A Right-Sized Reckoning Is Coming for Major League Baseball

[Nick Nelson]

The Minnesota Twins may have simply been ahead of the pack when it comes to shaving down payroll and adapting to the new economic landscape of Major League Baseball. What does that mean going forward?

Image courtesy of Kim Klement Neitzel-Imagn Images

The Twins cut their payroll by $30 million last offseason, with the uncertainty surrounding their TV deal known to be a major factor in this decision. Fans were rightfully angry, and over the weekend, ownership figurehead Joe Pohlad found himself (poorly) fielding questions about this decision and its impact on the team's outcome this season.

I'm not here to defend the payroll slashing, nor the stated reasoning behind it: that a professional baseball team must necessarily be operated as a traditional business, with bottom lines treated as the top priority. But what I will say is that the Pohlads are not alone in their agenda. 

The reason their payroll cut last offseason was so conspicuous and widely noticed was, first and foremost, because of the horrible timing, coming off a breakthrough season and playoff run. But it's also because the Twins were first in line for something that the rest of the league is soon to experience: the realities of a bursting TV revenue bubble, with massive implications on the economics of baseball.

I believe the Twins were the canaries in the coal mine. On Wednesday, Evan Drellich of The Athletic reported that Diamond Sports Group intends to scrap its agreements with all but one MLB team (Atlanta) next year. That means that 11 teams broadcasting with the Bally Sports affiliation, including nine that were under contract, would need to find a new home or renegotiate with the hated media conglomerate. Drellich later corrected his report to clarify that only two teams were formally dropped, but it sounds like Diamond is positioning itself to sever ties more broadly.

Local TV revenue has long been Major League Baseball's sweet, sweet honey hole. That's because teams have been able to cash in on cable packages featuring (and charging for) their broadcasts, even from subscribers who don't watch or care about the games. The proliferation of streaming models and evolution of viewing behaviors have turned this convention on its head.

The arrival of this disruptive moment is causing a lot of extraordinary things to happen. Twins ownership and their ill-advised payroll slash is one example. Another would be Bally Sports going dark out of nowhere on Comcast in the middle of last season, cutting off cable viewers for months. Zooming out, we have this prolonged and contentious legal battle playing out between Diamond and Major League Baseball, with no end in sight.

Look, there are definitely some bad actors here, but everyone involved is at the mercy of forces beyond their control. The paradigm has shifted. The money no longer adds up or works in the same way it once did. It's just not going to be possible for (most) baseball teams to rake in revenue like they did for the past few decades, via an inflated and unsustainable model.

Over the past couple of months, I've had conversations with some people who've been around the game for a long time, and these conversations have solidified a belief that's been stewing in my brain: MLB is headed for a reckoning. The league will figure out a broadcasting system that gives fans access to the games, and it'll still be plenty profitable, but the days of teams earning like they were accustomed to will soon be over--at least outside of mega-markets like New York.

When that comes to pass, you better believe we're going to see a lot of "right-sizing" from owners across the land, who are equally frugal to the Pohlads--if not more so. Keep in mind that even with their severe reductions, the Twins still ranked 19th among MLB teams in payroll, outspending all but one AL Central team.

The Twins claim they have no intentions of further cutting payroll, which is not the most uplifting news given the slashing that already took place. But if the rest of the league's spending is about to drop collectively around them, Minnesota's $130-million payroll may put them in a better relative position. And if the salaries that free agents are able to command decline precipitously (which I fear is going to be the case), the Twins front office may have a better chance to acquire impact talent with their extremely limited spending flexibility. To put it crudely: everyone else's loss can be their gain.

Players and agents are going to be angry. Teams are going to get ripped off. It's going to be ugly, and frustrating. But it's been a long time coming. The bubble is on the verge of popping for the business of baseball, and Twins fans have already gotten a taste.

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[TheLeviathan]

Correct, this reckoning has been coming for a long time now.  Satellite companies were the first canaries - as DirectTv and others saw their numbers drop by the millions, the cable model was next.  

MLB loves all the money it gets in some markets with local contracts, but it needs to take the product nationally and split the revenue.  The direct-to-consumer model isn't viable IMO.  The amount of money lost would be crippling.

