Major League Baseball's Screwball Economics

As another season begins, MLB faces an unsustainable future -- and you’re picking up the tab.

Major League Baseball's Screwball Economics
UPI/Kevin Dietsch
Marco Scutaro celebrates the Giants’ 2012 World Series victory.

Police in riot gear guard the dugouts, preparing for the worst with German shepherds at heel. This is Philadelphia in 1980, after all.

It's the top of the ninth. Two strikes. Two out. Bases loaded.

Human rocket Willie Wilson of the Kansas City Royals hugs the plate, curiously dressed in full powder blue, a color fancied by baseball teams and wedding parties of the era.

Tug McGraw in the 1980 World Series.
Manny Millan/Icon SMI
Tug McGraw in the 1980 World Series.
MLB Commissioner Bud Selig and his wife, Sue, at Game 2 of the 2008 World Series.
Flickr
MLB Commissioner Bud Selig and his wife, Sue, at Game 2 of the 2008 World Series.
Economist Patrick Rishe says baseball should pick up the pace.
Tom Carlson
Economist Patrick Rishe says baseball should pick up the pace.

His nemesis this evening is Phillies closer Tug McGraw, whose fame will later be shadowed by that of his son, country singer Tim McGraw. The screwball artist fires a pitch letter-high, but Wilson can only flail. Kansas City's insurgency is repelled. The Phillies win their first World Series since forming during the Chester A. Arthur presidency.

A record 54 million people tune into the game that night. It will be perhaps the last time baseball can legitimately call itself America's national pastime.


The Great Leap Downward

Fast-forward to last fall. Marco Scutaro cracks a 10th-inning single into the wet outfield of Detroit, nudging the San Francisco Giants to a World Series sweep. The Nielsen ratings will soon reveal how far baseball has plunged.

An average of just 12 million people tune into the 2012 Series — a collapse of nearly 80 percent from McGraw's heroics three decades earlier. In head-to-head competition, a regular-season NFL game will lap the Series by 10 million viewers. The geek comedy Big Bang Theory will pummel it by five million. Even the investigative drama Person of Interest — featuring "a software genius and an ex-CIA operative who work together to prevent violent crimes before they can happen" — will best the Series by two million viewers.

Commissioner Bud Selig has little to say about this spurning of affections. This flight of fans, after all, is very old news.

The last seven Series have attracted the seven smallest audiences in baseball history. In 2010, just 14 million people watched the Giants beat the Rangers, then a record-low audience. The next year, when the Rangers collapsed against the St. Louis Cardinals, dramatic Games 6 and 7 helped Fox recover, averaging 16 million viewers for the Series. But the audience was still dwarfed by those of baseball's heyday.

The sport's defenders have labored to explain the 2012 numbers away, citing late East Coast start times, an outbreak of entertainment alternatives and the favored wail of curmudgeons everywhere: that a younger, lesser generation of men prefer to whack pixelated zombies than witness the splendor of Pablo Sandoval going yard. Others claim the Tigers and Giants failed to ignite the country's passion. "I am of the belief that the match-up of the World Series is always important," says Professor Wayne McDonnell Jr., known as "Dr. Baseball" for his study of sports at New York University.

But of America's three major sports, only baseball needs excuses.

The NFL's ratings remain on a march to the heavens; 108 million people watched the last Super Bowl. Viewership for the NBA finals — though reduced from the days of Bird, Magic and Jordan — is once again climbing skyward.

Meanwhile, baseball's ratings continue to plummet, irrespective of month or match-up. Those record-low Series of the last seven years featured the game's biggest attractions, from the moneyed villains of Boston and New York to storied franchises like St. Louis and San Francisco. None stanched the bleeding.

Regular-season games have declined equally. Fox's Saturday audience has gone down an average of 800,000 since 2001. Sunday-night ESPN telecasts have shriveled by a million viewers in just the past six years.

In any other industry, such staggering drops would raise alarms of a rotting ship. One might presume that TV execs are screening Selig's calls. But the exact opposite is happening.

ESPN, Fox and Turner recently struck deals that double their annual payments to MLB. The Los Angeles Dodgers will soon ink a 25-year pact for local rights that's worth an estimated $7 or $8 billion. And while local sports-talkers spent the last month debating the value of Nolan Ryan having a desk chair at Rangers HQ, the franchise's position at or near the top of the standings was basically sealed when it inked a $1.6 billion deal with Fox Sports Southwest. The $80-million-a-year contract, which takes effect after next season, will be one of baseball's biggest. "It fundamentally changes the Rangers' economics," Vince Gennaro, author of Diamond Dollars: The Economics of Winning in Baseball, told the website Grantland in 2011.

