« Archive for May, 2008

I missed one major point on Tuesday: the dynamic that Mark Cuban wrote about not only raises a league’s salary cap, but also raises a hypothetical salary floor.

The NHL added a salary floor along with its cap following the 04-05 lockout. So if the New York Rangers and the Detroit Red Wings both increase their revenues by twenty percent, and the Nashville Predators’ revenue decreases five percent (with all other teams staying equal), both the cap and floor would be raised the following season. Despite having a decrease in incoming cash flow, the Predators could be forced to raise their player payroll.

What happens when teams are forced (or force themselves) to spend money on payroll, regardless of their position? You get the 2001 Pirates. In an attempt to prove that a new stadium really does help a team spend (and therefore win, because that’s how these things are supposed to work), the Pirates raised their payroll from $26.6 million to $57.8 million. That latter figure ranked 18th in the Major Leagues, which is by far the franchise’s highest spot in recent memory.

You see where I’m going. The Pirates were set on dishing out big contracts, almost regardless of who the actual players were. Jason Kendall, Kevin Young, Pat Meares, Derek Bell all became very rich thanks to the Kevin McClatchy/Cam Bonifay throw-money-at-a-problem-and-hope-it-gets-better grand plan. The team lost 100 games.

I’m not sure if there has been a case where an NHL team has had to spend recklessly to get above their minimum threshold. But if a payroll floor was instituted in Major League Baseball (not that this will happen any time soon), the Marlins would certainly be affected, and teams like the A’s, Pirates, and Devil Rays would be very close.

Now look at that list. In the short history of this blog, I have complimented each of those teams’ strategies (even the Pirates, under their new management). All four are in the midst of large scale rebuilds, albeit at different stages. Only the Rays are at a point where spending a little extra could have made some sense this past offseason.

The point is essentially the same as Tuesday: the more mandates and restrictions you impose on these individual businesses, the more inefficiencies will arise. Some collectivist practices can be helpful, since these leagues are cartels, after all. But forcing teams to spend (or not spend, for that matter) regardless of their top lines can create very dangerous situations for certain clubs.

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Great stuff from Mark Cuban:

In BFE, one of the smaller markets in the league, they just had a terrible season. Although they have a stadium they moved into just 8 years ago, they have no pricing elasticity for tickets or advertising, and in fact their attendance is declining. As a result, despite the additional TV revenue they will get from the new TV deal the league has signed, they will see a decline in total revenues of 5mm dollars this year and if they don’t have a good season, revenues could decline further in future years…

As you can quickly figure out, for the teams with new, big market size TV and stadium deals, the increase in the cap is no big deal. For those teams from BFE, who don’t have pricing elasticity or markets that can support stadiums that seat 100k, things are not so good. Every year seems to bring an increase in the salary cap , which their local fans and their own desire to win pressures them to spend up to, yet their total revenues never seem to keep up with.

Add to this pressure, the design of how contracts are structured so that teams which perform the worst and have the least pricing elasticity, get the highest draft picks and must write out checks for huge signing bonuses for their rookies, who they have no idea whether or not they will preform. Its not that they don’t want the high draft picks, but there is no question that their financial risk equation escalates dramatically.

I wholeheartedly agree. For as much as people consider the NFL to be the model league, I don’t think it’s very difficult to argue that MLB has taken over that spot. They’ve just about closed the revenue gap (despite having two less teams), and the sport’s competitive balance has been very good by just about any measure.

Could this have happened without the luxury tax and revenue sharing? I think that it could have. The expanded playoff system (and the illusion of fairness) allows it to happen. More teams are alive later in the season, drawing many more fans in August and September. And, as we know, more teams have a chance to win the World Series in any given season (it’s a lot easier to win 92 games, or 83, than it is to win 100, and the postseason is largely a crapshoot).

Now, it’s certainly true that sports leagues are inherently different than other industries. Teams compete, but they are also heavily reliant on each other (the Yankees would not make much money if they had nobody to play). Does that warrant the top teams subsidizing the bottom teams a bit? Perhaps. But they already do in a sense, since national contracts are shared equally, instead of being distributed based on the value added by each individual team.

One other point from Cuban, which I had never really considered:

Can a league survive without a cap ? Yes, but I think it must be a league where it takes more than 1 or 2 players to lead a team to a championship. Otherwise, the richest teams can just buy those 2 players, with a 3rd as insurance, which means the competitive balance of the league is purely dependent on finances. That is not a good position to be in. Baseball and football are 2 leagues that I can think can survive (as baseball has) quite nicely without a cap. The NBA and NHL would struggle competitively without them.

I don’t think that’s really true with the NHL, but it certainly is with the NBA. Regardless, it’s an important point in regards to baseball, since one or two players can hardly make a bad team competitive. Also keep in mind that there are greatly diminishing returns as a team spends more and more on player payroll (i.e. the Yankees spend much more than the Red Sox, but it hardly matters after a certain point).

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This is ridiculous (hat tip: Will):

Everyone loves a bargain, the Dodgers and Angels included. But, by signing the Russell Martins and Casey Kotchmans to long-term contracts so early in their careers, the local teams would risk squandering the significant financial advantage they enjoy over their rivals in Milwaukee, Miami, Denver, Phoenix and St. Petersburg, Fla. (…)

It is good that small-market teams are spending shared revenues rather than pocketing them, better still that teams are betting on the future performance of a 24-year-old rather than paying for the past performance of a 34-year-old.

