TVLand: A Small Market Solution? | Disciples of Uecker

Disciples of Uecker

We'd like to go to the Playoffs, that would be cool.

Speaking at the 2013 All-Star Game in New York, MLB Commissioner Bud Selig cited an alarming fact. According to The Associated Press, he stated that the average MLB salary rose 6% (to $3.65 million) for opening day 2013, allegedly the highest climb since 2008. As baseball’s revenue reaches $8 billion per year, the AP noted that Selig wants clubs to spend less than half of that revenue on payroll: “We’ve made some new television deals and our clubs got a little excited, and so we may go over 50 percent, and that’s dangerous. I think we have to work on more mechanisms.” From a labor perspective, it’s easy to see why Selig wants ownership to spend less on players; the more players earn, the more leverage they can potentially gain over owners. (Thankfully for Selig, however, labor has recently appeared willing and able to comply with ownership wishes on key issues such as PED-testing. So, the revenue-grab might not be anything more than an “Everybody’s Happy” period of prosperity for the MLB).

Revenue Speculation and Contract Explosions
Glancing at Cot’s Contracts “Highest Paid Players” list at BaseballProspectus, it’s easy to see the source of this payroll explosion. If one breaks down the period of $100 million+ contracts — from Kevin Brown‘s 1999 deal to Evan Longoria‘s 2017 deal — the explosion of contracts centers squarely around 2009-2013. Specifically, as local TV revenue deals began to increase, teams began to “speculate” in revenues and pay that speculation forward. The Cincinnati Reds’ extension with Joey Votto is a perfect example of this practice, since the Reds signed Votto’s monster deal a full two years before the MLB’s central TV deal kicked in, and four years before their local TV deal expires. Not only did the sheer number of $100 million and $200 million deals signed for 2009-2013 increase significantly, but the average amount on $100 million deals increased significantly, too:

Years $100m Contracts $200m Contracts Avg. $100m
1999-2003 7 1 $136.1
2004-2008 8 1 $124.6
2009-2013 21 2 $145.8
2014-2017 7 3 $116.9

One can only wonder what Selig thinks about the expansion of extremely lucrative contracts into 2015, 2016, and 2017. Although the majority of those forthcoming deals are smart buyout contracts for franchise players like Ryan Braun and Evan Longoria, the sheer number of $100 million contracts for the next half-decade has already matched the total number signed for 1999-2003. Basically, before any further megadeal extensions are signed — let alone 2015, 2016, 2017, and 2018 free agency — the next half decade has already produced a notable number of $100 and $200 million deals. The expansion of the $200 million club is particularly interesting; while Alex Rodriguez was the only player deemed worthy of $200 million for an entire decade, owners have deemed five different players worthy of that mark within the last three years. Just for fun, here’s how that contract explosion looks:

Year $200 Million Contracts
2014 Robinson Cano /Joey Votto / Clayton Kershaw
2012 Albert Pujols / Prince Fielder
2008 Alex Rodriguez
2001 Alex Rodriguez
Year $100 Million Contracts
2017 Evan Longoria
2016 Ryan Braun
2015 Elvis Andrus
2014 Jacoby Ellsbury / Shin-Shoo Choo / Ryan Zimmerman / Dustin Pedroia
2013 Justin Verlander / Felix Hernandez / Buster Posey / Zack Greinke / Cole Hamels / David Wright / Josh Hamilton
2012 Matt Kemp / Adrian Gonzalez / Matt Cain / Jose Reyes / CC Sabathia / Ryan Howard
2011 Joe Mauer / Troy Tulowitzki / Carl Crawford / Cliff Lee / Jayson Werth
2010 Matt Holliday
2009 Mark Teixeira / CC Sabathia
2008 Miguel Cabrera / Johan Santana / Vernon Wells
2007 Alfonso Soriano / Carlos Lee / Barry Zito
2005 Carlos Beltran
2004 Albert Pujols
2003 Todd Helton
2002 Jason Giambi
2001 Derek Jeter / Manny Ramirez / Mike Hampton
2000 Ken Griffey Jr.
1999 Kevin Brown

The role of revenue speculation cannot be underestimated in this contract explosion. In many cases, the owners were rewarded for their bets, as the amount of annual revenue each MLB team will receive doubled with the league’s new collection of $12.4 billion TV contracts. Notably, this is the revenue that each MLB team will receive before their local revenue is considered. To put this in perspective, the increase in MLB TV revenue pays for Matt Garza‘s contract in one year (I know that’s not how it really works, but for the sake of visualizing the impact of the deal, it’s worth questioning whether the Brewers could have signed Garza without the annual $26 million increase from MLB).

