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Pete Toms Article Archive
Written by Pete Toms   
Monday, 28 September 2009 08:38

Last Week in Bizball by Pete Toms

This week in LWIB, the abysmal performance of the Pittsburgh Pirates calls in to question the usefulness of revenue-sharing in MLB, the “nonsale sale” of the Chicago Cubs and will ESPN’s growing collection of local websites bring more urgency to the issue of control of local digital rights in MLB?

THE PITTSBURGH PIRATES AND THE REVENUE-SHARING DEBATE

The Pittsburgh Pirates last winning season was 1992. Even in that context, their dismal September performance has been noteworthy. LWIB, Dejan Kovacevic wrote for the Pittsburgh Post-Gazette, “This is, officially, indisputably, the worst baseball seen in Pittsburgh in more than a century.” Earlier this month LWIB reported that in reaction to the on field dominance of large payroll clubs this season, some small payroll clubs are agitating for increased revenue-sharing in the next CBA. Pirates President Frank Coonelly is among that group.

The continuing, long term, on field futility of the Pirates inevitably leads to a debate which has been ongoing within MLB since revenue-sharing was introduced after the 1994 strike. Are small market franchises investing their revenue-sharing receipts in improving their baseball teams or using that revenue for other purposes? Murray Chass wrote recently about the Pirates.

The Pirates, one of the smallest revenue teams in the majors, received approximately $40 million in revenue-sharing last year and most likely will get at least that much, despite the economy, for this year. One thing we know for sure. They aren’t spending the money to pay players.

Under the collective bargaining agreement, teams that receive money have to notify the commissioner’s office each April what they did with the money the previous year.

“They’re going to have some explaining to do,” a baseball official said. “It’s going to be difficult for them absent some substantial moves between now and April.”

High-revenue teams don’t appreciate revenue recipients that don’t spend the money to improve themselves but pocket it instead. The commissioner’s office is supposed to monitor the spending to make sure teams use the money as they’re supposed to, but no team has ever been disciplined or even reprimanded for not using it correctly.

The Pirates might be a good place for the commissioner to start.

This criticism of revenue-sharing is not new and not restricted to the Pirates. Since revenue-sharing was introduced there have been many examples of small market clubs (including the 2009 Pirates) whose revenue-sharing receipts exceeded their big league payroll. These same small market clubs also receive central fund dollars (national TV, merchandising). In fairness to the Pirates, Mr. Chass noted in a follow-up column that they have increased their investment in the amateur draft the past two seasons and also spent money on a new Dominican baseball academy.

According to Commissioner Selig, approximately $450 million will be redistributed this season as per MLB’s revenue-sharing formula. However the payouts and receipts of individual clubs is a bit of a guessing game as MLB is increasingly secretive about the details. Maury Brown reported for The Biz of Baseball in June that MLB has been withholding the figures from the media for the past few seasons.

MLB acknowledged during the last CBA negotiations that there were problems with the revenue-sharing formula in MLB. MLB concluded that under the previous CBA, the revenue-sharing formula provided too much disincentive for clubs to increase local revenues ( i.e. win more games, improve stadiums ). Put too simply and crassly, it was too often more financially advantageous for clubs to field inferior teams and maximize on revenue-sharing. The current CBA was amended to address this problem. Sports Economist Andrew Zimbalist was employed by MLB during the last CBA negotiations to change the revenue-sharing formula with the goal of improving upon its contribution to greater competitive balance. Again, too simply and crassly, the marginal tax rates upon which revenue-sharing are calculated were lowered in the current CBA. Mr. Zimbalist explained the new revenue-sharing formula in The Sports Business Journal in 2006. Of the former formula Mr. Zimbalist wrote;

Such a high marginal rate discouraged the low-revenue club from improving team performance and undermined the system’s goal of greater competitive balance.

Second, it created a cliff problem, whereby a team initially just above the median could, after revenue-sharing, end up with less net revenue than a team just below the median.

The new deal addresses these problems

And of the new formula Mr. Zimbalist wrote that it, “…provides a stronger incentive to teams to increase local revenue.” Mr. Zimbalist also wrote of the new formula, “These factors encourage team success as well as entrepreneurial behavior by the owners.”

Whether or not the changes made to revenue-sharing under this CBA have ameliorated the problems present in the former formula is probably only known by the owners and the MLBPA. Prior to this season there was evidence of greater competitive balance under the current CBA. Last season the Rays and Brewers both competed in the post season and in 2007 no club either won or lost 100 games - a rarity. However this season large payroll clubs will comprise practically all of the playoff teams, resulting in renewed concerns about “competitive balance” amongst pundits. Earlier this month, Joe Posnanski provided a broader perspective at SI.com.

There have only been 20 streaks in baseball history where a team finished below .500 for 10 or more seasons in a row -- and a quarter of those have come in the last decade. And those five long losing streaks don't even include the Royals, whose quirky 2003 season interrupted 14 losing years, or the Reds, who are one year away from a 10-year losing steak of their own.

