Restraint of trade

It can be easy to forget that for all of the work Angels owner Arte Moreno has done to boost his franchise, the team has never won a World Series under his stewardship. Moreno bought the Angels from Disney at the outset of the 2003 season, as Orange County was still in its championship hangover. Renovations to Angel Stadium were only five years old, and the future seemed limitless. In the nine seasons Moreno has been at the helm, the Angels have gone to the postseason five times and the LCS twice. Moreno courted a PR disaster and was the butt of jokes when the team was renamed, but he emerged from that relatively unscathed as he curried favor with fans by dropping ticket and concession prices. Now Moreno has built up a huge amount of community goodwill and is cashing in two ways: by getting a new TV deal and signing Albert Pujols and C.J. Wilson. These moves are clearly designed to win that elusive World Series and perhaps to also gain parity with (if not surpass) the Dodgers. It’s a bold gambit that could pay off huge.

The Los Angeles market is defined as Los Angeles, Orange, and Ventura counties. All told, the combined population of the three counties is nearly 14 million. LA TV rights also extend up into Central California and east into the Inland Empire (Riverside/San Bernardino), adding another 5-6 million residents. Like the Chicago and New York markets, Los Angeles is shared. The Bay Area, through a series of procedural mistakes, is gerrymandered by county, five to two in favor of the Giants. Recently there has been some speculation that when the Wolff-Fisher group bought the A’s for $180 million in 2005, that price was a discount reflective of only having two East Bay counties, and certainly didn’t include Santa Clara County. It’s practically impossible to verify this kind of extremely inside baseball information. What we have to go on are the sale prices of the various franchises at different points in time. The last major sale of the Giants (to the Magowan-Burns group) occurred in 1993, for $100 million. The A’s were sold by Wally Haas to the Schott-Hofmann group in 1995 for $95 million. Back then franchises didn’t appreciate at the rate they have been over the last decade. The prices look pretty even, thus making it difficult to pin down what premium for the majority of the Bay Area actually exists.

Wolff-Fisher paid roughly the same amount for the A’s that Moreno did for the Angels two years prior. However, only a year after Moreno bought the Angels from Disney, Fox sold the Dodgers to Frank McCourt for $430 million. That figure included Dodger Stadium and its surrounding real estate so it’s an entirely fair comparison, but it’s clear that some premium was baked into the price by virtue of the Dodgers brand and presence in Southern California.

Franchise sales over the last decade

Good luck trying to find some consistency in the above table. The Brewers were sold to Mark Attanasio at the same time Wolff bought the A’s. Milwaukee is a smaller market than the Bay Area (or even the East Bay) but it has a new ballpark, which makes a big difference. The Marlins were worth less than the A’s and were subject to the same stadium issues. The Nats’ price was essentially a franchise expansion fee, done solely to get the best return for the other 29 owners and MLB as possible. As you would expect, the sale price was grossly inflated. The Rays sold for more than the A’s (and Angels) a year prior, also with poor stadium prospects in a worse market than Miami.

Given the history of franchise sales, it’s hard to argue what a proper premium would have been for the A’s in 2005 had the Bay Area been shared instead of split. $20 million? $40 million? Forbes had the Giants’ valuation at $381 million. At least a third of that could have been wrapped up in AT&T Park, some other amount related to being the team with the more established and historically larger fanbase.

With a renovated ballpark and a rejuvenated fanbase in his pocket, Moreno did what any good marketing wonk would do – shore up weak areas such as actively selling throughout the entire LA Basin and radio contracts. The freshly inked TV deal is another major step towards achieving parity with the Dodgers, a World Series win will be a crowning achievement. Wolff and Fisher, who bought the A’s for a similar amount two years later, have taken numerous backwards steps such as tarping and the constant trading of young talent. They’ve also worked on attaining better radio and TV deals and have been successful doing so. Unlike the Angels, the A’s are severely restricted in terms of where they can build a stadium, and it has done nothing but put the team in a corner while the Giants continue to enjoy near complete hegemony over the Bay Area. If the price for the A’s did not include Santa Clara County or a shared Bay Area, they are surely paying for it now with the worse economy, more difficult climate to build, and the roadblocks the Giants continue to put up to delay or stop the A’s. The team is going to take several years to repair the damage caused by all of this. If it doesn’t start soon, it may never happen.

