The Business of Baseball
Where is baseball headed?
With Major League Baseball’s season getting underway, Steve Walters, Ph.D., a Sellinger School professor of economics who has consulted for three MLB teams, takes a look at the sport’s future.
On the surface the outlook for MLB appears strong, at least compared to the NFL and NBA. The former has “locked out” its players and might cancel some games this fall as it negotiates a new labor contract; the latter is projected to lose about $350 million this season. But MLB is not without issues: the New York Mets and Los Angeles Dodgers face financial crises; the Oakland Athletics and Tampa Bay Rays have stadium deals that limit revenues; and TV ratings are trending downward for the game’s signature event, the World Series, and even for regular season telecasts of popular teams like the Red Sox. Some experts are beginning to wonder if the sport is about to enter a rocky financial period.
As the 2011 season opened, there was plenty of good news in Forbes magazine’s annual special report on the business of baseball. At 73 million, 2010 attendance remained strong despite a weak economy, and revenues generated by MLB’s 30 teams hit a record $6.1 billion. Unlike professional football and basketball, baseball enjoys relative labor peace with no lockouts or strikes on the horizon.
But future revenue growth is unlikely to be as great as in the recent past. Two key innovations have delivered substantial new revenue lately: new technologies, such as web-based TV, and new stadiums. We might have hit diminishing returns in both areas. For example, just about all of the teams that wanted new facilities have gotten them. That substantially boosts their revenue in the short run, but there’s a “honeymoon effect” that slowly wears off.
Two teams that have not gotten new parks are the Athletics and Rays. Despite recent success—the Rays have made the post-season two of the past three years—neither team is filling seats and both face obstacles to improved facilities. Oakland wants a new park in San Jose, but that territory is controlled by the rival San Francisco Giants; the Rays are locked in to a lease agreement through 2027.
Then we have the Mets and Dodgers: two teams in financial turmoil because of the recklessness of their owners. The Mets financed their spendthrift ways by drawing on accounts at Bernard Madoff’s investment firm when they needed cash. When Madoff’s Ponzi scheme collapsed, the Mets’ owners needed a $25 million loan arranged by MLB Commissioner Bud Selig to pay operating expenses. Other team owners are not too happy about subsidizing the Mets, especially since some of their financial troubles are a result of poor decisions about paying players. This season they’ll be paying over $20 million to players they’ve cut loose because they’re not good enough to make the team. The Dodgers also face huge debt problems, plus the repercussions of a messy divorce—owners Frank and Jamie McCourt used team assets as collateral for other investments and lavish lifestyles, and it’s anybody’s guess how their divorce case will be resolved.
There are whispers that “contraction” might offer an out: MLB could buy out the cash-strapped Mets’ and Dodgers’ owners, transfer ownership of those teams to the current owners of the Rays and Athletics, and then fold the latter two franchises. But this is a long shot. Owners might like the idea of splitting industry revenue 28 ways instead of 30, but the players’ union would draw a line in the sand over the loss of 50 major-league jobs.
However these short-run issues eventually get worked out, MLB might face a longer-term problem: diminished demand for its product, especially among younger fans. The Red Sox, for example, ranked first in local TV ratings from 2004 onward – except last year, when their ratings fell 36%, to fifth in MLB.
What happened? No one has a good handle on that, but everyone’s concerned and will watch this year’s numbers very closely. They’ll pay closest attention to younger demographics. Competition for those viewers is fierce, and they have more and more entertainment options as electronic media evolve.
But there are encouraging signs that MLB is taking steps to improve its product. Thanks to more aggressive testing, the steroid era is over. The Commissioner’s Office is trying to improve the pace of play so that telecasts are both more exciting and require less of a time commitment. And new media might make it possible to appeal to new fans and enhance the pleasure of old fans by, for example, enabling greater access to players’ words and thoughts in the dugouts and bullpens during lulls in the on-field action. People love baseball in part for its rich history, but the industry understands that it needs to innovate if it is to continue to grow.
*For more information on the mismanagement of payroll in baseball, view Professor of Economics John Burger, Ph.D.’s faculty spotlight highlighting his research in the area.