Ivano Luberti from Baseball.it again talked with John Genzale, an expert in Sports Business. A few months ago, they spoke in another interview about the proposed Italian Baseball League. This time the economic crisis is the main topic and how Baseball is affected from it.
The economic crisis is arriving also in Europe: this is what media are telling us. This is what probably many of our readers are experiencing and maybe they don’t have time or willingness to think about baseball. But this is a baseball web site and we have to try to understand what impact the economic status will have on our sport and especially on the most important championship in the world. We have also to remember that the Italian Federation of building a professional league heavily funded by the MLB will make one of the two most important European Championships strongly dependent from the MLB.
Ivano Luberti: This is why we have interviewed John Genzale: a journalist specialized in sport business. Let him present himself.
John Genzale: First, let me say that I am the founding editor of the sports business trade magazine, Sports Business Journal, and I write three regular columns for the magazine. I taught sports business at NYU for three years at the graduate, under-graduate and continuing education level. Now I am also a professor of sports business at Columbia University and co-director of the graduate sports management program. But neither of those jobs affords me access to proprietary business information from teams and leagues. It’s fair to say that I am an observer, but it would be unfair for your readers to think that I have any special knowledge about their business. The opinions stated here are mine, not those of any organization I belong to, including my work with the FIBS or the creation of the Italian Baseball League.
In 2007 all but 3 teams had positive operating incomes: so baseball was indeed a revenue source. For what you know of this incomes are generated is this going to happen again in next year’s? Is this going to be confirmed for 2008 and what is the outlook for 2009?
Major League Baseball was the only American sports league to show gains in revenue in both 2007 and 2008. There is some evidence that MLB is a little more resistant to the economic downturn that other leagues. Put more positively, MBL is structured better than the National Football League, the National Basketball League, the National Hockey League, NASCAR and some smaller leagues when the economy turns sour. Let me explain because commercial sports in America are so different than the financial structure of sports in Europe: For years, commercial sports business in America was thought to be recession-proof. Historically, when times got bad in America, people turned to sports for affordable entertainment. So in times of the great depression and in cyclical recessions, fans would use sports as an escape from the reality of their financial problems. Baseball has always been the most affordable of the sports (it relates to supply and demand), so while all sports had been considered recession-proof, baseball weathered economic downturns better than the rest.
In the early 1990s, corporate America started to participate in sports in more ways than just advertising, as in the past. That then made sports more susceptible to the fortunes of the economy. MLB still realized a smaller percentage of total revenue from corporate involvement than other sports, so while baseball over the last 15 years is more susceptible to the economy, it still does better than other leagues when that economy turns down. The other element is ticket price. The days of affordable tickets are gone and so are the days of using sports to escape world realities. Now, going to a game is a family decision and the money comes from disposable income. Those who don’t have disposable income are excluded (so we are actually changing the demographic of the sports fan in America). MLB is impacted, but since it has the most affordable ticket prices of any of the major leagues in America, so the impact is relatively less and MLB can be expected to weather economic bad times better than other commercial sports leagues.
Many teams have big player contracts in place that were made many years ago: usually in these contracts, a lot of money is deferred to the last years of the contracts. Now, this big money has to be found [paid] during a big economic crisis. Do you think there will be problems for some of the teams to find money for big contracts?
I am sure you are talking about player contracts and not facility contracts, sponsorship obligations or other commitments. I think that the 30 owners of MLB would like you to believe that they are faced with economic realities that are more difficult than say two years ago. They are. But in baseball, there are clear paths to balancing the budget and producing the desired profit margin. In fact, it’s easier than in most businesses. MLB teams have historically dictated their payroll. They set the amount they are willing to pay in any given season. The minimum salaries in baseball are ridiculously low and there is no lack of people wanting to play professional baseball. So they can deal with back-loaded contracts by signing more players at minimum salaries. And television revenue goes a long way toward paying the entire payroll. The problem, of course, is selling lower quality players to fans. Sports teams in America are not like other businesses. The fans feel an ownership. The names of the cities are on the uniform chest. They represent communities more than other businesses. And no fan wants to let the economy dictate the quality of baseball and the image of their cities.
