Wednesday, December 12, 2007
El Guapo’s Ghost is delighted once again to have the opportunity to ask Vince Gennaro questions about the business of baseball and its impact on the product or better known as your local nine. Gennaro is a consultant to MLB teams, author of Diamond Dollars and a former president at Pepsico.
El Guapo’s Ghost: What are your thoughts on the Red Sox taking a stake in Rousch Racing?
Vince Gennaro: I think it’s great. Not because I think there is great synergy, but because they are aggressively looking for ways to generate revenue and asset appreciation, which should ultimately help the resource base of the Red Sox. The whole concept of Fenway Sports Group is a model that other teams should follow. Not enough baseball teams believe, as the Red Sox seem to, that the goal of the business side of the ballclub is to maximize revenues in order to fund baseball operations. Too many teams look at what baseball operations produces and says, "how much revenue can I generate from the team's performance", but I think that's far too narrow a view.
EGG: The one synergy I see is that they are able to better utilize their current marketing and selling staff that handles the ad selling for the Sox, NESN, BC, and Rousch.
EGG: You have already given your take on A-Rod’s deal with NYY for Yahoo Sports, but I have not heard anything more on the potential sale of the non-Yankees stakes in YES Network. If they are going to sell, would MLB consider buying a piece of the Regional Sports Network (RSN)? It could be the best way to redistribute revenues throughout baseball.
VG: It's an intriguing idea, as it could be a great way to have the other teams share in the spoils of the Yankees, but I see some obstacles. First, it would be a difficult pill to swallow for MLB to pay for a share of an asset (that the Yankees built) valued potentially at $3 billion, when the asset didn't even exist 5 years ago. I think that would be a big psychological barrier to get over. Second, I'm not sure the return will be worthy of the investment going forward. The YES economic model is in place, they're beyond the high risk start up phase, which yielded the high returns. Now, I would expect YES to settle in and be a more stable business with more reasonable appreciation. In fact, with Hank Steinbrenner calling the shots, there could be considerable downside if the Yankees don't make the playoffs for say, 2 of the next 3 years. Finally, a share of YES should be worth more to a strategic buyer, like MSG, or a regional Fox Sports affiliate who might get some synergies.
EGG: Did the Tigers’ market change from your assessment that they are a low baseline and marginal revenue club in the past few years? And do you think Mike Illitch is positioning himself to start his own RSN?
VG: Definitely...even when I categorized them as a low baseline/low marginal revenue club, they were borderline. I will say that the 43 win season did a lot of damage and at the time I did that assessment, they were still reeling (attendance and revenue-wise) from that horrible 2003. (Incidentally, in case you hadn't seen it, the Tigers sold $1.3 million in tickets in the 48 hour period after the Cabrera-Willis trade was announced) The Tigers are moving into a perfect situation to launch an RSN. Last year they were at 93% capacity in Comerica and this year they will likely inch closer to a sold out situation. In light of that, they need to create another vehicle to monetize the future demand they'll generate if they continue to win, or ultimately deliver a World Championship. I don't know the length of their agreement with Fox Sports North, but there are often buyout clauses and they should definitely explore it.
EGG: In the future, do you foresee the MLB Channel bidding and winning the broadcasts for smaller market clubs?
VG: It is an interesting thought that raises huge conflict of interest questions. For example, one way for MLB to funnel more dollars to small market teams is to pay them above market rates for their telecasts and lose money on the deal. (Meaning, instead of the Royals getting say, $10 million for a TV deal, MLB could offer $30 million and use it as a way to level the playing field) So, while I don't know what MLB will do, I could see it as something that MLB and its members decide to prohibit because of the conflict issues. Plus, selling ad time for these broadcasts is a local market endeavor and I don't think MLB would be in a good position to create any value there. I do see them eventually telecasting some national games, ala the NFL Network and using the MLB network to secure the best deal with Fox, ESPN, TBS. etc when they're up for renewal.
EGG: MLB is concerned about conflict of interest issues? Even if MLB never intended to broadcast games, another bidder would provide the Royals with a better negotiating position. As far as selling local ad time, MLB could contract that out to the team’s M&S department.
