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LWIB: How the Business Model of MLB Club Ownership Has Changed, Postseason TV Notes, Tidbits PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Tuesday, 26 October 2010 13:23

Last Week in Bizball by Pete Toms

This week in “Last Week in BizBall”, how the business model of franchise ownership in MLB has changed, postseason TV notes and tidbits.

HOW THE MODEL OF FRANCHISE OWNERSHIP HAS CHANGED

LWIB,  the SportsBusiness Journal published a piece by Richard Walden, head of sports finance for JP Morgan, examining the value of franchises in the “big 4”.  Mr. Walden compared the value of the last 4 franchise sales in each league with their “historical average” using “compound annual growth rate” (CAGR)  as the measuring stick.  The CAGR for the last 4 franchise sales in MLB is 12%, down slightly from its historical average of 13%.  The NHL saw the second lowest drop in CAGR at 9%, down slightly from its historical average of 11%.  The NFL (15%, down from 34%) and the NBA (6%, down from 28%) have seen significantly diminished CAGR in their most recent sales, however the NFL still leads in overall CAGR.  Mr. Walden also notes that, despite dour economic times, the past year saw franchises in each of the “big 4” command a record setting sale price.  (Cubs, Warriors, Canadiens and Dolphins)

What is driving the growth in franchise values?  After all, MLB attendance has declined three consecutive seasons.  National TV ratings for regular season MLB have flatlined.  The 2010 MLB All Star Game drew it’s worst TV ratings ever.  As Mr. Walden astutely points out, the business model of franchise ownership has changed significantly.  While “butts in the seats” remains crucially important, it is increasingly less so, even in MLB which easily sells the most tickets of any of the “big 4”.  From Mr. Walden:

Most of the historical data for sales have represented a “pure play” sale in which a buyer was obtaining a franchise within the chosen league and was betting primarily on the on-field play of the team and its share of national revenue. Sales agreements were relatively straightforward and, other than some typical adjustments for timing of cash inflows and outflows (such as timing of season-ticket sales), the headline price was a pretty good indicator of the actual purchase price for the subject franchise.

Mr. Walden notes that in recent sales, “non-franchise assets”, such as investments in regional sports networks (RSNs), real estate and future development rights, have been key to the escalating values.  Most often today, a franchise sale involves a whole lot more than just the team.

Earlier this month LWIB examined the growth in RSN revenues in MLB, with a particular focus on the recently concluded blockbuster deal for Texas Rangers local TV rights ($1.6 billion over 20 years).  Lee H. Berke, CEO of LHB Sports, Entertainment & Media, Inc., wrote in this week’s SportsBusiness Journal that, “….YES and NESN often receive the headlines, but over the past decade alone, team RSNs have successfully launched in New York, Chicago, the Bay Area, Baltimore/Washington, Denver and Cleveland to the point where over 25 [percent] of the teams in Major League Baseball and the NBA own or co-own their respective regional network.” This trend of growth in RSN revenue is expected to continue as the Cubs, Pirates, Padres, Dodgers and Astros have all been subjects of industry speculation concerning the future of their local TV deals.  (Either launching new RSNs or auctioning off their rights to same for large sums)  There is no better example of the shift in value of MLB ownership than the Yankees.  Some believe that the Yankees do not turn a profit but their real value to owners Yankee Global Enterprises (YGE) is control of their media content.  George Steinbrenner famously leveraged ownership of the Yankees to launch the RSN YES Network, which is reportedly worth $2 - $3 billion.

Mr. Walden also points out that the real estate - or development rights - surrounding a stadium/arena is an increasingly important factor in franchise sales.  The new Cubs owners plans for their franchise include developing real estate adjacent to Wrigley Field, with the long discussed “Triangle Building” the centrepiece.  The inclusion or exclusion of parking lots around the Rangers ballpark in Arlington were a contentious issue in the recently concluded auction of that franchise.  The divorce trial of Dodgers owners the McCourts revealed long term plans for the franchise to develop real estate surrounding Dodger Stadium.  The Giants are part of a group which has development rights to waterfront property very near AT&T Park.  The proposed development is known as Mission Rock.

Should fans be concerned that the model of franchise ownership in MLB is changing?  Traditionally the path to increasing revenues was winning.  Winning teams sold more seats at higher prices as well as more beer, hot dogs, caps and shirts.  But more and more clubs have lucrative, guaranteed, long term local media revenues (whether via subscriber fees from franchise owned RSNs or rights fees from same) which don’t fluctuate with team performance.  Nor is developing real estate around ballparks tied to team performance but rather the health of the local economy and credit markets.  As the “leaked financial docs” have proven, an inferior on the field product is no impediment to profitability in today’s industry.  At the same time, increased revenue sharing has diminished the financial rewards for fielding a superior team.  MLB, via Major League Baseball Advanced Media, has also centralized revenues from the relatively new sources of digital media and secondary ticketing.  MLB appears healthy, franchise values and revenues continue to grow but for different reasons than in the past.  Fans should hope that the owner of “their” team is more concerned with winning than profiting because the former has never been less important to the latter.  Again, from Mr. Walden:

Winning on the field just ain’t what it used to be, and if you are scanning the headlines to see what a team is worth, you better look deep into the fine print and away from the league standings if you want to see the drivers of true value.

