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Pete Toms Article Archive
Written by Pete Toms   
Sunday, 01 November 2009 21:47

Last Week in Bizball by Pete Toms

This week in LWIB, how has MLB so far weathered the recession? And an increasing number of clubs are diversifying their revenue streams.

HOW HAS MLB WEATHERED THE RECESSION?

The 2009 regular season saw league wide attendance decline approximately 7%. The final attendance was in line with Commissioner Selig’s preseason forecast and given the recession a strong performance. Clubs also practiced widespread ticket discounting and sponsorship revenues were expected to be under great pressure as a result of the cratering of both the financial services and automotive sectors (traditionally amongst the biggest sponsors). TV ratings, both national and local, were a mixed bag but widely considered stable. As the deadline for offering players salary arbitration approaches, agents, players and front offices are assessing the current financial state of the industry. Fewer tickets were sold in 2009 but the more important question is how much revenue did MLB generate during the season?

LWIB, Mike Ozanian of Forbes interviewed Chad Lewis of Fitch Ratings on how the “big 3” have so far weathered the recession. Mr. Lewis was very upbeat about their financial health, saying in part, “…when we step back and look at the kind of macro revenue streams of the leagues we see a lot of stability in national TV contracts…” As for MLB, Mr. Lewis characterized 2009 as a “very solid year”. Mr. Lewis was encouraged that attendance was down only “5-6%” given the smaller seating capacities of the 2 new ballparks in NYC. Mr. Lewis has concluded that league wide ticket revenues were flat. He attributed this to, “a combination of stronger market teams being able to increase ticket prices where some of the weaker markets have cut ticket prices and have lost some attendance”. Mr. Lewis does say that Fitch “did take an action on MLB last week” (more on that below) but, “we continue to see the underlying fundamentals of MLB being very strong, attendance and viewership was very strong this year and obviously their TV contracts and collective bargaining agreement have to be very stable rating factors”.

The aforementioned “action” that Fitch Ratings recently took on MLB was a downgrade of their “Club Trust Securitization” from A- to A. The downgrade was announced in a press release. Despite the downgrade, overall Fitch is very positive about the present and future financial health of MLB.

The downgrade solely reflects a criteria change related to transaction structures which generally utilize a bankruptcy-remote securitization of future contractual flows.

AND

Importantly, Fitch notes the one-notch downgrade only reflects a change in criteria related to Fitch's opinion regarding the enhancements provided from the legal structure and not related to Fitch's analysis of the principal qualitative and quantitative factors that contribute to performance of MLB.

AND

The 'A-' rating primarily reflects MLB's premiere status as a professional sports league in the U.S. which has operated for over 100 years, the strength and ability to renew future broadcast contracts and the structural aspects of the transaction which isolates noteholders from team level performance. Additionally, the 'A-' rating reflects the fundamentally strong league economics and fiscal governance, including financial covenants, league level borrowing limits, reserve levels and mandatory pay down mechanisms (in the event national broadcast contracts are renewed at lower rates), collective-bargaining agreement (CBA) which is in place through December 2011, historical renewals of national broadcast contracts, attendance and viewership and popularity and international growth initiatives.

Interestingly, Fitch does express some concern about financial and competitive disparities amongst MLB franchises.

While Fitch positively views MLB's economic model and financial policies, a wide disparity exists between the financially strongest and weakest teams. A team's reliance on local revenues, which fluctuate significantly between small and large markets, and a team's discretion to spend unreservedly on player salaries can result in greater financial disparity among MLB teams. This disparity has the potential to lead to a less competitive framework for MLB, however, Fitch recognizes MLB's very long history of viability in very good and very bad economic times and more recently the diversity of MLB clubs that have participated in the post season since 2000 as important mitigating factors. Furthermore, Fitch importantly notes despite the range of financial disparity of participating clubs, noteholders are insulated from team level operations given their rights to national television contracts to service debt prior to distributions to teams for operations.

The success of MLBAM and MLBN are frequently cited by sports biz pundits as key to the future prosperity of MLB. Curiously, neither are mentioned in the Fitch press release nor did Mr. Lewis discuss these entities with Mr. Ozanian. (or at least in the final edited version)

Fitch Ratings’ conclusions about the 2009 season correspond with recent comments made by MLB COO Bob DuPuy. LWIB Mr. DuPuy was quoted by Tom Van Riper of Forbes, "You can't feel too bad when attendance is off but revenue is flat," DuPuy said. "It's a terrific achievement."

