April 2, 2009

The Biz Beat

A Look at the Year Ahead

by Shawn Hoffman

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The world is a different place than it was a year ago, when AIG was just another insurance company, and a bailout was something more suited for Pacman Jones than General Motors. Even as baseball is coming off of a year of record revenues and eight percent year-over-year growth, the tone has been uncertain, if not entirely grim. Pre-season ticket sales are down, even with most teams cutting or freezing prices, and GM's demise is leading sponsorship sales down. Bud Selig has been preaching caution at every opportunity, bringing in the big guns when necessary. Most teams have sensibly heeded his advice-this winter's free-agent market was decidedly cool, apart from the Yankees' binge.

It's still a frightening time though, since a team's revenues are far more variable than its costs once the season begins. A number of teams will simply be trying to withstand 2009, hoping for a recovery in the second half of the year or early 2010. With that uncertainty leading the way, here are some predictions for the year ahead:

Small-market teams will be hit hard at the box office. Let's get the easiest one out of the way first. Teams in small markets could see large declines in gate revenue, particularly in the second half of the season if they're out of their respective playoff races (think Pittsburgh, Florida, San Diego, etc.). We could also throw in markets that have been hit especially hard by the crisis-Detroit, California, and Florida among them. Without a doubt, this puts extra pressure on teams like the Tigers, A's, and Rays to compete, as they try to avoid having attendance fall off during August and September.

Overall, league-wide attendance will almost certainly be down, but the bigger question is what the average price of those tickets will be. Twenty or so teams have either frozen or cut ticket prices coming into the season, and if the economy is still struggling through the summer, those cuts will only become deeper. Even if attendance is only down six percent, total gate receipts could see an even bigger drop.

That is, for the 28 teams outside of New York.

The Mets and Yankees will have empty seats, but they'll still be coining money. Jeff Wilpon said it best: "I'd rather be opening up a new stadium in this economy than trying to sell seats in the old Shea."

As much as it doesn't seem like a great time to open two new luxury palaces in a city that used to lean heavily on banks, the Mets and Yankees should be relieved. The novelty effect of new stadiums has real value, as do pre-sold $600,000 luxury suites. As hard as it might be to sell $85 obstructed-view seats in the worst economy we may ever see, enough people (and corporations) will shell out the big bucks to make up for the inevitable empty seats.

Class warfare will re-emerge. We've already seen some subtle shots fired this winter, with the Pirates and Brewers calling for a salary cap (buyer beware), but those shots could become missiles next year after the Yankees and Mets pull in record revenues, and the bottom half of the league is struggling to break even. You can bet that revenue sharing will resurface as a hot topic entering the 2010 season, leading up to the next round of CBA negotiations in 2011-12. A lower luxury-tax threshold may also gain some small-market political support, but it's the cap that may end up serving as the key bargaining chip.

The small-market teams need to be careful, though. Some of the policies they're pushing, particularly the cap, could actually be counterproductive, and aren't worth giving up major concessions to the big-market teams or the union. Those could include a guaranteed percentage of salaries for players, or decentralizing digital rights. (The latter may seem like a small giveback today, but it would be a major blow to small-market teams in the long term.)

The naming rights market will stay dry. All forms of advertising are going up in smoke in this recession, so this shouldn't be any different. For now, it only directly affects the Nationals and, to a certain extent, the Yankees-Yankee Stadium will never be Bank of America Field, but the team did have an extensive signage deal with Bank of Amaerica that was nixed after the company became a quasi-government agency. The Nats, meanwhile, were betting on a better economy when they decided to go nameless last spring, and there's a good chance they've fired their in-house economist by now.

On a more indirect level, this could cause some extra headaches for the A's and Rays. Naming-rights deals are often used to help finance new stadiums, generally serving as a portion of the team's share. If the market remains in a coma, it might be difficult to assume a high-end deal, and the teams could be on the hook for another $25-50 million in funding.

Media will thrive, relative to the rest of the industry. This recession might actually be a good thing for sports media, since it should clearly demonstrate that sports programming is, and will remain, a 'have.' Unlike taped sitcoms or dramas, most people still watch sports the same way that they did thirty years ago: live, and with commercials. That gives the networks some incredibly valuable ad inventory in this age of DVRs and on-demand shows.

It should also be a very interesting year for MLB Advanced Media, which has lowered the prices for MLB.tv across the board. It could gain some momentum as a cheaper alternative to Extra Innings, but we may have to wait until web browsers are commonplace on televisions to see this hit its tipping point.

Industry Revenues Will Go Up. It should be a tight squeeze, but despite all of the negativity, industry revenues will likely edge past last year's $6.5 billion. Between MLB Network and the new stadiums in New York, MLB is starting out anywhere from $300-400 million ahead right out of the gate. National media revenues are already locked in, and BAM should keep growing, albeit at a more moderate pace. While a number of teams will feel some serious pain, the industry as a whole will probably look quite healthy at this time next year.

And that, more than anything, might be the story. Baseball's labor front has been very quiet since August of 2002, mostly because all thirty teams have been able to make money with the current system, but 2009 could represent the first major bump in that road, as the industry becomes more top-heavy. That doesn't mean that the system is broken; even the best companies are seeing some pullback in this recession. But it does mean that there will be some small- and mid-market teams feeling a bit left out. And that generally doesn't lead to peace.

Shawn Hoffman is an author of Baseball Prospectus. 
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