EGG: Do you think MLB is trying to recruit Oprah to be a part of the group that purchases the Cubs? Oprah can still bring in an entirely different/female demographic that would eventually increase broadcast and ad rates.
VG: It's a great idea. There is no one bigger in Chicago and you're right about the female demographic. She is also a media mogul, which could possibly aid the Cubs as well. What the Cubs really need to do is adopt the John Henry-Red Sox model. Take a small capacity, historic ballpark and find ways to further expand it and create revenue streams beyond the stadium that capitalize on the passion of Cubs fans. The best thing that ever happened to the Red Sox was to be sold for $700 million. At that cost basis, ownership has no choice but to run it as a real business, which many fans think is the "kiss of death", but its just the opposite. It's all about building a player development system that allows you to sustain a competitive team and finding ways to monetize the demand you create when you win. With a new ownership group paying somewhere in the neighborhood of $1 billion, I'm confident they will find the best minds to craft and execute a strategy that will lead to success...even if it doesn't come as quickly as it did for the Sox.
EGG: I think it is going to be tougher for the new Cubs owners than for Henry-Werner as they will have a small stake in the RSN. The RSN is the Cubs biggest opportunity to grow revenues like the Sox. This, among other things, made me think that Oprah was a perfect match before she sold Oxygen.
EGG: You mention player development. What are your thoughts on the relatively large investments / signing bonuses the Yanks, Tigers and Sox have been dishing out over the past few drafts and international signing periods? My calculations indicate that these are wise investments for not only large market clubs but for smaller revenue teams as well.
VG: The large investments in the draft and Latin America the Yankees, Red Sox and Tigers are making are absolutely great decisions. It is virtually impossible to overpay (in the form of signing bonuses) in the early rounds of the draft. Given the drafting teams expectation about the player, and also the track record of early round draft picks, it would cost many more millions to purchase the same number of wins in the free agent market. (I have an article on this topic--the Dollar Value of Player Development--in the new Hardball Times Annual--2008, which is out now, that goes deeply into the numbers). For teams with deep financial pockets (Yanks/Sox) Latin America is even better since they don't need to "stand in line" and wait their turn to sign players, as they do in the reverse order amateur draft. Tampa Bay also "gets it" they spent the equivalent of 30% of their 2007 payroll on the #1 overall pick in the draft, David Price a pitcher from Vanderbilt. Also, given the relative cost of pitching in the free agent market, at least half the first round picks should be pitchers. In most years, the tenth best pitcher is probably a better draft investment than say, the third best position player. The Royals should have a $25 million payroll, while doubling their scouting and player development budget, instead of a $70+ million payroll and pinching pennies on player development by passing over Rick Porcello and others like him, due to his bonus demands.
This leads me to comment on the potential of the proposed Santana trade. I believe it is either a bad deal for the Yankees or Red Sox...unless Santana's agent is an idiot. Why trade Lester (or Hughes) plus other prospects for what amounts to one year of control of the best pitcher in baseball and then the right to pay him market wages (say, $160m over 6yrs...+ luxury tax). If the agent is remiss in his role, he may "deliver" Santana to his traded team with a lower value deal. If he's doing his job, what you get in a trade for Santana is a $30 million pitcher in 2008 for about $13 million...and the inside track on paying market wages (or slightly less) for a long-term deal. If you look at what Hughes or Lester is expected to deliver through their pre-arb and arbitration eligible years, the cost at which they will deliver it, vs. the replacement cost of buying those wins in the free agent market. These players (Hughes/Lester) have an "asset value" of $50+ million. I would not deal either pitcher straight up for Santana, unless it coincided with a below market deal, e.g., 4 yrs at $18m per year, for Santana. The Red Sox and Yanks would be better off spending extra $ in player acquisition in the DR and Venezuela, Japan, etc.
EGG: While I do not think it is significant for the Sox and Yanks, the additional revenue Santana would bring in over a Hughes or Lester should be considered. Also, the immediate branding opportunities a Cy Young award winner would give an organization has be a consideration in the trade analysis.
El Guapo's Ghost would like to thank Vince for his insightful answers and of course his time.