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Albatross Contracts and Baseball Wisdom in Recessions

November 24, 2008
Anybody going to a ballgame next year?

Anybody going to a ballgame next year?

In January 2002, Chan Ho Park was coming off a career year with the Dodgers, sporting a 1.17 WHIP, 218 Ks in 234 IP, and an All-Star appearance. Despite the preposterously large home/away difference in Park’s ERA and batters’ SLG, not to mention Park’s second-half downturn, and the fact that he was coming off five straight years of 192+ innings pitched, the Texas Rangers awarded him with a five-year deal for $65 million.

The following is a list of pitchers who have or had been given albatrossy contracts similar to Park: Mike Hampton (signed Dec 2000, Colorado Rockies, $121 million / 8 years); Denny Neagle (Ibid to both, $51 million / 5 years); Carl Pavano (Signed Dec 2004, New York Yankees, $39.95 million / 4 years); Barry Zito (Signed Dec. 2006, San Francisco Giants, $126 million, 7 years).

Here’s the difference with Park’s contract, and why I’m bringing it up now. In January 2002, while Wall Street was making a moderate recovery from the terrorist attacks of four months prior, indicators were not rosily optimistic (and for good reason, considering the upcoming recession, based largely on those attacks, the dot-com burst, and all those Enron/Tyco/ImClone type dealies that questioned accountability).

So on September 30, 2008, the Cardinals signed a fairly solid #3 pitcher, Kyle Lohse, to a four-year, $41 million contract. This was after all economic indicators showed that a big pile of corn-ridden poo was heading towards the fan. In the three weeks before the signing, Lehman Bros. had filed for bankruptcy, Merrill Lynch was sold, AIG was in the middle of getting $85 billion from the government, Goldman Sachs became a bank holding company, WaMu was sold to Chase, and it was pretty damn clear to most four-year-olds that the economy was in the tank for the foreseeable future.

So, what the hell?

A story we may hear shoved down our throats over the next two months is how sports, movies, and the entertainment industry by-and-large (sorry, megamarket Broadway crap) are recession-proof; that in the wake of the Depression and numerous recessions, people will keep streaming into baseball stadiums. These articles will be written hand-in-hand as teams get into bidding wars to hand out record contracts to C.C. Sabathia, A.J. Burnett, and to a lesser extent, Derek Lowe and Brad Penny.

There have already been a handful of pieces arguing the veracity of baseball’s ability to withstand economic downturns. Tim Marchman, writing in the beginning of this year in the late New York Sun, argued that not only did baseball have a plethora of revenue streams that would shield it from monetary failure, but that in recessions of the past, baseball attendances didn’t suffer:

In 1948, 16 teams drew a total of 21 million fans, an average of 1.3 million per team. In November, the economy tipped into a recession that lasted until October of the next year. During 1949, attendance held steady at 1.26 million per team. These are figures baseball didn’t regularly exceed for another 40 years, until the 1978 expansion led to great gains in popularity in the teeth of yet more negative growth: In 1980, during a recession that lasted from January until July, attendance rose from 1979’s 1.6 million fans per team to 1.7 million. Every team in the National League drew at least a million fans that year.

Examples abound. In 1969, the 24 teams drew 1.15 million fans per team. During a recession that began that December, and lasted until November 1970, attendance increased to 1.25 million per team. More recently in 2000, baseball set a new attendance record at 73 million; the next year, despite a meltdown in technology stocks, it drew 73 million again.

Craig Calcaterra at ShysterBall tepidly rebukes Marchman’s principle, noting that it takes a year for GDP recessions to have effects on the population’s wages and mindsets: 

1948-49 Recession
pre-recession attendance (1948): 20,938,388
recession year attendance (1949): 20,215,365
post-recession year one attendance: (1950): 17,462,977*
post-recession year two attendance: (1951): 16,126,676*

2001 Recession
Pre-recession attendance (2000): 72,702,420
Recession year attendance (2001): 72,567,108
Post recession year one attendance (2002): 67,944,389
Post recession year two attendance (2003): 67,630,052

I’m not suggesting the attendance decline in these two examples was caused by post-recession ennui. Indeed, in each example there were factors — the Korean War and September 11th/Afghanistan/Iraq War — which may have contributed to people turning their attention to things other than baseball in the ensuing years. That said, none of these events had such a great impact that they themselves led to recessions, so we shouldn’t overstate their impact on baseball attendance.

Calcaterra agreed with Marchman re: “(a) season tickets are purchased by richer, more recession-resistant folks; and (b) during recessions, sports and entertainment are often the only things keeping folks away from the ledge.” But he also noted that the different revenue streams MLB has (MLB.tv, merchandise, etc) are also more passive forms of activity, and therefore easier to discard.

A counter-argument came this summer from Peter Bernstein in ESPN the Magazine (which, by the way, is the print nomenclature parallel to like Cedric the Entertainer. Really? This is a magazine, not a tv network? At least with CedricTE it’s part of his appeal. With the magazine I want to eat an old man’s foot whenever I hear a commercial announcer call it as such). Apologies. Back to Bernstein, who shows the economic disparity between average hourly wages of blue-collar workers and ticket prices over the last 17 years:

Earnings versus ticket costs
Year Avg. MLB Tkt. Price Avg. Hourly Earnings
1991 $8.64 $10.52
2001 $18.99 $14.55
2008 $25.40 $18.01

Since 2001, the average worker has fallen further behind and their average hourly earnings are now 29 percent less than the average cost of a ticket.

