Monday, November 26, 2012

The big business of Major League Baseball and Television

The Los Angeles Dodgers are in the midst of agreeing to the most important local television agreement in baseball history. reported the Dodgers and Fox Sports are close to an agreement that would pay the Dodgers between $6 billion and $7 billion over the 25-years of the proposed agreement. The Dodgers would receive more than $280 million annually, twice what any MLB currently receives for their local rights, an incredible $1.73 million a game for each of the 4,050 scheduled during the lifetime of the agreement.

Wednesday, 49% of the YES Network was sold to Fox Sports for $3.4 billion. The YES Network (Yankees Entertainment Sports) was created by the New York Yankees, own New York regional television rights to both the Yankees and the Brooklyn Nets. While not owning a controlling interest in YES, Fox’s 49% essentially offers Fox Sports a strong ownership stake in the most successful regional sports network.

The Dodgers deal according to Yahoo Sports Jeff Passan is so big the “Dodgers will make more money from local TV alone than 26 franchises take in from all of their revenue streams. Only the Yankees, Red Sox and Cubs do better, according to Forbes' annual franchise valuations, though they'll soon be joined by the Angels, Rangers and Phillies. The first two have their own $3 billion TV deals.”

After the Yankees sold 49 percent of the YES Network ESPN’s Darren Rovell reported the Yankees have an extra $500 million they can now spend on their player payroll. In March Yankees managing partner Hal Steinbrenner suggested the Yankees free willing spending days were coming to an end. Steinbrenner was determined the Yankees 2014 payroll would fall behind the $189 million Major League Baseball luxury threshold.

“Is it a requirement with baseball that we be at 189? No, it’s not a requirement. But that is going to be the luxury tax threshold, and that’s where I want to be.” Steinbrenner said at the Yankees 2012 spring training camp in looking ahead to how he saw the Yankees 2013 team payroll.

A key to their agreement with Fox Sports, the Yankees have agreed to keep their games on YES for an additional 20 years. The current agreement called for the Yankees to remain on YES through the 2021 Yankees season. YES currently pays the Yankees $85 million annually, with escalators built in at an annual rate of 4 percent.

The question that needs to be asked and hasn’t been answered – how will these agreements impact baseballs completive balance. Major League Baseball remains the only sport of the four major North American sports (Major League Baseball, National Football League, National Basketball Association, and National Hockey League) which doesn’t have a salary cap or a salary floor.

"I'm a finance geek. I guess I always have been. That's my background; budgets matter and balance sheets matter. I just feel that if you do well on the player development side and you have a good farm system, you don't need a $220 million payroll. You can field every bit as good a team with young talent." Steinbrenner said in March.

The Yankees projected 2013 payroll stood at $220 million in March, when Steinbrenner set a goal to cut that payroll to $189 million. The Yankees have more than $114 million in payroll tied up with six players on their roster including Alex Rodriguez, Mark Teixeira and CC Sabathia. Will the Yankees 2013 payroll exceed $189 million – likely with Fox investing $3.4 billion in the YES Network.

On August 25 the Dodgers and the Boston Red Sox completed a trade that saw the Dodgers pick up Adrian Gonzalez ($21.9 million), Carl Crawford ($20.4 million), Josh Beckett ($17.0 million) and their respective 2013 salaries. Add Hanley Ramirez’s 2013 salary ($15.5 million) whom the Dodgers picked up from the Miami Marlin in July –those four players will be paid a combined $74.8 million by the Dodgers next season.

The Dodgers opening day payroll in 2012 was roughly $105 million for 32 players. Between previously signed contracts, contract extensions and player acquisitions during the season, the team's projected payroll for 2013 is now over $192 million. The Dodgers will owe nearly $150 million to 10 players alone in 2013.

The Dodgers current local television rights agreement expires at the end of the 2013 MLB season. Fox Sports and the Dodgers set Friday as the deadline to finalize their new agreement that will pay the Dodgers $280 million annually.

Desser Sports Media, who negotiated the Lakers/Time Warner regional television rights agreement ($120 million annually – the most paid to any NBA team) told Forbes in August they believed the Dodgers could receive as much as $175 million and $225 million annually from their local television rights…or $4.5 billion over a 20-year deal, nowhere near the $280 million the Dodgers will be receiving from Fox Sports.

Frank McCourt was forced to sell the Dodgers by MLB commissioner Bud Selig after the end of his marriage to Jamie McCourt forced Frank to place the Dodgers in bankruptcy protection. McCourt had been negotiating a 20-year, $3 billion package with Fox (Bud Selig looks like a genius now for voiding that agreement).

MLB forces teams to share 34 percent of their local television agreements (the Dodgers will be giving up $80 million of their local television money), but as Yahoo Sports pointed out: “That still leaves them with a bigger deal than any team – and upwards of 20 times that of Atlanta, one of the best franchises in baseball that happens to be saddled with the sport's worst television contract for 20 more years as a term of its sale.”

Baseball games are won on a baseball diamond and not in a boardroom or as a result of a television agreement. The Dodgers may have the necessary financial resources to buy (build) a winner but they still have to make the right decisions.

The Dodgers have the right baseball person in Stan Kasten to make those baseball decisions. Kasten the Dodgers team president had similar roles in building both the Atlanta Braves and Washington Nationals. Kasten must feel like the kid in a candy store, more money than he ever imagined he might be able to spend to build a baseball team, and the knowledge if something goes wrong he can buy a replacement part – that that is the difference between the Dodgers, Yankees, Red Sox, Phillies, Rangers and the rest of Major League Baseball.

The Toronto Blue Jays owned by Rogers Communications projected 2013 payroll stands at $130 million. In the last two weeks the Jays have acquired Jose Reyes, Mark Buehrle, Josh Johnson and John Buck from the Miami Marlins and then signed Melky Cabrera, who batted .346 last season before being suspended for violating the sport’s drug policy to a two-year $16 million free agent contract.

The Blue Jays are “all-in” for 2013. Rogers gave Blue Jays general manager Alex Anthopoulos more than they could justify spending on the Blue Jays, after Blue Jays president Paul Beeston (Beeston was also the Blue Jays president when the Blue Jays won the World Series in 1992 and 1993) convinced the powers that be, now was the time for Rogers to invest in the Blue Jays.

If the Blue Jays do not win in 2013, if any of the players they picked in their trade with the Marlins are injured or fail to produce, the Blue Jays cannot afford to buy replacement parts. The Dodgers, Yankees and the Red Sox may not advertise what happens if they fail, but given the near unlimited financial resources each of those teams enjoy – they can buy their way out of their mistakes, that’s an unfair competitive advantage those franchises enjoy and teams like the Blue Jays fear.

For Sports Business News this is Howard Bloom

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