[umterp23]

Gone will be guaranteed contracts that tie up $100's MM per player unless it gets a Bonilla/Ohtani retirement structure.  Yearly opt out clauses could be the new norm and players will fight for earlier arbitration structure that gets them out of baseline MLB minimums and 6 year team control. More and more minor league teams could fall victim as well based on not having enough money.  

the Players Union and or Owners could be headed to a lockout scenario if the TV revenue explodes that way it could in the next 3-4 months.  

There is roughly 5,600 professional baseball players across all levels of MLB/MiLB today.

I could see short season minor league teams falling off the cliff after the college draft takes place.  The draft could go down to 10 rounds vs 20 rounds and opportunities to play at the next level be truly harder and harder.  Many high school talent could be college bound except for elite high school guys will be impacted.

Let's see how good Manfred is for all of baseball to earn his salary paid for by the owners

[Mike Sixel]

I can almost guarantee that another level of the minors is gone.... Especially with college baseball increasing. The owners will want someone else to pay four development. 

No idea if the bubble is finally bursting, but people have been saying the sports bubble will burst for years and years...

I'll believe it when I see it.

[Brock Beauchamp]

I think the RSN model works pretty well IF a long-term view is taken and not the constant, money-money-NOW approach we've seen for decades.

Having baseball, hockey, and basketball on a single channel is a good thing for all involved parties, including fans.

But drastic changes are needed. RSNs will need to move to higher-tier cable packages. Blackouts must end. EVERY TEAM must be available to stream, free of long-term obligations and bundling.

The cash cow is gone. It's not coming back. It's time to meet fans where they are instead of trying to push them somewhere they haven't wanted to be for two decades.

[TheLeviathan]

9 minutes ago, Mike Sixel said:

I can almost guarantee that another level of the minors is gone.... Especially with college baseball increasing. The owners will want someone else to pay four development. 

No idea if the bubble is finally bursting, but people have been saying the sports bubble will burst for years and years...

I'll believe it when I see it.

Apple or Amazon or Google may swoop in and save them.  But make no mistake...unless non-baseball watchers are subsidizing the payouts, the payouts are going to drop substantially.

[Jocko87]

3 minutes ago, Mike Sixel said:

I can almost guarantee that another level of the minors is gone.... Especially with college baseball increasing. The owners will want someone else to pay four development. 

No idea if the bubble is finally bursting, but people have been saying the sports bubble will burst for years and years...

I'll believe it when I see it.

It's bursting right in front of us. It's so big It's hard to tell and will take a long time.

Sports gambling is the harbinger of doom. There is no way it's embraced like this if they aren't desperate.  Owners in all sports are fully aware that the financial system is a house of cards.

The PGA Tour is just a few years ahead of everyone. On the bright side, MLB can now have private equity owners.  Completely unrelated, I'm sure.

 

[jmlease1]

There's going to be a real danger of actually having a problematic tier system within MLB related to revenues where teams like the Yankees, Dodgers and a small handful of others (maybe Mets and Cubs?) are operating with revenues that are far and away beyond what any other club is generating locally that gives them the ability to not have to change their models significantly when everyone else is cutting back substantially. You'll have a large chunk (15-20) teams that function somewhat in the same ecosphere for payroll, and then a handful of teams that are flipping out non-competitive payrolls. but what's problematic is those structures, especially at the top can ossify.

Look at what's happening in the Premier League, where clubs like Manchester City, Chelsea, Tottenham, Liverpool, Manchester United, and Arsenal live in an entirely different world of revenue generation, in part because they've been so consistently in the top 6 of the Premier league for so long, elevating their status locally, regionally, nationally, and internationally and drastically increasing their ability to generate sponsorship and merchandising revenue, not to mention match-day revenue. The attempts at financial fair play rules imposed to stop another Citeh coming in and buying their way up the top and staying there until their revenues catch up have also made it safer than ever for those "big clubs" to stay at the top, no longer fear relegation, etc.

How do you manage baseball if the Yankees and Dodgers are always so much more successful than everyone else? or is MLB fine with that? Do they think that expanded playoffs with short series at the start provides enough upset potential that it doesn't matter if a big market big money team wins 110 games?

