Archive for Business

The Myth of the Small-Market Series

Even when the current World Series match-up of Giants versus Rangers was just a possibility, I began to hear chatter to the effect of “Bud Selig and Fox are going to hate having two small-market clubs in the World Series.” But, I don’t think Major League Baseball or its broadcast partner are all that upset.

First, while Dallas and San Francisco may not have the historical cachet as big markets, they are not small markets. According to Nielsen, Dallas and San Francisco are the fifth and sixth largest television markets in the country. I didn’t hear similar complaints when eighth-ranked Boston was in the Series. Sure, Yankees-Dodgers would have a lot more households, but unless you want to radically alter the competitive balance of the league to guarantee these markets a place in the Series, a 5-6 match-up is an above-average pairing of media markets.

Second, I don’t think Selig has a preference for which teams make it to the World Series, except for the Brewers. The broadcast contract the League signed with Fox is already in effect. MLB’s television revenue stream is set. And having two new markets host the championship games gets two large and enthusiastic fanbases out spend more money on tickets and merchandise. What about future World Series? If Yankees-Phillies had drawn more fans, then maybe MLB would get more in its next contract. But, this requires quite a bit of naivety on the broadcasters’ part. When looking at the revenue-generating prospects of a World Series, I doubt that television executives blindly look at the the ratings without putting them in context. The rules of baseball make it likely that many “small-market” clubs will get to and advance into the playoffs. Another year of Phillies-Yankees wasn’t going to do much to fool anybody.

Why It’s OK for Players to Call Out Fans

Earlier this week, Evan Longoria and David Price stated that they were embarrassed by the weak attendance to their potential playoff-clinching game in Tampa Bay on Monday night. Their comments brought immediate backlash from the baseball media. How could guys making millions of dollars criticize fans for not supporting them, especially in the climate of a recession?! Pundits also cited the ugly facility, the difficulty of getting to the stadium, and the possibility that puppies might be run over by fans driving to the game. Oh, the horror.

What this was, was a rallying of the troops, and it’s exactly what the Rays need. Sporting events benefit from bandwagon effects. People want to go where other people are. If the Rays game is the place to be, then citizens need to know that. The way to make it so is to get someone who is well-liked to say it’s the place to be. I can’t think of better spokesmen than Longoria and Price.

Baseball is a business, and if fans don’t want to pay to see the games, that’s their right. But they have to understand that when you don’t patronize a business, it goes away. Do fans want that? If fans aren’t going to come out, then the owners may decide it’s in their best interest to trade their valuable commodities elsewhere instead of actively seeking improvements on the free-agent market. The owners may even decide it’s not worth staying in town, find a prospective new location where fans will go to the game, buy out the lease, and hit the road. Why stick around if fans won’t even come when the team is doing exactly what fans in many other cities wish their front offices would do?

Rays owner Stuart Sternberg has already announced that the Rays will be slashing payroll. The reason for this is that all the investments intended to improve the team were done, not out of kindness, but to make money. As I have found, in most cases winning begets high returns. But this hasn’t been true for the Rays.

If Tampa Bay residents want good baseball to remain, they are going to have to support it. Good fans sometimes need a push, just as good soldiers sometimes need a reminder from a general. That’s all Price and Longoria were offering, and I don’t think there is anything inappropriate about their comments.

Spreading the Game Around the World

According to Sports Business Journal ($), the NBA is proposing lowering rookie salaries by 30 percent in the next collective bargaining agreement. In a bilateral bargaining arrangement (monopsony league and monopoly union), taking from not-yet union members might seem to be a favorable proposal. Even if current players might agree to such a policy change, I think the NBA might want to reevaluate this strategy. With the rise of professional basketball around the world, some of the best young players may choose to play in European leagues where their salaries are not restricted, just as Josh Childress (formerly of the Atlanta Hawks) did.

More American ballplayers jumping to Europe only makes further jumping easier. And sponsors eager to spread their brands worldwide may be willing to subsidize player moves outside the US. The NBA doesn’t have the market power it once did, largely thanks to its own successful promotion of the game internationally.

