SBJ/April 3 - 9, 2006/SBJ In Depth

Special Report: MLB season preview

Oakland A’s owner Lewis Wolff felt confident he’d made a good deal when he bought the club early last year for $180 million, even without the certainty of a new stadium. Then he attended his first owners meeting and heard MLB executives present their financial forecasts. What had been a sport slowly, at times awkwardly, regaining its fiscal footing was now utterly flush with new cash.

Attendance is one of the key economic indicators
that has climbed for MLB. A record 74.9 million fans
attended a regular-season game in 2005.
“It was sort of a surprise, to be honest. We went from happy to triple-happy,” Wolff said. “But there’s really been such a dedication, particularly on the part of [MLB Commissioner] Bud [Selig] to enhancing the value of the clubs, enhancing the total value of our game, and it’s really paid off. We couldn’t be happier with where this is going.”

MLB financial data obtained by SportsBusiness Journal shows the backing behind Wolff’s jubilation. Less than five years ago, Selig was testifying before a skeptical Congress not about steroids but on the financial distress in the industry. The then-embattled commissioner outlined a $232 million operating loss for MLB and all of its teams in 2001, which then deepened to $418 million the following year.

Fast forward to 2006, and baseball now projects a complete reversal, with anticipated earnings before interest, taxes, depreciation and amortization (EBITDA) of $450 million, up a whopping 50 percent from $300 million in earnings in 2005 (view the MLB EBITDA chart).

Just five of 30 clubs showed individual profits in 2001; 21 teams did so in 2005, and the number should reach 25 in 2006, MLB executives say (view the MLB Enterprises revenue chart).

Fiscal belt-tightening and a restructuring of MLB’s debt no doubt helped considerably to turn the red ink to black. But the fundamental reason behind the historic turnabout is baseball’s rapid emergence into a revenue-generating giant. For years, union leaders urged management to grow their way out of their monetary problems, and at last, that has happened.

Turning point
The 2003 season opened with a new collective-bargaining agreement between MLB and the MLB Players Association, and since then business has been booming.
Eleven of the league’s 19 current top-level corporate partners signed new deals or extended incumbent ones.
Revenue from national media rights deals jumped 29 percent, averaging more than $700 million annually.
Seven teams were sold, with each buyer paying a double-digit increase over the previous purchase price.
Sales of licensed merchandise topped $3.1 billion, up more than 14 percent.
Revenue generated by MLBAM rose to approximately $270 million, a fivefold increase.
2005: A banner year
A record 74.9 million fans attended a regular-season game.
Four teams set all-time attendance records: the Red Sox (2,847,888), Angels (3,404,686), Yankees (4,090,696) and Cardinals (3,538,988).
The Red Sox have sold out 226 consecutive games, the second-longest streak in MLB history.
Fans used MLB.com to watch streamed video of games more than 7 million times.
This year, MLB will join the NFL as the second American sports league to surpass $5 billion in total revenue with a haul of $5.1 billion, up 6 percent from last year’s $4.8 billion and up 38 percent from 2003’s $3.7 billion (view the MLB revenue chart).

Since 2001, total gate receipts have grown from $1.38 billion in 2001 to $1.8 billion last year and a projected figure of $1.95 billion this year as attendance has grown from 72.6 million to more than 76 million expected to pass through the turnstiles this year (view the MLB attendance chart). MLB Enterprises, which includes MLB Properties and baseball’s international operations, has grown from a $195 million-a-year business in 2003 to more than $300 million this year. And MLB Advanced Media, a separate company that produces baseball’s successful Web site, MLB.com, will also cross the $300 million threshold in 2006, an exponential leap from a revenue total of $5 million in 2000 (view the MLBAM revenue chart).

Total player compensation, meanwhile, has stayed essentially flat, growing roughly at the rate of inflation from $2.1 billion in 2001 to $2.6 billion this year, keeping the industry’s profit outlook bright but potentially raising implications for labor negotiations set to begin later this year (view the Player salary trends chart).

And in a case of the strong becoming stronger, MLB executives say the dramatically improved financial health has allowed the sport to move beyond simple triage and into investing in new and already profitable initiatives, such as the recently completed World Baseball Classic.

“What we have in front of us is a real opportunity to now focus on growth and new opportunities in a way we’ve never had,” said MLB President Bob DuPuy. “Our biggest challenge is really staying relevant. Fifty years ago, the big sports were baseball, boxing and horse racing. Well, boxing and horse racing have basically died out, and it’s now us, football and basketball. We want to make sure we’re still in that mix in another 50 years.”