If it all seems incongruent, born of the same economics that brought you bank bailouts and the housing crisis, that's because it is. Baseball, you see, is expecting you to pick up the tab.

In an age of stagnant wages, the average cable or satellite bill is expected to reach $200 by 2020 — even before extra fees for phone and Internet knock on the door.

"It's an unsustainable model for sports rights to escalate at a pace that's exponentially higher than wages for families," says Dan York, DirecTV's chief content officer. "It's coming to the breaking point."


Banking on the Slowest Falling Star

Inside broadcasting's executive suites, the Holy Grail has a new name: "appointment TV," considered the last defense against a fierce and fast-encroaching enemy, the DVR.

The problem for networks is that viewers are no longer showing up when they're supposed to. Instead of planning Tuesday nights around, say, Justified, people are recording shows to watch at their convenience. And unless they have a fondness for commercial interruptions, they'll be fast-forwarding through their daily regimen of Geico ads. Which makes Justified less valuable to advertisers.

Human nature, however, isn't partial to watching a baseball game three days after it's played. Viewers still want to see it live, even if it means opening their homes to Flo from Progressive.

"Live sports and a few other events, like the Oscars, are still must-see programming," says Maureen Huff of Time Warner Cable, the company soon to be writing those very large checks to the Dodgers.

Advertisers also see sports as the best weapon for reaching young men, who are known to have a special gift for eluding commercial reach. Never mind that baseball's youthful audience has gone AWOL. More women age 50 and older watched the last World Series than did men under 49. But compared to babe cops and reality fare, the game's ratings practically shine.

"It's kind of counterintuitive," says Paul Sweeney, a media analyst for Bloomberg Industries. "It's just that sports are kind of less bad. They're doing better than other programming."

You can't blame baseball for cashing in on this backhanded blessing. After all, when your customers willingly pay $8 for a lukewarm Budweiser, it's safe to assume they'll buy anything at any price.

Chris Bevilacqua should know. He negotiated the Rangers' TV deal, and arranged another $60 million a year for the feeble San Diego Padres.

"It's like any other market," he says. "The markets go up and down. In the case of media and sports rights, they very rarely go down."

He's right. Or at least that's been true in the past.

Bob Gessner knows the drill. He's president of MCTV, a cable provider in Massillon, Ohio, that carries Cleveland Indians games. For the past decade, the Tribe has been a woeful club, losing games and fans with equal facility.

"In a year when the team does well, the reset [for broadcast fees] is due to the team doing well," Gessner says. "When the team is doing poorly, the rates will jump just as much because they need money to rebuild the team."

Cable and satellite companies grudgingly succumb, no matter how illogical the deal. Every provider feels forced to carry the same channels, lest customers flee to a competitor.

With no one saying no, the networks see sports as a no-lose racket, with ESPN as its piper. The sports channel charges cable companies $5 a month per customer, by far the highest monthly fee in national television. While that may seem a pittance, it's big money when spread over the 100 million U.S. households with pay TV. And it's made the other big boys envious.

NBC and CBS have launched their own sports channels. Another from Fox is on the way. Even regional sports channels are starting to broach that $5 mark. Their bet is that viewers will always be willing to pay more. And more. And more.

Economics on the ground say otherwise. Today, the average TV bill rests at $86 per month, about half of which pays for sports programming. That's more than double a decade ago. So it's no coincidence that the cable and satellite industries have been jettisoning customers for nine years straight.

The new round of deals promises to hasten these unpleasant trends. "I can't tell you what will be the trigger," says Matthew Polka, president of the American Cable Association. "But I am certain that at some point in the very near future, that balloon will burst."

And when it does, baseball will take the brunt of the explosion.


Fixed Odds and Fleeing Fans

To understand baseball's decline is to appreciate its awkward relationship with the very thing it sells: competition.

The NBA and NFL, those exemplars of socialism, share most of their revenue, realizing that for their sports to thrive nationwide, Green Bay and San Antonio must get the same cut of hope as Boston and Chicago.

Yet baseball hews closer to raw capitalism, where the big crush the small with painful regularity. If you're a fan in Miami or Denver, that's not entertainment; that's everyday life.