The basic significance of these cable deals cannot be understated for baseball and team identity building; by my count, approximately 18 of the 28 $100 million deals signed for 2009-2017 were extensions outside of the free agency market (and two of the recent $200 million deals were outside of free agency). It is interesting to note that the common complaint that free agency ruins one-team players (or, franchise players) may be going by the wayside, as MLB superstars and teams alike get to have their cake and eat it, too. Unfortunately, the good ol’ “Hometown Discount” line might not be worth much anymore — the average $100 extension / buyout deal signed for 2014-2017 has already reached 82% of the average $100 million contract value from 1999-2008, and the Clayton Kershaw and Joey Votto deals are worth 93% of the average $200 million deal. On the other hand, at least fans might have a better chance to watch their favorite hometown players for a sizable portion of their careers.

Small Markets and the Cable Bubble
On the other hand, recent analysis by Wendy Thurm and Jeff Todd calls into question the ability of MLB’s cable bubble to sustain itself. Specifically, Thurm cites issues with carriage fees and potential legislation that could undermine complete cable TV packages (as always, her work on labor comes highly recommended, but this article should be required reading). Todd analyzes the Philadelphia Phillies’ recent $2.5 billion deal with Comcast SportsNet, noting that although the deal may be in line with expectations for the Philadelphia market, it does not provide fuel for further increases in large cable deals. Todd echoes an argument that Thurm also made regarding the role of TV ratings calculations in the delivery of these new cable deals:

“In other words, it does not appear that Philadelphia landed the “Dodgers-esque” deal that some observers thought possible — at least in terms of impact on relative spending capacity. With the club’s ratings dropping a remarkable 40% in each of the last two seasons, going from first in the game to seventh in the process, one can’t help but wonder what impact the team’s on-field downturn may have had on negotiations.”

Similarly, the Houston Astros have faced a difficult fate with their monster cable deal. In August, Maury Brown argued that “cash grab” criticisms of the Astros ownership group are erroneous, as the regional Comcast SportsNet in Houston has not yet delivered the promised $80 million annual revenue to the Astros. Not only has the network faced difficulties gaining carriage, but their start-up costs are also keeping the network in the red. I have previously criticized the Astros for signing a grand TV deal and then spending nothing during their rebuilding, and it looks like I am one of many people who were wrong to say that. In October, the fight between the Astros and Comcast reached bankruptcy court.

With teams such as Milwaukee, Kansas City, Pittsburgh, and St. Louis mired in low-revenue, long-term TV deals (the earliest expiration is for the Cardinals’ 2017 deal), the implications in Philadelphia and Houston suggest that a TV bubble will not make it to the MLB’s smaller markets. Notably, there are analysts around the web that argue that the new MLB TV climate diminishes the validity of small market cries (see this MLB blog entry for recommended reading / bulletin board material). Basically, with several tiers of MLB revenue sharing in place through the 2012-2016 CBA (see CBA.XXIV.A.4, 10, and 13-15, p.119), a competitive balance / luxury tax, and the brand new $52 million/year MLB TV deal, the argument goes that the plight of the small market is no longer. However, the Houston and Philadelphia situations suggest that:

(1) Using team ownership to establish a stake in a Regional Sports Network does not always provide a revenue bonanza.

(2) MLB markets are not always surpassing their previous market-capacity / market-potential, as the Rangers, Padres, or arguably even the Dodgers (or Indians!) deals suggested (here we might contrast the Dodgers’ increase in their deal to the Phillies’ increase in their new TV contract).

At a basic level, it is also absurd to suggest that small markets cease to exist when the top local TV contracts pay teams $100 million (or more), while the smallest markets earn between $10 and $30 million (at best).

