Sunday, September 02, 2012

A Lazy Sunday with Money in the Air

Since I’m not sure how many people are watching this Indians team – outside of sadists or those who are REALLY big fans of watching Matt MaTola wave at breaking pitches – and because there’s really not much else to say about this Tribe team or this season that hasn’t been said in the last couple of weeks, it’s time to go in another (albeit unfortunate) direction on the Lazy One.

Sure, I suppose we could delve into whether Acta is going to survive this as the team has lacked any kind of fire or sense of urgency for the better part of a month now or attempt to play the “blame game”.  But doesn’t everyone already have a pretty set opinion on that, one that’s unlikely to change your specific view that the slide is the fault of (pick one or…maybe more) the Dolans, the Front Office, or Manny Acta?

The fact that this team has lost 28 of its last 34 games (um…a 17% winning percentage over a course of time longer than a calendar month, and nearly ¼ of a season) should not be lost on anyone that’s making these decisions this off-season as the team has become unwatchable, incapable of generating any hope for the future, and demoralizing a fan base that needed no more demoralization.

Yes there are pertinent issues that could be discussed as it could be analyzed as to whether the Indians pick up the options for Ubaldo (now the second-worst ERA in MLB among qualified starters, “bested” only by Randy Wolf, who was released by the Brewers and is pitching long relief for the Orioles) and Fauxberto based on the maybe 40 to 50-some innings he’s going to throw this year, as “low” as those contract number seem to be on those options, or we could attempt to figure out what in the world happened to Choo and Kipnis (most notably, but certainly among others) over the last month, but those things are more depressing than what we’ve been seeing on the field.

If I wanted to churn the waters of intrigue, I could make a case past trading just Choo, Perez, and (gulp) Cabrera this offseason and wonder if they consider a move involving the recently-benched-by-Acta Carlos Santana, perhaps to a team in need of offense from the catching position and flush with young starting pitchers…like, say the Rays, in an effort to do what the Rays and A’s are doing – winning with elite young starting pitching, which is in short supply on the North Coast or anywhere near it…

But on a team where the “bright spot” of the season is purported to be Mike Brantley – a “speedy” CF (12 SB, 9 CS) with “on-base skills” (.336 OBP) who has shown “flashes of power” (6 HR…or two more than Damon in twice the PA) – doesn’t the growing sense that the string is being painfully and s…l…o…w…l…y played out threaten to color our views of any of those questions, particularly given the recent spate of games?

So, rather than delve into the atrocities that are happening on the field in Cleveland, let’s put our focus onto some off-the-field happenings on the larger landscape of MLB and how those changes are likely to affect the Indians as we attempt to move on.  With a teaser that the effect of these developments is…um, not good for the Indians going forward, let’s get loose on a Lazy One…

Obviously, the big news in MLB over the last week or so was the earth-shattering trade between the Red Sox and Dodgers where Adrian Gonzalez, Josh Beckett, and Carl Crawford (plus their contracts…and Nick Punto) made their way to Chavez Ravine in the largest “salary dump” probably in sports history as the Dodgers assumed over one-quarter of ONE BILLION dollars in salary commitments and the Red Sox cleared some long-term commitments from their books while adding some top-end pitching (!) prospects from LA.  Certainly, you don’t come here for any kind of in-depth analysis of what’s happening with Boston or LA, but the willingness of the Dodgers to assume that money gets to the (still) growing disparity that is going to be the focus here today.  If you want to talk about what the deal means for the Red Sox, LGT’s Ryan Richards had the best takeaway in terms of Boston’s future and their ability to “rebuild” in a way that most teams can’t:
(This is) how a big-market club can rebuild - not by trading good players for prospects, but by trading salaries for nothing. If/when they unload Beckett, Gonzalez, and (most importantly) Crawford, they’ll have the abilities to be players on the free agent market for anyone out there, take on someone else’s salary problems, etc.

So, the Red Sox can now completely remake their team via the FA market (Upton?) or by looking at players who are approaching FA that aren’t likely to re-up with their teams (Choo, Headley, etc.) and have the financial wherewithal and (now) flexibility to construct a roster, almost from scratch.  In doing so, money won’t really be an issue in FA, nor will the young talent needed in trades, as they continue to have one of the deepest farm systems in MLB, with the concept of what they did with Gonzalez just a few years ago – acquire him with top prospects, then extend him – perhaps being their modus operandi this coming off-season, allowing them to target players like Choo or Josh Johnson with an eye towards extending them after they become Red Sox.