On opening day next year, the Dodgers' local TV contract will pay for their entire $200 million-plus roster — the highest in baseball — before they sell a single ticket, hot pretzel or warm Pepsi.

Across the country in Minneapolis, the Twins' deal will be enough to cover the salary of their best player, catcher Joe Mauer — with perhaps a weak-hitting infielder to spare.

Though baseball has long played with a rigged financial deck, it's about to get perilously worse.

The game, of course, does its best to subdue such talk. The surest way to keep front-office types from the phone is to request an interview to discuss how the latest local TV deals will affect competitive balance. The Padres, Dodgers, Cardinals, Twins, Brewers, Indians and Pirates all declined comment for this story.

Selig's office isn't any more effusive. "We are going to take a pass on this one," says spokesman Matt Bourne.

Still, it's safe to say that these fixed odds have deposed generations of fans in smaller cities across the land. In any given year, half the teams are in the midst of three-to-five-year rebuilding projects, since they're financially barred from the faster route of free agency. At the same time, the league has done little to make all that losing bearable.

While the NBA and NFL constantly remake rules for speed and action, baseball's last significant change was the designated hitter. In 1973.

The result has produced a spectacle once described by the Boston Globe's Ray Fitzgerald as "six minutes of action crammed into two-and-one-half hours." Forgive young men for preferring Call of Duty or football by the time the Fall Classic rolls around.

"Baseball has been declining in interest for some time in terms of the young male audience," says Patrick Rishe, an economist who studies sports at Webster University in St. Louis. "I think baseball is seen as archaic. The sport moves at a slower pace. Their athleticism doesn't jump off the screen. I think they have to find a way to speed it up."

But the game is hamstrung by its sizable purist wing, those who believe the slightest change invites heresy. Meanwhile, the economic disparities continue to mount.

No one knows this better than the people of Kansas City. During the '70s and '80s, the Royals were a power on par with the Red Sox, despite playing in the country's 31st-largest market.

"Stands were filled," says Joe Posnanski, the town's former dean of sports writers at the Kansas City Star. "Everyone talked about the Royals. It was really one of the best baseball cities in America at that time."

Yet Kansas City stopped playing for titles in 1985, just as the league's crevice between rich and poor was becoming too wide to jump. The Royals sunk to little more than schedule-filler, a talent farm for the rest of baseball.

Players like Carlos Beltran, Johnny Damon and Zack Greinke "were traded before their contracts expired because the Royals said they could no longer afford them," according to Posnanski. "It started to feel like a vicious circle, and it depressed many Kansas City Royals fans."

He has no doubt that "if the Royals start to win, and win big, the young fans will get excited about them."

But that winning part is a big if. Local TV will bring Kansas City just $20 million this year. Even with an estimated $25 million in revenue-sharing, they're still at a four-to-one disadvantage against the Dodgers. Toss in a potential fan base that's but a speck of L.A.'s, and the Royals become a mom-and-pop clothier parked next to Walmart.

They might win a sale or two, even have a good year. But few succeed in business or baseball when the odds are this stacked.


Television's Strong-Arm Racket

The collapse of baseball's TV revenue won't come from diehard fans. There's no indication that the sport's truest disciples won't pay more and more until there's nothing left.

The problem is non-fans, who are picking up most of the check.

Here's how it works: Just six companies control 90 percent of America's TV programming. And they won't let your local provider simply carry the channels you actually want to watch to keep your bill modest.

When Disney negotiates contracts, anyone who wants ESPN is usually forced to buy a bundle that includes lesser fare like ESPN Classic or ABC Family, whether they want them or not.

The same goes for programmers like Viacom. If you want Nickelodeon or MTV, you're also required to buy Logo and VH1 Classic, among the lowest-rated channels in television.

"It's incredible," says Matthew Polka of the American Cable Association. "If you want one popular channel, they make you take 10."

Most contracts require that all channels be included as part of a cable company's "basic" package. That's why your TV menu is loaded with shows about tow-truck drivers and women who make bras.

"It causes us to basically be forced to provide a bloated, expanded level of basic cable service," Polka says. "Our customers know that these aren't channels watched on a regular basis, but they still have to pay for the monthly subscriber fee. Because of your market power, you are essentially forcing me to carry channels I don't want."