32 thoughts on “Restraint of trade

  1. Perhaps the subject of the next post: Repair – how to win back a fanbase?

  2. What has caused the extreme drop off in the value of the Padres? They seem to be quite the outlier when it comes to increasing franchise values.

  3. @gojohn10 – That’s gonna take a lot more than one post.

    @Dan – Starting around 3 years ago, every franchise being sold was sold for far more than the Forbes valuation. The Padres were a prime example of this.

  4. No wonder they haven’t been able to field much of a team. Moorad probably bought more than he could afford. That’s a big difference between 530 million and 401 million.

  5. It will be interesting to see what the A’s do on media contracts IF they are allowed the rights to SJ. Do the A’s pick up a TV station beyond Comcast? do they get a better contract? Do they expand programming on Comcast and The Wolf? Will there be a Spanish broadcasting team and start reaching out to the Latino community? I mean you are not going to have a Jaime Jarrin, but you getting Amaury Pi-Gonzalez back would be good. There is money to be made here. Of course all this could be moot if January comes and we get no news or bad news. Already planning a trip up from Central Valley after my school year is finished, for the A’s game stand with the Angels in Mid-May.

  6. @ML – I was thinking maybe there was some “R”-themed trilogy of posts planned and was taking a stab at the next one.

  7. Personally, I’m not going to worry about the huge gap between the haves and have-nots in MLB. MLB has been broken for a long time. The only way it will change is if owners of have-not teams band together and force a new CBA that includes a salary cap and a portion of all TV contracts go into a shared pool. Until then, it’s all about an elite handful of teams, and a bunch of sparring partners for those elite teams.

    I just want the A’s to stop being the have-not when compared to the other have-nots (the poorest of the poor).

  8. @jeff-athletic: “MLB has been broken for a long time. The only way it will change is if owners of have-not teams band together and force a new CBA that includes a salary cap and a portion of all TV contracts go into a shared pool.”
    .
    A salary cap makes no sense in a league where talent is priced based on years of major league experience (regardless of talent, young players are relatively cheap and veterans are relatively expensive) and drated prospects are nowhere near ready to join major league rosters.
    .
    And apart from the structural differences between MLB and the NBA and NFL, don’t forget that baseball owners DID band together and try to force a salary cap in 1994, and the resulting strike nearly destroyed the game. So a salary cap will never happen in MLB. Parity can only be addressed through revenue sharing.

  9. As long as the A’s are stuck in the Coliseum, they are a have-not: No money to keep players from going elsewhere, and a football stadium facility that free agents don’t want to play in. A’s are doing the right thing by pursuing a new venue in San Jose. While some would prefer they fester endlessly in the Coliseum simply because it’s in Oakland, I don’t see that as a viable plan.

  10. @simon –
    Then the idea of putting a portion, as much has half, of local TV contracts into a shared pool would be a great idea. That way, teams that get those fat contracts still get rewarded individually, but the rest of the league benefits. And the rest of the league should benefit, because those local teams that get those fat TV contracts can’t have games without the rest of the league. Then that money in the pool gets evenly distributed to all clubs.

    I get your point that a salary cap can’t work in MLB. But the pooling of TV contracts is, I think, a great idea.

  11. @jeff-athletic- MLB does share local TV revenue across the board. Selig got that done instead of a hard salary cap therefore all MLB teams make $$ except the Tigers who’s owner does not care. Mike Illitch is a new era Walter Haas when it comes to spending.

    Of course it is not evenly distributed but no form of revenue sharing really is. The big market teams subsidize the small market depending on how small market they are.

    When the A’s get the green light to San Jose next month it will be the start of a new era for them. Beane already dealt Cahill and that is a sign of the dawn being upon us.

    I would agree that a salary cap would work but the big market teams would have to shed payroll big time and the small market teams would need a floor like the A’s. Or they will just stay far below the cap on purpose. The NFL had to put in a cap floor because of this.

    Once the A’s move to San Jose it will take 3-5 years to rebuild their fan base in the South Bay. People from Santa Clara, Santa Cruz, Monterey along with some from Alameda/Contra Costa will form a new fan base around Cisco Field.

    A new stadium will bring novelty and the A’s know like the Giants in 2000 they need to have a strong team going into Cisco Field in 2015 to properly compete against the Giants long run.

    I am looking forward to seeing the A’s in San Jose. It will bring balance in the market as there are about 3M people under served in the South Bay, Santa Cruz, and Monterey.

