FCP and Maury Brown Discuss the Economy and Baseball

By Gary Armida

If one turns on the news, reads the front of the newspaper, or has a simple family conversation, there is one constant. One cannot escape any conversation or presentation without hearing the word, economy. The economy is the conversation in our society today. While some people will unnecessarily obsess on it, it is a worthy conversation as our unemployment rises, businesses are closing, and many people are having a tough time paying the bills. Baseball is no different from any other business. Many people will romanticize Baseball as simply a game, but the fact is that Baseball is a business that generates millions of dollars. It is, however, dependent on the sponsors, television revenue, and fan attendance in order to generate that money. With the uncertain nature of the true impact of today’s economy on Baseball, this off season has been a study in nervousness, fear, and conservatism. Baseball teams, outside of the teams in New York, seem to be preparing for the worst. From front office cuts to smaller salaries per season, the landscape seems to be changing. For any baseball fan, the true question is-how will this impact the sport and, more specifically, my team? The Biz of Baseball’s own Maury Brown helps shed some light on the economy’s impact on Major League Baseball.

Impact One: The Organization

Many fans and pundits hold the belief that the first sign that Baseball was worried came on November 8th. The Arizona Diamondbacks cut 31 front office employees as a result of what Diamondbacks President Derrick Hall called a “sluggish economy”. As news begins to filter that most teams are trimming their budgets, the most jaded fan starts to think that teams are using the economy as an excuse to spend less. Brown disagrees. “There’s no evidence of the activity, at this time. For the most part, the Yankees’ signings has put that notion to rest.” The Yankees do operate in a different stratosphere when it comes to money, but teams like the Diamondbacks or the Twins are more vulnerable to a poor economy. In fact, more entities surrounding Baseball are feeling the crunch. “There have been cuts not only with the Diamondbacks, but at MLB.com as well”, states Brown.

 The jaded fan is most likely influenced by the thought that sports entities like Baseball and Football are impervious to the economy. This belief is exacerbated by the super agent, Scott Boras who proclaimed that the economy won’t impact baseball because of record breaking revenues and the fact that recessions have never impacted Baseball. Brown disagrees, “The economy is influencing how MLB is conducting business, but certainly not every club is going to be impacted as much as others. Both New York clubs may see revenues close to or above their highest ever with their new stadiums opening in 2009. As we’ve witnessed with the signings of Sabathia and Burnett with the Yankees, and Francisco Rodriguez signing with the Mets, it’s clear that while most clubs will be dealing with adjustments based on the recession, large revenue clubs may not.”

Impact Two: Competitive Balance

So, what’s the importance? The idea of competitive balance is always a topic and it seems that some teams are operating on a different economic scale. It is true that this is always the case with the Yankees, Red Sox, Mets, Angels, and Cubs as opposed to the Marlins, Rays, Twins, and Pirates. But, if the difference between the big and small markets was great before a recession, that gap must widen in times of economic strife. Thus, the Yankees can commit $250 million to two pitchers while the American League Champion Rays are determining how much they can spend on an outfielder or designated hitter. Or, it’s the Mets signing Francisco Rodriguez while middle market teams like the Astros non-tender a Ty Wigginton or the Diamondbacks don’t offer Adam Dunn salary arbitration. Most teams actually forfeited possible draft picks out of the fear that the player would accept arbitration. As stated many times, if a league does not have competitive integrity, it has nothing. The economic troubles have placed a spotlight on the gap between the “have’s” and the “have not’s”.

So, obviously, the teams are impacted. But who is most impacted? Players? Front Office Personnel? Scouting Department? Maury Brown answers, “Good question. ‘Front Office’ covers a broad area, including ticket sales. I would have to say that front office employees may be feeling the pinch more than areas of player development at the moment.” This makes sense as Baseball teams, like most companies, will look to cut the excess from the “non-impactful” areas like middle management. So, for the time being, Baseball Operations seem to be running in the same manner. Teams are still scouting, still developing players, and still (somewhat) spending money on players albeit at a much slower pace.

