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LWIB: Debate over Rule 4 Changes, the Value of National TV Rights, plus Tidbits PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Tuesday, 06 December 2011 09:41

Last Week in Bizball by Pete Toms

This week in “Last Week in BizBall“, continuing debate over Rule 4 changes, the value of national TV rights, plus tidbits.

DEBATE CONTINUES OVER RULE 4 CHANGES

Easily the most debated aspect of the new CBA has been the changes governing the acquisition of amateur talent, via both the Rule 4 draft (aka amateur draft) and international free agent market. The prevailing wisdom amongst the punditry (me included) is that the changes will bring about greater competitive imbalance. I wrote, “In recent years, some chronically uncompetitive clubs (ie. Pirates, Royals, Nationals) have been the biggest spenders in the Rule 4 draft. These clubs have concluded that investing in the acquisition of amateur talent, rather than veteran free agents, is their best chance at assembling playoff calibre teams.” I went on to detail how many believe that the soft caps, and the severe penalties for exceeding them, which now govern the acquisition of amateur players, makes this approach obsolete. LWIB, the debate continued. Noted sports economist Andrew Zimbalist argued in favour of the forthcoming changes to the Rule 4. According to Zimbalist, the recent record spending in the draft by the Pirates and Nationals is simply a result of their positions atop the reverse-order draft and not a tactical “small market” approach. He also finds no evidence to support the theory popular amongst us pundits that small market teams have adopted an approach of outspending their large market competitors in the draft:

(This)….hypothesis would predict a strong inverse correlation between a team’s market size and its draft spending. In fact, in none of the last three years is there a statistically significant correlation between the two variables. The third-highest draft spenders over the last three years were the larger-market Red Sox, while the smaller-market Marlins, Twins and A’s were all among the lowest spenders (each spending less than $5 million a year).

He also argues that the changes to the draft will solve the “signability” problem in the Rule 4, thus contributing to more, not less, competitive balance. Put another way, the Rule 4 will finally serve the purpose of a reverse order draft; the worst teams will be best situated to acquire the best amateurs:…the cap and tax plan is based upon a progressive structure of different caps for each team. The team with the lowest win percentage the prior year is allocated the highest cap, while the team with the highest win percentage is given the lowest cap. For 2012, the per team caps run from $4.47 million to $11.49 million. These levels will increase annually at the rate of growth of aggregate industry revenue. It is therefore not surprising that Pittsburgh’s Coonelly has stated that he has no worries that the Pirates will be able to continue to sign their top picks — and now with the added benefit of spending less money to do so. Further, this outcome will diminish the probability that small-market teams won’t be able to sign their top picks, a problem that has undermined the balancing intent of MLB’s amateur draft.

Zimbalist also favours the new “competitive balance lottery” element of the draft, where only small revenue and small market clubs can acquire players (or trade their pick for talent, not $)

Along with the debate over future competitive balance, there is a parallel debate over whether or not this CBA will result in a diminishment in the quality of athletes choosing to enter affiliated professional baseball. There is a consensus that the changes to the Rule 4 will funnel more high school players into college programs. The practice of paying so-called “over slot” bonuses in later rounds to entice high school players to forego either college baseball or football has ended. What has been largely overlooked is that there is relatively scant scholarship money available for college baseball players. Justin Herzig wrote at The Sports Agent Blog:

The new CBA rules state that any bonus of more than $100k provided to players drafted outside the top 10 rounds, will have that amount go against the team’s Signing Bonus Pool. These high school prospects, as well as the ones drafted in rounds 6-10 that will most likely only be offered less than $200k, are put into a very difficult situation. Unlike college basketball and football, even the top recruits are only offered partial collegiate scholarships, forcing the families to make up the remaining tuition. For many families, coming up with that tens of thousands of dollars for the next three years or four years is not an option; they are rather left with the decision to take that small signing bonus or attend a community college.

While $100-200k may sound like a goldmine to an 18 year old, this allure of instant money may only worsen the situation. However, the opportunity cost for accepting that money must be noted. That 18 year old will now be spending the next however many years making less than $2,000 a month. And what happens when the baseball dream dies as it does for 95% of all draftees? They are left with no college education, no real world skill set, and very little to fall back on. For families that cannot afford to pay for their child’s college education, the MLB is merely setting them up for a life of poverty.

SELECT READ MORE TO SEE THE VALUE OF NATIONAL TV RIGHTS, PLUS TIDBITS

THE VALUE OF NATIONAL TV RIGHTS

Every year, twice a year, following the All Star Game and World Series, many baseball pundits see the ever diminishing TV ratings for these properties (there are year to year fluctuations for the WS, but the overall trend is unmistakably downward) and write columns lamenting the national pastime’s declining stature. This past regular season saw relatively flat ratings for national TV rights holders TNT, ESPN and Fox. Based on all that, one could conclude that MLB will find a soft market amongst broadcasters for their national TV rights package in the upcoming round of negotiations. (The current deals with the aforementioned rights holders expire after the 13 season) The AAV of MLB’s national TV rights deals is approximately $650 million. (The present value is probably higher as the annual fees in these deals typically rise over the duration of the agreement). LWIB, a Reuters report on the escalating value of sports media rights predicted, “…the next contract talks for Major League Baseball -- which could start in the coming months -- are expected to yield a TV deal worth about $1 billion a year.”

How and why is the value of MLB’s national TV rights increasing while ratings are, at best, flat? Because live sports is one of the few remaining genres of TV still attracting a mass audience. And because there are more cable channels vying for live sports programming with Versus (soon to be NBC Sports Network), Fox’s FX and TNT’s truTV all betting that live sports programming will increase both subscriber fees and distribution. And because MLB has the option of programming more live games, most importantly playoff games, on MLB Network, which would provide the same aforementioned benefits to that channel. And because live sports programming is also key to broadcasters emerging TV Everywhere strategy. (Which will be complicated by MLBAM’s control over digital rights) If you want, I went into more detail about all this stuff here.

TIDBITS

  • I have yet to consume 1 second of MLB’s Fan Cave content. That wouldn’t’ surprise MLB, nor would they care. Fan Cave connects with a much younger audience and that is its purpose. Terry Lefton reported on the state of Fan Cave. “…MLB’s social media experiment yielded 236 million social media impressions and 1.3 billion total media impressions; attracted more than 250,000 Facebook and Twitter followers; led to visits by 66 current MLB players and 28 former players; and generated more than 300 online videos…” Terry adds that next season will see a reality TV element introduced to Fan Cave where “inhabitants” will be voted off (or out?). According to the piece, MLB believes the average fan of Fan Cave is 30 while the average “avid” fan of MLB is 45. I have read in media trades that the median age of a World Series TV viewer is early fifties. So, good for Fan Cave, although I will remain completely disinterested
  • The SEC investigation into the financing of the Marlins new ballpark was the big stadium news last week (in baseball anyway, we won’t discuss the 49ers new digs in Santa Clara). But there were plenty of other developments in the world of baseball stadia. A lawsuit was filed in San Jose over land that the city has agreed to sell the A’s upon which to build. The group filing the lawsuit receives support from the Giants. See here. In both Cincinnati and Chicago, governments are coming up short on revenues which are allocated for paying off bonds sold to finance construction/renovation of their pro baseball and football stadiums. So, they have to find the money somewhere else and you can read Neal deMause here and here. Mark Bergen chimed in at Forbes.
  • If you are a baseball analytics geek then you know what PITCHf/x, HITf/x, FIELDf/x and COMMANDf/x are. LWIB, the company behind those technologies, Sportvision, announced they are expanding into MiLB. See here.

You can follow me on Twitter @PeteToms


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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