Forget Salary Cap, Baseball Needs a Profit Cap

Scott Boras set off a firestorm – like only Scott Boras – when he issued a doctrine about team spending and use of revenue sharing funding. It’s not a new debate, but more pertinent given the timing, at the start of a free agent period when teams may start to reign in payroll, thus cutting into Mr. Boras’ commission checks.

That aside, Jayson Stark wrote an interesting editorial outlining the facts and calling for a salary basement as a resolution, pointing the problem at the lower spending teams, similar to Boras. They both are right, but understanding the problem is one thing, solving it a completely separate story.

The Yankees, Red Sox, Mets, and Cubs are not the problem here. They play in big markets, maximize revenue to the best of their ability, then reinvest in the product on the field. They also play by the rules, paying a substantial tax on their earnings, similar to the US government taxing the rich more than they tax the poor (or at least that is how its supposed to work). Most people agree it’s the Pirates, Royals, Marlins, et al, who cash the “stimulus” checks, but stash the money in savings that hurt the baseball economy.

Ending revenue sharing is not the answer. Smaller market teams need some of the big market revenue to stay in the game. Its not feasible to think a team in Pittsburgh will earn the same local media revenue, sell as much merchandise, or get the same level of sponsorship as any team in a market with a substantially larger population and healthier economy. It’s just not possible. So some sharing is necessary.

As an aside, the fact the Florida is considered small market is a joke. Look at Miami-Dade County in terms of size, spending power, per capita income, television market, and almost any other statistic relative to Milwaukee, Pittsburgh, Cleveland, and others, and explain how Miami is small market. The Marlins problem is management, and the fact that the city will not support a baseball team, and that responsibility falls to MLB to fix or change.

Back on topic. The deeper problem is not that team salaries are low relative to the amount collected from revenue sharing, its that these teams are among the most profitable in baseball. MLB VP of Labor Relations Rob Manfred is correct that player development and team operations is a major expense that the public does not consider when looking at the face value numbers, but those expenses should still go into the P&L, so how do these teams end with a profit?

Salary minimum’s are tough since teams do not to rebuild, may flush money into player development (i.e. future investments), or it could force teams to make poor spending decisions because they are forced to spend. An alternative method is a profit minimum. First, teams need to submit to more transparency with the league office (not necessarily the public). Use projected revenue numbers for the season, including MLB central fund contributions, and do not allocate any revenue sharing money until a small market team exceeds that forecasted number – whether its on player development, team payroll, or organization spending. At that time, teams eligible for revenue sharing can only collect when they have incur an expense. For example, Pittsburgh needs to sign a free agent, then it will receive the revenue sharing money to cover that players salary. Each team can continue to draw from this revolving credit line up to the amount they would receive under the current system.

Anything above that amount, the owners need to fund, similar to today. If they don’t exhaust the funds, then the money goes back into the central fund for redistribution to all teams – NOT into the owners pocket. Sports ownership is not a profitable business annually, owners know that coming in, the big profit comes when you sell a team whose value appreciates.

It’s not perfect, but another idea to put on the table. In the end, the only way to truly satisfy the public and the ancillary stakeholders is with full transparency, which I would not hold my breath waiting for. In this scenario, at least it takes the profit out of the hands of the owners and forces some transparency.

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Should Sports Change Revenue Sharing to TARP-like Program?

Last week’s SBJ cover story on the state of Detroit’s sports teams battling through the recession further illuminates how hard the recession has hit that part of the country. Sports teams are the least of Detroit’s problems, yet they remain one of the few refuges for an area fraught with unemployment and failing businesses.

Three key points I took away from the story: 1) Detroit has phenomenal sports fans, it’s aggregate per-cap attendance across all four major sports as a testament; 2) for the most part, the city is blessed with top ownership (we know about the Lions), Davidson and Ilitch have put wining teams on the field, done right by the fans, and tried to do right by local business; 3) the recession is stronger than both #1 and #2, which will make it difficult to sustain these teams over the next decade.

Ticket sales and sponsorship revenue are the most critical and most volatile revenue streams for teams. The economy has put both under significant pressure in the Detroit market. Teams face a steeper trade-off in ticket sales vs. price reductions than most markets and its key sponsors lost significant marketing budget. Lions aside, since the NFL shares revenue in a more equitable manner across the league, each team expects a significant revenue drop this year, which immediately makes it more difficult to field a championship-caliber team.