MLB and Teams sponsors: One big bad signal about impact of economic crisis in baseball has been the Mastercard and Anheuser-Busch InBev resigning from their World Baseball Classic sponsorship. Also GM has announced a decrease in his investments in sport sponsorship. MLB has announced they replaced the sponsorship for WBC but didn’t announce the value of the new deals, which could mean they are going to get less money. Are you expecting many other firms to stop this kind of expenses?
Yes, I am. I think the sports sell is much harder because companies have more serious obligations. GM can’t lay off people and then spend generously on sports promotion. And I think that creating trying to create new business, always hard, is still harder in bad economic times. A company that spends 2 percent of annual revenue on sponsorships may get away with spending less, say 1.75 percent, but they can’t sell to their employees, their communities, their stockholders and their boards that they need to add spending in such a climate. That’s what is facing the World Baseball Classic.
On the positive side, ESPN told me that they are planning big-time coverage of the WBC. For the first time in 2006, they had only weeks to prepare and they didn’t know what to expect in terms of worldwide fan interest. But the WBC was a huge international success (more so outside the United States), and ESPN, the No. 1 worldwide brand in sports is gearing up for a big event. They will be able to attract advertisers, many, many advertisers. Perhaps those advertising buys will be less than they would have been in good economic times and perhaps they would have gotten more advertisers is good economic times. But they will still make a television success of the WBC. But will MLB generate the sponsorship they deserve or the member nations? I doubt it.
In past weeks both the Tribune group and the Times Co are trying to sell their participation in the Cubs and Red Sox respectively. The bad news is that this are sales made to save costs and this could mean they are going to sale for few money. Is that a coincidence that the first two sales come from media companies? Have we to expect other similar sales? Are these sales going to lower the value of the teams?
I’m sure that the economy has propelled thinking by media companies of selling sports properties, but this is really a trend that started seven or eight years ago. Media companies use sports as television destinations. Sports, quite simple, produced subscribers for cable companies. But cable penetration approached 100 percent in the United States, cable companies began to lose interest in sports properties. Disney, Fox, Turner and others sold MLB teams. The Tribune has been talking about the Cubs since before that time. Their own ownership questions have delayed the sale. And the latest drive to sell the Cubs began before the economy turned sour. As for the Red Sox, they are owned by John Henry’s group, and I don’t consider them a media team. As for John Henry and his partners, they are very happy with their investment in the Red Sox and the many, many spin-off companies they have created. They are hugely successful.
One more point here that I must make, when using the Red Sox as an example. Team profit and the economy are very important in sports, but the key to sports ownership is “team value.” Even when most MLB teams were losing money before the latest labor contract, there was no end of investors trying to buy their way into baseball. Because even when net operating income is down, team values keep going up. That’s the investment. That’s where they money grows. Team value – not profit – is the most important figure in commercial sports. And team value is still on the rise despite the economy. Perhaps at a slower incline because of the economy, but still going up. Maybe we will see a time when the economy causes team value to decline, but I believe that’s years away.
How is it possible for team value to increase if there are no revenues?
When a businessman buys a team in sports, he isn’t seeking cash flow, although some teams provide that in large numbers. He is seeking asset appreciation. That’s the business play. So the most important number to an owner of a major U.S. sports team is team value … how much higher is the value of the team today than it was when he bought it. There are two responses to why value keeps increasing; one logical, the other is distinctly illogical. It’s about supply and demand. There are only 122 major-league franchises in the United States (MLB, NFL, NBA, NHL). There are many more millionaires than teams available. Because there is a limited supply and great demand, investing in a team is among the surest investment in the country. The more solid the investment, the more would-be investors, so it actually builds on itself. There has never been a failure of a major sports franchise in the United States. There has never been a bankruptcy. (There have been Chapter 11 filings for reorganization, but never liquidation. Teams have sometimes changed cities. But never a failure.)
