« Archive for January, 2009

My latest BP post is up (subscription required). I don’t think any business is totally “recession-proof.” That implies that it is completely unaffected by the greater economy. Even products that are completely inelastic or “recession-resistant” are still affected. More people go to McDonald’s during a recession. Does this make it recession-proof? I would say it’s a recession play, since their business is actually being helped.

But this is all semantics. Check out the post, and you can comment here if you’re not a BP-subscriber.

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If you’ve ever taken a sports economics class, or possibly just read a sports economics book, you’ve probably heard this theory: if Congress ever explicitly revoked MLB’s anti-trust exemption (or the illusion of one that they have), all hell would break loose. Therefore, MLB has always (and will always) do whatever it takes to stay in government’s good graces. But is this really true?

I wrote a while back about whether the Tribune would sue MLB if the owners didn’t approve the eventual Cubs buyer. Given the Tribune’s financial state (even before filing for bankruptcy), the company has every reason to take the highest possible bid, regardless of the bidder’s chemistry with the other 29 owners.

It’s probably a moot point now, with the Ricketts family reportedly getting the team. But what would happen if the ATE actually was defeated in court, or through the legislative process? Would the draft be eliminated? Would there be 15 teams in New York and Boston by the end of the next decade?

No, and no. Unlike Major League Baseball, the other three major American sports leagues don’t have exemptions. In fact, only the leagues’ national television deals are specifically protected under law, via the Sports Broadcasting Act of 1961.

And yet, these leagues tend to have very similar tendencies as Major League Baseball. Really, the only differences are in the ownership realm — transfer of ownership, relocation, etc. In the early 1980’s, the NFL infamously tried to block Al Davis from moving the Raiders to Los Angeles. Davis took the league to court, and eventually won. Since then, the NFL has kept its ‘approval process,’ more for formality’s sake than anything else.

So according to our chaos theory, NFL teams should be piling into New York, Chicago, Boston, and Los Angeles. If the only cost is that of the moving vans, why not?

The short answer: stadium subsidies. The Arizona Cardinals still play their home games in Arizona because the local governments built them a stadium in Glendale. If Los Angeles had been willing to do the same, the Steelers would likely be playing the L.A. Cardinals on Sunday.

Now, if public subsidies ever dried up (gasp), we could eventually see a huge wave of relocations. It makes zero economic sense that the NFL hasn’t had a team in Los Angeles for fifteen years, except that the city wasn’t willing to build a stadium for the Raiders or Rams, let alone the Cardinals or Vikings. But if the teams knew they were going to be on the hook for the bill anyway, it would be much more prudent to build in L.A. than to re-build in Minnesota.

The same could be said for MLB teams. If territorial rights were eliminated, and relocation was no longer subject to league approval, teams would go wherever the stadiums were being built for them. But if the Marlins were forced to build a stadium with their own money, it would make a lot more sense to build in, let’s say, Brooklyn, than in downtown Miami.

But don’t fret, Rays fans. We’re still a far way off from this. Elected officials love to cut ribbons, and shiny new stadiums make for great ribbon-cutting ceremonies.

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I touched on this a few weeks ago. Losing right up until the point you can win has become a popular long-term strategy, especially since the Rays pulled it off to a tee. But with the economy as bad as it is, is this strategy still viable?

Let’s walk through a real example. We’ll pick on the Pirates, because it’s easy.

The Pirates are heading into what should be their seventeenth straight losing season, an all-time record. Aside from a brief blip surrounding the 2006 All-Star Game, the Pirates’ attendance has been around 1.5-1.6 million in their post-honeymoon years at PNC Park. That’s about what they were drawing at Three Rivers Stadium in the ’90s, although the ticket prices are a bit higher now.

Looking forward to 2009, the Pirates have been very few substantive changes to their Major League roster (goodbye Chris Gomez, hello Ramon Vazquez), and 75 wins is probably a reach goal at this point.  Meanwhile, the Pittsburgh economy isn’t faring much better than the rest of the country’s, and the town has other things on its mind for the time being. You wouldn’t think buying season tickets is on the top of the agenda right now.

So the Pirates are really going to have to rely on individual game tickets. And that could get very ugly.

But let’s consider the other side. Figure the Pirates would need to win 20 more games, just to faux-compete in the NL Central. Even if they could have added those 20 wins at $1M per or less (an extraordinarily low rate, given the Pirates’ current talent base), they would have had to sell about 750,000 extra tickets to break even on that strategy. Without actually winning the division, that seems incredibly unlikely.