  12. Let’s get something straight. The current revenue sharing model calls for all teams to share roughly a third of their locally generated revenue, including TV.

  13. @ML- Yes that is correct, but a 1/3 of the Yankees locally generated revenue is different than a 1/3 of the Orioles locally generated revenue.TV is of course included in the equation.

    That means each team does puts in a different amount into the pool. Then depending on how “small market” you are then a cut is given out.

    I should have been more clear….but your 1/3 statement makes it crystal clear.

  14. This article sheds light on the “baseball is a business” argument that so many say in defense of the A’s (and other teams’) cheapness and greed. After a few years and in a normal economy, teams wind up appreciating in value and turning a handsome profit for owners when sold. Whatever the budget surplus/deficit in any particular year, owners will sooner or later cash in big time when they sell. Those who defend Wolff whine about how the A’s are a low revenue team that can’t spend any money, and that no one in their right mind (except Haas, who was obviously stupid), would want to lose money any year. But if Wolff/Fisher/Beane were to sell today, they would see a cool $122 Million, 71% return on their investment after only 6 years! Not bad, especially in today’s economy.

    Only billionaires buy sports teams; no one buys them in order to make their fortune, as is the case with other businesses. Owning a team is an investment for the super rich make their money work for them over time to get even more money. In the meantime, ticket prices, concession prices and parking fees keep going up, making it more and more difficult for regular fans to attend games on a frequent basis. Outrageous profits and returns give a small handful of owners the incentive to pay outrageous salaries to free agents which most teams can’t even consider. The system is broken and both sides, players and owners, are responsible.

  15. @Jerry/eb – That’s why I’ve been saying all along that the big CBA fight would be the next CBA, not the one that was just approved. The problem needs to hit crisis status for the gears to move.

  16. Jerry, that’s a pretty poor argument. That’s under a 9.3% average return each year. While by no means peanuts (actually a *very* good as an investment), that amounts to a 2005 value of $16.7 Million a year and now at 2011 value $23.9 a year. If you believe the team makes, say $5 million a year in profits (instead of losing money this year), that means in order to actually *GET* that return on their investment, they can’t go beyond adding $25 million a year in the red. If they ran the team like the Haas family, just throwing money around without caring about the bottom line, when you sold the team, you’d lose money. The *ONLY* way an owner makes a profit on their investment is by running the team as a business and holding tightly to the bottom line. Most people who can afford to buy a team aren’t that cavalier when it comes to their money so while you can’t hope to find someone willing to treat an MLB team as a toy, it’s hard to ignore how fiscally irresponsible they’d be nor how rare it would be.

  17. Well it’s going to now that the TV contracts are getting insanely unbalanced.

  18. The “restraint of trade” headline is a great way to describe what the Giants have done to the A’s. This country was based on the principle of free trade and being able to set up shop anywhere one wants.

    For the Giants to do this is wrong. T-rights were made for a reason but not to restrain another team to move 35 miles south in the same general market.

    MLB as a whole does well because they revenue share 400M+ from all the teams to make sure everyone turns a profit and increase in value.

    AE or not, this is against the law and Wolff has complied with every request Bud Selig has asked for. Wolff played this right.

    He did not lose his mind and resort to litigation even though he and San Jose would have a great case. He did not open his mouth like Jean Quan just did and look foolish.

    In the end, he has done the right thing and let Selig run his process regardless of how ridiculous it may seem from the naked eye.

    Wolff will finally get what Schott and Hoffman could not accomplish…..Find a way to San Jose.

  19. @Jerry The problem with the argument that owners cash in on appreciation when they sell their teams is this: It’s a ponzi scheme. Yes, in recent years this has been the case, but that doesn’t mean it will always be the case.
    .
    When market value outstrips underlying economic fundamentals so dramatically, it just screams “bubble.” Tech stocks looked pretty good in 2000. Real estate looked good a few years ago. Sports franchises look good now, but a few years from now?
    .
    Keep in mind also, technology is putting great pressure on professional sports teams. In the past, teams have been able to raise prices at rates greater than inflation, and fans bought tickets anyway. More and more, fans are asking themselves, do I want to spend $100 per ticket and endure the hassle of going to the game, or get a better view from the comfort of home on my 70 inch HDTV? Another reason to worry whether the currently high level of ticket prices, and franchise values, can be maintained.
    .
    In a great irony, one of the main reasons cited for the Sonics move to Oklahoma City was that Key Arena, though recently renovated and having all the premium seating and bells and whistles, was not big enough. I think it quite likely that NBA teams in the near future will be looking to downsize arenas, not upsize them, in which case Key may come to look “just right.”
    .
    In this environment, it is quite rational for team owners to not want a model dependent on persistent deficit spending.

