The MLB economy

[rjortiz]

Dave Cameron wrote an article on the state of baseball's economy for The HBT:

 

http://www.hardballtimes.com/10-things-i-learned-about-the-baseball-economy/

 

Lesson #1: The Baseball Economy is Remarkably Healthy

 

This isn’t news to anyone who has been paying attention for the last few years, but MLB’s financial trajectory has been pointed upwards for decades now, and the rate of revenue gains has only been increasing of late. As Forbes’ Maury Brown has recorded, league-wide revenues were approximately $2 billion in 1995; they are expected to top $9 billion this year. Based on U.S. inflation rates over the last 20 years, $2 billion in 1995 dollars is equivalent to $3.1 billion in 2014 dollars, so MLB is on course to outpace inflation by about 300 percent over a two-decade time period.

 

There have been plenty of questionable decisions made during Bud Selig’s tenure as commissioner, and some of the revenue gains would have occurred regardless of who was in power during this time, but as the guy in charge of helping MLB grow, Bud Selig has to go down as one of the most successful commissioners in the history of sports. I don’t agree with everything he’s done while he’s been in office, but there’s no getting around the fact that he took over a sport with some legitimate financial concerns, was in charge during the dot-com crash and The Great Recession, and has still managed to turn the league into a financial behemoth.

 

I wonder what he would be saying if he was an economist for a Wall Street firm in 2005. This has been discussed in other threads, but it should be obvious to everyone that MLB is experiencing a bubble. Their finances are private, so it is impossible to say how inflated it is. We know that the TV market is the main driver, and the foundation of all regional sports networks are carriage fees charged to all their consumers. This is an oversimplification, but the poorest cable consumers have some similarities to the subprime market in mortgages during the housing bubble. Monthly cable costs are at record levels, and analysts project costs to continue rising. A large percentage of cable consumers will be priced out, and will seek cheaper alternatives. Cable companies are slow to react to everything, but they will either start offering a la carte programming, or cater to their richest consumers, therefore making cable a luxury item.

 

The first scenario is more likely, but both of them will pop the MLB TV bubble. As mentioned before, sports networks, including ESPN, make their majority of their revenue by the ability to charge all cable consumers a carriage fee. In the a la carte scenario, most regional sports networks will go bankrupt. The CSN Houston bankruptcy is the most likely course for the smaller and middle market teams. They will take huge losses in their equity stakes, and lose out on the hundreds of millions in broadcasting rights. The new TV deals they sign will be for significantly less. This will also happen to the richer MLB teams, but in a less dramatic fashion. They should be able to survive, but with a much reduced revenue stream. The national TV deals will also be much less lucrative. Most TV viewers just don't like sports.

 

Cameron has even alluded to this scenario on multiple occasions, which is why I am completely perplexed how one can conclude that it is "remarkably healthy." It is literally one of the most bizarre connection between a premise and a conclusion I've ever seen. The whole foundation is built on an unsustainable source, and when it breaks it will reveal how "remarkably healthy" MLB economy is.

 

There is also signs that the last great MLB bubble (new stadiums) might blow up at the same time. I would have to look into this deeper, but the Yankees and Cubs are heavily involved in securitizing their debts. I'm pretty sure the Dodgers, Mets, and Rangers are playing the derivatives market as well. If anything has the chance to blow up as spectacularly as the 2008 financial crisis it would be this one.

Edited May 13, 2014 by rjortiz

[Spudboy]

Very interesting stuff. Thanks for posting it.

 

Where did you get this? "Most TV viewers just don't like sports. "

[rjortiz]

Very interesting stuff. Thanks for posting it.

 

Where did you get this? "Most TV viewers just don't like sports. "

 

Consumer data.

 

I'll look for the articles, but I remember reading in an analysis of ESPN's revenues that only around 10% of people who pay a programming fee for ESPN actually watch the network. In another article about cable bills, the percentage of people that would cut sports out of their programming if given the choice was over 50%. I think it is safe to predict that when the average cable bill crosses into triple digits (if it hasn't already) that the percentage will increase. The polls mentioned ESPN and sports as the key word, so I wonder what responses CSN Houston, or Tennis Channel would get.

 

The model is sustainable if they can keep both TV programming fees high, keep who pays them at 100%, and keep their current consumer base. Not increase, but just to sustain their current earnings.

 

Here's the ESPN figure:

 

http://www.sportsonearth.com/article/53498716#!M5B7a

 

… cable is, for as long as it lasts, this great closed system where 90% of subscribers support ESPN that is only watched by 10%. Now, that's a great little plot, so long as you can keep everyone inside the closed circle … I think it's going to bust on its own. I've felt that for a long time. I don't think closed systems in our world are going to hold. Of course, they're going to be defended with ideas like "TV everywhere" and all sorts of other concepts to try desperately to keep that closed-money-circle train going …

 

Took awhile to sift through the mountains of delusional cultists touting the ESPN model for building a TV network. I am actually not surprised that Cameron made that conclusion. Most economics courses teach us about market rationality, so most people never even think to check the foundations it is build on.

Edited May 13, 2014 by rjortiz

[Spudboy]

Again, thanks for all your work.

 

It will be interesting to see how this all plays out.

[rjortiz]

Here's a little bit of information on the Yankees stadium debt:

 

https://www.moodys.com/research/Moodys-changes-Yankee-Stadium-LLC-outlook-to-stable-from-positive--PR_287411

 

CREDIT CHALLENGES

 

• Recent weaker team performance has reduced ticket sales and may temper future sales, pressuring debt service coverage

 

• Assigned revenues annually declined since 2010 as a result of lower ticket and suite license sales, yielding a nearly 20% revenue decline from the 2010 peak and underperformance to original projections

 

• Swap counterparty risk and collateral postings or termination payments could pressure StadCo's and the team's finances given Interest rate swaps remain negative on a mark-to-market basis

 

• In the unlikely event of bankruptcy by StadCo, the possibility exists that the lease agreements may be challenged and subsequently modified

 

• Potential future changes to Major League Baseball revenue sharing agreement

 

I'm guessing the Yankees were swapping floating rates with a fixed one. Making matters worse, the Yankees suck, so the risk of them playing in front of 20,000 fans in September is a real possibility. That could trigger collateral calls, which is going to force the Yankees to cut payroll, or sell off more equity in the YES Network.

[Northern Star]

I just read today about the Dodgers' TV woes. TWC paid $8 billion but directly control only about 20% of the LA market, requiring them to get other providers to pay carriage fees. They've demanded $4 per month per subscriber, and the likes of DirecTV have told them to stick it where the sun don't shine. Result: 80% of LA has not been able to see the Dodgers on TV this season. Good job Dodgers and TWC!

 

I strongly believe it's only a matter of time before cable goes to a la carte. It's the best system for matching demand to supply. Some channels are going to go under, but if you have a suspect product, then you should expect the consequences of a free market, instead of being propped up by an unfair and uncompetitive pricing model.