Editor's note: This essay earned the author a 2013 Herb Moss Business of Baseball Scholarship from Ohio University's E.W. Scripps School of Journalism. Moss is a longtime SABR member and a 1968 graduate of the Scripps school. He established the scholarship to recognize the importance of business and economic news, and to follow his love of baseball. Moss is VP at UBS investments, which specializes in financial services. The essay is being republished in its original form at SABR.org with the permission of Herb Moss.
By Stephen Uhlmann
On Feb. 11, 2013, the Cleveland Indians sent shockwaves throughout the baseball world by signing coveted free-agent outfielder Michael Bourn to a four-year, $48 million contract.
The move ended what was an unprecedented off-season of spending for the Indians, who spent an astounding $117 million on free agents in the 2013 offseason. Other deals included a four-year, $56 million signing of Nick Swisher, a one-year, $7 million inking of pitcher Brett Meyers, and a one-year, $6 million deal with slugger Mark Reynolds.
The question that followed this splurge was obvious.
How could the Indians, a small-market club who has spent a combined $8.3 million on free agents the last two years, find the money to make these moves?
The answer was that they are taking advantage of the latest gold mine discovered by Major League Baseball teams: television contracts.
Lucrative television contracts for Major League Baseball teams are not new. The New York Yankees signed a 12-year, $486 million deal with the Madison Square Garden Network in 1988, a deal that propelled them to an improved financial situation.
While teams were trying to improve finances through the“stadium boom”of the 199s and early 2000s, the Yankees were again striking gold with television money. They formed their own network in 2002, and immediately began reaping the benefits. The Yankees will receive $85 million per year from YES beginning with the 2013 season, a figure that could pay off 41 percent of their projected payroll of $207 million before selling a single ticket, hot dog or jersey.
Other teams have also been proactive in recent years locking up long-term, big money deals.
Prior to the 2010 season, the Texas Rangers signed a deal with Fox Sports Southwest worth $80 million per year. It then should come as no surprise that the Rangers increased their payroll by 42 percent between the end of 2010 and 2011. Their payroll for 2013 is projected to be $121.5 million, a 207 percent increase since 2010.
The Los Angeles Angels of Anaheim raised the bar for television contracts in December of 2011 when they reached a $3 billion, 20-year deal with Fox Sports. That led to the team committing $331.5 million toward contracts for Albert Pujols and C.J. Wilson prior to the 2012 season and then $125 million toward Josh Hamilton this past offseason.
None, however, can come close to the level of the deal struck between the Los Angeles Dodgers and Fox Sports this past winter. The deal will pay out an unprecedented $6-$7 billion over the next 25 years. That translates to $240-$280 million in revenue per year. It certainly can be the explanation for the Dodgers wild trading deadline spending spree in 2012 that brought in superstar-caliber players such as Adrian Gonzalez and Shane Victorino.
This current trend has teams with expiring deals seeing money signs. The Philadelphia Phillies are about to see their $35 million per year deal expire at the end of the 2014 season. Their market size, while not as large as Los Angeles, is still rather big and should command big money.
Other small-market teams, such as the Seattle Mariners, and Cincinnati Reds are ready to reap the benefits of this new environment with their deals expiring in 2015 and 2016 respectively. Small-to-mid-market teams have done well in recent negotiations, with the San Diego Padres ($60 million) and Houston Astros ($80 million) seeing much larger revenue streams from television deals coming in.
Not every team is lucky enough to be joining in the mad rush for television revenue. A number of teams are locked in to long-term deals that were signed before this recent boom began.
The St. Louis Cardinals are stuck with a deal that pays out a paltry $14 million per year and does not expire until 2017. A number of small-market teams are locked into similar deals for under $20 million per year including the Miami Marlins ($18 million per year) and Pittsburgh Pirates ($18 million) that will certainly affect budgets for re-signing players and making bids on free agents.
All in all, it's easy to see just how much of an impact that television contracts will play in the coming years in the MLB. As player salaries continue to push upward, teams with these deals in place will have the dollars necessary for free agent bidding wars.
The Indians may be in a better place with their $40 million per year TV deal with Fox Sports Ohio, however the Dodgers will have cashed that much money in just 27 games into the season.