Bernstein also makes the point that “since going to 30 teams in 1998, MLB attendance has grown an average of just one percent per year. The sport has been making money not by drawing a lot more fans, but by drawing different fans-businesses that are willing and able to pay top dollar to have their place at the ballpark.”

That may be so, but as Marchman and Calcaterra pointed out, there are different revenue streams for teams, and gate receipts are just a portion of that.

Over at the Biz of Baseball, Maury Brown essentially repudiates Calcaterra’s point of easily-discarded other profit outlets, by not worrying about attendance revenue: 

The possible difference in economic downturns in the past and its impacts on baseball as an entertainment option may be that MLB’s increased development of television and the internet products provide new outlets for fans, and therefore, provide a stronger revenue stream for MLB than in the past. If you see that the cost of going to a game is too much, perhaps taking in MLB.TV, Extra Innings, or the upcoming MLB Channel provides fans a way to connects where those options were either not available, or not yet fully utilized during the last recession.

A recession will most likely slow growth for baseball, but at this point, with a number of teams adding new stadiums and the aforementioned MLB Channel coming online in ’09, the odds seem long at this point for a downturn for MLB’s revenues.

Lastly, MLB has at least one serious trump card, should they be faced with numbers that are not to their liking. Placing MLBAM as an IPO would garner a massive cash infusion to MLB. In 2000, MLBAM was said to be worth approximately $2 billion. There’s little doubting that it would be worth more now.

Whew. Ok. That’s a lot to take in. Here are some questions: 1) Will teams suffer economically over the next few years? 2) And even if they don’t think they will, how many teams are going to make a bad business decision this offseason? 3) And does signing a pitcher for two years too many for too much money count as a bad decision?

Here are some thoughts to said questions:

1) I don’t see how, even with those different revenue streams, professional sports franchises won’t take a hit much like every other industry in America.

In the Chan Ho Park thing from way above, the Rangers didn’t get hurt so much. Sure, that contract along with the megadeal A-Rod walked in with were boondoggles that Texas decided to take a step back from. Player expenses (salaries, benefits, and bonuses) for Texas 2001-06:

2001: $76 million
2002: $95 m
2003: $108m
2004: $106m
2005: $81m
2006: $73m

As Texas recovered from those two big contracts, their payroll recouped and took a breather before beginning the climb towards nine digits again. But the overall health of the franchise was fine, thanks to market share and brand management.

But that all still depends on people and companies willing to pay for things. Like jerseys. Or advertising. As this Wall Street Journal article reports, the consumer price index dropped 1% in October, the highest monthly drop ever, consumer spending plummeted 1%, nobody’s building houses, and it’s probably going to be a historically-weak Christmas season, and unemployment will most likely reach at least 8% next year.

Again, this may not matter for the season-ticket holders, but it will matter for lots and lots of fans who are less likely to go to games, sign up for MLB.tv, or buy merch, here or in England/Japan/Italy. Or, say, companies that used to be fine throwing around payments for naming rights a la CitiField may not be doing much.

By the way, one of the things that wasn’t really taken into consideration in the articles – and I’m surprised, actually – is the total cost amount for a family of four to go to a ballgame as compared to real wages between previous recessions and now. The “suburb” ballparks that Chavez Ravine’s Dodger Stadium ushered in – by which I mean ballparks that people are more apt to drive to – are more plentiful now than they were in the early ’30s and late ’40s. Between parking and inflated concessions, I’d imagine (can’t say for sure) that the real cost of attending a three-hour long baseball game is much higher now than it ever was, in accordance with workers’ wages.)

2) Many teams will make bad decisions. If baseball history has proven anything, it’s that team ownership/front offices are slow to the pickup. The MLB entity may be at the forefront of marketing and technology, but the way the businesses are run are not. And yes, bidding wars, shortsightedness, and failure to adapt will ensure that Derek Lowe is for some reason getting a four- or five-year contract somewhere, like in Chicago.

3) And no, those pitcher contracts are not going to be bank-breaking bad decisions, because Chicago, New York1 and New York2, and Boston will be able to take the hit when Fatty Sabathia is rolling around in his own inflated ERA juices in 2011, unable to move his arm past joystick control. Milwaukee, despite its “attempt” at offering a contract, is not really in the hunt for C.C.

 
Major League Baseball as an entity will be fine, of course. Now, will Kansas City be unable to cope with the $24 million they still owe Jose Guillen? That’s a better question.

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2 Comments
  1. vicecommish permalink

    Although there was a well-documented shift in ballpark construction away from downtown centers to highway-accessible, multi-purpose, cookie-cutter arenas, the example of Chavez Ravine is perhaps not the best illustration of the phenomenon. Dodger Stadium is located just north of Downtown Los Angeles, a little over a mile from its admittedly anemic skyline, in one of the city’s oldest residential districts–Echo Park. It is very much an urban park, though the driving culture of Southern California and the relative lack of public transportation options to the stadium combine to force the vast majority of fans to take their cars to games.

    A better example of MLB’s flight to the suburbs would be in Anaheim, where the Los Angeles Angels established their home in 1966 and became the California Angels. After sharing the Dodgers’ Chavez Ravine home for years, the “Singing Cowboy,” Gene Autry, moved his team within slingshot distance of Disneyland, where they immediately saw a huge increase in attendance over their previous season, drawing over 1.4 million to the Big A (they had drawn a paltry 566,727 in their swan song at Dodger Stadium).

  2. waka25 permalink

    Touche, sir. Though I guess the point about public transportation was what I was driving at – people are more apt to drive to Dodger Stadium (I guess by virtue of the city, not necessarily the specific neighborhood locale) than Ebbets Field.
    But yes, Anaheim is a better example.

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