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Billion Dollar Blueprint

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Billion Dollar Blueprint

by Robert Whiting (May 8, 2012)

Money. Money. Money. MLB is rolling in it, as indicated by the recent sale of the Los Angeles Dodgers for an astonishing $2 billion, an all time record for a major league team. The $2 billion figure is more than double the previous record for an MLB franchise sale, which was the $845,000,000 paid when the Chicago Cubs were sold by the Chicago Tribune Co. to the family of Joe Rickets, founder of Ameritrade, Inc., in 2009. That $845 million figure was considered eye-popping at the time. 

The astonishing sale price of the LA Dodgers was due to the TV cable contract the Dodgers are slated to get from the Time Warner regional sports network next year when the present Dodger TV contract with Fox Sports Network Sports 2 expires. Analysts estimate this deal to be in the neighborhood of $90 million a year for the next 20, possibly 30 years.

Cable TV packages are dramatically increasing the profit margins of MLB teams in major markets.  The Texas Rangers, for example, signed a new TV deal in 2012 which calls for an annual income from local cable TV broadcasts of Rangers games of $80 million a year for the next 20 years. Such largesse is one reason they were able to bid spend $100 million to acquire Yu Darvish.

Companies operating in the rapidly growing Cable TV industry in the US  are willing to pay high fees to the MLB clubs like the Dodgers and the Rangers, because the long 162 game schedule offers daily ready-made programming -- games can even be telecast twice a day -- for 6-8 months a year. In the case of the Rangers, the telecasts reach between 2.5 million and 3 million households in Texas who each pay $110 a year for the privilege of watching every single one of the 162 Texas Rangers games.  $110 is less than what it costs for a family to attend a game at the Rangers ballpark in Arlington. And in the recession weary U.S. economy, that is a good deal.

The revenue from these regional cable contracts is in addition to the national media rights which are controlled by the MLB commissioner, the revenue from which is divided among all 30 teams, along with merchandise and sales, which add another $40 million or so annually to each of the 30 MB clubs' income. (This season an average 16 games per team will be available on free TV, an all-time low.)

The richest team in MLB is the New York Yankees who have an annual revenue of $439 million, a payroll of $190 million, and were valued by Forbes this year at $1,800,000. The Dodgers are ranked second in value and will be drawing annual revenue of $330 million a year after the new cable contract is signed, with a payroll of $90 million. This puts them slightly above the Red Sox. The Rangers are worth $674 million (ranked 7th on the Forbes list) with an annual revenue of $233 million and a payroll in excess of $100,000,000. Darvish being the most notable addition.

This year, MLB total revenue overall will climb to nearly $8 billion.

Ladies and Gentlemen. That is a lot of money.

The MLB has become such a growing cash machine -- with ever-rising ticket prices, increasing cable TV revenue, and income from such enterprises as, which has risen to over $600,000,000 a year since its inception in 2000 -- that many MLB owners seemingly view their teams as primarily investment vehicles, something to be sold at a huge profit after riding an inevitable rise in value. The Dodgers, for example, nearly tripled their worth from 2008, when, according to Forbes, the team was worth $694 million. Since 1996, no less than 22 teams have changed owners. The value of a franchise is buttressed by the ever-present threat to move a club if a new stadium is not provided at taxpayer expense, with the MLB commissioner cooperating by threatening to bar subsequent competitors from moving in to the abandoned locale. Accelerated depreciation of player salaries provides yet another taxpayer subsidy to MLB's bottom line. Thus, MLB ownership has become a private club that many wealthy people wish to enter if only to become even more wealthy.

Japan suffers by comparison in all this. The NPB's total annual revenue is less than $1.5 billion. The Yokohama Baystars, two-thirds ownership of which was recently sold to DeNA, are valued at around 10 billion yen (or $125 million dollars), a price that is about one-third of the worth of MLB's cheapest team, the Oakland A's). Japan's two most expensive teams, the Hanshin Tigers and the Yomiuri Giants, are estimated to have a value in the neighborhood of $1 billion, (and indeed, some would say they are "priceless," beyond value, and, in actuality, impossible to buy, because of the emotional attachments they engender). But the Giants, Tigers, and the SoftBank Hawks are the only teams in the NPB with an annual revenue in excess of $100,000,000 -- a figure that is surpassed by every MLB team, with even Oakland bringing in $163 million. Revenue from TV has plummeted in recent years. The Giants are slowly disappearing from network television into the under developed realm of Japanese cable TV. PL marketing, which controls rights to Pacific League games, only takes in $3 million a year in media revenue.

Of course, Japanese teams operate on a different basis, as we have discussed many times in this column. They are advertising vehicles, that's all. In order to attempt to emulate the MLB they would have to grant the NPB commissioner vast new powers -- the power to integrate media and merchandising, among other things -- under a new business plan. But Hanshin and Yomiuri refuse to agree to this, so the NPB as a whole continues to suffer. Then there is the sad fact that NPB teams still have to pay a sizable chunk of money in stadium rental fees -- 25% of the gate in the case of the Yomiuri Giants, Nippon Ham Fighters, and Chiba Lotte Marines -- while MLB teams play in taxpayer funded stadiums for the most part.

Ira Stevens of ScoutDragon, an elite consulting organization used by many MLB, teams, has suggested that if this financial disparity between Japan and the US continues to grow, the temptation would be great for MLB to expand to Asia. Says Stevens, "If MLB really wanted to move into Japan, there is a simple way to do it. All potential owners would need to do is link up with Japanese investors and start buying up stadiums -- the way Colony Capital did -- when they become available. Once you control the stadium, the next step is putting a team in it. If an NPB team is already using a stadium, offer them a chance to withdraw from NPB and play in MLB. If they refuse, which is likely, well, work around the lease and start an MLB franchise from scratch, mixing in available players from Latin and North America with as many Japanese players as possible."

Potential candidates in this scenario are the Osaka Dome, Green Stadium Kobe, Chiba Marine Stadium, and Yokohama Stadium. The recent purchase of the Yahoo Dome  by SoftBank for 87 billion yen (about  $1,500,000,000) gives an indication of price. All that's needed is to create four teams. They would each play 81 games with each other in Japan and 81 games in North America, to mention one possible arrangement.

"How many teams do you think you could get to join? " asks Stevens.  "The traditional power brokers of the NPB, Yomiuri and Hanshin, would mostly likely initially oppose the idea. But there are possibilities with other teams, like SoftBank. Yet, over time, both Hanshin and Yomiuri might be persuaded to join MLB. Their teams' value might double or triple overnight. And the thought of becoming a global brand instead of being just the top dogs in Japan might be a convincing argument."

MLB certainly knows how to market baseball, both at the ballpark and on television. They know how to make the game interesting. The Major Leagues, as the argument goes. The MLB game itself is arguably more interesting than the NPB version. There are fewer sacrifice bunts, more home runs, more strikeouts, more over all power. It's bigger, faster, stronger. And the pace of the games is quicker than it is in Japan. Japanese fans have come to realize that through NHK MLB telecasts. Even the camera angles are better.  You get 30 MLB teams coming to Japan for two weeks at a time, with games on cable TV every night. Then you start building new stadiums (and perhaps entice the cities to cooperate in funding). It will give the NPB fits.

Well, maybe. It would also be a gamble -- big gamble. There is, of course, no guarantee at all the MLB business model would work in Japan. But then MLB gambled on the WBC and won, so much so that the NPBPA wants a big cut of the action.

The question is, does the MLB really want to do this?

And how much money is really enough for MLB money mongers?

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