But as depressing as that all sounds to Indians’ fans – as we stare down the barrel of an unsavory final month of baseball and what figures to be an…um, interesting off-season, the bigger story in the Red Sox-Dodgers deal was the Dodgers’ willingness to assume the contracts of Beckett and Crawford to add the SoCal native Adrian Gonzalez to their roster.  Though the rationale for the Dodgers to do this has been noted in many places, the impetus for the Dodgers’ “ability” to take on these contracts is the TV deal that awaits them this off-season, one that played a major role in their sale earlier in the year.

The money that is waiting for them from their soon-to-be-negotiated local TV deal wll fill their coffers to the tune of about $200M a year (which is perhaps a conservative estimate) from either FOX or Time Warner, which furthers a trend that was brought into focus in the off-season.  Grantland’s Jonah Keri goe sa bit into how local TV money is widening the gap in MLB as he identifies the Dodgers as the “dangerous” new spender on the block with the marvelous conclusion that “The Dodgers are now officially the National League’s answer to the Yankees, only more willing to accept smaller profit margins and thumb their noses at artificial spending limits.”  Realizing that this is a well-worn topic in this place, it’s one worth re-visiting with the Dodgers’ upcoming deal (remember, still not even signed with anyone and still likely to become a bidding war) further changing the landscape of MLB and how TV money affects it, even further than what we saw from the “other” LA team this off-season.  

In case you don’t remember, the Angels inked a deal with FOX that pays them $150M annually for the next 20 years and that came on the heels of a deal that the Rangers signed with FOX that pays them about $80M a year for the next 20 years.  At the time of the Angels’ deal, I attempted to come to grips with the GOBS of money that are quite suddenly in play here and why FOX (or Time Warner) would be willing to pay such exorbitant fees to broadcast MLB games.  While proclaiming that “A Brave New World” was nearly upon us in MLB, this is what was written:
What the TV companies are doing here as it doesn’t matter necessarily how many TV’s are tuned into a channel, but how many TV customers (people who pay their cable/satellite bills) have that channel that they pay for on their cable bill. To put that another way, it doesn’t matter how many people are watching the Indians or the Angels or the Rangers, it matters how many people are paying a portion of their TV bill for the chance to watch Tribe games. Because that number is lower in Cleveland than it is in LA or Dallas or…well, this could go on for a while, the rights to broadcast those games are going to be higher because the revenue that the cable company brings in is higher based on the amount of TV sets (or cable/satellite customers) in that local market.

Ultimately, live sporting events are really the last thing that anyone watches live anymore and so, yes these cable operators are going to pay a premium to air these games, particularly with MLB’s rules on local broadcasts.

Where do you think they’ll be willing to spend the most money?
Perhaps where the largest number of TV viewers exists?
Notice where these deals are getting done right now?
LA, Dallas…you know, the largest TV markets.

Go read that LA Times piece again (or if you haven’t yet as this is the last chance ) and realize that the final line from that article is that “the bidding between Fox and Time Warner Cable for the Dodgers’ television rights is about to start, and the over-under is $4 billion” and that it is all based on the cable/satellite subscribers in a particular market.

So, Fox and Time Warner will throw perhaps MORE money at the Dodgers (perhaps $200M/year) to broadcast their games…does anyone want to guess what kind of revenue the Yankees get from YES, given that NY is larger than LA and one of the offerings on MY cable package is to order the YES network as a stand-alone channel?

Well, in an attempt to answer my own months-old question, you can easily find out that YES has 14 million subscribers, with each subscriber paying $2 of their monthly cable bill directly to YES, which equates to $28M per month of guaranteed income for YES, or about $336M a year.  Obviously, that doesn’t take into consideration ad revenue or any costs associated with broadcasting the games or any other content, but for as much hand-wringing as there was about the Angels getting $150M per year and the Rangers’ deal worth $80M just prior to that, it’s not hard to see that there’s is a shockingly growing disparity happening here, particularly as other large-market teams turn their population “advantages” into outrageous revenue streams that other teams can’t sniff, only based upon the number of TV sets in a particular city or region.

