Major League Baseball, like most sports leagues around the world, is on indefinite hiatus because of the COVID-19 pandemic. Last week the 30 owners approved a plan that would begin the 2020 season in July. Teams would play an 82-game regular season with a 14-team expanded postseason field. MLB and the MLBPA are now negotiating the restart plan and details.
Baseball is a $10 billion per year industry and already 30 or so percent of regular season games have been missed. There's no gate revenue coming in (ticket sales, merchandise, etc.) and there may not be any this year if games are played without fans. There's also no television revenue because there are no games to broadcast. The financial losses are already enormous and growing.
"The economic effects are devastating, frankly, for the clubs," commissioner Rob Manfred said last week. "We're a big business, but we're a seasonal business. Unfortunately this crisis began at kind of the low point for us in terms of revenue (because) we hadn't quite started playing our season yet. If we don't play a season the losses for the owners could approach $4 billion."
The financial recovery will be a multiyear effort for both the average American and billion-dollar baseball franchises. Player salaries will be slashed as teams get their payrolls in order -- free agency could be ugly this winter -- and, according to ESPN's Jeff Passan, the MLBPA has already agreed not to challenge MLB's debt-service rule. That allows teams to borrow money to avoid financial ruin.
MLB will undoubtedly explore ways to generate additional revenue going forward to get its head back above water following the pandemic. New broadcast packages and ticket options will be on the table. Beyond the usual, the league has another, more significant option to create a large cash infusion in the near future: Expansion. Bring two new teams in the league.
Truth be told, expansion has only a tiny little bit to do with growing the game and a lot to do with the big cash influx, historically. The Marlins and Rockies exist in part because clubs had to pay their $280 million collusion settlement to the MLBPA prior to the 1991 season. Former commissioner Fay Vincent admitted as much in a 2005 interview with The Biz of Baseball:
"Look, each owner had a $10 million bill and there were about 26 clubs before expansion and 30 at the moment, then $280 million, let's say $10 million a club – they didn't have the money. So they did what most would business do, they sold stock, they sold interest in the clubs, in the expansion clubs. In my day two of them - Miami and Denver. And that money, which was vital, paid off their collusion debt. Without it I think baseball would have had a very serious time."
Expanding to pay off debt? MLB has done it before. The league did it following the collusion settlement and they could do it again after the pandemic, and the losses teams suffered in the collusion settlement pale in comparison to what they're facing during the shutdown. MLB has expanded to pay debt before and there's little reason to think they won't do it again.
(There's a common misconception that MLB expanded in 1998 to recoup revenue lost during the 1994-95 work stoppage. That's not what happened. MLB formed an expansion committee in March 1994 following the success of the Marlins and Rockies in 1993, and requested proposals by June. MLB was well into the expansion planning phase when the strike started Aug. 12.)
Baseball is currently in the middle of its longest expansion drought since the league first expanded in 1961. It has been 22 years since the Diamondbacks and (Devil) Rays joined the league. Even before the pandemic, I expected MLB to add two new teams at some point in the 2020s. There's too much money to be made. The shutdown provides additional financial incentive to expand.
The National Hockey League added the Vegas Golden Knights in 2017. The franchise paid a $500 million expansion fee. The NHL's unnamed Seattle franchise will join the league in 2021. That franchise paid a $650 million expansion fee. With all due respect to the NHL, it is not MLB, and their franchise values are far lower. Here are the 2020 Forbes franchise valuations:
| Major League Baseball | National Hockey League |
|---|---|
1. New York Yankees: $5 billion | 1. New York Rangers: $1.65 billion |
2. Los Angeles Dodgers: $3.4 billion | 2. Toronto Maple Leafs: $1.5 billion |
3. Boston Red Sox: $3.3 billion | 3. Montreal Canadiens: $1.34 billion |
... | ... |
30. Miami Marlins: $980 million | 31. Arizona Coyotes: $300 million |
MLB average: $1.85 billion | NHL average: $666 million |
The average MLB franchise is worth more than the most-valuable NHL franchise, and the average NHL franchise is worth less than the least-valuable MLB franchise. I'm not trying to knock the NHL. I love hockey. It's a great sport. I'm just providing important context. MLB and the NHL are in very, very different places financially.
The NHL securing $500 million and then $650 million in expansion fees for its two most recent franchises strongly suggests MLB could fetch $1 billion or more in an expansion fee. And remember, the league would bring in two expansion teams at once to even out the two leagues. That won't completely offset the losses suffered during the shutdown but gosh, it sure would put a dent in them.
It should be noted expansion fees are not paid all at once. The D-Backs and (Devil) Rays each paid a $130 million expansion fee -- they also gave up $5 million annually from MLB's central fund for five years, so the total paid was $155 million -- that was paid in four installments: $32 million in 1995, $25 million in 1996, $40 million in 1997, and $33 million in 1997. It's not all paid up front.
The financial windfall of expansion doesn't end at the expansion fee either. New teams equals new merchandise, new advertising opportunities, and new Jewel Event options (All-Star Games at new parks, etc.). National broadcasting deals can become more lucrative and, if the postseason field is permanently expanded to accommodate more teams, that's even more revenue.
The MLBPA would surely be on-board with expansion. Two new teams equals 52 new active roster spots and 80 new 40-man roster spots. And hey, expansion could help save a few minor-league franchises facing contraction. Expansion teams need a farm system too. Simply put, expansion creates more jobs and more opportunities for players. There's a risk of watering down the talent pool, sure, but the way teams tank now, I'm not sure we'd even notice. The more opportunities the better, I believe.
The obvious question is where will MLB find buyers? The pandemic is hurting everyone financially and there are presumably fewer ownership groups with the means to afford a franchise now, even with the expansion fee paid over multiple years. MLB only needs two ownership groups to make it happen though, and I reckon there's still enough people out there would want to own a team.
Case in point: Alex Rodriguez. A-Rod reportedly explored purchasing the Mets recently. More accurately, he explored forming an ownership group to secure financing to purchase the Mets at a discount. The ownership group didn't materialize -- and the Wilpons are said to be uninterested in giving a discount -- but it shows there are still people that want to buy teams, even after the shutdown.
MLB and the MLBPA have to get through the shutdown before expansion gets discussed. They have enough on their plate already. Once we come out on the other end of this though, the owners will look for ways to recoup the money they've lost, and expansion is a tool they've used after suffering big sudden losses in the past. It's not hard to see the pandemic leading to two new MLB teams within a few seasons.