But what if the Pirates were closer to a 75 win team, and played in a lousy division. Would they be willing to abandon their rebuilding process?

Well, we have one data point on this: the Billy and the A’s. Only a year after trading Nick Swisher, Dan Haren, Rich Harden, and Joe Blanton, Oakland is trying to win. It seemed really odd at the time, but there’s definitely some logic to it: the division sucks. The 2008 Angels were an 88-win team disguised as a 100-win juggernaut, and they’re now without Mark Teixeira and Francisco Rodriguez. With Jason Giambi and Matt Holliday on board, it’s not so crazy that the A’s could win the AL West.

Did the economy play into their thinking? It’s possible. It wasn’t such a mystery that the market would be down this winter, and Billy probably figured he could go bargain shopping. Whether the team was worried about attendance falling off the table is another matter, but it’s not so out of the question.

In the end, it’s a team-by-team decision. It doesn’t make sense for the Pirates to try to win. But it makes lots of sense for the A’s. Both are smart teams, and both are acting accordingly.

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Take a look at this list. Yikes.

As it stands now, Jason Bay, Matt Holliday, Chipper Jones, Brian Roberts, and Vlad Guerrero look to be the big prizes. And of those five, Guerrero and Holliday seem to be the only locks to actually hit the market (assuming Roberts is traded at some point).

The light supply should be good for the top players available. If ten teams need an outfielder, and Bay is the only good one on the market, he should have several clubs bidding against each other. This is especially true if two of the teams are division rivals: stripping talent from the Red Sox has real financial value to the Yankees.

But this could easily end up being a winter like the one we had in 2002-03, after a terrible year financially for the 30 teams. Only ten or so free agents signed long-term deals, and that list includes Mike Stanton, Mike Remlinger, Edgardo Alfonzo, and David Bell. These players — along with higher-caliber guys like Jim Thome,  Cliff Floyd, and Tom Glavine — got their paydays, largely thanks to the light supply. But the total dollars spent were way down, and guys like Reggie Sanders and Kenny Lofton ended up in Pittsburgh on one-year-deals.

The question is, will the economy show enough life in the second half of 2009 to boost owner-confidence, and convince them to loosen the purse-strings a bit? Teams pay based on future projections, not past financial performance. If things are looking up for 2010 and beyond, the teams will essentially be able to call a bottom, and make deals based on more positive long-term growth.

There is also one other wild-card: the remaining free agent class of 2009. With so many quality players still available (Manny, Dunn, Abreu, Hudson, etc.), and demand drying up, it’s very possible that these guys will sign one-year deals and head back to the market next year. If one or all do, it changes the dynamics of next year’s class.

The players could use a bit of game theory here. If all of next year’s top free agents sign early, and Manny and Abreu take long-term deals this winter, Dunn would be best off signing for one year. That way, if he has a solid year, he could be a big fish in a very small pond. Obviously, there’s a lot of risk involved in that strategy. Dunn could have a down season, or get hurt. And even if things do go well, he would have to hope that Bay, Holliday, Guerrero, Manny, and Abreu don’t take the same approach.

But regardless, it could be very interesting (or very boring) this time next year.

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Jayson Stark has a pretty wide-ranging interview with Bud today. Some highlights:

We’re in the worst economic downturn since the Great Depression. No one seems to know where this is headed. Obviously, I’m very concerned. … I’ve lived through a lot of economic recessions in my day. I’ve never seen anything like this. And neither has anybody else. … And so while, in the past, I’ve felt baseball was recession-proof, this is different. And each owner is going to have to determine, personally and from his team’s standpoint, what that means.

He’s right. This isn’t collusion; if it was, then the Yankees went seriously off the reservation, which even George didn’t do in the late ’80s. This is simply a case of baseball teams acting like every other company right now, and refusing to add costs or take on risk. This isn’t hoarding money; in most cases, it’s smart business. And the smartest teams will take advantage of this by finding long-term, below-market opportunities.

I’m not going to comment on (the Yankees). I haven’t in the past, and I won’t now. Every club has to do what they have to do, and I’m very comfortable saying that. I’m proud of the system we have. I think we’ve had more competitive balance than we’ve ever had. And we have labor peace now through 2011. So I’ll continue to watch what happens in the system and make my judgments at the appropriate time.

Spoken like a guy in charge of a system that works. Amen.

Bud also talks about postseason starting times, steroids (ugh), and the WBC.