A new deal
For years within baseball, hope and faith wasn’t a sitcom but rather a Selig catchphrase that encapsulated his ideals for a new CBA. After seeing big-market, big-spending clubs such as the New York Yankees and Atlanta Braves dominate baseball in the 1990s, Selig and many owners wanted a system that would promote greater competitive balance and, ideally, an NFL-type level of parity in which market size had no direct correlation to expected on-field success.

Management didn’t get the salary cap it sought in the tense and prolonged 2002 labor negotiations, which without a work stoppage produced the four-year collective-bargaining agreement that will expire after the 2006 season. Instead of a cap, a revenue-sharing system was constructed in which MLB teams share 34 percent of locally generated net revenue (local revenue minus stadium costs).

Teams have eschewed lengthy contracts in favor of
more payroll flexibility. Even the free-spending
Yankees held Johnny Damon to a four-year deal;
he had sought a seven-year contract.
Additionally, a luxury tax was imposed on high-end payrolls — the figure rises to $136.5 million this year — which has quite effectively worked to drag down salary growth. Only the Yankees (three times), Boston (twice), and the Los Angeles Angels (once) have been forced to pay the tax.

On the field, the system worked beyond even Selig’s wildest dreams. This decade has seen a different World Series champion each year, the Boston Red Sox break an 86-year championship dry spell in 2004, and once financially hamstrung clubs such as the Chicago White Sox, Cleveland and Oakland grow into competitive forces. Postseason competition reached epic levels in 2003 and 2004, particularly during seven-game American League Championship Series clashes between Boston and the Yankees.

The success for baseball arrived despite the payroll spread between the top-spending clubs and the bottom only widening. The Yankees and Red Sox raced far ahead of the rest of baseball in spending, with the rest operating at an average well below the luxury tax threshold.

“This is a system that reflects the realities of the business better and allows teams to make more responsible decisions,” said Rob Manfred, MLB executive vice president for labor relations and human resources. “That, we believe, is a much more prudent way to run a business.”

Leveraging success
Baseball’s new fiscal world order, however, is about far more than curbing salary growth. Recognizing that baseball was slipping fast in youth participation, fan avidity polls and just about every other measure of relevance, MLB executives used the new labor deal to refocus their selling efforts and get dramatically more aggressive in hawking the MLB brand.

MLB is making its logo less of a simple background
element and more of a showcase element of
marketing campaigns and new merchandise.
A 2000 reorganization of MLB’s business operations put baseball’s merchandising, sponsorship, licensing, international and television businesses all under one internal structure, led by Tim Brosnan, executive vice president for business, creating a streamlined platform that six years later is still paying new dividends and revenue growth.

Central to that is a significantly enhanced commitment to showcasing the MLB logo, the silhouetted batter (thought by many to be Hall of Famer Harmon Killebrew). For years, the logo was a background element in MLB’s marketing, one that did not have nearly the same impact and recognition as the NFL’s shield and the NBA logo featuring Jerry West. No longer. MLB’s batter is now emblazoned on nearly every piece of apparel, merchandise, printed material or Web page.

“There’s a much more unified effort going on now to tie everything together, whether it’s marketing, sponsorship, merchandise, what have you,” said John Brody, MLB senior vice president of corporate sales and marketing. Brody worked for MLB from 1998 to 2002, and then returned in early 2004 to find a more well-oiled sales machine. “It’s no longer a case where everybody’s operating out of their own silo. We have a much more effective sales vehicle to provide our sponsors, and it’s made a huge difference in our ability to generate revenue and allow sponsors to leverage the full power of our brand.”

A recent case in point is MLB’s work in creating ways for its national sponsors to advertise with all 18 clubs operating spring training camps in Florida at once, with a similar program in development for the 12 Cactus League teams.

The development of MLBAM, which operates separately from the rest of MLB’s business operations, follows a similar story of re-establishing the power of the MLB brand. While the other sports leagues were working more slowly to move their Web sites beyond simple brochureware, MLBAM Chief Executive Bob Bowman was turning MLB.com into a deeply integrated cash cow.

The first steps were relatively easy, even as they weren’t necessarily mimicked by the other leagues: selling out-of-market game video, setting up an online store, bulking up advertising sales as users flocked in for news content and real-time statistics.

But early last year, a series of dramatic steps expanded the entire scope of the business. MLBAM bought Tickets.com for $66.5 million, as well as interactive rights from the players union, which allowed a total reshaping of its fantasy baseball platform.