Defending Dynamic Pricing

I’ve received several calls from reporters over the past few weeks to discuss a phenomenon that’s sweeping baseball: the “dynamic pricing” of tickets. In general, this means charging different prices for the same seats for different games. This may involve charging a higher price for rivalry games, weekend games, or the latest fad charging more for game-day purchases. All of these adjustments are designed to generate more revenue for clubs by varying the price of the ticket according to changes in fans’ willingness to pay for games.

I can see how fans might find such policies repugnant. A seat is a seat, the stadium’s in place, the salaries are set, and workers have been hired. What justifies the price increase? Joe Eskenazi expresses his frustration with the Giants dynamic pricing policy

The oft-quoted model for the new, likely soon-to-be-ubiquitous baseball pricing system is airline ticket purchasing. It’s almost certain readers have experienced first-hand the joys of last week’s $300 tickets this week being priced at $410. It’s a strong incentive to buy early before myriad contrived supply-and-demand factors are tossed into the algorithm and you end up paying through the nose. As noted before, inducing people to spend quickly and pinging those who do not is good business sense.

On the other hand, it just seems downright wrong that you should be made to pay more for a baseball game because it’s a “great day for baseball.” It seems exploitative that you should be made to cough up extra dollars when Tim Lincecum is on the mound; will we be given a deep discount when Zito is pitching or Pablo Sandoval takes a day off? Further following the airline model, will we be charged extra for using the restroom? Do clean seats cost more? Do I have to pay extra to stay out of the all-felon, all-drunk, all-jerks talking loudly about work on their iPhone section?

The act of charging different prices for different units of identical items is known to economists as price discrimination. While discrimination has pejorative connotations, in this sense the term merely describes the act of charging different prices according to different willingnesses to pay. There are several conditions that must be met for price discrimination to work, and baseball teams meet them all pretty well. And while successful price discrimination definitely increases profits, it also has the benefit of increasing output. For baseball, this means more, and sometimes cheaper, baseball for fans.

How does charging more for premium games benefit fans? For the fan who was previously able to buy a ticket for $20 who must now pay $25, that fan is certainly worse off. But, if he values attending the game at $25 or greater, then all that has been lost is consumer surplus—the difference between what a consumer is willing to pay and what he/she actually pays. That loss to the consumer is offset by the gains to the seller. If we’re not picking sides, the world has the exact amount of surplus as it used to have; all we’ve observed is a transfer of surplus from one party to another. It’s easy to see yourself as the fan who’s ticket price has gone up and be pissed about it. But, I’m not really all that sympathetic. People are paying a price for a product they value at that price or higher, I’m not seeing a downside. You used to be able to buy something you valued more for less, and now you have to pay a higher price that is still equivalent to or less than what you value the product. And when the product is a baseball game, cry me a river in the name of social justice.

But, that’s not the reason why price discrimination is a good thing. If you want to take sides with the fans paying a higher price, I’m not going to stop you. The blessing of charging different prices for a product is that it allows more units to be sold at a lower price. In a world were a seller chooses only one price for a product, it must be the one where it maximizes the gains from selling a few units at a high price and selling many units at a low price. Where that price occurs it’s going to result in some people paying prices less than they value the product and some having to pay more than they value the product. The former group will continue to purchase the product, but the latter group is priced out of the market—this is very bad.

Son: Hey dad, will you take me to see a baseball game? I’ve never been.
Dad: Sorry son, tickets are expensive and we can’t afford that right now.
Son: I don’t care what team we see. I just want to go to experience the ballpark. I’ll go see the Royals play on a cold night.
Dad: It doesn’t matter what the weather is or who’s playing. Tickets are tickets, and we can’t afford them right now.

But with price discrimination, those marginal fans have the opportunity to go to games when other fans value them less. (What you’re upset that poor people can’t go to big games? When world poverty is eliminated come back to me and we can discuss the moral importance of assuring poor people the right to see important games.) Fluctuating prices don’t just mean higher prices, they result in lower prices as well. The team now has the freedom to charge lower prices without losing revenue from all the fans willing to pay higher prices when games are in high demand.

