Minor League Baseball braces for fundamental change to its structure in a victory for MLB
At a time of year when Minor League Baseball has usually just concluded its regular season, the organization this year finds itself bracing for seismic change: After 119 years of operating as an independent entity, MiLB will ultimately accede to Major League Baseball’s plan for a new governing structure, according to sources on both sides of the negotiations. As a result, MiLB will be brought under MLB’s umbrella to reimagine the minor league business-side model and align with Commissioner Rob Manfred’s long-held “One Baseball” vision.
Against a backdrop of the June cancellation of the season due to the COVID-19 pandemic, MiLB is resigned to MLB’s proposal to contract it from 160 to 120 affiliated teams, even though a wide array of owners are still divided over what governing structure is best. That issue frames the remaining negotiations between MiLB and MLB in the final days of the Professional Baseball Agreement, which is set to expire Sept. 30. It’s unlikely that all details will be ironed out before the end of the month, but expectations are that a full agreement will be reached sometime this fall.
The governing structure that will emerge will be “new territory, a new business model and quite different,” said one source close to the negotiations. “Whatever we call it, it’s not going to be called a Professional Baseball Agreement anymore. The PBA is a contract between MLB and the national association. The big difference is that there will be contracts between MLB and directly with teams.”
In bringing MiLB under its umbrella, MLB will take a large step toward unifying all facets of the sport. It plans to move MiLB’s headquarters from St. Petersburg, Fla., where it has been for some four decades and staffs 60-plus employees, to New York City, where before the pandemic took hold more than 1,400 MLB employees moved into a spacious new office at 1271 Avenue of the Americas. MLB’s Chief Revenue Officer Noah Garden is expected to take a lead role on the commercial side with MiLB.
To envision the expected new structure, one insider described it as a licensing agreement similar to a franchise or franchisee agreement. The analogy: a Ritz-Carlton Hotel that has a franchise from the parent company to operate, and a detailed contract spells out rights and obligations. The relationship will be a contractual one between MLB and each individual team rather than between MLB and a third-party association in which all the affiliates are members.
MLB believes the minor league structure has not dramatically evolved in 30-plus years, defined by low ticket prices and revenue generated from concessions. As an example of the challenging economics of minor league baseball, most MiLB clubs will budget for three to five rainouts per year. If there are seven to 10 rainouts each season, that could be the difference, especially for smaller clubs, between being in the red and being in the black for the year. The effect from losing an entire season, then, is especially acute because teams essentially have five months — April through August — to generate revenue and then spend the next seven months only spending money on expenses such as payroll and stadium rent.
MiLB overall attracted more than 41.5 million fans to ballparks in 2019, and teams often operate on razor-thin margins. Some 90% of a team’s revenue addresses operating expenses, and with no gate receipts in 2020, approximately 120 minor league teams received Paycheck Protection Program loans to stay afloat.
In addition to the teams that will be contracted — largely expected to be smaller Class A or rookie league teams — a source familiar with MiLB’s financial model said he is “stunned” that no team has yet announced it is folding but added that he expects some to do so in the coming months.
In place of the current structure, MLB wants to institute a more sophisticated business model, believing there is significant potential in what its staff can do when acting on behalf of MiLB while selling sponsorship deals and media rights.
“There has been a disconnect between the major league club, which has viewed these teams as player development vessels, and the minor league owner, who is just trying to eke out a business,” said one source who is close to Major League Baseball. “We join forces, we elevate everybody. That is the pitch to them, and I think most of the MiLB owners agree with that.”
In fact, an increasing number of minor league owners have reached out to MLB informally, expressing the belief that there is a better business model and that the structure needs to change. They have echoed MLB’s stance that the focus should be on revenue growth and feel that affiliates can be more valuable because they generate more revenue. MLB has encountered few owners who say they have been operating efficiently from a cost standpoint.
Several MiLB sources say there is significant opportunity in the ability for MLB, with its media muscle, and MiLB, with its connectivity in local markets, to go to the marketplace to offer a fully integrated opportunity to embrace the sport from top to bottom.
“In certain categories, that could make a ton of sense,” one insider said. “But to think you’ll just be able to turn on a switch and everything will be rosy, it’s not that simple. With some strategy and a commitment to innovate, it could be really powerful. Noah is one of the best in the business.”
Asked to envision the big-picture potential of the new structure, a MiLB source close to negotiations said, “The hustle that MiLB will bring — the scrappiness, the innovation — if MLB embraces all that, holy cow, this could be huge.”
MiLB’s recent strides to significantly grow its business profile had been thwarted by the coronavirus. In December 2018, MiLB hired Octagon for a three-phase process to conduct a deep audit of the MiLB media business; work with MiLB to develop an overarching strategy; and then to go to marketplace to monetize. The first two phases were completed, but the pandemic paused the third phase.
Even MiLB sources acknowledge that it had virtually no leverage over the past year. Then the pandemic further changed the tenor and nature of the dialogue as both sides have confronted the sobering realization that a canceled MiLB season has put several teams in dire financial straits, in the words of MiLB President Pat O’Conner.
The monthslong negotiations between the two sides often took an acrimonious tone publicly, and while the private talks were more civil, even within Minor League Baseball there was a distinct chasm as to what the future of the organization should be. Certain MiLB owners, including some from Class A teams all the way up to Class AAA, as well as MiLB executives have believed the minor leagues will be better served when they are governed and fueled by the full backing and resources of MLB.
However, another old-school faction that wanted MiLB to retain independent control of its operations — including O’Conner — still believed they could grow their businesses. As one source had argued, “It’s worked for 120 years, why does it need to change right now?”
The divide between MiLB owners did not break down by market size or age as much as it did by business sophistication, an industry source said. The revamped negotiating committee includes: Marv Goldklang, Hudson Valley Renegades and Charleston RiverDogs owner; D.G. Elmore, Elmore Sports Group; Tom Volpe, Stockton Ports owner; William Stavropoulos, Great Lakes Loons owner; Billy Prim, Winston-Salem Dash owner; Jim Goodmon, Durham Bulls owner; and George Yund, MiLB chief outside counsel. The team, whose names were first reported by Baseball America, has been negotiating with MLB’s team, led by Deputy Commissioner Dan Halem.
Throughout the winter, O’Conner sharply criticized MLB publicly over what he viewed as heavy-handed negotiating tactics. MLB and MiLB have not acted as partners over the past year. Some close to MiLB lament the fact that O’Conner specifically did not have meaningful relationships with Halem or Manfred, and that the void created a massively missed opportunity.
O’Conner referred comment to the MiLB office, but when another minor league source was asked how much influence he still has over further negotiation decisions, the answer was, “Zero.”