  20. @Sid

    Very, very well said Sid.

    Kudos to Wolff for being very very patient and letting the process pan out. You are right that at any point he and/or San Jose could have taken this to court, and won very easily. What the Giants have done, and MLB by enabling them, is restraint of free trade, and without anti-trust exemption, blatant violation of anti-trust. Not to mention it’s UN-American.

    This is all why the Giants are now my most hated team of all time, in spite of growing up a bit of a fan of them, and coming from a family of Giants fans.

  21. @jeff-athletic- UN-American is spot on. America has the largest economy in the world despite not having the most people. The reason is because people can live the dream and setup shop anywhere.

    Wolff is a smart man…..far more patient than I would have been.

    He is going to get what he wants and what the A’s deserve. A new Bay Area ballpark that will allow the A’s to compete with the Giants locally and the big market teams in their division.

    @bartleby- I think to the contrary about technology and sports.

    When the recession hit franchise values should have gone down. Instead they did not slow one bit and I think technology is why.

    Back in the day, there was no internet. Therefore people had to read the newspaper and there were times where you had to listen to the radio because the game was not televised. Or you had to watch the 6pm or 11pm news on TV and wait for the sports piece.

    Buying tickets was even worse, you had to go to physical ticket master or to the stadium to purchase them. Now you can simply look online at several websites and find tickets in a heartbeat.

    With technology, people can get great coverage of their teams online. Blogs like this one are a perfect example of that. Whether it is your phone, laptop, tablet, or this blog it gets people more interested in sports for the most part because the ease of information and news.

    News comes out in a flicker and people are posting about it on FB, Twitter, ESPN, etc…..It gives people more reason to be interested rather than disinterested.

    The 49ers should not get fans in that dump known as Candlestick with all the technology there is out there to watch on 60″ HDTVs and not have to deal with traffic. Of course that is not the case as they still got fans with a bad team in a dump of stadium since 2002.

    The overall fan experience is just flat out better now then before 2000. Back then because of the lack of technology franchise values stayed consistent I believe….Of course I maybe wrong and there is another explanation.

    The only way franchise values go down is if attendance, TV ratings, and online ratings go down in 2/3 of the markets……that would spell doom for sports in general.

    Plus sports keep kids out of trouble and is a good way to stay in shape and foster confidence. Without pro teams to watch kids would get less interested and would become couch potatoes.

    Technology will only get more and more people into sports. Especially the kids as they have so much to learn from than even when I grew up in the 1990s.

    You maybe right long run…..but I just do not see it in my lifetime and I was born in the early 1980s.

  22. @Sid My point wasn’t that technology has decreased interest in sports, quite the contrary. My point is that it has placed big time pressure on spiraling ticket prices. As the viewing experience at home gets better and better, it becomes harder to justify the cost and hassle of actually going to games.
    .
    The NBA is perhaps the best example. This dynamic is part of why the recent lockout was so challenging.
    .
    If you read Bill Simmons on ESPN, he writes about this a lot.
    .
    @Jeff-athletic I agree that the AE is restraint of free trade, un-American, and bad policy. But it’s pure wishful thinking to believe that a case overturning it can be “won very easily.” The AE has been around for close to a century, endorsed by the Supreme Court three times, upheld by the Federal Circuits seven times, and endorsed by Congress in the Curt Flood Act. Notwithstanding a few outlier decisions with little or no precedential value, at this point, it is very unlikely the Supreme Court would undertake to overturn it. As much as I would personally like it to happen, I don’t see the AE going away short of an Act of Congress.

  23. I find it funny that the Giants’ lawsuit possibilities are always dismissed because “MLB teams can’t sue other teams, it’s in the constitution” but Wolff can easily sue MLB with no problem.

