Players May Try to Leverage RSN Rebates as Owners Seek to Protect Asset Class, Even Break Union
It’s easy to visualize the 30 Major League Baseball owners as a cadre of reptiles, so it makes sense that they’re running their league like Gordon Gekko. Except that greed, for lack of a better word, is not good for the sport of baseball. Therein lies the conflict between treating team ownership as little more than a prestigious form of asset diversification while at the same time actively poisoning that asset’s viability.
I’ve been writing here for years now that an owner’s true goal is not necessarily accumulating annual profits, but in owning an asset that generates tremendous revenue while appreciating at a high rate. The revelation of the Atlanta Braves’ financials proved that there can indeed be profit in MLB as well, though you’d be shocked to know how many people chimed in to “well actually” the numbers.
Then you’ve got those teams like the Rays and Pirates, among others, that are able to rake in cash by operating skinny payrolls and pulling down revenue-sharing funds. Doesn’t matter that their ballparks aren’t full, they’ve got guaranteed income from national broadcast deals and the excesses of teams in bigger markets. If you want to know why the league’s “best and final” offer included a competitive balance threshold that remained static for three years, look no further than the teams that want to see it exceeded.
My view of how billionaires really view professional sports — MLB in particular — was formed by a conversation with one of them, though I hadn’t really seen it echoed publicly before or since. Most decry the difficult nature of running a team within the arduous confines of the collective bargaining agreement, specifically arbitration raises and the CBT. Hell, the commissioner said during his press conference that the league has had revenue difficulties over the last five years.
But what if — and this may be very difficult to hear, so please have a seat — the commissioner and owners are lying? Wow, I heard you gasp from here. If we can accept the notion that these would-be stewards of the game are really only concerned with their investment portfolio, a big chunk of which happens to include a team for which you feel great affection, we can better understand why it is that these people really don’t give a shit about you.
For more on that, take a look at the column Jeff Moorad wrote for Sportico about “the evolution of sports as an asset class.” Moorad started out as an agent, representing the likes of Troy Aikman, Manny Ramirez, and CC Sabathia, before becoming CEO of the Arizona Diamondbacks. He was then named vice-chairman and CEO of the San Diego Padres and is now the principal of MSP Sports Capital, chairman of the Morgan Lewis Sports Industry team, and an adjunct professor at UCLA Anderson School of Management.
There’s a great deal more context in the piece, but this snippet lays out a lot of what you need to know [all emphasis mine].
Fundamentally, investors are attracted to the disproportionate annualized returns available in sports, with limited relative downside risk. The indexed valuation performance of sports franchises and clubs has far outpaced the S&P 500 over the last decade, and in some leagues, such as the NBA and MLB, has done so dramatically. Rising valuations have shown to be uncorrelated to on-field performance or to the broader market cycles. For a disciplined institutional investor, sports represent a significant uncorrelated diversification opportunity for a portfolio. At MSP Sports Capital, the sports investment fund I founded with Suns vice chairman and NBA Board of Governors member Jahm Najafi and Sportradar’s North American CEO Arne Rees, we believe that the combination of competitive dynamics, cultural significance and increasing management sophistication positions teams, leagues and sports-related businesses for continued growth of revenues, incomes and valuations.
The issue with all of this from an MLB perspective is that, while the sport can’t ruin itself overnight, the downstream impact of lost games could be disastrous for the league’s revenue model. Even the short-term risks become palpable if more games are canceled beyond the first two series, something the union no doubt understands and will seek to leverage. The players are already in “FU mode,” as one source put it, so they could just dig in and see if they can hit owners where it hurts.
As Jeff Passan laid out, teams will owe rebates to the regional sports networks that carry their local broadcasts unless a minimum number of games are played. That figure varies from 138-150 by team, hence the league’s willingness to forfeit up to a month of the season without sweating. When you factor in the reduced value of those games relative to the playoffs and figure that losses would be mitigated by non-existent payroll obligations, April is pretty expendable.
That said, a team like the Los Angeles Dodgers that enjoys a massive revenue push from its RSN deal may not want a protracted standoff. Even smaller-market teams with significantly reduced deals are going to want that guaranteed cash flow. But the bigger issue comes in the form of subscription streaming services, which will suffer greatly from a lack of desire.
Remember how Sinclair is trying to drum up interest from MLB teams, the Cubs being one of them, for what would essentially be the Netflix of sports? While some people surely have interest across multiple leagues and will subscribe to get access to several NBA and NHL teams, it’s hard to imagine many Detroit Tigers fans lining up to pay nearly $20 a month when their team isn’t even playing.
The hardcore fans may not stay away for long, but what about those on the fringe who will wash their hands of baseball for good (or at least for a year or two)? Might the heavy hitters paying billions for postseason rights start to rethink the wisdom of that investment when it comes time to renew those contracts in the future? ESPN already reworked its deal to reduce regular-season coverage in favor of playoff games, though even that will be in jeopardy if players nix expansion efforts.
If the goal is truly to foster asset appreciation, and I have no doubt it is for most owners, shouldn’t they be thinking big-picture here rather than fretting over a few million more in salary being paid to rookies? The answer is yes, though there could be some even more insidious motivating factors when it comes to how some of these stewards are approaching negotiations.
Baseball America’s Kyle Glaser tweeted recently that one “prominent, influential owner had been openly saying his goal during negotiations was to ‘break the union,’ not find a fair deal.” While said owner is probably an outlier in terms of union-busting being his primary goal, he’s certainly not alone in wanting to exert power over the players in addition to making more money.
Back in December, I was told by a team official that a prominent, influential owner had been openly saying his goal during negotiations was to "break the union", not find a fair deal.
Not all 30 principal owners feel this way, but the fact that mindset exists is problematic.
— Kyle Glaser (@KyleAGlaser) March 2, 2022
Even though assholes always seem to win in these situations, it’s entirely possible that enough of them understand how much they could end up losing if they continue to dig in with their unserious negotiating tactics. Then again, maybe they are taking the perpetuity of their investment for granted. Perhaps the league has tried so hard to get fans to look at trees like Max Scherzer and Bryce Harper instead of the forest of pre-arb players constituting a majority of the workforce that it has lost all perspective.
What will it take to get owners to clean off their glasses and see what’s really going on? I’m skeptical that cutting checks to RSNs for a few games will be enough to light a fire, though I do feel confident that fear of eventually losing postseason revenue streams could wake a few people up.
It’s a bad situation for fans either way, then you add in those stadium workers and municipalities that should be benefitting from spring training activities. And how about all the seasonal employees at Wrigley Field and elsewhere whose livelihoods are at stake? Remember, it’s not just the ballplayers who aren’t getting paid during the lockout the owners proactively imposed.
This really needs to get figured out, but I’m not sure how and when that happens if the owners choose to keep making offers the union is never going to accept.