[Vanimal46]

40 minutes ago, TheLeviathan said:

The direct-to-consumer model isn't viable IMO.  The amount of money lost would be crippling.

Yeah, the solution has to be multi-pronged. Work a deal to get the games on an over the air channel, and nurture the relationship with cable/satellite companies. 

I haven’t been able to find any subscriber numbers for Arizona, but the Padres have 40,400 paid subscribers to their direct to consumer product. The Padres are making roughly $4.5 mill from streaming. That’s not gonna pay the bills. 

Edit: Correction it’s 45,400 paid subscribers 

[TheLeviathan]

3 minutes ago, Vanimal46 said:

Yeah, the solution has to be multi-pronged. Work a deal to get the games on an over the air channel, and nurture the relationship with cable/satellite companies. 

I haven’t been able to find any subscriber numbers for Arizona, but the Padres have 40,400 paid subscribers to their direct to consumer product. The Padres are making roughly $4.5 mill from streaming. That’s not gonna pay the bills. 

Thank you for finding those numbers.  The Twins had a crappy deal that was paying 40M.  You're looking at a 90% haircut going direct to consumer.

I've been saying it for years - that model is NOT viable.  

[DJL44]

Sports are still great at generating cash on TV. They command high ad rates because people are much less likely to skip the ads.

Old model: People with money who don't watch baseball pay MLB a lot of money through cable subscriptions for games they don't watch. People with less money who want to watch baseball can't watch their favorite teams play on television. TV audience actually watching baseball shrinks every year.

New model (hopefully): People who actually like watching baseball are able to watch the games of their favorite team without restriction. Number of people watching baseball games on TV increases by 2 to 4 times. Advertisers have a larger pool of people available to watch their advertising.

The new model may not make as much money, but it will still make plenty of money. Easier access to games on TV might even grow the sport as more people follow their local teams.

[USAFChief]

8 minutes ago, Vanimal46 said:

Yeah, the solution has to be multi-pronged. Work a deal to get the games on an over the air channel, and nurture the relationship with cable/satellite companies. 

I haven’t been able to find any subscriber numbers for Arizona, but the Padres have 40,400 paid subscribers to their direct to consumer product. The Padres are making roughly $4.5 mill from streaming. That’s not gonna pay the bills. 

The article also says the Padres are still available via local cable/satellite systems.

 

That seems like the key to me.

Get rid of the blackouts, which will mean less money from cable/satellite, but add some revenue back through streaming. 

 

[TheLeviathan]

2 minutes ago, DJL44 said:

 

New model (hopefully): People who actually like watching baseball are able to watch the games of their favorite team without restriction. Number of people watching baseball games on TV increases by 2 to 4 times. Advertisers have a larger pool of people available to watch their advertising.

Can you explain where/how you see the number of people increasing by 2 to 4 times?

[nicksaviking]

18 minutes ago, Jocko87 said:

It's bursting right in front of us. It's so big It's hard to tell and will take a long time.

Sports gambling is the harbinger of doom. There is no way it's embraced like this if they aren't desperate.  Owners in all sports are fully aware that the financial system is a house of cards.

The PGA Tour is just a few years ahead of everyone. On the bright side, MLB can now have private equity owners.  Completely unrelated, I'm sure.

 

Can't agree with this. The revenue from sports betting is insane, the billionaire's would happily take this income regardless of the health of their sport. The NFL owners are thriving and they're the ones pushing the sports betting the hardest.

[Vanimal46]

2 minutes ago, USAFChief said:

The article also says the Padres are still available via local cable/satellite systems.

 

That seems like the key to me.

Get rid of the blackouts, which will mean less money from cable/satellite, but add some revenue back through streaming. 

 

Agreed. They’re not going to receive the lump sum from the RSN anymore for exclusive rights. I don’t know how realistic this is, but they should open it up and negotiate with existing cable/satellite providers, over the air channels, YouTube TV, Hulu, etc. The idea is to make it so simple to watch their content no matter who you use as a TV provider. 

[TheLeviathan]

Just now, Vanimal46 said:

Agreed. They’re not going to receive the lump sum from the RSN anymore for exclusive rights. I don’t know how realistic this is, but they should open it up and negotiate with existing cable/satellite providers, over the air channels, YouTube TV, Hulu, etc. The idea is to make it so simple to watch their content no matter who you use as a TV provider. 

