The Sports Professor Rick Horrow, in conjunction with promotional partner Northern Trust, recaps the business issues surrounding the 2005 Major League Baseball season.
As Major League Baseball finishes its two-week round of 30 team home openers, it is hard to believe that just two years ago the industry was struggling to overcome the specter of Labor Armageddon. The "late inning save" avoided the first cancellation of a post-season and World Series since 1994, and began the slow recovery to relative economic health.
This Spring, however, the headlines were dominated by Jose Canseco and his "Juiced" Congressional testimony, and the obsessive debate over the merits of Major League Baseball’s new steroid policy. The level of disconnect was never more apparent than in a recent USA Today poll. Sixty-eight percent of the 568 major leaguers surveyed said that drug testing is as strict as it should be. However, nearly the same percentage of fans (66 percent) said the policy is not strict enough. However, MLB has attempted to overcome the "steroid image crisis" as the season opens. Ticket sales have been up eight percent from a year ago, and 28 of 30 clubs have experienced ticket increases from last year. At opening day, nearly 49 million tickets were sold for the season, a 6.5 percent increase over the same period last year. New sponsors Wheaties, Home Depot, and DHL have been added to the roster of MLB corporate sponsors/partners. Most importantly, gross revenues are projected to be approximately $4.5 billion this season, compared to $4.1 billion last year, and $1.6 billion merely a decade ago. As baseball settles into the 2005 season, three major business and marketing questions dominate.
1. CAN BASEBALL CONTINUE TO IMPROVE ITS BUSINESS POSITION TWO YEARS AFTER THE HISTORIC COLLECTIVE BARGAINING AGREEMENT?
Major League Baseball salaries seem to have stabilized – albeit at a high level. The average salary last year was $2,313,535, down 2.5 percent from $2,372,189 the year before. This marks the first average salary decline since a four percent drop in 1995, the year after the strike that forced cancellation of the 1994 World Series. As the business seems to be stabilizing, two major business issues remain: (a) adequate revenue sharing; and (b) guaranteed contracts.
First, the "leveling of the playing field" between the "haves" and "have-nots" is always the primary concern. Commissioner Selig predicts that over $300 million will be transferred from the "haves" to the "have-nots" by the end of this labor agreement in 2006 – through a system of luxury tax and revenue sharing. While the $120.5 million luxury tax threshold is a deterrent to spending by most teams, the Yankees remain in a class by themselves. Last year, they paid more in luxury tax ($25 million) than the Tampa Bay Devil Rays paid for their entire payroll ($24.4 million), and also paid $63 million in revenue sharing. While being rich does not guarantee success (last year’s ALCS), money is still necessary to stay in the ball game. The Yankees are clearly using the luxury tax payment as a "cost of doing business." Their fans demand it; their new stadium process demands it; their television partners demand it; and their long-term investors demand it as well. The predicted effect of the luxury tax seems not to deter Yankees spending, but rather to spread up to $100 million in revenue to other teams to enhance their payrolls to make them more competitive. Still, the Yankees will spend nearly $97 million on pitchers this year, more than 26 teams will pay for their entire payroll. It seems to be paying off for them, however. The Yankees sold over three million tickets before opening day, and they are expected to top last year’s record home attendance record of 3.7 million – generating well over $120 million from gate receipts alone.
The second major issue involves the increase in guaranteed contracts in Major League Baseball. There are over 190 guaranteed contracts today, paying players nearly $3 billion whether they perform or not. The Yankees are obligated to $425.6 million in guarantees through 2010. The Boston Red Sox are at $177 million; the St. Louis Cardinals at $171.2 million; the New York Mets at $171 million; the Philadelphia Phillies at $147.7 million; and the Los Angeles Dodgers at $122.4 million. Contrast that to the Tampa Bay Devil Rays at $13 million, and the Pittsburgh Pirates at $6.3 million over that same five-year period. While signing these players was obviously important to respective baseball general managers at the time, the mortgaged future of certain teams may reduce their value over the long haul.
2. CAN MAJOR LEAGUE BASEBALL SUSTAIN ITS REVENUE GROWTH THROUGH TRADITIONAL AND NEW REVENUE SOURCES?
The industry continues to depend on three "old reliable" revenue streams. First, there is television. Major League Baseball is in the late innings of its $2.5 billion deal with Fox (through 2006), and its $851 million deal with ESPN. From this perspective, ratings are more critical than ever. Though Fox experienced a 36 percent viewership drop during last year’s regular season, the Red Sox run to the world championship last year boosted ratings nearly 30 percent, and generated an extra $140 million in ad sales.
Second, Corporate America continues to embrace baseball again. Big spenders including MasterCard, State Farm, John Hancock, Gillette, Bank of America, and others invested over $300,000 for World Series commercials. Three weeks ago, General Motors Chevrolet brand was rumored to spend over $50 million to become "the official vehicle of MLB."
Third, merchandise sales continue to rise. The new Washington Nationals are leading the pack with a meteoric rise in memorabilia sales. The team accounted for $3 million of MLB licensed merchandise sold in the first quarter this year. Overall, sales of MLB merchandise are up 36 percent before opening day.
These revenues continue to be supplemented by new and creative revenue streams. For example, the Chicago Cubs reluctantly announced the introduction of a rotating 10’X3’ advertising sign behind home plate this season. Becoming the "last of 30 teams to go into that," the $5 million annual revenue is necessary to offset additional players expenses.
From an Internet perspective, MLB is attempting to create a business that potentially could spin off into a larger public offering. In the meantime, a "convenience fee" that is attached to online ticket purchases has been streamlined and reduced by most teams – from an average of $4 per ticket last year to less than half that this year. Still, Internet revenue should be a major component of long-term economic growth for Major League Baseball.
