Pretty interesting read. Some highlights:

I had no intentions of trying to outspend the Yankees or Red Sox.  There was no reason to. I didnt have to beat either of those teams unless I made it to the World Series. The only teams I had to be better than were those in the National League, and more importantly, those in my division.  There were no big spending rivals close to home, so the AL East could spend themselves silly. My plans were to spend to win, not to spend for spending’s sake.  IMHO, the money I could save being in the 2nd tier of payroll could be invested in scouting and development. I made this clear to any and all of the owners that I spoke to across the league. Of course that didnt stop some from trying to convince some owners otherwise.

I.e. diminishing returns. There’s only so much you really need to spend to compete.

Then the credit crisis hit and hit hard.

All of the sudden, what seemed like a sane business decision, didnt seem so sane any longer. In particular, the financial participations I had been discussing with my bankers were for shorter term loans. Just refinance at the end of the term. Its what everyone is doing. Except that it no longer seemed like a safe bet that I could refinance in a few years. I didnt want to be caught with a Sumner Redstone margin call, and for better or worse, the banks were getting worried about staying in business and the idea of matching the asset to the term wasnt something they were ready to do, unless of course they could convince 30 other banks to do the same thing.  I thought about writing to Congress to get a bailout…just kidding.

He probably feels lucky, in this sense. Had he made this type of deal 2 years ago, he very well could have had trouble refinancing, and I honestly can’t believe I’m writing that about a guy worth billions of dollars. But that’s where we are, in this credit market. So score one for Cuban, in the name of financial prudence and, to a certain extent, emotional restraint (imagine having the opportunity to buy your favorite sports team, just by taking on some risky debt….).

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Friday, I wrote about MLB Network possibly paying rights fees for MLB games. But as one e-mailer noted, this is a pretty standard practice among individual teams that own controlling interests in a regional sports network (RSN). The Yankees, for one, own most of the YES Network, and take a pretty hefty rights fee every year. The Mets do the same with SNY.

This isn’t necessarily just a big Ponzi scheme. The right to televise Yankees games is worth tens of millions of dollars to YES. If the Yankees simply granted them those rights for free, they would essentially be subsidizing Goldman Sachs, their minority partner in the network.

Obviously, if the network was wholly owned, this would just be a paper transaction. The Yankees would be able to place the cash wherever they need it at that particular second, since they would be the sole owners of that cash. But because the team has a minority partner, they have to play the role of fiduciary.

Given that the Yankees don’t own 100% of the network, it is perfectly reasonable that they ask for a near-market rate from YES. But this is where we open up the giant can of worms: how can market rate possibly be determined, when there is only one bidder?

Think about the incentive structure here. The team has every reason to want the highest rights fee possible, while keeping the network viable (they could always lower the rights fee, if they wanted to boost the network’s earnings before a partial sale). The team’s partner (in this case, Goldman) has every reason to want the lowest rights fee possible, in order to maximize ROI.

In the end, the team, as the controlling party, has final say. The Yankees could pretty much pick a number out of thin air if they wanted to, and there isn’t much Goldman could do to stop it (short of a lawsuit, which they would likely lose, unless the Yankees were blatantly killing the network’s viability).

And yet, this doesn’t seem to actually be happening. Why not? Revenue sharing. For every dollar in local revenue, the Yankees give up $0.31. So even though Goldman owns 1/3 of YES’s revenue, the Yankees are still better off reinvesting the money into the network than donating it to MLB’s welfare pot.

Of course, this doesn’t apply to MLB Network. Every dollar in profit at MLBN is $0.67 to the owners; every dollar transferred to the 30 teams is $1. That might be too enticing to pass up. If MLBN starts broadcasting live games, this will be something to keep a close eye on.

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It could certainly be a factor. Eight years is a long time, and value systems can change drastically.

There are two kinds of inflation in play here: real-world inflation and baseball-related inflation. Baseball inflation is based on industry revenues, and has been booming the past few years. If a team’s earning capacity grows by 40% over an 8-year period, a long-term deal that looked expensive at the start (i.e. A-Rod’s original contract, or even Derek Lowe’s 4-year deal with the Dodgers) can look downright cheap by the time it ends.

That type of inflation will probably slow in the next couple of years, as the greater economy fights through headwinds. But real-world inflation, which hasn’t been a major factor in the U.S. since the late ’70s and early ’80s, may explode in 2010 and beyond. That will have a similar effect on long-term deals, albeit in a much less optimal way for both sides.

Let me explain. Baseball-related inflation is great for teams. It means revenues are rising, and generally leads to cash surpluses. This allows teams to further reinvest, either through the player payroll or otherwise.

Real-world inflation, on the other hand, is terrible for business. It kills consumer and investor confidence, since prices are changing rapidly and no one wants to end up with the short end of the stick. And it is anathema to credit markets, since real interest rates are thrown completely out of whack.