Even then, with the extra local money, they're not making up tens of millions of dollars.  This model is a major drop in revenue if it's the path forward.  I don't know any other way around that.

It gets your product in front of people (a good thing!) but at a steep discount to your bottom line.

[Vanimal46]

Let’s just say all 13 teams team up and create a network on Amazon Prime… Sure, you’re going to get existing baseball fans to subscribe. But you’re probably not getting new eyes on the sport. Apple TV has an MLS package available to purchase that I have no interest in pursuing. If I could watch their content on CBS first, and decide I like it, then maybe I would purchase the MLS package. 

[DJL44]

2 minutes ago, TheLeviathan said:

Can you explain where/how you see the number of people increasing by 2 to 4 times?

Less than half of people subscribe to cable/dish. Among people 18-30 it's 30%. Those numbers are 2 years old, and cable is shedding millions of viewers each year. Many of the people who have cable subscriptions were unable to get Twins games because BSN was so bad at getting the games broadly distributed. Dish Network hasn't had games for years and Comcast was blacked out for the entire summer. The latest estimates had the Twins reaching 15% of their audience through BSN.

[TheLeviathan]

2 minutes ago, DJL44 said:

Less than half of people subscribe to cable/dish. Among people 18-30 it's 30%. Those numbers are 2 years old, and cable is shedding millions of viewers each year. Many of the people who have cable subscriptions were unable to get Twins games because BSN was so bad at getting the games broadly distributed. Dish Network hasn't had games for years and Comcast was blacked out for the entire summer. The latest estimates had the Twins reaching 15% of their audience through BSN.

Well, perhaps relative to last year's debacle in this specific market, you might see that jump.  But overall, compared to 5 years ago, you're going to have less people paying into the model and less advertising dollars.  

The Padres have a rabid fan base and they are making 4.5M.  Compare that to RSN deals at 60M and I can't see that as any reasonable way to argue is "plenty of money".  It might still be worth doing, but it's a massive drop.

[S Bart]

25 minutes ago, Vanimal46 said:

Yeah, the solution has to be multi-pronged. Work a deal to get the games on an over the air channel, and nurture the relationship with cable/satellite companies. 

I haven’t been able to find any subscriber numbers for Arizona, but the Padres have 40,400 paid subscribers to their direct to consumer product. The Padres are making roughly $4.5 mill from streaming. That’s not gonna pay the bills. 

Edit: Correction it’s 45,400 paid subscribers 

Well, the team has increased in attendance and Padres merchandise has boomed in San Diego.  TV deals are not the only portion of the business income. I will guarantee that the number of subscribers will be higher next year.

[nicksaviking]

MLB has already lost a generation of fans by only being concerned with short term profits. It's going to take years for them to build back up, if they can do it at all.

And if they can't get the yearly dividends that they used to from TV deals, I'm guessing there will be a lot of owners selling and cashing out on the huge equity they've gotten in the decades since they bought the teams. But new owners now without the decades of equity and smaller profits will just mean smaller and smaller payrolls. At some point, the non-major market owners are going to have to tell the large market owners and the MLBPA, that there's three options. Near complete revenue sharing like every other pro league, contract all the non-major markets or boot the major markets from the league. If there's a fourth option that keeps things as they are, I haven't heard anybody suggest it yet.

[DJL44]

3 minutes ago, TheLeviathan said:

The Padres have a rabid fan base and they are making 4.5M.  Compare that to RSN deals at 60M and I can't see that as any reasonable way to argue is "plenty of money".  It might still be worth doing, but it's a massive drop.

They're making $4.5M in subscriptions. How much are they making selling ads to those subscribers? The real money is in selling the viewing audience to advertisers.

[TheLeviathan]

1 minute ago, DJL44 said:

They're making $4.5M in subscriptions. How much are they making selling ads to those subscribers? The real money is in selling the viewing audience to advertisers.

How much do you think they can sell to advertisers when it's only 40,000 people (at most) watching?

[DJL44]

3 minutes ago, nicksaviking said:

At some point, the non-major market owners are going to have to tell the large market owners and the MLBPA, that there's three options. Near complete revenue sharing like every other pro league, contract all the non-major markets or boot the major markets from the league. If there's a fourth option that keeps things as they are, I haven't heard anybody suggest it yet.