The big-picture result for MLBAM is a giant nine-figure pot of found money that didn’t exist six years ago, and one from which net profits are shared equally among the 30 clubs, providing another key avenue for the owners to cooperate and temper their parochial urges (view the MLB media revenue chart).

The interactive ascendancy shows no signs of stopping. Bowman is aggressively moving into wireless applications and helping power many non-baseball Web operations, such as Major League Soccer’s online business and CBS SportsLine.com’s March Madness on Demand.

“At our growth rate now, making investments in areas beyond baseball makes a lot of sense,” said George Kliavkoff, MLBAM executive vice president, business. “There’s an incredible infrastructure here now, and there’s a ton of opportunity coming our way to deploy it in interesting and significant ways.

Similarly, a willingness to give up some interactive and wireless rights in a new TV deal with ESPN (view the MLB TV rights table) enabled MLB last fall to increase its yearly take from the network by 50 percent in a new $2.4 billion deal over eight seasons that begins this week. The new deal was struck even as TV ratings limped along with none of the historic growth seen in nearly every other sector of the industry (view the MLB national media rights holders table).

Choking off debt
There is now little chance MLB will slip back into its extreme debt-ridden days of the late 1990s and early new millennium. Baseball still has more than $3.5 billion in collective debt, but this season marks the formal introduction of new debt rules that prohibit clubs from carrying more than 10 times their annual EBITDA in debt, or 15 times that figure if a new ballpark is in development or recently opened.

Though the rule is going into effect now, it has been on the ground functionally since 2003, as that EBITDA figure used to determine permissible debt is actually a rolling three-year average.

To that end, teams now generally eschew the seven-, eight- and 10-year guaranteed contracts previously given to stars such as Alex Rodriguez, with payroll flexibility and financial prudence the new watchwords. Five years is now the typical maximum contract length offered to free agents, and the Yankees last winter notably turned a seemingly inflexible demand for a seven-year contract from outfielder Johnny Damon into a four-year, $52 million deal.

“Debt is something I’m always keeping a very close eye on, as are the clubs,” Selig said. “We’ve made some progress in that area, and hope to keep making progress. It’s unquestionably a critical thing for the industry.”



MLB EBITDA

EBITDA = Earnings before interest, taxes, deprication and amoritization
Souce: SportsBusiness Journal research

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MLB Enterprises revenue

Note: MLB Enterprises includes MLB Properties, which oversees the league’s nonbroadcast business such as sponsorships and merchandise, and MLB International.
Source: SportsBusiness Journal research

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MLB revenue

Note: Figures represent total revenue from all league operations and shared revenue from the 30 clubs
Source: SportsBusiness Journal research

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MLB attendance (millions)

Source: SportsBusiness Journal

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MLB Advance Media (MLBAM) revenue

Source: SportsBusiness Journal research

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Player salary trends

Source: SportsBusiness Journal research

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MLB media revenue
MLB’s media revenue more than doubled from 1999 to this season, led by growth in cable and new media.

Source: SportsBusiness Journal research

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MLB TV rights
Fox’s rights deal with MLB expires at the end of the season, and the average annual value of the league’s next network deal is expected to top half a billion dollars. ESPN in September signed an eight-year, $2.4 billion extension of its rights deal, continuing a steady climb in the amount of money the league collects from the only cable partner it has ever had.

Network
Contract period Rights holder(s) Total rights fee(s) Avg. annual value
2001-06 Fox $2.5 billion $416.7 million
1996-2000 Fox, NBC $1.7 billion $335.4 million
Cable
Contract period Rights holder Total rights fee Avg. annual value
2006-13 ESPN $2.37 billion $296.0 million
2000-05* ESPN $851 million $141.8 million
1994-99 ESPN $255 million $42.5 million

Note: ESPN is the only national cable rights holder MLB has ever had. Their partnership began in 1990.
* Terms of the deal replaced the terms of the previous MLB deal for ESPN for the 2000 season.
Source: SportsBusiness Journal research

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MLB national media rights holders

Rights holder Terms
TV
• Fox (network) $2.5 billion, 2001-06*
• ESPN (cable) $2.37 billion, 2006-13
Radio
•XM Satellite Radio (satellite) $650 million, 2005-15
•ESPN Radio (terrestrial) $55 million, 2006-10
New Media
•ESPN.com and other ESPN platforms
(broadband video, other new media)
$240 million, 2006-13

* Includes rights to division series and two regular-season games a week now controlled by ESPN, following Disney’s acquisition of Fox Family Network.
Source: SportsBusiness Journal research

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