If dynamic pricing goes away, so do the cheap seats. If you have to choose one price to maximize profits, it’s going to be one that prevents a lot of fans from going to the games, and that is a bigger tragedy in my mind.

Incentives for Getting Economic Impact Studies Right

Craig Depken links to an interesting article on the economic impact of the Super Bowl at Division of Labour. It’s your usual discussion of economic benefit claims with private consulting firms claiming $100s of millions in benefits, with economists arguing these numbers are grossly exaggerated. Interestingly enough, the consulting firm hired to do one of the studies discussed refused to comment.

But Craig highlights a quote that really sticks out to me.

Advocates of the Super Bowl as an economic engine dismiss its academic skeptics as using complicated formulas to obscure the obvious. And they note that the reports bashing NFL figures bring the professors coveted media coverage as the big game approaches.

“It’s dangerous to say these games don’t generate economic impact,” said Robert Canton, a director in PricewaterhouseCoopers’ Hospitality and Leisure practice who focuses on sports and tourism.

“It’s not logical,” he added.

So, let me get this straight. Professional teams that earn billions of dollars of public subsidies based on the notion that the sports events and venues generate otherwise uncapturable benefits are honest brokers of the truth, while academic economists can’t be trusted because they’re glory hounds. That’s the kind of logic that brings us multipliers of five.

Competition and Player Salaries: The Impact of the Federal League

Last week, Maury Brown released The Biz of Baseball MLB Salary Database. It’s still in beta mode, so I decided to test it out this weekend.

One interesting feature of the database is that it includes some salaries from far back in baseball’s history. The database is not comprehensive (nor should it be expected to be) but the data that is there provides an opportunity to analyze salaries at a key times in baseball history.

For example, in 1914, the Federal League began play as a competing major league. It lasted for two seasons until reaching an agreement with the American and National Leagues. During its two years of operation it raided AL and NL rosters for its players, ignoring the reserve clause that was keeping salaries below the competitive level. Most of the jumpers left in 1914 (80 players), with 16 additional players joining the FL in 1915.

The agreement between the AL and NL created a monopsony for baseball talent, because each team represented a single buyer for its player’s services. The FL added competition for baseball talent, and even if players didn’t jump, their wages were likely to raise from the threat of jumping. While I don’t think anyone would disagree with this in theory, it would be nice to observe this effect. Someone may have examined this before, but I haven’t seen it.

Though the salary data is not comprehensive, it’s possible to track players who play over consecutive seasons to see how their salaries changed from the previous year. Salaries are affected by many factors; however, by tracking percentage-changes for individuals, player quality is approximately constant. I looked at a ten-year sample from 1910–1919, tracking an average of 16 players per year (ranging from 9 to 28 players). The figure below maps the average annual changes over the sample.


Player Salary Changes (1910-1919)

Before the Federal League became a major league, the AL and NL showed healthy salary growth, which is consistent with their average annual attendance growth of 4.5% from 1901–1913. During the FL’s inaugural season in 1914, there was a drastic spike in salary growth. 1915 also showed a 27% rise in salaries, which is the third-greatest change in the sample. In 1916, after the league disbanded, salaries rose only a paltry 7%; and in 1917, salaries fell by 3%—the only negative year in the sample. In 1918 and 1919, salary growth was 16% and 11%, muted compared to what it was before and after the entrance of the FL.

Thus, the available evidence is consistent with economic theory. New competition raised player salaries, and after the competition went away (buying off the owners most likely to start a new league) salary growth was depressed.

Thanks to Maury Brown and the other folks over at The Biz of Baseball Network for making this tool available.

(Source for the historical info: Quirk and Fort, Pay Dirt, pp. 313–319)

Suggestions for Getting Fans Excited about the Braves Again

For my birthday last year, my daughter and I went to a night game to see the Braves take on the Marlins while they were in hot pursuit of the NL Wildcard. It also happened to be $1 ticket night. We arrived early to avoid the crowd, but I soon realized that it wasn’t necessary. A mere 25,000 was the listed attendance for this pivotal game, but even that low number was an exaggeration on the high side.