100% revenue sharing of broadcasting. 0% revenue sharing for local ticket sales, concessions, etc. That's the model that encourages teams to put fans in the stands.

[Trov]

3 minutes ago, DJL44 said:

They're making $4.5M in subscriptions. How much are they making selling ads to those subscribers? The real money is in selling the viewing audience to advertisers.

It is a good question, but most reports from TV people have been that streaming advertising has generally been less money than live TV.  Maybe this has changed over the last few years with so much more streaming going on, and all of them going with ads.  I know my wife watches Pirates games through MLB app, and there are a few ads, but much of the time between innings are just saying we will be back.  You would think MLB would be able to have ads fill that space, but they do not. 

[TheLeviathan]

Using this as a guide that would be about $400 per commercial.  ($10 per 1000.  That's 40 x 10 for 40k people) Let's call it $500 for fun.  (This would be top end then)  5 commercials per inning break plus pre and post would be about 60 commercials per broadcast?  That's about 30k per broadcast.  Which works out to be about 5M per season.

So 10M total with ads and subscribers.  And that's the top end of what I can argue.

[DJL44]

1 minute ago, TheLeviathan said:

Using this as a guide that would be about $400 per commercial.  ($10 per 1000.  That's 40 x 10 for 40k people) Let's call it $500 for fun.  (This would be top end then)  5 commercials per inning break plus pre and post would be about 60 commercials per broadcast?  That's about 30k per broadcast.  Which works out to be about 5M per season.

So 10M total with ads and subscribers.  And that's the top end of what I can argue.

So $10M off streaming, plus whatever they're still making from cable/satellite.

[TheLeviathan]

Just now, DJL44 said:

So $10M off streaming, plus whatever they're still making from cable/satellite.

I don't think you're going to be able to do both without running into all kinds of problems with blackouts or negotiations.  You're splitting the pot and everyone will drop their rates since they aren't getting exclusivity.

[Trov]

MLB is for a huge shake up, and should have done it years ago.  The problem is the owners and players have fought for years over who wins the contracts, and not thinking that rising tides raises all boats.  They would rather fight over how much of the pie they each get, and not thinking how can we work together to get a larger pie to share. 

Now teams are saying they need to cut payroll because of lost TV money.  Players do not care about that.  It is going to lead to players not getting contracts they think is right, but if there is not sharing of money from the super market teams to the small/mid market teams, it will lead to the top top guys only being able to go to the mega market teams.  Once they have their rosters filled, they will not sign other players.  Then the players will still demand huge money, but the lower teams either will not have it, or will choose not to spend it because why bid against themselves? 

I have long said they need to get a revenue sharing split similar to NBA.  A salary cap/floor is set based on how much money comes into the sport.  You have to spend money then on players.  Superstars still get paid, but it actually will increase what the mid-level guys get, because teams need to spend.

The players will never go for it because they one do not trust owners, and two they have always said no cap, but forget a cap will come with a floor. 

[jmlease1]

14 minutes ago, nicksaviking said:

MLB has already lost a generation of fans by only being concerned with short term profits. It's going to take years for them to build back up, if they can do it at all.

And if they can't get the yearly dividends that they used to from TV deals, I'm guessing there will be a lot of owners selling and cashing out on the huge equity they've gotten in the decades since the bought the teams. But new owners now without the decades of equity and smaller profits will just mean smaller and smaller payrolls. At some point, the non-major market owners are going to have to tell the large market owners and the MLBPA, that there's three options. Near complete revenue sharing like every other pro league, contract all the non-major markets or boot the major markets from the league. If there's a fourth option that keeps things as they are, I haven't heard anybody suggest it yet.

It's the revenue sharing that has kept the NFL so healthy more than anything else. Even the non-guaranteed contracts weren't really a difference-maker (there's more guaranteed money than ever and it's totally fine). but local revenue in the NFL was also limited to game-day revenue and merchandizing, and the MLB and the NBA have much bigger local pools working. The NBA has been able to manage their way through it a bit with stronger salary cap rules and huge revenue growth nationally on TV contracts...MLB has almost none of that.