SELECT READ MORE TO SEE POSTSEASON TV NOTES, PLUS THIS WEEK'S TIDBITS

POSTSEASON TV NOTES

With the World Series soon to start, so is the annual round of complaining from baseball pundits that the games start and end too late.  The punditry proclaim every year at this time that MLB is losing a generation of fans because the games air too late for kids to view them.  The aging demographic of baseball fans is a legitimate problem for MLB but the start and finish time of World Series games isn’t a factor.  Or so I conclude after reading this column by John Ourand in the SportsBusiness Journal.  Mr. Ourand’s piece includes numbers from Nielsen Co. which conclude that kids watched the 4 division series on TBS in far greater numbers for prime time games than afternoon games.  (including the late afternoon games which air after school in the east)  Mr. Ourand interviewed Mike Mulvihill, Fox Sports VP programming and research, for the piece.

…Mulvihill said, televised baseball is not the best way for the sport to latch onto young fans. He said Fox has participated in research and focus groups that show kids are more likely to become baseball fans if they play the game and attend major league games.

“We are, at best, a distant third to those two activities,” Mulvihill said. “Over the years, there’s been so much criticism leveled at us and other networks that have had the postseason for starting games in prime time. What we’re increasingly coming to understand is that television is a relatively small factor in turning kids onto the game.”

And for all you crotchety, middle aged fans falling asleep during the late innings this World Series (including me), for the last time, ratings peak when the game ends around 11:30 PM ET.

Will Fox broadcast the World Series in HD?  This (HT Fang’s Bites) TV pundit wrote LWIB that Fox didn’t broadcast the NLCS in true HD, but instead in “widescreen” format.

Now before you say I'm seeing things. Fox has actually said during each broadcast that the games are being presented in a "widescreen" format. (The network even referred baseball viewers to foxsports.com/widescreen for more information.)

What is a "widescreen" format? Once upon a time when Fox did not broadcast NFL games in high-def, it upconverted the SD picture so it would fit the entire widescreen of a high-def set. The picture would be slightly improved, but it would fall far short of an HD image. Fox called the picture "digital widescreen."

I suspect that for some reason -- perhaps costs, perhaps a lack of available HD cameras during the NFL season -- that Fox is trying to slip a "digital widescreen" picture past its viewers this week.

But the scary thing is that Fox has the exclusive rights to carry next week's World Series.

Let's hope that the network brings their high-def cameras then.

The Sports Video Group reported that Fox Sports has recently started delivering all their NFL and MLB coverage in a 16:9, widescreen aspect ratio.  I’ve no idea what that means or if it has anything to do with the “widescreen” format mentioned above, but some of you may understand it.

TIDBITS

  • Ed Sherman of Crain’s Chicago Business points out that the hiring of Mike Quade as Cubs manager fits with owner Thomas Ricketts plan to “…lower outlay for baseball operations this year,..” Mr. Sherman doesn’t argue that this is the sole reason Mr. Quade got the job but it probably didn’t hurt.  According to Mr. Sherman, Mr. Quade come relatively cheap both in terms of salary (approx $1 million per year) and length of contract (2 years).  As Mr. Sherman points out, Quade represents a significant saving over his predecessor who commanded upwards of $4 million per year.  Mr. Sherman suspects that it would have cost Mr. Ricketts $5 million plus per year to lure Joe Girardi to Wrigley Field (although he wrote that before the Yankees were eliminated)
  • The October 26 broadcast of Real Sports on HBO will include a piece titled “Miami Ballpark”  From the press release courtesy of Fang’s Bites:

The Florida Marlins, two-time World Series winners since their launch in 1993, are the latest Major League Baseball team to build a ballpark of their own. Scheduled to open in 2012, the stadium is a 37,000-seat, retractable-roof venue costing $642 million and largely paid for by Miami-Dade County. A public outcry erupted in August after leaked financial reports indicated the ballclub turned a $50-million profit at the same time they were seeking public financing. REAL SPORTS host Bryant Gumbel heads to South Florida to cover this hot-button story and examine the concerns raised by public officials who say their viewpoint has changed in light of this new information.

Last week, LWIB brought attention to big changes in Independent baseball.  Four franchises have departed the Northern League in favour of the American Association.  That leaves the Northern League with 4 franchises and an uncertain future.  LWIB, Ballpark Digest reported that one of the remaining 4 franchise might move to the Frontier League and a second may fold.


Pete Toms is senior writer for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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