Agents and players have found relatively soft demand for the services of free agents the past two off seasons. Already, baseball writers (including Buster Olney) are predicting a continuation of the trend this winter. While many clubs will claim that business is suffering, many on the players’ side will claim there is evidence to the contrary.

Select Read More to see details on how clubs are diversifying revenue streams

MORE CLUBS DIVERSIFYING REVENUE STREAMS

LWIB the Chicago White Sox announced that they are the most recent MLB franchise to launch a new venture outside the traditional model of selling tickets, sponsorships, concessions, etc. Clubs are motivated to generate revenue outside the normal parameters in part because that new revenue is not subject to revenue sharing. The Boston Red Sox led the way with the creation of sports marketing agency Fenway Sports Group in 2004. The aforementioned White Sox’ venture is a bit of a new twist. Ben Klayman reported for Reuters (HT Shysterball);

The Chicago White Sox are stepping up to the plate in the digital media arena.

Silver Chalice Ventures, a wholly owned subsidiary of the Major League Baseball team, is working with customers to boost business online and via mobile platforms by helping clients offer such services as the ability check scores on cell phones.

The revenue raised by Silver Chalice will not be subject to baseball's revenue-sharing rules, meaning everything generated by Silver Chalice belongs 100 percent to the team, said Brooks Boyer, White Sox chief marketing officer and CEO of the new venture.

In September the Tampa Bay Rays announced that they had formed Sunburst Entertainment Group, a marketing unit similar to FSG. From the SEG website;

Sunburst Entertainment Group (Sunburst) is a full service sports and entertainment consulting company that provides sales, marketing and operational business consulting to other sports and entertainment enterprises; makes direct investments in sports and entertainment related projects; and hosts a variety of events at Tropicana Field in St. Petersburg, FL.

LWIB, the Baltimore Orioles distributed an RFP with the goal of overhauling their ballpark concessions and merchandising operations. Their AL East rivals, the New York Yankees, are rumoured to be amongst the concessionaires interested in partnering with the Orioles. Don Muret reported for The Sports Business Journal;

Oriole Park at Camden Yards, which set off the retro craze in MLB ballpark design, may be in line for its first major overhaul as the club looks to keep up with innovations in game-day experiences as well as growth around the park in downtown Baltimore.

Several parts of the park, including Eutaw Street, the festive food court that spawned similar outfield destinations at 12 other MLB parks, could undergo dramatic changes, according to a request for proposals for concessions and merchandise that the Orioles sent to prospective partners.

AND

Firms showing initial interest included Legends Hospitality Management, co-owned by AL East rival the New York Yankees. (LWIB note, the Yankees partner in LHM is the Dallas Cowboys)

The 2009 season saw a continuation of the trend of MLB franchises partnering with concert promoters. This practice is not restricted to MLB. The Gridiron Stadium Network is a coalition of 10 NFL and 1 MLS franchises which, “…works to optimize opportunities to expand the use of the state-of-the-art facilities for new sports, entertainment, public and private events.” Don Muret reported for The Sports Business Journal on the concerts held at MLB ballparks in 2009;

Ballpark concerts at MLB stadiums this summer, led by pop superstar Paul McCartney and the touring tandem of Elton John and Billy Joel, resulted in sellouts and staunch paydays for the Mets, Phillies and Red Sox.

The concert revenue was welcome at a time when everyone in sports is battling the effects of the recession. MLB clubs do not have to share their portion of concert revenue with other teams.

The three teams all struck traditional rent deals with promoters, rather than promoting the concerts themselves, as a few organizations have begun to do. Under the rental arrangement, the acts take most ticket revenue, and the teams make their money on ticket fees, concessions and parking.

AND

The Elton John/Billy Joel tour also hit ballparks in Chicago and Washington, D.C. In Chicago, two shows at Wrigley Field grossed $11.1 million with 77,000-plus in attendance, according to Billboard Boxscore. The Cubs, who own and operate the stadium, declined to comment.

In Washington, Nationals Park had one Elton John/Billy Joel date, its first concert since the facility opened in 2008. Team President Stan Kasten wouldn’t discuss ticket revenue but said the team would like to book more shows in 2010.

If small revenue franchises are successful in increasing the amount of revenue sharing in the next CBA (Brewers owner Mark Attanasio and Pirates President Frank Coonelly have publicly expressed their support for such changes this year) there will likely be a greater number of teams discovering a greater number of ways to generate revenues outside their traditional baseball operations.


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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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