Looking further down the line, the auto industry will never look the same, and the future of these key sponsors and a critical regional source of employment is in jeopardy for the long-term. That said, will Detroit teams require, and should they receive a boost from the league’s central pool, similar to the government backing its local companies.

From a pure market size perspective it’s a border line top 10 DMA (11 to be exact), but the unemployment numbers, per capita income, and discretionary income numbers make it a candidate for help. Should leagues focus more on helping these owners, who have proven they invest in the team, have loyal fan bases, and can be a key market for leagues than the low-income owners that reap the benefits of revenue-sharing, yet do not add much value to the league.

Putting absolute numbers aside, using forward-looking marginal revenue metrics, leagues should consider if adding each dollar they subsidize Detroit with adds more value to the league and other teams than each dollar MLB subsidizes Pittsburgh or Florida, for example. Market size, ownership wealth, and absolute revenue numbers don’t encapsulate who most needs revenue sharing. Leagues should visit which teams need it at the margin, and how much value the investment (and it is investment by the other teams) can add to the league at large. Detroit – along with other traditional sports cities in struggling regions, are good candidates to consider in the short-term.

Can Fans Handle More Fantasy? Teams Should Find Out

Nobody can debate the power of fantasy sports and the value of the marketplace, currently dominated by football. Following typical economics, as customers showed their appetite for more fantasy, competitors have flooded the market with countless products, each claiming a different fantasy experience, or unique prizes. In the end, most of the products are similar and ESPN and Yahoo continue to dominate because of their established brand and unmatched scale.

However, one area I’m surprised content producers have not yet fully exploited is team-based fantasy games or contests linked to in-venue or in-game viewing. Football aside, other major sports have room for growth. In fact, basketball and baseball participation remains flat or down the past few years, so each could use some innovation to invigorate it. Further, the local nature of these sports lends themselves more to team-based games involving their home team and maybe specific opponents or rivals.

The concept aligns with the current movement for teams to nurture a community. Nothing stimulates engagement more than fantasy, so if teams can steer that engagement to their own websites, broadcasts, and live games, it could lead to indirect benefits in key revenue streams, in addition to creating a new branding platform. Further, teams control the assets (players), the arena, at least have a significant say in television, and have a complementary web presence. With this combination of assets teams could activate fantasy in a compelling manner through multiple distribution channels and have real, coveted prizes (locker room visits, luxury suite, road trip) with access that other fantasy outlets can’t offer.

Thus far, most teams and leagues have taken a backseat, allowing media and retail operations to claim much of the value they create. It’s time for teams to become more progressive, be willing to step out and be innovative. We can think of any number of ways to implement the game, that’s not the hard part. Making the decision to do it, marketing it the right way, and executing well are the keys.

Conversely, if teams don’t act soon, media outlets with focus shifting toward local will jump on it. ESPN <Fill in the City> already possesses the know-how and operations to extend fantasy to city and team levels. CBS can leverage its local radio stations to do so as well. It’s only a matter of time for RSNs finally to move on this opportunity they have sat on for years, especially with the ESPN putting the competitive pressure on.

Maybe the fantasy market truly is saturated, and fans simply can’t handle more. But, if I’m running team marketing or business operations, I’d rather find that out rather than let someone else cash in on my assets once again. A few small shops have started to poke around with Facebook apps (Watercooler), and a rogue game or two has emerged here or there, but when the teams or major media entities make the move, then it becomes serious.

MLBAM Postseason Deal Solidifies Key Premise in Digital

MLBAM announced a deal with Turner and Fox to offer a postseason version of its popular live streaming video package. I’ve read a few comments describing confusion over adding another product to the myriad of permutations that MLBAM already offers, but this should be a case study on monetizing digital content.