Small Market Thought Experiment
I believe it was Bill James that once suggested that the MLB’s small market clubs could address the league’s inequities by simply refusing to play the big markets (and therefore, refusing to pay their share of revenue). Small market owners do have the ability to say, “You cannot play without us,” and notably, as the top TV deals stretch into Phillie-land and Dodger-land, even midmarket teams like Detroit might begin to criticize the big markets. In some regard, the 1994 strike was so vicious because it added a dimension of ownership fractions to the typical “labor vs. ownership” dynamic; there was not a unified ownership group to face off against the players.

Basically, there are inequities in the game that small market owners will need to address if they are to continuously compete with the big clubs. Even though revenue gains allow teams like the Brewers to be able to sign Garza, or the Reds to gamble on a player like Votto, their market situations basically allow those clubs to have one great gamble; on the other hand, the press speculation of the Dodgers’ ability to extend Hanley Ramirez that followed the Kershaw extension (not to mention the Matt Kemp, Andre Ethier, or Zack Greinke contracts, just to name a few) shows the benefits of earning several hundred million per year in local TV revenues.

The small market clubs such as the Cardinals, Royals, Pirates, and Brewers could gain interesting leverage by combining their efforts to create a SuperRegional Sports Network (depending on how the Reds and Indians contracts develop, at some point those markets could also join into a midwestern super market). Their motivation to organize can be tied to the nearly simultaneous expiration of their deals (and, the expiration of the current CBA before their TV deals). As the Detroit Tigers’ $40 million/year deal comes due to expire in the same year as the Cardinals, perhaps the smaller midwestern markets could even convince the Tigers to use their regional strength as a member of this group, too. Certainly, strong Tigers and Cardinals deals could set the pace for eventual Brewers, Pirates, and Royals deals (at the very least, if the Tigers and Cardinals cannot receive significant gains through their revenue negotiations, then clubs like the Brewers will really be in trouble). The benefits of joining together to form one SuperNetwork could allow the clubs to collectively:

(1) Address, solve, or cover carriage issues in specific localities. If one club encounters a carriage issue in their locale, a contingency plan could be used by the other clubs to cover their revenue in some way, shape, or form.

(2) Receive more revenue by drawing on the strengths of multiple markets. By working in tandem, these clubs could overcome potential shortcomings in the smallest / least-lucrative advertising markets.

(3) Assess the speculative cable bubble. If each club individually approaches cable deals, their market share could be hurt by deals that are signed in progression by other small markets. If the cable market evens out (or collapse) in the coming years, a collective ownership group could enact strategies to keep revenue cuts (or issues with producing revenue) to a minimum.

(4) Argue for an increased share in advertising proceedings or ownership shares in local sports networks. One of the benefits of the Phillies deal was that the Philadelphia ownership group receives some portion of actual advertising revenue. Even if their deal did not necessarily expand their market revenue beyond previous megadeal expectations, this type of provision gives the club a lucrative, direct road to revenue. Again, this is a provision that smaller markets might be able to achieve while working in tandem, rather than as separate clubs.

(5) Provide a unified small market ownership group to oppose big market interests during the negotiations for the next CBA. While an ownership “strike” could be damaging to the game (and hurt the ranks of ownership in their battle against labor), small market ownership groups could be better poised to address revenue shortcomings, or perhaps even enact comprehensive revenue sharing reform in the MLB, as a group.

The MLB and MLBPA will need to agree to a new Collectively Bargained deal before the expiration of the Cardinals, Brewers, Pirates, and Royals deals (not to mention the Braves, Athletics, Indians, and maybe even Rays and Reds, depending on how their negotiations progress). If owners of small market clubs can agree to negotiate their cable deals collectively, and address revenue issues with other owners, they could potentially increase their ability to operate with enough revenue to sign multiple superstar contracts to their homegrown players and free agents alike.

I linked some sources as I used them. In general, these are the sites I referred to for this research:

BaseballProspectus. Prospectus Entertainment Ventures, 1996-2014. ESPN Internet Ventures, 2013.
FanGraphs., LLC., 2014.
The Hardball Times.
MLB Advanced Media, LP., 2014.

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