Maury Brown argued recently at The Biz of Baseball that increased parity in MLB (if parity is measured by the number of small payroll clubs in the postseason) is a direct result of the introduction of the wild card. Will the next CBA (the current agreement expires in December 2011) see more teams qualifying for the playoffs? While not advocating for the change, last week Peter Gammons discussed the benefits of expanding the playoffs. No doubt an expanded playoff format would prompt a bitterly negative reaction from many hardcore baseball fans and writers but it could satisfy the small market franchises demands for greater competitive balance.

Select Read More to see details of the Chicago Cubs "Non-Sale Sale". and Local ESPN.coms and MLB Digital Rights Fees

 

 

THE “NON-SALE SALE” OF THE CHICAGO CUBS

LWIB saw the sale of the Chicago Cubs from Tribune Co. to a group headed by Thomas Ricketts move forward when a Delaware bankruptcy judge gave his blessing to the transaction. As the deal nears completion (MLB owners could approve the deal in November) LWIB saw reports very critical of the structure of the sale. Maury Brown explained for The Biz of Baseball, “The structure of the transaction is technically not a “sale” with Tribune continuing to own a minority stake. In what is called a “leveraged partnership”, Tribune would avoid hundreds of millions of dollars in capital gains taxes.” The Chicago Tribune (also owned by Tribune Co.) reported, “Such partnerships require the blessing of the Internal Revenue Service, and Tribune Co. has been careful never to call the transaction a sale, a legal treatment that would negate the favorable tax treatment.”

LWIB, Allan Sloan wrote a column very critical of the deal. Mr. Sloan speculates that the deal could well attract scrutiny from the IRS. Mr. Sloan’s piece received much attention, being published in the Washington Post, CNNMoney.com and linked in the New York Times. From Mr. Sloan;

….Zell's nonsale sale of the Cubs, which would work like this. The Ricketts family, founders of Ameritrade (now TD Ameritrade), would put $150 million of cash into a partnership that would also borrow up to $698 million. Tribune would put the Cubs, Wrigley Field and related assets into the partnership.

Tribune would emerge with $740 million of cash and 5 percent of the partnership, while the Ricketts family would have 95 percent and operating control. Call me naive, but it sure seems to me that when you start with 100 percent and full control and end up with 5 percent, $740 million and no control, you've sold 95 percent.

Zell's tax folks, however, will argue that Tribune is getting nontaxable proceeds from a leveraged partnership. They'll also argue that Tribune's guarantee of some of the partnership's borrowings makes it a true partner of the Rickettses. Hello? A debt guarantee from a bankrupt company? What's that worth? Can you spell "nothing"?

By my estimate, Tribune would have about a $720 million gain -- the $740 million, less 95 percent of the $21 million Tribune paid for the Cubs in 1981. At a 40 percent federal-state combined rate, the gain would generate about $290 million in taxes. Instead, that money would go to Tribune's creditors.

For additional analysis of the structure and legality of the transaction, see George Washington Law School Professor Sarah Lawsky here and here.

LOCAL ESPN.coms AND MLB LOCAL DIGITAL RIGHTS

The Biz of Baseball has reported extensively on the ongoing efforts within MLB to resolve the issue of control of local digital rights. (See here, here and here.) Clubs (most notably the Red Sox and Yankees) with interests in RSNs have long lobbied for greater control of local digital rights. Their position has been that the clubs, in conjunction with their RSNs, are better positioned than MLBAM to maximize the value of these rights. This season MLB made progress on the long divisive issue, with MLBAM reaching agreements with the Padres and Yankees to provide live “in market” streaming of games.

As ESPN aggressively expands its roster of websites devoted to local content, will RSNs react by pressuring MLB for greater access to digital content? Is there now greater urgency for MLB to strike live “in market” steaming deals with more clubs? Last week Eric Fisher reported that today ESPN will launch ESPNDallas.com. This on the heels of the launch of ESPNBoston.com and the spring launch of ESPNChicago,com. Mr. Fisher also reports that early 2010 will see ESPN sites devoted to Los Angeles and New York. LWIB John Ourand reported in The Sports Business Journal that RSNs are, out of necessity, reacting aggressively to ESPN’s local initiatives.

RSNs have spent years virtually ignoring their Web sites, largely using them as placeholders while waiting for a digital business to develop. While ESPN was developing video and social-media applications, RSN sites offered little more than tune-in information.

In their defense, RSNs had no reason to ramp up an online strategy that promised little revenue. But that inaction is as responsible for opening the door for ESPN to expand locally as the problems local newspapers face.

AND

RSNs, though, believe they have a competitive advantage thanks to the local relationships they have developed with the teams and their fans. Several teams hold stakes in Comcast’s RSNs, including baseball’s Giants and White Sox. In Boston, NESN is partly owned by the Red Sox. Just last week, team owner John Henry launched a blog on NESN.com and told a personal story about David Ortiz.

“That’s the kind of access I’m going to have and no one else is going to have,” said NESN President Sean McGrail.

Most RSNs I talked to believe they will start streaming live local pro basketball and baseball games within the year, something they expect will give them another competitive advantage over ESPN, which will not have those rights. To do that, though, RSNs need to upgrade their sites, and that is something most are already planning.

MLB President and COO Bob DuPuy stated earlier this season that MLB plans to have live “in market” streaming deals in place for most teams at some point next season. ESPN’s local initiatives could accelerate this timetable.


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Pete Toms is an author for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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