MLBAM is taking its valuable core content – mainly live baseball games, to which its held onto the digital rights to – and pushing it out through every viable distribution channel. Then it’s repackaging the content to develop a new offering of the same core content, charging users a fair, reasonable price for each unique offering

MLBAM is executing the Internet business model many write about, but few perfect. Taking advantage of the low distribution costs to put their content out in multiple places, understanding the profit margin increases with scale, so finding ways to deliver the same content to more people directly boosts the bottom line, and understanding the value of its content to strategic partners (i.e. Turner and Fox) and to customers in the marketplace. The $10 computer version or $4.99 mobile version may not sound like significant revenue generators, but in all likelihood the marginal cost to develop these products is next to nothing since it leverages the same technology MLBAM already uses all season and the same content and camera angles going to broadcast. Net result is a significant profit margin for the partners to share.

Of course, the other key factor is that MLBAM offers the best products. Aside from executing on the business model, MLBAM delivers a great user experience, and is more willing to try new technologies, new distribution, and new features in digital than any sports entity. The HD feed is ridiculously close to what you get through TV. The Twitter feed and social networking integration with TBS Hot Corner are fun value-adds to occupy fans during what can be tediously long games. Camera angles, Tivo/DVR-like replays and highlights, box scores and game summaries, multi-screen layout, it has almost everything fans want. They should consider integrating a live, real-time fantasy game involving the players playing in that game, but that’s an entirely different topic for another post.

Overall, MLBAM is a model for not just sports, but any digital business with valuable content trying to figure out how to monetize it. Focus on your core product, find as many unique ways as possible to package it, leverage every possible digital distribution channel, find partners to extend the distribution even further, and monetize it every step along the way.

Rangers Become MLB’s Version of Citi and BofA

Multiple sources report that Tom Hicks has borrowed at least $15mm from MLB to cover operational expenses this year. Though Hicks has tried to position it as essentially short-term revolving credit, given the dreary state of Hicks’ personal finances, plus the amount he has tied up in illiquid assets (mainly other sports franchises), this loan is unlikely to be enough. Sound familiar? Think Phoenix Coyotes and the NHL – though the NHL mangled the ownership situation, which magnified that problem. Better yet, it’s not too dissimilar from the US government funding large banks to keep them solvent and protect the industry from the ramifications of bankruptcy – obviously at a much smaller, and less critical scale.

Similar to how the government began imposing restriction on salaries, bonuses, and operations of banks that it took equity in, MLB now has a say in business matters for the Texas Rangers. The team made no substantial trades at the deadline to boost their playoff chances and failed to sign its first round draft pick. This creates a conundrum – on one hand the team obviously does not have the resources to increase expenses so MLB is right in not letting them spend. On the other not investing in the team, especially with increased fan interest from the pennant race, punishes the fan base and could lead to lower revenue (decreased ticket sales, merchandise, etc.), effectively increasing financial losses.

Hicks dug his own hole – starting with the egregious A-Rod and Chan Ho Park contracts, right through the enormous investment in EPL soccer. Other MLB owners should not have to cover Hicks’ mistakes. If so, it would incentivize teams to spend beyond their means and assume good old MLB will make everything better. Clearly, not feasible. The consequences of letting it fail come from many angles – how to find 50 new jobs to appease the MLBPA, stadium lease issues, a deserted fan base, a full minor league system of players and affiliates, and that’s without even getting to the legal bankruptcy issues.

The situation has no right answer to appease all parties. MLB’s best protection against this is to prevent it in the first place. Teams should be required to show evidence of liquid funds in excess of opening day payroll before the season starts. Further, when major free agent contracts players are added during the season, the team should again post evidence it can afford the payments. If MLB intends to operate as a financial support system, financial reporting must become more transparent. Maybe it already is within the closely held MLB offices, but this situation should never arise in season unless substantiating circumstances occur. Baseball should not allow owners to field a team without funding lined up to make payroll for the entire season. If they can’t, auction the team, or force new equity partners upon them. However, unlike the NHL, put regulations around the process to prevent the Coyotes situation.

This topic probably warrants a full-length report, but the short summary is that MLB (and all pro leagues) need to prevent teams from reaching this situation in mid-season. Whether that means approving each contract above a certain value, or providing proof of finances to fund payroll, it needs to happen. Akin to applying for a mortgage or apartment rental – the buyer needs to show proof of income to get the keys. Baseball needs to require proof for teams to get the players.

New Ticket Offers: Innovative or Another Reason to Worry?