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Why Players Won’t Be Getting a Piece of the MLBN Pie

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Great stuff from Maury today:

The other way to view MLBAM and MLBN is what they are worth in net value, which in turn trickles down to increase franchise value. If projections remain true, MLBN would have a net value of over $1 billion by 2015. As for MLBAM, in 2005, MLB engaged in the possibility of an initial public offer for the digital rights asset. Bank of America, Goldman Sachs, First Boston and J.P. Morgan tried in vain to get the owners to go forward with the initial public offering (IPO). After all, they had good reason to want to see it happen, as these analysts predicted the value of the IPO at the time to be $2-2.5 billion, or approx $2.7 billion in 2008 based on inflation.

So, let’s say that MLB befalls some incredible headwinds. Let’s say that in 2-3 years the country is still in the throws of a recession. The league could then offer up MLBAM and/or MLBN as an IPO and reap the benefits – the two act as a security blanket for MLB.

Read the whole article, if you haven’t already. Projects like MLBN and MLBAM offer the owners an incredible ROI, with almost guaranteed results. That added equity is a huge benefit to owners that bought in pre-BAM, and helps immensely in times like these, when credit is so tough to come by.

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I had to comment on this:

Sheikh Mansour bin Zayed Al Nahyan, the billionaire member of Abu Dhabi’s royal family who now owns Manchester City, a club of middling distinction and less achievement in the English Premier League, is reportedly ready to spend 100 million euros ($132 million) to buy Brazilian superstar Kaka away from AC Milan.

The Italian team has given Kaka, under contract until 2013, formal permission to speak to Manchester City’s representatives now visiting Milan. Manchester City assistant manager Mark Bowen told the BBC that the midfield playmaker is “very close” to making the move.

European soccer is very much a free market. Just like in any other industry, you can start a team from scratch, and if it does well, it moves up in the ranks. There is some revenue sharing on TV money, but not much else.

This generally creates oligopolies on top of the league standings. Most leagues see one of the same three or four teams win every year, and those teams are worth vastly more than any of the others.

Needless to say, if you can get your team into that top echelon, you’re sitting pretty. But it’s not easy. The top teams control so much of the capital going into the sport, it’s hard for smaller teams to compete for talent. And since league championships are based on the standings, and not playoffs, breaking into the upper ranks can be extraordinarily difficult.

Throwing $100 million at the problem is one way to go about it. Manchester City probably feels like if they can create enough excitement, enough buzz, and shape a new image for themselves, they can eventually turn it into enough revenue to make this deal look smart.

If this seems a little ass-backwards… well, it is. But it takes some serious cajones to make this kind of risk, and I don’t think that’s lost among the team’s management.

In terms of what it does to overall player costs, it really shouldn’t change anything in the short term. After all, Man City throwing money at Kaka doesn’t increase other teams’ marginal revenue per win. But if it actually works, you may see more well-capitalized team owners play copycat, which would at least create higher demand for top caliber players.

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Via Maury:

“I would ask, if it’s such a bad idea, what sport doesn’t have a salary cap other than us?” Milwaukee Brewers owner Mark Attanasio said Wednesday to The Associated Press.

“I think there’s a lot of owners that would like to have that right now,” Oakland owner Lew Wolff said. “I think the parity is what we’re looking for, and the more ways you can get to parity the better. I think it’s pretty good now, but I think it could be better.

“It’s a very good question, because maybe this recession, depression, whatever we’re in may be a change for a lot more years,” Wolff said.

“There’s no question that, a market like Pittsburgh, a salary cap would be advantageous,” added Pirates owner Bob Nutting.

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TucsonRoyal on Beyond the Boxscore ran a multiple regression analysis to see what factors impacted free agent salaries. Here’s an excerpt:

This wasn’t what I expected. It seems that teams that are winning actually pay more for the same level of talent as teams that win less and those with higher payrolls over pay (i.e. Yankees). This is probably do to the bidding wars that teams get into for the top talent. Also, the home discount of ~1 million is much more of factor than the team’s winning percentage that signs the player.

Here was my response in the comments:


Re: teams that win / teams with higher payrolls ‘overpaying,’ this is actually what we should expect, since these teams are higher up on the revenue curve.

Take the Yankees, who are a perfect example of both. For every marginal win, all other things being equal, the Yankees will make more than any other team, since they play in a larger market, etc. So they will obviously be willing to pay more for each marginal win.

The Yankees are also competing for the playoffs every year, and every win between 90-100 is obviously much more valuable than a win between 60-70. So again, they’re willing to pay more per marginal win than teams that may not be in the race.

The biggest factor, by the way, was the signing team’s existing payroll. Second was the player’s VORP, followed by the team’s record.

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