So while real-world inflation lessens the value of players’ long-term contracts, it also lessens the value of the sport’s media contracts, hurts ticket sales, and makes managing debt obligations (which most teams carry as long as possible, in order to benefit from baseball-related inflation) an almost impossible task.

With the economy struggling, inflation isn’t a threat in the very near-term. But the Federal Reserve is pumping trillions of dollars into the system, as they try to avoid deflation. Once GDP starts growing again, and confidence returns, there will be so much extra money in circulation that the Fed will have its hands full trying to control runaway inflation. To add to it, the federal government will continue to operate at steep deficits, taking on foreign debt to fund itself. The easiest way to pay this back, of course, is to print even more money, thereby decreasing the value of the dollar even further.

Needless to say, we’re probably looking at at least a year or two of severe inflation, if not much worse. Having fixed-price contracts with players will actually be a major plus for teams, as long as those players are still somewhat productive. If A-Rod, Mark Teixeira, and C.C. Sabathia are all still going even reasonably strong in 2015, the Yankees will be thankful they locked them up for as long as they did.

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Here’s something I hadn’t thought about (from Maury’s interview with MLBN chief Tony Petitti):

Bizball: … As President and CEO of MLB Network, how have you approached programming that could influence negotiations when these broadcast agreements come up for renewal?

Petitti: Well, the first thing important in programming is that people are going to want to watch… In terms of the future and in terms of negotiations, the bottom line for the network is we want the network to grow and we want it eventually to grow beyond 50 million homes. So whatever content is out there we would be like to be perceived as a viable place for that content to be, whether it’s additional games or other packages. But having said that we are building it around studio programming and the kind of great tape programming that we have on but I think the key is that we’re prepared to take on anything that could come our way in a few years, in terms of more content…

Bizball: Could that include playoff games?

Petitti: … Now whether that means that baseball wants to move more content here, that’ll be up to you know the Commissioner’s Office and we’ll sit there like any other bidder hoping we can come up with some more. (emphasis mine)

Really? MLB Network is going to be like any other bidder? Does the NFL Network have to pay a lump sum for its Thursday night games?

Here’s the difference, from what I can gather: the NFL wholly owns its network, while MLB only owns a controlling interest in theirs. The NFL wouldn’t give games to NFLN unless it thought it could make more from doing so than by licensing out the rights. The same is true for MLB, but the standard is much higher, since MLB only owns 2/3 of the resulting profits. Therefore, MLB Network may have to bid like any other distributor.

But it’s not quite that simple. MLB does own a controlling interest in the network. Therefore, it has final say over how the company’s funds are allocated. This means they could use the network to bid up rights fees for some of their smaller TV packages (i.e. Sunday afternoon games, midweek night games, or even divisional playoff games).

Thinking even more creatively, MLB could essentially funnel cash from the network to the 30 teams, and completely bypass the network’s other equity holders (i.e. the cable providers). Say MLBN is projected to make $50 million in profits. MLB then decides to do a new Tuesday night package, which they value at $50 million. As a partly-owned subsidiary, MLBN would have to bid, and pay, for the rights, like anyone else. MLB awards the games to MLBN, taking $50 million from the company they partly own and distributing it among the 30 teams.

Sound crazy? It’s not. It might not be the smartest long-term strategy either, given that MLB is relying on the cable providers for the great majority of the network’s revenue. But it’s definitely something to watch out for.

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It’s not as lucrative as I had expected, or at least not yet. Here’s the key number: MLB is charging cable providers about 24 cents per month per subscriber, as compared to 88 cents for the NFL Network (apples-to-apples), and $3.65 for ESPN (apples-to-bowling-balls, but still relevant for perspective’s sake). That means MLBN will bring in about $150 million in subscriber fees next year, which is about half of what I thought they could get.

Let’s compare that to the NFL Network, which by all accounts is reeling financially and has been universally deemed a failure to this point. The network is available in 42 million homes, but is not on Comcast’s basic tier. This means that customers can choose to pay for it on their own, but are not automatically saddled with it when they sign up for Comcast cable (MLB Network will be on the basic tier for all 50 million homes it reaches).

Let’s say that two-thirds of those 42 million homes are Comcast (probably a high-end guess). That means that the NFL Network is on the basic tier in 14 million homes, collecting $0.88 per subscriber per month. This adds up to about $148 million annually, or almost equal to MLB Network before a single Comcast customer has purchased it.

This doesn’t necessarily mean MLB Network is doomed to fail. Having a larger audience means greater advertising potential (SNL Kagan estimates $50 million in 2009). And the NFL may have a cost structure that is completely out of line with revenues, given that they probably expected greater penetration by this point.