  24. It’s true. Lew Wolff couldn’t sue MLB any more than the Giants can. San Jose, however, could… It won’t happen.

  25. @Bartleby: I disagree that the value of MLB franchises is a ponzi scheme or that it is subject to a bubble. MLB is not the housing market or the tech market; it is a monopoly where the supply of teams is strictly limited by MLB itself. As a result, the supply can’t increase with demand (e.g., population) to keep prices (values) from increasing. While MLB has, of course, added teams, these additions have not kept pace with demand (population growth), leading to increases in value for the existing franchises. While there have been short-term decreases in the value of teams due to short-term economic conditions, the clear long-term trend is an increase in franchise value. There is no reason to think that this trend won’t continue.

    I agree that technology is a factor and that more people may prefer to watch games on TV. But more viewers would mean increased prices for TV rights, and the value of TV rights is a component of overall franchise value. As ML pointed out regarding the Angels TV deal, this is big money.

  26. Hmmm….I don’t know about this: “There is no reason to think that [the tendency for MLB franchises to increase in value] won’t continue.” People used to say this sort of thing about real estate, and look where it is today. I think there’s plenty of reason to believe franchises are currently over-valued and that the bubble in their valuations will burst, probably fairly soon.
    .
    Franchise value depends on current revenues, current expenses, and expectations of growth in both areas. If you project expenses to grow faster than revenues, there’s no reason to expect that franchises will become more dear. And where does the revenue come from? I don’t know the exact proportion right now, but indications from things like the Angels TV contract suggests they have more to do with TV contracts than with ticket sales; the Angels are actually reducing their ticket prices (and even their beer prices) as they collect more from their TV outlets.
    .
    Now why are TV contracts growing to such astronomical levels? The main reason is that franchises are benefiting from competition between TV networks to acquire premium content rights for their viewers. The Angels benefited from a bidding war between Fox and TWC, which may very well be temporary. It’s not even clear that the network that’s paying the Angels will remain solvent for the duration of their contract. The networks want these rights so they can bargain with other rights holders for packages of content.
    .
    Cable companies in particular are being squeezed by local broadcasters and the FCC’s “must carry” provisions, so it’s partly defensive on their part. There’s also the expectation that they can sell enough ads to make the contract pay for them, but ads are getting cheaper as consumers spread their attention across more outlets. This part of the Angels TV contract has “bubble” written all over it.
    .
    And then there’s the issue of all the other sports and sources of entertainment in the world. Baseball is great, but it’s not America’s favorite sport, let alone the world’s. Even though MLB has a monopoly on pro baseball in the U. S., they don’t have a monopoly on sports and entertainment.
    .
    So I think there are plenty of signs that the franchise bubble may burst fairly soon. The fundamentals are unsound.

  27. [I wrote a long comment about why MLB franchise values are a bubble, with analysis of the sources of TV revenues and their future. The web site discarded the comment and gave me a reset, so it's gone.]

  28. Hmmm, now it’s back. This is weird.

  29. @Mossback
    You missed the point that MLB’s supply isn’t increasing like housing was during that bubble. There is no equivalent of the vast tracts of urban sprawl filled with McMansions that most definitely contributed to the bust.

    The TV networks, cable companies, and players might end up losing money, but the franchise values will be remaine essenrially intact.

  30. Nobody involved in this process – Giants, A’s, San Jose, Oakland – has much of a basis for a lawsuit right now, nobody has threatened to sue, and the likelihood of litigation following MLB’s decision is very small.
    The T-Rights issue is complicated but it is basically a business deal. Regardless of what fans think is “fair” or “unAmerican,” the fact is that both the current Giants owners and the current A’s owners bought their teams with a full understanding of the T-Rights and have made their business plans accordingly.
    .
    What’s happening now is that MLB is fed up with Oakland and has no other viable options for the A’s besides San Jose. So Bud is going to try to find some kind of compensation package that will make the Giants willing to give up Santa Clara County, and then he’ll find a way to pay for it or make the A’s pay for it.
    .
    Everything else is posturing. The Giants take the negotiating position that the T-Rights are priceless and that Bud can’t even imagine a package big enough to make them happy. The A’s take the position that fairness or the “best interests of baseball” dictates they should receive the T-Rights, and the massive increase in the franchise’s value that will come with them, for free.
    .
    Both these positions are almost absurdly unreasonable, and it is fanboy nonsense to agree with either of them. More fun to watch how this deal plays out, as I think it will this coming spring.

  31. @Al I think you’re missing the point that MLB is a form of entertainment that happens to be uniquely dependent on ad sales by TV networks. It’s therefore in a very precarious position. If the networks get foreclosed they won’t be covering Prince Albert’s contract.

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