvious is MLB Advanced Media, whose revenues very well could have been ~$300 million in 2006, and ~$500-600 million in 2007. Although it’s less likely, MLB could also be including revenues from team owned regional sports networks, although I have a feeling that figure would be much larger than $600 million.

Regardless, as Tango said, the Forbes baseball issue is a very useful starting point. If nothing else, it gives us a slight peek into an extremely closed world, and generally leads to some very good discussion.

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I’ve only taken a quick look, so just a few quick notes for now. Much more later.

• The Yankees, obviously, are the highest valued team in the game, coming in at just over $1.3 billion. That’s almost sixty percent higher than the Mets ($824 million) and Red Sox ($816 million).

• Not surprisingly, the Rockies saw the biggest one year change in valuation, rising seventeen percent to $371 million.

• The thirty teams’ combined estimated market cap is $14.15 billion, up nine percent from last year’s $12.94 billion.

• Total revenues came in at $5.49 billion, up 7.7 percent from last year’s estimate, but over half a billion dollars less than MLB’s own (and exalted) number. I haven’t read the full article yet, but I would be surprised if Forbes didn’t address this gap.

• The Yankees, Red Sox, and Blue Jays were the only teams to run at an operating loss. Just as they did the past three years, the Yankees led the way, this time losing $47.3 million. Note that the Yankees and Red Sox are “subsidiaries” in holding companies that have other strongly tied assets (as we covered in part yesterday). Needless to say, some creative accounting can make YES or NESN (which don’t have to share revenue) look extremely profitable.

• On a somewhat related note, the teams that were most profitable were generally low revenue teams. The Nationals set the pace with a $43.7 net income, followed by the Marlins at $35.6 million. The Rays, Rockies, Twins, and Padres also reached the top ten (although the Mets and Braves peeked in there, as well).

• Overall, league-wide income was down about $3 million.

More to come later.

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If you don’t already know about Fenway Sports Group, it’s a very intriguing story. In 2004, New England Sports Ventures (the holding company for the Red Sox and NESN) created FSG to serve as a marketing and consulting firm, mainly in the sports realm. From Maury Brown:

FSG is engaging in everything from a ownership of a NASCAR team (Roush Fenway Racing), to a marketing and sponsorship partnership agreement with Boston College athletics in which FSG’s involvement has fueled a large expansion of the athletic department’s corporate sponsor base, to FSG co-owning an AVP Pro Beach Volleyball tournament, and other ventures such as a partnership with the PGA Tour’s Deutsche Bank Championship. FSG and the Red Sox remain closely tied, but that is changing as FSG continues to grow and mature.

And now this from Maury on Monday:

Fenway Sports Group (FSG) today announced that Dunkin’ Donuts, the world’s largest coffee and baked goods chain, has selected FSG as its sports marketing agency of record.

In this role, FSG will help Dunkin’ Donuts shape its sports marketing strategy, develop programs that leverage Dunkin’s current broad-ranging portfolio of marketing assets, and maximize the value of its future sports, entertainment and event marketing partnerships.

FSG will also work with Dunkin’ Donuts’ national sponsorships team and field marketing managers to negotiate potential sports properties, agreements, and provide tactical support for its national sports marketing calendar programs.

Now, it’s obviously very tough to judge any privately held company’s performance. But with that caveat aside, what fascinates me about this is that the Red Sox are expanding far beyond the walls of Fenway Park, a move that few teams would ever even consider.

As crucial as growth strategies are for almost every other big firm in this country, they are rarely discussed inside the offices of most major sports franchises. Outside of baseball operations, most MLB teams focus on making marginal improvements to existing practices (i.e. streamlining ticket sales, or adding new sponsorship inventory), or implementing short term strategies (i.e. developing a new marketing campaign). Rarely do front office types think in terms of scale, instead relying on the fairly consistent growth of the league’s pooled revenue.

In fact, since the very beginning of the modern league format, the real growth in professional sports has almost always been done collectively (e.g. national television and radio contracts, expanded playoffs, MLB Advanced Media, etc.). There has been a decent amount of innovation relating to existing revenue streams in the past two decades, particularly in stadium construction and design. But even these have become league activities, to a certain extent.

Of course, the big X factor that I haven’t mentioned is winning. Every team benefits from winning on the field, both in terms of short-term revenue and long-term branding. But winning can really only be a part of a long term growth strategy, since no team wins forever.

The key, then, is to find or develop new core competencies, depending on the strength of a given team’s brand and the personnel within the organization. Thirty years ago, Ted Turner saw the Atlanta Braves not only as a baseball team, but as a fantastic entertainment asset that could be integrated seamlessly with his television station.

The Red Sox seem to have accomplished something similar (in spirit, at least) with FSG, which could spawn a number of imitators in the coming years (just as Turner’s venture did). It’s an open question as to whether other teams can be as successful with a similar strategy, but, at the very least, this could potentially encourage others to grow in some form.

There’s clearly a lot more to be said on this, so stay tuned.

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