But this also isn’t a ringing endorsement of MLB Network’s business model, at least not for 2009. $200 million is significant, but it’s not even half of what MLB Advanced Media will bring in this year. Find another cable network that is making more online than it is through their traditional revenue streams.

The future picture is a bit mixed, as well. Keep in mind, the cable providers are all major equity holders in the network; they have every incentive to pass on an extra 25 cents per month to subscribers, if it will mean big profits (and possibly even dividends) from MLBN. But how much longer can networks keep charging monthly fees, when more and more content is available for free online? As much as cable is viewed as the last stronghold of old world media, it too might be in its final days.

If done right, MLB Network could be a tremendous growth engine for baseball. But it could have been an extremely profitable venture from day one, and now it seems like it won’t be.

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I want to clarify something that I wrote in my Baseball Analysts piece. Here’s how I broke down the process of how teams determine what they’ll pay for a free agent:

[C]ompanies will hire employees up until the point when marginal revenue equals marginal cost. So if the A’s project that Rafael Furcal will bring them $15 million in additional revenue next season, they should be willing to pay him up to $15 million. This number is his marginal revenue product (MRP).

Sounds simple enough, but a player’s MRP is tied to many different factors. The most obvious, of course, is the player’s production. In our hypothetical, the A’s could project that Furcal is worth five additional wins, and each of those wins is worth $3 million, making his MRP $15 million.

But what if the A’s, worried about the economic climate, decided to do a whole new set of revenue forecasts for 2009, and found that ticket sales were likely to take a huge hit? Or that demand for playoff tickets (should the team get that far) would be much lighter than normal, resulting in lower prices? All of a sudden, the rewards of winning 5 more games and possibly reaching the playoffs are much smaller. This, in turn, means that Furcal’s marginal value to the team is much less, so his MRP (or the salary the team would have been willing to pay him) goes down as well.

All of this is very true, but it’s a bit too theoretical. Obviously, teams don’t go into an offseason and arbitrarily sign one player based on his projected MRP, then arbitrarily sign another player, and another, and so on. They go in with a plan, expecting to sign or trade for one or multiple players to fill holes in their roster.

For example, let’s say the Yankees went into the offseason with what they expected to be an 82-win team (accounting for all the players lost to retirement or free agency). If C.C. Sabathia is worth 4 marginal wins next season, his MRP to the Yankees wouldn’t seem that high, since the monetary difference between an 82-win season and an 86-win season is very small.

But the Yankees didn’t just sign Sabathia, obviously. They also signed Mark Teixeira and A.J. Burnett, who could add another 8 marginal wins (these are all theoretical numbers, not based on any real forecasts). This brings them from 86 to 94, and an enormous jump in terms of earnings potential (possibly around $60 million, if the Yankees are calculating correctly).

The MRP calculation I discuss above is more implicit in this process than explicit, unless that player is the final piece the team is adding. A team will set its payroll budget based on how many games it feels it can win with that figure. A smart team will set multiple budgets, depending on whether they land Player X or Player Y, and do their best to hit the optimal combination (i.e. the projected win total that allows for the highest earning potential, with the lowest payroll capable of achieving it).

This is also very much related to my thoughts on one-size-fits-all MRP systems, which don’t acknowledge that every team will inevitably value the same player differently. If anything, this does flatten things out a bit, particularly in good economic times (teams with excess earning potential may set their budgets higher than they can even spend, making the free agent market an all-out bidding war). But especially at times like today, a player’s MRP is extremely variant, team-to-team.

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This is some really cool stuff.

I’ve said a thousand times, if I was running MLB Advanced Media, the first thing I would do is open up the video vault and flood the internet with embeddable baseball clips. MLB.com could make a killing off of advertising against these clips, either through pre-roll sponsorships or mid-roll text/graphic ads. And that doesn’t even take into account the massive viral marketing presence the videos would create.

MLB obviously sees the value in old videos, since they’re stacking the network’s lineup with them. Maybe they feel that “giving them away” on the internet is somehow different than airing them on cable. But there’s a billion dollar business sitting there, and they’re not acting on it.

It’s certainly not a trivially easy process. People tend to use their televisions more for background noise, making MLB Network a great place for MLB’s long-form content. But on the internet, the clips have to be a bit more engaging, which usually means shorter. It would take a lot of work, but MLBAM and MLB Productions could team up to create thousands of short videos, which would be embeddable on third party sites and, eventually, remixable. The ROI would be far higher than it is for World Series DVDs, and many of MLB Productions’ other projects.

More than anything, MLB Network is further proof that MLB views itself as a major content creator, and not just a live events company that licenses out its television and radio rights. And as such, MLB will eventually have to do what all other content creators are doing in this new era of media: open up.