Just to put some of those HUGE numbers above into the proper context, as Bill Lubinger of the PD pointed out at the beginning of the year, the Brewers get $12M a year from FOX to broadcast their games and San Diego just signed a NEW deal with FOX that pays them $20M annually to show Padres’ games.  According to the Lubinger piece, STO pays the Indians about $30M a year, with a subscriber total of about 3 million people, or about 20% of the amount of people that subscribe to the YES Network, with the YES fees to cable companies and subscribers unquestionably outpacing anything that STO would receive, if the Cablevision-YES contentiousness from a couple of years ago sheds any kind of light on how demanding YES is in terms of expectations from individual subscribers.

Now, you have the Rangers and the Angels and the Dodgers (just to name a few because of their recent or upcoming deals) joining the ranks of the “elite” in terms of guaranteed money from local TV deals.  And even with the money that’s generated from the just-announced national TV deal with ESPN, the disparity in terms of the “haves” and the “have-nots” will continue to exist, because the new ESPN deal means more money for ALL teams, with Craig Calcaterra of Hardball Talk doing the heavy lifting on some of the numbers:
Beginning in 2014, ESPN’s annual payment for MLB rights will jump from around $306 million to $700 million a year. Meaning that the annual payment to each team will jump from just over $10 million to around $23 million.  That’s $13 million more in each team’s pocket per year starting in 2014, through the ESPN deal alone.

Now, figure that there will be at least similar and perhaps greater proportional annual bumps for the deals currently held by Fox and TBS. Which are bigger money overall given that they include the playoffs. And that’s assuming that baseball and their would-be network partners don’t get creative and add in a new broadcast product of some kind.

 Figure then, what, $25 million more a year on top of the ESPN bump?  $40 million? With numbers going they way they’re going right now, it’s entirely possible. The upshot of all of this means that, without doing a single thing, each major league team is looking at an increased cash payment of, at minimum, $40 million. Probably much more. Just for the national TV rights increase.

On the surface, this looks to be a great development for the Indians and it certainly is for their bottom line, but in a sport with no shared local TV revenue and with no salary cap (yes…I know about the luxury tax for exceeding the payroll threshold), it basically means that every team will be taking in more money, with no difference from team to team in terms of how this “new” revenue is distributed.  So, we’re likely to see some bumps in salaries for individual players and more teams guaranteeing more money going forward, but the disparity between the “haves” and the “have-nots” will not really change as a result of the ESPN national TV deal.

While I’m sure that fact will only generate more wailing and teeth-gnashing from the “SPEND MORE” and “SELL THE TEAM” crowd (with the only paper in town’s website inexplicably posting a story about Royals’ fans taking out a full-page ad asking their owner to sell…anything for those almighty page clicks while they stir the pot of discontent), what is becoming apparent in all of this is that the TV money being thrown around is huge, to the point that nobody’s going to be losing money here (not that they have been), and it’s just becoming about who is able to make the MOST money based on their market size with their local TV deals being the cash cows that produce milk every month for these teams via EVERYONE’s cable bill.

As a quick aside, here is a mind-blowing article on the( growing) power that ESPN has in terms of how it controls the sports landscape and the almost unfathomable money-making machine that it is, largely due to their per-subscriber rates:
The company’s revenues are growing at 9 percent a year, with a projected $8.2 billion in revenue in 2012, according to research firm SNL Kagan. Head count has doubled in the last seven years to 7,000 employees worldwide. ESPN earns one out of every four dollars earned by cable stations in America. According to SNL Kagan, ESPN charges its cable affiliates an average $5.13 per month for each of its 100 million subscribers (the industry average is about 20¢ per subscriber) while also taking in $2 billion a year in advertising revenue. 

That piece later passes along the information that the newly-created NBC Sports Network charges $0.31 per subscriber (again, ESPN charges $5.31 PER MONTH per subscriber), so it’s not as if their competition is in any kind of place to approach the revenue stream that paces ESPN.  As someone who largely tuned out ESPN a couple of years ago (I kid you not, outside of a live College Football game and the show that precedes it on Saturday morning), the piece is stunning to see how much they really have come to dominate the sports landscape…and how they’ve done it.  Frankly, if you want to place the finger of blame for the way that TV money has affected sports, here’s another piece to peruse that points out how the demand for live sporting events is making your cable bill (or Direct TV or anything else) balloon, with no real end in sight, and making the impossible money that’s changing hands as a result dictate how sports is evolving at all levels.