Despite the small crowd, it was one of the most enjoyable games I’ve ever attended at the Ted. The crowd wasn’t just there for the cheap tickets, they were into the game and its playoff implications. Even my six-year-old didn’t want to leave her seat. In between innings, I scanned the empty seats and wondered what the Braves could do to get people to pay more attention to a team that is likely to be a winner in the coming years. I’m not a PR consultant, but I have a few ideas.

— As the $1 ticket experience revealed, the main price of the game isn’t the ticket. Time, parking, and safety are the big costs. People have plenty of other entertainment options, including watching the game on TV. The game has to offer something extra. At a minimum, the area around the stadium has to be cleaned up. Parking in a poorly-lit church lot and walking past a parade of beggars through a sketchy area of town is a big deterrent. I know you want people to get into the stadium to spend money, but scaring them in probably isn’t the best tactic if they don’t go down to the stadium in the first place. Buy some property around the stadium and clean it up. Expand parking opportunities to lessen traffic. Build some bars or restaurants outside the stadium that are only open around games. The goal isn’t to run directly profitable businesses in these establishments, but to clean up the area around the stadium. (Oh wait, a stadium didn’t spur economic development on its own?)

— Get some new between-innings “entertainment.” I don’t go to that many games and even I knew the script as to what was coming, right up the the annoying “Thank God, I’m a Country Boy” sing along. Do something new, and don’t do the same thing every game. Dare I suggest using the giant scoreboard to talk about baseball? Focus on pennant races, game updates, and web gems. Maybe use the television announcers with some between-inning commentary to integrate the broadcast experience that is familiar to Braves fans.

— Sell this team as a winner. Last season’s ad campaign focused on Turner Field. Turner Field? Look, I like the Ted as much as the next fan, but its 14 years old: too old to be seen as a new and exciting, and too new to have nostalgic value. The seasons before, they sold the “baby Braves,” and that turned out to be boring when all but one of them blossomed. How about selling Atlanta fans a winning team? Don’t just put a winner on the field, remind fans that that’s the goal that this team is aiming for. This team is going to be a contender. Come watch us take on the Division rival NL Champion Phillies! Isn’t that exciting? Why not use it.

— Signal that this team is different to fans. Let fans see a visible sign that this team is different. No more, hanging around until mid-season before breaking your heart. How can you signal this? Why not new uniforms? Be bold. Deviate from the string of Division championships as a motivation for following the team; that was five seasons ago. Adopt a slogan like, “A Whole New Breed of Winners,” but less lame.

— Be more open with fans, and cut the corporate trust-us-we-know-what-we’re-doing attitude. For example, just yesterday, John Schuerholz told Mark Bowman the following.

In addition, those fans who have summed the estimated salaries that the Braves will dish out this summer, find themselves wondering why it appears the Braves might be spending somewhere in the neighborhood of $5 million less than they did during the 2009 season.

When asked about the 2010 payroll, Braves president John Schuerholz said it will remain the same despite that fewer fans came to Turner Field in 2009.

“It won’t be diminished at all,” Schuerholz said. “In the face of the economy and in the face of the downturn that we and a lot of other clubs had to deal with in terms of attendance and such, we’re not backing off. We’re going to continue committing all that we can in what I think is a very reasonable manner to put the club together.”

Calculations of salaries provided in 2009 confirm the Braves’ payroll was about $95 million. Estimated costs that will be incurred during the summer appear to rest in the neighborhood of $85 million.

Still the Braves contend that their payroll once again rests near the $90 million figure that was enhanced in 2009 with the insurance dollars they received while Tim Hudson spent the first five months of the season rehabbing from Tommy John elbow reconstruction surgery.

This act is tiresome, and the condescending double-speak rubs everyone the wrong way. Fans have been buzzing all offseason about what the team was going to do with a payroll equivalent to last year’s, which is commonly listed at about $97 million.