Baseball rides comfortably in the back seat of this strong-arm game. According to the research firm NPD Group, the average cable or satellite bill will reach $200 by 2020. Half of that fee will go to sports. And everyone pays, because most providers are barred by contract from moving sports to a premium package.

That's why Fox can double its payments to carry the World Series. Though only 10 percent of America will watch, the remaining 90 percent will cover the freight.

Yet consumers have clearly tired of picking up someone else's check. During a single quarter in 2012, Comcast lost 117,000 subscribers. While such figures are cyclical, cable and satellite have lost customers nine years running.

What's worse for baseball, the largest exodus involves the young, who increasingly turn to cheaper fare like Netflix and Hulu. They're not just turning away from the game; they don't even want access.

But neither television nor baseball seems to notice these darkening skies. Take the country's most obsessive TV market, Los Angeles, where a school of piranhas has attacked the city's cable bill.

Not long ago, L.A. hosted just two regional sports channels. Soon there will be seven. The Lakers charge $4 a month. Fox bills $5.40 for its two channels. The Dodgers are expected to add another $5. And Bevilacqua just negotiated a stunning 500 percent increase for the Pac-12's media rights.

"There are no new pro or college games being created," says DirecTV's Dan York. "But what used to be delivered via two regional sports networks now seeks to be re-sliced into [multiple channels and] more costs for consumers. That's not a sustainable model."

Yes, the diehard Dodger fan will readily fire up his debit card to cover the impending $200 tab. But the team's broadcasts average just 100,000 viewers. That means the remaining 5.6 million L.A. households with cable must be convinced to pay the same to catch such searing drama as Vanderpump Rules and Confessions: Animal Hoarding.

One needn't be an economist to know this won't turn out well.


Baseball is Introduced to Reality

Baseball may be sick, but the prognosis isn't terminal. Average per-game attendance was 31,000 last year, not far below pre-recession days. Better still, polling shows that Latinos, the country's fastest-growing demographic, are also the game's biggest fans.

Posnanski notes that teams have agreed to share Internet revenues, meaning there may come a day when the Pirates and the Royals won't have reserved seats at the kids' table come playoff time.

Yet it's more likely that consumers and the cable industry will force baseball to confront its decaying foundation. And if they're successful, the cost to true fans will rocket.

Companies like Time Warner Cable have begun to use their own market power to fight back, offering cheaper, mostly sports-free deals for those tired of paying for games they don't watch. Time Warner's TV Essentials package comes in at less than $50, says spokeswoman Maureen Huff, and is "designed for people who are just kind of feeling the economy." Most telling: It doesn't include ESPN or other sports channels.

Cablevision is the biggest threat looming off baseball's stern. Earlier this month, the New York provider filed a federal anti-trust suit against Viacom, claiming that in order to carry Comedy Central and VH1, it was forced to buy channels like Logo and Palladia as well. According to the suit, Cablevision could always reject these demands. But Viacom wanted a $1 billion penalty in exchange for any exercise in free will.

If the court rules against Viacom, cable and satellite may finally be able to offer packages to suit any price or taste. Baseball's welfare payments from non-fans will corrode. And with an audience in decline, remaining subscribers will be forced to spend that much more to compensate. Suddenly, that $200 bill could look like a going-out-of-business sale.

A decaying game will be introduced to Economics 101. It won't be a pleasant encounter.

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5 comments
primi_timpano
primi_timpano topcommenter

It seems that baseball is doing just fine. Your article seems to concern the broadcasters more than the teams.

JustSaying
JustSaying

I would like to see a graph on the interest in baseball superimposed over a graph of the percentage of fatherless homes in that same time frame. Baseball, more than any other sport, is one that is passed down from generation to generation. It almost always starts with 2 baseball gloves and a game of catch with your dad.

Dallasalli
Dallasalli

Rangers increased ticket prices overall and made some sections (third level behind home plate) into more expensive options.  Hard to believe they did that since they've lost so many veteran/fan favorite players this past summer.  I'm guessing fans will find everything more expensive, beer, sodas, food, etc.

fergusontx
fergusontx

Very interesting with quite a few points I wasn't aware of.  As a baseball fan, the one thing I did know was that the added financial burden would fall to me ... whether through cost of beer, pretzels, tickets or cable.

mcdallas
mcdallas

@JustSaying That is one of the best points I've seen in D.O. commenting in months.  Thanks!


...and...I totally agree.

 
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