But back to the matter at hand as the dollars in play here are SO big and are only getting bigger, it’s impossible to see how MLB doesn’t become even more divided when it comes to team performance from year to year.  Sure, every year you’ll have a nice story to point out that “there’s no disparity” in MLB, but take a look at this year’s “feel-good” teams among small markets:
Pirates – Just now breaking their streak of 19 straight losing seasons
Rays – Lost 90+ games for 10 straight years
A’s – Last winning record in 2006
Nationals – Last winning season in Montreal in 2003 and in the 4th largest CSA 

Is any of that “prolonged” winning like we’ve seen in other places around MLB?
As a quick aside, please note in that link above (and I’ll do it here again) that Detroit is nearly double the size of Cleveland (regardless of owner) in that CSA listing from 2010 and has about 2.35 million fewer people than greater Detroit in the 2011 estimate.

And even more pointedly, weren’t the Indians that “example” of a small-market success back at the end of the last decade or the Twins just prior to that and weren’t the Brewers (16 ½ GB in their division and having already lost Prince and traded Grienke after “going for it” the last couple of years with one appearance in the LCS to show for it) held up as an organization that could sustain winning in a small market?

Unlike in larger markets, when things fall apart or a plan goes awry in places like Cleveland or Milwaukee or Kansas City (the “sexy” pick to emerge among small-market teams this year), they get bad…then they get worse.

And that’s where we are in Cleveland, although I’ll point out that this isn’t all being pointed out to provide an explanation or a justification for what’s been happening on the field over the past 2 months or so (because that’s a talent evaluation issue that I think has been discussed at great length already), but it has been over two-and-a-half years since Billy Beane told Pete Gammons, “The way the system is right now, there really is no difference between a $75 million and $40 million payroll…I think a lot of small-market clubs look at that and ask, ‘Why pay $75 million when $40 million will buy me as many wins?’”

Now, imagine if that would have been spoken by someone at the corner of Carnegie and Ontario and the pitchforks that would have been wielded as a result…
Regardless, Beane’s $55M A’s are in the playoff hunt as are the $64M Rays, while the $78M Indians are limping (badly) to the finish line this year.  The difference between those two teams in contention and the Indians’ performance this year has everything to do with player acquisition and player development (hey, look where each team ranks in ERA in the AL) and less to do with any kind of money being spent on the MLB roster.

What these teams try to do is line up similarly-aged and similarly-controlled players and hope that a home-grown “core” of players develops that can carry an organization for a couple of years.  Sometimes it works (Cleveland from ’05 to ’08, Milwaukee from ’08 to ’11, Rays from ’08 to present) and sometimes it doesn’t (Kansas City and Pittsburgh, prior to this year…because they haven’t won anything yet, being the most obvious examples of this), but that’s the blueprint that seems to be out there for teams that can’t spend away their problems via FA or by assuming money in trades. And here is where it becomes imperative for a team like the Indians (or the A’s or the Rays) to develop home-grown players – and particularly pitchers…if you’ll remember how even the large-market Giants won the WS with home-grown Lincecum, Cain, and Bumgardner leading the way – in an effort to get maximum contributions from young players, who aren’t susceptible to the money associated with the open market.  As we’ve seen here in Cleveland this year, when those home-grown players or young players acquired with the idea that they’ll become “core” players – and particularly pitchers – aren’t able to contribute enough production to win consistently, the warts that exist on those ballclubs become exposed, then put under the magnifying glass.  Essentially, when the Indians swing-and-miss (pun intended) on a guy like LaPorta or when Carlos Carrasco loses a year to injury or Atom Miller’s career is completely derailed, it leaves the team with a hole and one that can’t be adequately filled with the kind of money that’s necessary (on the FA market) to fill it, meaning that it’s ultimately filled by the mid-to-lower-tier of FA that we’ve consistently seen for the Tribe, particularly since 2010.