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Or, at least, losing for the sake of winning in the future. I think it has, and the Pirates are the latest example.

The Rays, of course, are the new prototype. The team lost, and lost, and lost… until they won. The difference wasn’t so much in the core of the roster, but in the marginal aspects: the defense, bullpen, and bench. Josh Wilson, and Greg Norton turned into Willy Aybar and Cliff Floyd. Gary Glover, Brian Stokes, and Shawn Camp turned into Dan Wheeler, J.P. Howell, and Grant Balfour.

This wasn’t an accident. There are a lot of smart people in Tampa’s front office, who knew exactly what they were getting when they brought in Josh Wilson. I’m sure they also knew the relative values of going 67-95 or 81-81, and chose the former.

This is smart business, as long as the team can withstand the lean years financially. And this seems to be the approach the Pirates are taking.

I wrote last year that the Pirates were right to do nothing, despite Jason Bay’s frustration (the only move I suggested was to trade Freddy Sanchez, in a sell-high move). Now, Jack Wilson is complaining, saying that the Bucs need “more players” in order to compete.

He’s right, obviously. But free agency isn’t the way to acquire those players; the draft is, and the only way to get high draft picks is to lose. And the Pirates are doing a solid job of that.

Consider: this past spring, Dan Fox introduced a defensive metric on Baseball Prospectus that rated Luis Rivas as one of the worst defensive middle infielders in the last fifty years. Weeks later, Fox was hired by the Pirates. And yet Rivas played over 400 innings at second or short for the Pirates last year, with predictable results.

Like the Rays, the Pirates have some pretty smart people in their front office. They didn’t expect Luis Rivas to turn into Cal Ripken, nor do they think Derrick Turnbow will suddenly become Mariano Rivera. They seem to be purposely filling the margins in poorly, in order to keep picking up high draft picks until the very moment they feel they can compete.

As anti-competitive as it sounds, it’s a fantastic strategy, when executed correctly. There is no value in being mediocre, as the Kevin McClatchy/Cam Bonifay/Dave Littlefield Pirates clearly showed. For so long, they  seemed to be shooting for .500, just so they could end their string of losing seasons (now at a record 16 years and counting). When they failed to do even that, management decided to keep spending as much on the Major League payroll as possible, while never going above slot on draft picks. If anything, this was anti-competitive.

The Pirates finally seem to be on the right track, under Frank Coonelly and Neal Huntington. It’s easy to take what the Rays did for granted, so let’s not assume that the Pirates will be able to be so successful so quickly. But if nothing else, there seems to be a real plan in place, which, for this franchise, is very new.

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Here’s my original take on it. The paper is having a major cash crunch, and this is a tremendously high-value asset that isn’t related to their core business. I’m not sure how liquid the market is right now, but this is a smart move. From the WSJ:

The Times Co. pushed discussions beyond the exploration phase early last month at a quarterly meeting of NESV’s limited partners at which the Times Co. indicated to the partnership its intention to sell. Since then Times Co. has been pursuing potential buyers, according to people familiar with the discussions. A Times spokeswoman declined to comment.

It is unclear what the Times Co. thinks it can get for its stake. Barclays Capital estimates the Times Co.’s investment is worth about $166 million; analysts and sports bankers recently told Reuters the Times Co. could raise at least $200 million if it sold its stake.

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Shockingly enough. For my thoughts on salary caps and salary floors, read here, here, and here.

Not that it matters, since the players would never accept a cap anyway, but this is just political jockeying by an owner looking to increase the value of his investment. Attanasio bought the Brewers for $220 million, a figure which priced in the existing system. If the system was changed to become more favorable to the Brewers, the team would obviously be worth more (although I’m not so sure a cap even does this).

This type of lobbying is inevitable in a collective sports league (i.e. one that is guided by a shared framework, instead of a free market), so it’s not really Attanasio’s fault. But his statements need to be taken at face value, and the cap needs to be judged on its own merits. And viewing it from this perspective, it fails on almost every level.

The Yankees make a lot of money, but the current playoff system doesn’t allow any one team to win the World Series every year (last time I checked, the Yankees haven’t since 2000). Attanasio said, “At the rate the Yankees are going, I’m not sure anyone can compete with them.” He’s wrong, on a lot of levels. To start with, the Yankees made these moves because they are trying to catch up to the Red Sox and Rays. I’m not even sure they’ve done that.

Remember, the NFL makes billions of dollar a year from its national television contracts. This is why so many teams in the league can compete, and still make money. This has little to do with the salary cap. On the same level, MLB’s media presence (including MLBAM and MLB Network) is becoming large enough where a similar effect is taking hold.

Baseball’s system is just fine how it is. Lots of teams are making money, and any team can compete if their management is good enough. The Yankees signing Mark Teixeira doesn’t change that.

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