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New MLB TV Contracts to Impact Salaries

In Cleveland, and other cities that have trouble drawing big crowds to the ballpark, there is an ongoing dynamic --similar to the chicken or egg conundrum-- that goes something like this: If few fans show up for games, the team doesn’t have money to sign good players, but if the team isn’t any good, many fans aren’t interested in going to games.

There's some truth to that scenario, but it largely misses the point, because the real money doesn't come from tickets sales, or beer and hot dogs. The real money in baseball comes from television.

There are two sources of television revenue for each MLB team, the national contract and the local contract. The national contract is negotiated by MLB. It includes the rights to nationally televised games on particular afternoons and evenings, the All-Star Game, and the postseason. These are the games that are on FOX, ESPN, TBS, and the MLB Network. The money from the national TV deals is split evenly by all thirty teams, no matter how many of their games are actually shown across those national networks.

The local contract is negotiated by the individual team, a deal negotiated with whichever company’s offer they like the best. For the Indians, that’s SportsTime Ohio (which was created and is owned by the Dolan family). The money from each team’s local TV deal is mostly kept by the team. The Indians have been getting somewhere between $25-30 million from their local TV contract in recent years. Not long ago, that would have put them in the bottom half of all teams, but not dramatically behind many teams. Recently though, there has been a massive shift in the amount of money networks have been willing to pay.

In 2010, the Rangers announced a new deal with Fox Sports Southwest that will pay them ~$150 million a year. In 2011, the Angels announced an almost identical deal with Fox Sports West, they’ll also be getting ~$150 million per season. Those figures dwarf the Indians’ sum. Even accounting for the revenue sharing portion of each team’s local contract (one third of the money is pooled), the Rangers and Angels are each pocketing an extra $80 million a year, compared to the Tribe. Starting next year, the Houston Astros will be getting $85 million a year and the San Diego Padres will be getting $75 million. Up the coast, the Los Angeles Dodgers are near a new TV deal that is expected to be in the ballpark of $200 million a year. Sit back and think about that for a minute… $200 million!

The New York Yankees are being paid $90 million a season by the YES Network, seemingly a rare instance in which they’re not the wealthiest team in baseball. The Red Sox are paid $60 million by NESN, which seems like small potatoes compared to some of the other figures I’ve mentioned. Of course, the Yankees own over 30% of the YES Network, whose profits were reportedly ~$450 million in 2011. The Red Sox own 80% of NESN, also a very profitable corporation. Both ownership groups are bringing in far more money than the team is officially paid for television rights, money that isn’t a part of MLB’s revenue sharing pool. The Yankees could run a $400 million payroll and still turn a profit.

At $30 million a year, the Indians are way behind a lot of other teams. Of course, as I said, SportsTime Ohio is largely owned by the Dolan family. The network, which televises other sporting events of interest to Ohioans, certainly brings in more than $30 million a year. How much of that additional profit might be going into the ball club, no one can say. How much of it should go into the team is up for debate. In any event, STO isn’t earning what the YES Network does, because Cleveland’s TV market is far smaller than New York’s. The Indians will always lag behind in local television revenue, and the discrepancy may only get wider with time.

The national TV contracts, as I said, are divided evenly among all thirty teams. There’s been big, big news on that front recently, as FOX, ESPN, and TBS all signed new deals with Major League Baseball in the last few weeks, deals that substantially increase the amount of money coming into baseball. The new contracts will put an additional $740 million into baseball (annually) which works out to almost $25 million for each team (the new contracts all run through 2021).

On one level, this impacts every team identically, because the money going to each of them from the new contracts is identical, but on another level, this money impacts small market teams far more than large market teams, because an additional $25 million is a much bigger difference to them.

ESPN’s payroll data lists the Yankees as having had a $195M payroll in 2012. An extra $25M would lead to a 13% increase. The Oakland A’s payroll was $49 million, the new money would allow for a 51% increase. Now, that’s an over simplification, because teams won’t necessarily funnel all of the new money into big league payroll. It may go into improved facilities, scouting, and infrastructure. Still, it should be clear that a team like Oakland can use the money to bring about much greater change than a team like the Yankees.

The Indians 2012 payroll was listed at $66 million, so an extra $25M would lead to a 38% increase.

That money doesn’t kick in until 2014, but the time to spend is now. Eventually, player salaries will catch up with the higher revenue streams. Owners may pocket some of the money initially, perhaps to pay themselves back for prior losses (though I question if anyone is truly losing money through its ownership of an MLB team). Eventually though, players and their agents, along with fans, will push for the money to be spent on payroll. At that point, while the Indians should be able to carry a slightly higher relative payroll, the major advantage of additional money will be lost.

The Dodgers are one team that’s clearly already spending the money they see on the horizon, since their new ownership group took over, they’ve acquired a number of huge contracts, in hopes of making a quick turnaround. I would like to see the Indians work out a long-term deal with Jason Kipnis, see if they can buy out a couple years of his free agency, even though it’s a ways away. They should be aggressive in acquiring other players this off-season too. It isn’t the deepest free agent class, but this is a good time to sign solid players to contracts that will likely look very reasonable once salary inflation kicks in by 2015.

This off-season is an opportunity to get a jump on more conservative teams, the Indians should make competitive offers to the top available pitchers, make aggressive offers to teams that are looking to trade valuable players, even if it means taking on salary. Spend as though the new TV money is already here, rather than a year away, before the market corrects itself and salaries climb across the board.