In this blog, I’ve previously lauded the Cleveland Indians for cross-marketing deals with the Browns and creating ancillary revenue streams by hosting dinners on the field and additional events outside the game. However, after the Tribe recently announced another cross-marketing deal, this time with the Blue Jackets, a few weeks after owner Charles Dolan claimed the team would lose $15-20mm this season, I’ve started to question how far teams should take these off-field deals.

Cleveland is not alone, as most major league teams are trying creative ways to move ticket inventory – and many continue to struggle as much or more than the Indians, notably Pittsburgh, San Diego, and Tampa Bay. When evaluating company stocks, I always feel that when a company starts introducing products or services it has maxed out a saturated market (i.e. Coke/Pepsi moving outside Colas) or its struggling and started to scramble. The day the ice cream shop down the block started selling potato chips and sandwiches, it was clear the ice cream business was not doing well and the store was doomed. Best Buy selling outdoor patio furniture is another example of a sign that a company may be struggling with its core competencies and in for a rough patch.

It’s no secret Cleveland is struggling, but have they become desperate? Running cross promotions with the local hockey team a month after trading away your two best players for financial reasons may come off as more gimmicky than value-add to fans and customers. I’m sure team management asks these questions of themselves before embarking on these initiatives – does it align with the brand, what is the benefit to the fans, what does the cost-benefit trade-off look like, etc. In addition to the quantity of these non-baseball deals serves notice that the team is really struggling, the totality of the deals also serve notice with fans, and can dilute the brand as it becomes less about baseball.

The Indians face a tall order. The region has a number of cities struggling due to the recession (a recent news publication listed 8 of 10 top struggling cities in the Rustbelt area) and due to its on-field struggles Cleveland unloaded its most recognizable stars at the last two trade deadlines. Now its left with a team of disappointing signings (Hafner) and many unknowns, struggling to sell tickets, bleeding money, and no saving grace evident. It’s somewhat haunted by signing Fausto Carmona and Hafner to early contracts with the good intention of locking them up, but the lasting effect of clogging payroll on two underachievers.

They can’t blame the ballpark like a Florida Marlins or Minnesota Twins, though the Twins don’t have the same attendance problems. At this point, do these additional business deals risk diluting the baseball brand and losing more core fans, while not attracting new fans who view the promotions as gimmicky. Or can the team actually use these marketing deals and promotions to remain sustainable while rebuilding the team? An interesting question that will play itself out in baseball over the next season or two in cities like Cleveland and San Diego, with business savvy staffs and struggling teams.

Create the College Football MLB Stadium Tour

The NHL crafted a regular season event with the Winter Classic, MLB and the NBA have All-Star games, the NFL and MLB have taken the show on the road to play overseas, college football has an opportunity to ratchet things up in the regular season that has started to take form.

Grant it college football has fewer issues selling regular season tickets than do teams in most other sports due to the much shorter season (less supply), general football interest, and passion for school spirit. However, new revenue opportunities always exist. I propose the NCAA consider an MLB Stadium tour. Two possibilities – select a weekend and host a game in each region at a major MLB park, or make it a season-long entrenchment with one game played each weekend in an MLB Park around the country. It could be one game per conference, or one game per region between two non-conference rivals, or geographic rivals.

Notre Dame signing to play at Yankee Stadium is the start. Fenway Park for a BC rivalry game, Dodger Stadium for USC or UCLA, the new outdoor Minnesota Stadium for one of those funny trophies Minnesota plays for against Michigan or Wisconsin. Yes, less capacity could mean less ticket revenue, but if prices accordingly it could even out. The conferences (as an alliance, similar to the BCS) could sell the rights to the Stadium Tour independent of other TV contracts to bolster media revenue, they could sell a sponsorship for the event and come up with a number of creative, integrative activations in each market. For the NCAA and the schools at large, it’s a brand extension opportunity into the heart of the biggest media markets, some of which are dominated by professional teams and lack a strong college presence. Despite its wild popularity and success, without a strong hold in all of the Top 10 media markets, the NCAA still has room to grow. Besides sponsorship and TV money, this initiative could boost merchandise sales for schools, elevate key TV ratings during bowl season, which have stumbled slightly in recent years (possibly due to the BCS), and in general make the sport more valuable.

Something consider at least consider.