February 5, 2009

Opening Up MLB.com

How MLBAM Can Take its Next Big Step

by Shawn Hoffman

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Despite the horrendous economy, MLBAM is actually in a rare sweet spot. The business models that worked for media companies in the twentieth century are on life support, and may be gone faster than anybody had anticipated. (Would you advertise in a newspaper right now?) Every dollar is precious, and companies are looking for advertising mediums that can give them a more quantifiable return. Naturally, most are shifting to the internet, where every action is trackable. So even as total advertising output shrinks, the online pie will continue to grow.

MLBAM is in a great position to take advantage of that, since it already has two robust revenue streams (which is one more than most dominant internet companies). According to BusinessWeek.com, half of BAM's revenue (about $225 million in 2008) came from MLB.tv subscriptions, while the other half came from advertising and "other extras." The MLB.tv business should grow organically; the underlying technology is constantly improving, and high-speed internet access will only become more ubiquitous. At $120, it's a tremendous value-you can't watch six games at once on MLB Extra Innings-so there's no reason to think the product will be anything but an obvious winner. And it will only get even more interesting when internet-enabled televisions become the norm in a couple of years.

With that positive cash flow in hand, MLBAM should have the financial muscle to build an even stronger advertising business. But it's here that MLB.com tends to act more like an old-world media company than a thriving internet property.

Consider how big media companies used to manage their content way back in, let's say, 1995. It was hard to pirate audio, video, and text back then, since there really was no efficient way to distribute it. So with that type of exclusivity a given, media companies would hang on to their content for dear life, and attach a hefty licensing fee anytime someone else wanted to use it.

But in the late '90s, the internet started eating their lunch. Music and newspapers were the first to be exposed, though the newspapers mostly gave away their articles by choice. Video took a bit longer, but by the time YouTube was sold in 2006, people were watching almost as much on their computers as on television. You could either download your favorite shows on the same P2P networks that you got your music from, or watch on one of the thousands of free streaming sites.

Out of pure necessity, the record labels and television networks finally came to their senses. Instead of protecting their content and letting the P2P networks cash in, they've decided to give most of it away, and run with the ad-supported model. Go to Imeem or MySpace Music, and you can listen to any song you can think of, for free. The broadcast networks post their shows a day after they air, either on their own sites or on Hulu. Comedy Central has every second of every single episode of the Daily Show, the Colbert Report, and South Park (among others) up on their respective sites. And MTV lets you watch any music video in history on its MTV Music site. That's a pretty incredible shift, all in less than a decade. But these companies realized there was no other choice-they could either embrace the openness of the internet, or die a very painful death.

And that's the main difference between the pure media companies and Major League Baseball: MLB won't die if it doesn't win in the online space. It may see slower growth (a pretty horrid fate in itself if you ask the owners, since the value of their franchises would stagnate as well), but baseball certainly won't disappear.

Without that sense of urgency, MLB.com has been slow to open up, at least relative to the suddenly nimble major media companies. And really, that is the only thing that has stopped MLBAM from becoming a billion-dollar business. It sounds counter-intuitive, but by trying to wring out every dollar possible through downloads and subscriptions, MLB.com is actually leaving money on the table. Instead, they should be trying to flood the site with short clips (both new and old), and make them easy to share and embed on third-party sites (when you click 'Share' on an MLB.com video right now, it only lets you e-mail the URL to your friends).

This is essentially the YouTube model, minus all of the advertising-repellant homemade videos. Replace those with professionally made content (which publishers can charge high CPMs to advertise against), and you have a winner. Hulu, for one, has been so successful with this approach that it may actually beat YouTube's revenues this year, even though most people had never even heard of it until this past Sunday.

So what steps can MLB.com make? To start with, they should open their massive video vault in New York City, and use their video-editing software to create as many clips as possible. Imagine being able to see any home run in World Series history (of those that are on tape, at least), on demand. Or the last inning of any televised no-hitter. The possibilities are endless.

The next (and most important) step is to make the videos easy to embed. This is really fundamental, and it's easily the most glaring error on MLB.com right now. Embeds are what made YouTube a success, driving traffic virally instead of through expensive marketing strategies. MLB.com could probably double or triple its total streams overnight just by allowing bloggers to post the videos on their sites. And if BAM used pre-roll or overlay ads, that would instantly become some of the hottest inventory on the web (what could be better targeted?). If they wanted to be really creative, they could even create a self-serve ad network, a la Google, that would allow local marketers to place ads on specific videos (i.e. Primanti Brothers in Pittsburgh could advertise on Willie Stargell videos).

There's another important aspect of this whole strategy: not only would it drive MLBAM ad revenue, it would also serve to virally market MLB as a whole. The teams do a pretty substantial portion of their merchandise and individual game-ticket sales on the web. Driving more traffic to those sites should lead to incremental revenue growth, as people become more interested in the sport, or just make impulse purchases. MLB.tv would probably benefit the most, since most baseball fans probably aren't even aware of it yet.

So in a number of ways, this is a big opportunity for MLB. It may not be its primary business, but Major League Baseball is a major media company. A total of 2,430 regular-season games are played every year; that alone is more original content than any television station produces. MLB should be doing everything it can to monetize that footage, whether it be directly (through advertising) or indirectly (through a halo effect on tickets, merchandise, and MLB.tv).

For all intents and purposes, MLB Advanced Media has already been a tremendous success. It has reimbursed its shareholders' initial investments via dividends, and is now worth at least ten times the original valuation. And technologically, it's done some amazing things with MLB Gameday and MLB At Bat for the iPhone. But there's a lot more money to be made, and in these down times, every dollar counts.

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Shawn Hoffman writes about business and baseball at Squawking Baseball.

Shawn Hoffman is an author of Baseball Prospectus. 
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