Why suddenly act like this is what the team has been planning all along, and you’re just ignorant for thinking otherwise? Cut the bullshit. You either cut payroll by trading Vazquez, or you have been misleading fans by allowing the false expectation of a mid-$90 million payroll to persist. Insulting fans isn’t a way to build fan loyalty. And if this was on innocent divergence in expectations between fans and the front office, address it head on. Why are we just now learning about the Hudson insurance issue caveat to the “stable payroll” talking point that’s been pushed? Because this should be obvious to everyone, right? This could have been explained to a beat reporter weeks ago. Now after making some good moves, Braves fans are disappointed.

— It’s time for the Braves to embrace the new media. Braves fans just don’t watch TV, listen to the radio, and read the newspaper. And they read more than MLB.com in the Internet. Invite some fan-bloggers to the stadium for a meet-and-greet, maybe even hand out a few press credentials. How about Frank Wren sitting down for an interview with Mac Thomason, whose been blogging about the Braves before the term “blog” existed.

— And speaking of Frank Wren, let’s see some more of him. I have been very impressed with Wren’s open and frank style in interviews. He comes off friendly and honest, and he’s made some good moves. He’s very different than his predecessor, and I think the club would benefit from seeing Wren as the club’s figurehead; especially, with Bobby Cox stepping down after the season. To his credit, Wren does make himself available to the media, and I think he should continue to expand to new outlets.

Braves Attendance Recovers

Earlier in the season, Braves attendance was down about 15% relative to 2008, which was significantly less than the league’s average attendance decline of about 5%. Now, it appears that the Braves have righted the ship. Braves attendance is down 5%, which is actually better than the league-average decline of almost 7%. See Baseball-Reference’s 2008 vs. 2009 Attendance tracker.

The Expected Value of Being a Baseball Player

From my graduate school buddy Mark Steckbeck:

Doing the math, and discounting $400,000 per year for three years, beginning at age 17 and entering the big leagues at age 21 (not likely), the expected value of a career in baseball is about $86. Who’s likely to pursue that?

Now, certainly it’s not the average high school athlete who considers himself pro material, but It’s still predominantly those with low opportunity costs of their time that pursue the professional athlete track. Even if we changed it so that a high school athlete was ten times more likely to make it to the professional level, the expected value is only about $860. That is total, not per year.

Thanks to Tyler Cowen for the pointer.

ESPN Enters Local Sports Markets

There is an interesting article in this week’s Sports Business Journal (subscription required) regarding ESPN’s venture into local sports.

ESPN calls itself the Worldwide Leader in Sports, but it’s the company’s locally driven ambitions that have the sports media world talking and could have a seismic effect on how fans consume news about their favorite teams.

The company today will launch ESPNBoston.com, the second of its locally oriented sports sites following a successful spring launch in Chicago. Similar to the Chicago venture, the Boston site will feature a mix of beat coverage on the local pro, college and high school teams; audio content from ESPN’s 890 AM sports talk radio; Boston-oriented columns and podcasts from Bill Simmons, Peter Gammons, Michael Smith and others; a locally oriented online version of “SportsCenter”; and locally driven social media functions, among other material.

The Boston arrival, which had not been publicly discussed until late August, puts the ESPN effort into one of the country’s most passionate and hypercompetitive sports media markets. It also marks the beginning of a marked acceleration for ESPN’s local play, with a Dallas site slated for a late September or early October launch, and New York and Los Angeles destinations scheduled to follow early next year….

The initiative in part seeks to exploit the gap in locally driven sports coverage created by the historic and ongoing economic woes of the newspaper industry and the resulting reduction of content. To that end, ESPNChicago.com has been greeted with some early success: Its tally of more than 700,000 unique visitors and 1.7 million minutes of time spent on the site in July was up 19 percent from June on both counts and up 87 percent in audience size from May, according to comScore.

If local newspapers weren’t worried before, they should be now. The only thing that keeps them in business is superior local coverage. The economies of scale the ESPN has in covering sports on the web give it a significant advantage over existing outlets. I do not expect local coverage to disappear, but I will not be surprised to see the best local-market writers to be hired away by ESPN. Other online sports platforms like Sports Illustrated and Yahoo! may follow suit. This is all-good for sports fans, who typically prefer local coverage.