But the Angels and Dodgers can pay market rate, and they’re better off paying year by year, minimizing the risk and saving the biggest bucks for free agents, or soon-to-be free agents.

Minimize risk? So Gary Matthews Jr., Torii Hunter, Nomar Garciaparra, Juan Pierre, and Andruw Jones are less risky investments than Russell Martin would be. Especially when Martin has almost no leverage. Right.

What’s so strange about this column is that Shaikin seems to make all the right points, until he ultimately uses some strange kind of logic to come up with his conclusion. For example:

Carlos Silva, an ordinary innings eater, signed as a free agent last winter for $12 million a year. The Diamondbacks have Brandon Webb, the best pitcher in baseball, for $6.5 million next year and $8.5 million in 2009, in what would have been his first year after free agency.

The trade-off is simple: The players get the security of guaranteed dollars, and the teams get a discount while assuming the risk of poor performance or injury.

“You see those contracts, and to me the risk is substantially rewarded,” said agent Scott Boras. “They may be paying 30 cents on the dollar.”

Does that sound bad for the teams? Really? Each year of Andruw Jones will cost the Dodgers more than Evan Longoria is guaranteed in total through 2013. And Longoria’s deal is the risky one?

I’ve said this before: the great majority of these deals haven’t been very risky for the teams at all. The idea of signing a player with one year (or one week) of Major League experience to a long term deal seems risky. But the teams have structured it so the player is the one taking on most of the risk. Large market or small, these are clear wins for the teams.

Not surprised to see Boras pop up in all of this. Team options for a player’s first three free agent years, when supply on the free agent market is becoming thinner and thinner? That type of deal must drive a competent agent crazy.

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This from the NY Daily News (hat tip: Tango):

Last year, the team - which hasn’t won a World Series in eight years - grossed a record $188 million in gate receipts, a 20.5% increase over the 2006 season.

Factoring in other revenue streams like overpriced hot dogs, beer, pizzas and souvenirs - and income from the cable TV rights to home games - Stadium income surpassed $319 million in 2007.

That $319 million figure doesn’t sound all-inclusive. Does it include pooled revenue from national media contracts? Royalties for merchandise sold outside of the stadium? What about corporate sponsorships? Doesn’t seem like it, at least based on the details in the report.

So then what about Forbes’s $327 million revenue estimate for the Yankees? It’s tough to say, since we have no idea how they formulate their numbers. Hypothetically, they could be estimating the team’s post-revenue sharing/luxury tax figure, which could be spot on. But this seems like a pretty large discrepancy to me.

The other number that is in question, then, is the $47.3 million net loss the magazine roughly calculated for the Yankees. We can be skeptical of that number regardless, since it’s likely very difficult to separate the Yankees’ revenue from that of the YES Network. But even then, I have a tough time believing that the team (an old world, mature company bringing in $300-$400+ million in revenue) would allow itself to lose almost $50 million.

Thoughts? Anything I’m missing here?

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Evan LongoriaAt a couple of different points in the last fifteen years or so, signing pre-arb players to long term contracts through their first FA-eligible seasons became a vogue move around Major League Baseball. It’s now moved beyond that, to the point where it is widely considered a best practice in the industry.

The logic is simple: by signing players early, teams will generally extend their control over that player’s service, while also saving a good deal of cash if the player pans out as expected. The Indians were famous for doing this en masse in the 1990’s, and did so again with their current batch of players. Just in the last year and a half, the Rays have signed Carl Crawford, Rocco Baldelli, James Shields, Carlos Pena, Evan Longoria, and most recently Scott Kazmir to long term deals.

Most recently, teams have begun locking in players with less and less experience. Since the end of last season, Troy Tulowitzki, Chris Young, Ryan Braun, and Longoria all signed deals that buy out free agent years, despite the fact that none of them were anywhere near being arbitration-eligible.

While these are risky deals for both sides, they strongly favor the teams in terms of pure financial value. As industry revenues accelerate, the clubs are trading a small amount of risk (if the player completely craps out) in exchange for cost certainty and potentially large savings down the road. The players, in exchange, are guaranteed their first millions, which is certainly hard to turn down.

But there’s another dynamic that is in play here: as more and more players sign these deals, the supply of premium players on the free agent market will continue to drop. That, combined with the growing war chests many teams have already put together, will create excess demand for whatever talent ends up on the open market.

In fact, this has likely already happened in the past few years. Teams have a certain amount of money they can spend on payroll; as revenues rise and each win becomes more valuable, those budgets increase. With a limited supply of free agents, there will inevitably be high demand for some mediocre players (i.e. Carlos Silva).

The real question is this: at what point does the potential reward of becoming a free agent outweigh the risks of turning down $30+ million when you have nothing in the bank? If supply continues to dwindle, free agency may simply become too rational a choice to pass up.

More than anyone, agents should be aware of the net losses these players are taking on; at what point do they start stepping in and advising their clients against signing long term deals early in their careers? If, in 1996, Alex Rodriguez had signed a deal with the Mariners that included team options through 2003, baseball history could have been drastically altered in many ways.

Quick side note: are any of these players represented by Scott Boras? I will do a more thorough check this weekend, but I’m curious as to whether Boras clients are any more or less likely to sign this type of deal.

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  • 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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Jerry YangThe 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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