Thursday, December 14, 2006

Major League Baseball 2007 -- The Haves vs. the Have Nots

Wednesday was a great day to be a fan of the Boston Red Sox. Baseball fans who call Red Sox Nation home. Red Sox fans have to be excited their beloved Red Sox capped off a few weeks of free agent spending, reportedly signing Japanese pitching sensation Daisuke Matsuzaka to a six-year deal worth as much as $52 million, on top of the $51.1 million transfer fee the Red Sox will pay to his Japanese team, the Seibu Lions, once the agreement is finalized today. Salary escalators (performance bonuses) could push Matsuzaka’s contract to $60 million.

All told the Boston Red Sox today will commit more than $110 million to Matsuzaka. How big a contract does this represent? Consider the 2006 Major League Baseball opening day payrolls of all 30 teams, only the Red Sox and the Yankees had higher 2006 opening day payrolls.

In an off-season highlighted by mid-level free agents signing $10 million a year contracts, the Red Sox sent a chilling message throughout the baseball industry – we’re ready to pay more than $50 million as a ‘finders fee’ to negotiate with a 26-year old who has never pitched a day in either baseball’s established minor league system or Major League Baseball.

The Red Sox, Matsuzaka and his agent Scott Boras where working on a tight deadline, and found a way to make reach an agreement late Wednesday. The two sides had to reach a contract by midnight tonight or Matsuzaka would be forced to return to Japan and pitch one more year before becoming a free agent.

At the same time the Red Sox are poised to make the most important player signing of the off-season, Yahoo reported the Toronto Blue Jays had offered their centerfielder Vernon Wells a seven-year, $126-million contract. The terms if accepted by Wells would make the golden-glove outfielder among the six highest-paid players in the major leagues and likely exceed the average annual value of the free-agent deal Alfonso Soriano signed with the Chicago Cubs this winter. Since the Blue Jays won the 1993 World Series, the Jays have finished ahead of the Yankees and the Red Sox one time in the last 13 seasons, the 2006 season when the Jays managed to finish one game ahead of the Boston Red Sox.

Wednesday’s media converge of Matsuzaka’s arrival in Boston boarded on obscene. Sending a clear message to Homeland Security they better keep an eye on the crazies who are members of Red Sox Nation, Boston radio station WEEI (the home of the Red Sox in New England) followed the flight path of John Henry’s private plane’s journey four-hour, 43-minute flight from John Wayne Airport in Orange County, Calif., the Dassault Mystere 900 tri-jet of Boston owner John Henry, with a big Red Sox logo on its tail, landed at Laurence G. Hanscom Field in suburban Bedford at 5:16 p.m. The scene at the suburban Boston airport bore a striking resemblance to the arrival of the Beatles on American soil in 1963. Chaos reigned supreme with the arrival of Beatlemania and Matsuzaka’s arrival.

Dozens of Red Sox fans (many of whom had been following the progress of Matsuzaka’s flight on the Internet) and a media horde that rivaled the 1980’s Papal visit to Boston greeted a stunned Matsuzaka. In all seriousness, Matsuzaka reportedly was taken aback by the commotion his arrival caused in Boston. If Matsuzaka, was surprised he’s being billed as the ‘second coming’ in the heart of Red Sox Nation, how he’ll react to his first appearance on Yawkey Way (Fenway Park) might be of far greater concern.

For the Red Sox, Matsuzaka is the third piece of a puzzle that has seen the Red Sox spend more than $200 million on three major off season free agent acquisitions: Matsuzaka, outfielder J.D. Drew and shortstop Julio Lugo. Along with a decision to not trade outfielder Manny Ramirez, the Red Sox who slumped to third place in the American League’s eastern division in 2006, and failed to make the playoffs for the first time in four years, have sent a message in no uncertain terms, the Red Sox will spend like the Yankees in order to win baseball games.

While the Yankees payroll will still be bigger than the Red Sox (the $51.1 million the Red Sox have to pay for the rights to Matsuzaka will not count against their total 2007 team payroll), the Red Sox clearly have indicted to the baseball universe, we have the same business philosophy as the much detested Evil Empire – we can fix our personal problems by buying talent. Major League Baseball is governed by the free market system, as long as you’re prepared to spend money, pay the applicable taxes (or in the Red Sox case a $51.1 million posting fee) you’re free to spend as much as you want. And the Red Sox 2007 business philosophy will do to the Yankees what they’ve done to us.

Was it a good business decision? If you’re a Red Sox fan, the franchise has added the best young prospect in baseball with Matsuzaka signing. Coupled with Josh Beckett and Curt Schilling the Red Sox have a starting rotation with three number one pitchers. The middle of the Red Sox batting order, David Ortiz, Manny Ramirez and J.D. Drew rival anyone’s 3-4-5 hitters in baseball. By the way collectively the six players mentioned, will be collectively earn more than $75 million (and again that doesn’t include the Matsuzaka posting fee) in 2007.

Saturday the Red Sox put single game tickets on sale for games in April, May and September. By Saturday evening the 25 games the Red Sox put tickets on sale for were sold out. John Henry and his partners understand Red Sox Nation support their team year in and year out. The Red Sox have sold out Fenway Park for four consecutive years with an average 2006 ticket price of $46.46. Fenway Park may have the smallest capacity of any big league ballpark, but with an average ticket price double that of the Yankees (and an average ticket price double than more 75 percent of the other 29 MLB franchises) the Red Sox generate more revenue from ticket sales than any other MLB team. The Red Sox spend a great deal of money but they make a great deal of money.