As hard as it is to see the light at any kind of tunnel, the structure of MLB and the money absolutely pouring into the sport – with more money going to larger-market teams – via TV contracts boggles the mind.  This means that the players will be paid more for sure, but it also means that teams like the Indians have an even smaller margin for error when it comes to evaluating and developing young talent because when players that they’re counting on – and banking on – to develop simply don’t develop into anything close to what’s been projected for them…well, then we see what we’ve seen on the field over the last 2 months.

How the Indians address THOSE issues will be worth watching over the last couple of months and in the offseason (since the team is hardly worth watching), but the resolution to those issues has to be constructed so perfectly to have any chance of contention, much less prolonged contention, that it makes EVERY decision made by a small-market team a gamble, with the effect of being on the “losing” side of too many gambles equating into…well, into a lot of “losing”.

And that’s certainly what we’re seeing now…


MTF said...

Interesting post. Not sharing local broadcast revenue sure is a killer.

I'm hoping a trend emerges of watching even those local broadcasts via the web, versus over the air (cable) broadcasts.

If my kids are any indication, that could be happening since not a one of the three has a cable connection. Roku is their unanimous choice for their TVs but mostly they watch shows on their computers. If that's really a trend then the associated (shared proportionately) cash flows will eventually catch up to that fact, and the Indians will be in better shape relative to the rest of the league than today.

In the meantime, the Dolans have a valuable set of assets that they are having trouble monetizing. Between the team, the network and the club's interest in MLBAM (which might someday be worth as much as the team itself), there's no shortage of potential asset value. Waiting for the cash flow to reflect the asset value sure is agonizing though.

Paul Cousineau said...

That's an interesting angle, and we also watch a good deal of our TV through Roku. However, the only way to get Indians' games if you're in market (legally, I think) is to have cable or some sort of satellite subscription as Indians' games aren't available on the MLB package I can get through my Roku.

Maybe there are ways around this, but that's the reason that live, local sporting events are one of the last things that people HAVE to get local cable/satellite for.

Perhaps MLBAM or MLB has a way to move around this and level this thing out in the future, but the size and length of these deals being meted out by Fox and Time Warner all over the country for the Angels, Rangers, or Lakers leads me to believe that those channels aren't going to be available locally through any source than what the current setup is.

Prof said...

Good article and good comments. I think the thing that bothers me most is that back in the days when revenue was directly tied to performance (i.e., if your team stinks no one will come to the games and you are guaranteed to lose money) every poor team had an incentive to improve. With so much guaranteed money out there now (win or lose), some small market teams might decide to settle for a smaller guaranteed profit rather than gamble on hitting the jackpot by investing in a potential winner.

I am not a member of the "Dolenz R Cheep!!" crowd, but I can see where any small market team might be tempted to go that route.

Hyde said...

...we’re likely to see some bumps in salaries for individual players and more teams guaranteeing more money going forward, but the disparity between the “haves” and the “have-nots” will not really change as a result of the ESPN national TV deal.

It does even things out at least a little bit. Let's say, using hypothetical round numbers as an example, that Team A is taking in $200 million a season, and Team B only $100 million a season--half as much. Throw in the new $40 million, and the gap becomes $240 million to $140 million--more than half as much. It's not total equality, but it's better than nothing.

And total equality isn't going to happen anyway. One thing about baseball history that I'm not sure is widely understood is that there has always been a huge gap between wealthy and non-wealthy teams, and this was usually borne out on the field. You write that this is going to be the first winning season for the Athletics since 2006, but the history of the A's organization is filled with numerous long stretches where the team was terrible. The Pirates were a disaster area in the pre-Roberto Clemente years. And on the other side, the Yankees were never more dominant than in the years prior to big local TV deals and free agency.

I think we're letting the current Tribe brass off the hook to say that a small market team has to do everything perfectly in order to be competitive. It's more accurate to say that if you're below average at player development, and do no better than 50-50 on trades, you're probably going to struggle.

MTF said...

You are right-- I am assuming local sports will eventually be made available on the web, regardless of what MLB (or the Yankees!) would prefer, and they might as well get in front of the trend rather than find themselves in endless litigation against technology and their customers wishes. MLBAM has made lots of money staying ahead of the curve so far, and I gotta believe it will try to work something out with local broadcasts when customers start pushing (baseball can see the obvious just as well as we can).

Some small glimmer of hope for the future, anyway.

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