Impact 3: The Slow Market

With Mark Teixeira on the precipice of signing his gigantic contract, the major players will be finished with their time on the market. Francisco Rodriguez, CC Sabathia, AJ Burnett, and Teixeira were always going to get their money. The main difference in this off season is the perceived middle class free agent like a Derek Lowe, Adam Dunn, Rafael Furcal, and to a lesser degree Manny Ramirez. In past years, each of those players would walk away with salaries between $15 to $20 million per season. This year, however, that does not look to be the case which in Dunn’s case is quite misguided as he is an elite producer. Ramirez and Lowe are both older players which also factors into the contract figure. But, one thing is for sure: teams outside of New York are not aggressive one bit in this market. There will be no Gil Meche or Carlos Silva contracts handed out this winter, especially from the middle to low market teams. “At the end of this FA cycle it should be interesting to see how the small percentage of players that make up the cream of the crop land some of the largest contracts in history, while many players may land one or two year deals when in the past they may have garnered three to four year deals. It’s early on with deals now picking up steam, but the middle will be where the economic downturn will most likely be felt the most.” The fact that Dunn has hit over 200 homeruns during the last five seasons and does not have one single offer on the table is a clear illustration of an economic problem.

Impact 4: Revenue Streams: The MLB Network, Ad revenue, Alternate Revenue

Now, more than ever, it is important for Major League Baseball to continue to generate revenue. Their latest venture, the Major League Baseball Network (which launches on January 1^st) represents an enormous opportunity for Baseball. One may question why Major League Baseball would start a network during this uncertain time. Brown has the answer, “Well, since the deal is with the carriers, and therefore, contracts are locked in, the revenues will be steady on that front. The question will be how ad revenues will be. With the launch coming to 50 million households, I suspect MLB Network to be a rousing success.”  The biggest question is the advertising revenues. Some of Major League Baseball’s bigger sponsors come from the auto industry. At last check, the auto industry is some trouble. Yes, the carriers are a done deal, but the ad revenue is going to be an issue.

Another major revenue source for teams comes from stadium naming rights. Teams often receive upwards of $10 million per year just to have their stadium named. The Mets, who are opening a new stadium, already have hit a snag with their naming rights. Citigroup is struggling had been bailed out by the government. However, it has still promised to pay the New York Mets $20 million per season for the new stadium to bear the name Citi Field. This situation is one that will likely change according to Brown. “It clearly comes across as Citigroup not having their priorities in the right place. The problem may be exiting the agreement brokered long before the economy started its steep decline. With the government bailing out Citigroup, it may be that the government will be the only force able to decouple the record naming rights deal.” While the Mets are hardly in need of money, losing $20 million dollars per year will hurt the organization especially with reports that owner Fred Wilpon lost a reported $300 million dollars in an investment deal.

Again, naming rights are likely to hurt the smaller market teams like a Milwaukee or a San Diego if businesses no longer have the funds for that kind of advertising. With ad revenue and now alternate sources of revenue no longer a given, teams must prepare for some barren times. Obviously, that is being demonstrated at this moment.

Impact 5: The Fans

Over course, nobody really cares about multi-billion dollar corporations losing money or having to tighten the budget. The fans are the most important aspect of this unstable economy. Earlier this winter Commissioner Bud Selig warned teams not to get “too cocky” with ticket prices. In fact, the Boston Red Sox were one of the few teams to freeze ticket prices. Most teams raised their ticket prices. With families already struggling, one may expect a decrease in attendance for the first time since the period after the 1994 strike. Brown agrees with the attendance. “I expect it will be down this year. While I applaud the league and clubs for trying to lower prices for fans, it may not be enough given the continuing slide.”

For the average fan, it is definitely not enough. Teams are far too insensitive towards the fans. With many teams, including the New York teams, having their stadiums paid by public funds, they have been quick to forget their source of revenue and continue to price the taxpaying citizen out of the park. If that trend continues and business stop purchasing luxury boxes, attendance will severely decrease. Once again, that impacts revenue streams from ticket sales to concession sales.

Closing Thoughts

In the end, many will agree with Scot Boras that Baseball is impervious to economic struggle. Yes, Baseball will survive, but given the current structure of the league with small market teams struggling anyway, the problem is worse. The only true solution is for teams to be mindful of their spending, their revenue, and their fans. It is more important than ever for teams to field a competitive, entertaining product. If they don’t, the recession will have a more impactful, longer lasting effect on the sport.

Editor’s Note: For further reading on the business of baseball, Maury Brown’s Biz of Baseball site is a must-read. The link is found in our “Friends of FCP” section as well as right here.

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