Banks, investment bankers and finance houses regard sports franchise ownership as among the surest investments in the commercial landscape. Because of that, franchise owners have access to even more capital because of the strength of their collateral, the team. Sometimes real estate is included in ownership. If there is real property, especially a new, revenue-producing facility, the numbers go much higher. No other U.S. Industry provides its owners with such instant popularity. To become an owner of a major sports franchise in the United States is to become an important person in the community instantly. Sports ownership isn’t viewed as a mere investment. It’s more attractive than that. It is the ultimate trophy for a successful career and a successful live. Some guys love sports. Some guys like to be part of the team, meet the star players, and forge a partnership with star players. Some guys get trophy wives. But the guys with the real money and real power in American get trophy teams.
Which teams are significantly owned by many media companies? Apart from Tribune corp., I know Liberty Media owning the Braves (which means Direct TV and other local TV Channels) and Rogers Corporation owning the Blue Jays. But there are other participations?
As I’ve said, Turner sold the Braves (and the Thrashers and Hawks), Disney sold the Angles (and the Ducks and the Pond) and Fox sold the Dodgers. In baseball, Comcast still has significant sports interests but not at the major-league level in baseball.
It is quite understandable the there is a big connection between media companies and professional sports, but what is the main reason media company invest in professional baseball teams? What do they get from it?
As mentioned above, Cable penetration was the goal when media companies were trying to line-up subscribers around the country. Sports did that better than anything in America. But when penetration approached 100 percent, the drive to control the asset disappeared. It was also a programming play. It costs lots of money to produce original entertainment programming, many times that of producing sports programming. In sports, you just send some crews with cameras to the field (used to be three cameras, now 16) and you have compelling programming. In baseball, with 162 games of three hours each and shoulder programming, the cost of production is a fraction of any other programming.
Don’t you think there is some conflict of interest in a media company owning one of the objects of their work?
No. I think there are economies of scale, but no inherent conflict in the business sense. If you are talking about a journalism sense, then I think perhaps that is the case. I hate what we call in America “homers,” reporters that are cheerleaders for the home team. But that was taken away from us before media ownership in sports. Teams began taking the right to approve announcers back in the 70s. That wasn’t a product of media ownership. But after that, teams could fire reporters who were critical of the team. The result in America is inferior, sometime awful, reporting.
Going back to the economic crisis: in a move that seems to go against the common sense the Yankees just signed three big free agents giving them exceptionally long contracts and big favorable conditions, like the opt out clause for CC Sabathia. It seems that they didn’t try to stay low with their offer hoping for other teams to stay low as well. With Sabathia for example they made the big offer for first. The Yankees were also the team that has lost more money in 2007 (47 million $) and are the ones with more debts among MLB teams. How can they be able to sustain these deals?
Wait. The Yankees are NOT losing money. They are making so much money, it’s ridiculous. They just got their bill for the luxury tax of $26.9 million. This is very complicated, but the real money in baseball is in local media. All the teams make relatively the same amount of money on national television, and merchandise. Gate can vary (tickets sold and ticket price and per cap: the amount people spend at the stadium on concessions, parking, etc.). But the variation is not so great to cause competitive imbalance. The real difference is in local media, and the Yankees have the biggest media market in the world.
What the Yankees do is to take their profit from television revenue through their own television company, YES Network (Yankees Entertainment and Sports). When Madison Square Garden bid $100 million a year to carry Yankees games, George Steinbrenner sold the rights to his own company for half that amount $50 million. That means the Yankees made less on their balance sheet, but YES got a discount and more profits as a result. Why? Because baseball revenue is subject to revenue sharing. Steinbrenner would have had to share more of his profits with the 29 mother owners. This way, he keeps more for himself. Of course, this didn’t make his partners in MLB happy. (Yes, they are his business partners.) That trend has continued with the Yankees, so on their books they show less of a profit then they really produce. But believe me, the three players and the $424 million in commitments over the next eight to 10 years are easily paid for. When they signed Alex Rodriguez five years ago, his $25 million a year contract was paid for before he played a single game. That said the Yankees payroll for 2009 will be lower than the one for 2008.