Since John Henry and company took over stewardship of the Red Sox before the start of the 2002 season, the value of the Red Sox has increased tremendously. In 2001 the last year of the Yawkey ownership era Forbes Magazine’s subjective financial valuation list pegged the Red Sox value at $339 million. Driven in part by the $700 sale of the Red Sox and the 80 percent stake in the New England Sports Network (NESN) the Red Sox value increased to $426 million a year later.

In 2003 after the first year Henry and company owned the franchise the value increased to $488 million. In 2004 Forbes determined the Red Sox had a value of $526 million and a value of $563 million in 2005 (just after winning the organization’s first World Series since the 1918 season).

Between the 2003 season and the end of the 2005 season (Forbes financial valuations are announced at the start of each respective season and based on the previous year’s revenues) established the value of the Red Sox at $617 million. Forbes list is subjective but well respected, established and generally considered the industry benchmark for team values. The value of the Red Sox has increased dramatically under the leadership and business acumen of John Henry and company.

True the Red Sox didn’t make the playoffs in 2006, but the capacity of Fenway was increased (to a little more than 38,000), 28 Friday night Red Sox games that where offered on an over-the-air television carrier moved to the New England Sports Network (NESN) 80 percent of NESN is owned by the Red Sox. That decision alone added $4 million to the Red Sox bottom line. And the Red Sox brand is everywhere – try Red Sox lottery tickets that include an opportunity to win the most valued commodity – Red Sox season tickets.

According to Forbes: in 2001 the Red Sox received $18 million from NESN, but the games are worth far more than that. Author Zimbalist estimates that NESN's revenue rose to $50 million in 2001 from $39 million the previous year and that NESN netted about $14 million. Thus Red Sox owner Henry received $11.2 million of revenues without subjecting it to baseball's revenue sharing. Fueled by the increase in revenue from NESN, the Sox increased 14% in value that year and in 2003 where the third-most-valuable team, worth $488 million.

Today the Red Sox are the second-most-valuable team in baseball. When the 2007 financial valuations are released by Forbes in April its reasonable to expect the teams’ value will be in excess of $700 million. True, the Yankees have a value of more than $1 billion and with the building of a new Yankee Stadium the Yankees value is going to increase, but the signing of Daisuke Matsuzaka opens the potential of the Far East markets to the Red Sox. The value in the Red Sox signing Daisuke Matsuzaka won’t be determined in wins and losses but in how much additional revenue the Red Sox will generate.

What Red Sox management clearly understands is they have one of the most valued brands in the sports world today, but that brand only has value if those who own that business continue to invest in their business. If the Red Sox have nearly doubled in value in the five years John Henry has owned the team where does that leave the value of lesser franchises?

According to Forbes the Blue Jays had a value of $182 million in 2002 and $286 million in 2006. Which brings up the signing of Vernon Wells. It doesn’t make any sense for Blue Jays owner Ted Rogers to commit $126 million to any player unless that player is going to fill the Rogers Centre or win a World Series for the Blue Jays. Vernon Wells is a good baseball player but it doesn’t make economic sense for the Blue Jays to offer him the sixth biggest contract in baseball history.

The Chicago Cubs have joined the Red Sox in spending money during the off-season committing more than $250 million to a handful of players. The Tribune company are getting ready to sell the Cubs and likely believe the commitments they’ve made to their new personal are an investment that will pay off in increasing whatever the team will be sold for, but the Vernon Wells contract just doesn’t make sense for Toronto. Now that said, given the current market conditions (Gary Matthews, five-year, $50 million contract is the best example of a market out of control) suggests Wells’ free market system value is what the Blue Jays are prepared to offer Wells but playing in the same division as the Yankees and the Red Sox two teams with seemingly unlimited financial resources the Blue Jays long-term cannot hope to compete with the Blue Jays and the Yankees.

Two of the best examples that separate how the Yankees and Red Sox do business as opposed to how the Blue Jays can manage their teams are Carl Pavano’s Yankees contract, and Matt Clement’s Red Sox deal. Both players signed four year contracts worth around $40 million each prior to the 2005 season. Neither pitcher is in the plans for the Yankees and Red Sox in 2006 or 2007. They may well pitch again for the Yankees and Red Sox that will pay each pitcher $10 million for the 2007 and 2008 seasons but the Yankees and Red Sox both moved on as businesses. They’ll meet the contractual obligations they have to both players but they’ve already written off the two contracts.

Often injured A.J. Burnett has four years and more than $45 million left on the free agent contract he signed with the Blue Jays prior to the start of the 2006 season. The difference, the Blue Jays need Burnett to stand and deliver, they cannot be reasonably expected to shrug their shoulder and say “oh well it didn’t work out, we’ll go out and sign Daisuke Matsuzaka or Andy Pettitte as replacement parts”. That’s what makes it reasonable to expect the Red Sox and Yankees to spend like drunken sailors and nonsensical for the Blue Jays to agree to pay Vernon Wells $126 million over seven years.

For Sports Business News this is Howard Bloom

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