Is this going to paralyze the other owners overwhelmed by the power (or madness) of the Yankees?
Competitive balance has always been a baseball complaint. But the Tampa Bay Rays beat the Yankees last year and could again. Much more importantly, competitive balance is over rates. In every sport, when one player or team can dominate, the entire sport gains. Golf ratings are four times greater when Tiger Woods plays. Muhammad Ali saved boxing. The NFL, I believe, suffers from what we call parity or competitive balance. In team sports, there are magic names in the United States as in Europe. The Yankees are the best brand in sports and all MLB teams share in the revenue created by the popularity of the Yankees. Each team gets just as much as Steinbrenner does when a hat is sole with the Yankees interlocking N-Y. And all teams are eager to have the Yankees visit for a three-game series. MLB and it owners can thank their lucky stars for the popularity of the Yankees.
Just as importantly is the nature of baseball. All teams in MLB will win 54 games. All teams will lose 54 games. It’s what they do with the other 54 games that determine champions. They all have a chance to beat the Yankees and have been doing it pretty regularly.
Yet for the Yankees, high payroll (the highest) results in ticket sales and ratings, the two most important sources of revenue, not only for the Yankees but also for MLB, a $6 billion business.
Luxury tax: the MLB instated the luxury tax trying to find a way to prevent few teams to spend a lot of money leaving others behind and then redistributing some money among poorer teams. I would say it doesn’t seem to work: Yankees are paying the tax every year and they keep on increasing their payroll. But they are the only one to do so, even if there is still a big difference in team’s payrolls. Do you think it is appropriate that MLB try to balance ability of teams to pay players? And if you think so, what they should do, given the fact that players seem to never accept a salary cap like in the NBA?
I disagree. I think that the luxury tax works. Teams still have the ability to improve their quality and those members of the 30-club partnership that are disadvantaged in business are compensated. This is a good system.
If the Yankees had continually won championships in recent years, perhaps it could be criticized. But under the luxury tax rule, they Yankees haven’t won a single championship.
MLB signed long term deals with TBS, FOX and Direct TV. Are these deals a sure thing in the crisis scenario? What is the reason to create the new MLB Network?
Sure thing? Yes because those media companies receive only a small portion of their total revenue from sports. Revenue from other programming, subscriptions, advertising and other sources can and contractually must to be used to meet their contractual obligations to MLB.
If those companies can survive the economic crisis, MLB can bank that money. It is not beyond reason that they would try to renegotiate, or work a more profitable deal with MLB, especially if they get in trouble. But the basic nature of the contracts is as secure as any contract in this business climate.
As for the MLB Network: I have been slightly critical of sports leagues that sign large, exclusive deals with media outlets, then create their own networks. I think that’s disingenuous. But MLB is following the other team sports leagues in creating MLB Network. There are profits that can be made, especially in an era of fractionalization (more channels and fewer viewers for each). Our idea of ratings has changes. And target audiences can be reached by providing niche programming. Every one of those new league networks promise their television partners that they won’t show live games. If that happens, we can expect a revolution in commercial sports in America as television is still the largest source of revenue.
Do you think the economic crisis is going to affect the MLB international investments (and particularly the IBL project)?
Yes, to some degree. Still, MLB understands that it has to grow. Its best potential for growth – given that most Americans have already made their decision about whether to be a fan – is international markets.
I believe that international marketing will be among the last spending categories that will be affected. But there is also a political issue. It’s hard for MLB to spend money in international markets when other sports leagues are laying off people. The reality is that even if they can afford to invest in international markets, they may not be able to afford the negative public relations. Still, the economic difficulty is temporary and baseball is forever.
Mister-Baseball.com thanks Ivano Luberti for conducting the interview.