How MLB Expansion Makes Sense

As Commissioner Manfred said in an interview with Joe Passan, baseball is a growth business and sooner or later, growth businesses expand. Manfred told reporters that he’d be interested in expanding from 30 to 32 franchises and that baseball would have a better structure as two 16-team leagues split into four divisions of four. It seems that the addition of two new franchises is almost inevitable. Many articles have been written discussing the merits of adding franchises in cities such as Montreal, Vancouver, Portland, Austin, Las Vegas, Nashville, Sacramento, Indianapolis, San Jose, Memphis, Charlotte, Virginia Beach and San Antonio.

But there are significant challenges to expanding the league. Large-market clubs are upset about the amount of money that goes towards revenue sharing. Adding two small-market clubs would force large-market teams to devote a higher percentage of their budget towards revenue sharing while reducing revenue they receive from league merchandise, the national TV deal and MLBAM. If MLB is going to expand, they’ll need to choose markets that can support teams without requiring significant revenue sharing.

MLB hasn’t had such good luck with expansion recently. In 1998, MLB expanded to include Tampa Bay and Arizona. Tampa Bay has financially been a complete failure since its creation. In their inaugural year, they were able to attract over 30,000 fans per game. Since then, despite having a successful period from 2008-2013, they’ve attracted no more than roughly 23k fans a year and have ranked last or second last in attendance in the American League for 13 of the 18 years they’ve been in existence.  Their TV deal is considered to be poor and isn’t eligible for renewal until after 2018. They typically have one of the lowest payrolls in the league and are able to stay above water solely due to revenue sharing and other league shared revenues.

Arizona has been more successful than Tampa Bay. They ranked in the top half of the National League in attendance from 1998 to 2004, while winning the division three times during that period including a World Series victory. However, since 2004, the Diamondbacks attendance has been ranked between 11th and 14th in the National League. As part of their deal to get a stadium, the Diamondbacks agreed to have low ticket prices so they receive minimal revenue from attendance. As a result, the Diamondbacks have struggled to spend enough money to field a competitive roster and have only once spent more than the $102M that they spent in 2002 on payroll. Jayson Stark wrote that he was told that the Diamondbacks received almost $80M from revenue-sharing in the past three years. Their new TV deal will help, but it pays less than large-market TV deals (my article). This may be better than Tampa Bay, but it isn’t a very good result.

In 1993, the MLB expanded to add the Marlins and Rockies. Jon Heyman reported that the Marlins’ revenues are lower than the Rays and Athletics and that the Marlins received $50 million in revenue sharing this past year. Despite this, the Marlins are still not making a profit. The Rockies have been more successful. They had a stretch from 1993-1999 where they led the NL in attendance. They’ve leveled off since then, but are ranked about at the midpoint in attendance. However, the Rockies still receive revenue sharing funds each year and aren’t known for having high payrolls. All four of these teams are annually eligible for the competitive balance lottery, which is eligible only to clubs in one of the ten smallest markets or has one of the ten smallest revenue pools. It’s safe to say that these four clubs are some of the weakest in baseball.

The American City Business Journals recently did a study to determine whether any market in North America had the economic capacity to support an MLB franchise. They didn’t find a single market strong enough to support an MLB team. Even worse, they felt that Montreal was the best candidate in North America for a new MLB team, but that it only had a limited chance of success. Montreal already failed to support one team and it’s questionable that they’d do better with a second chance. If Montreal could support another team, there are plenty of franchises that could benefit from relocation.

The arguable failure of previous expansion attempts combined with the lack of any remaining large markets available illustrates why further expansion in the United States will be a significant challenge. Therefore, it should come as no surprise that Commissioner Manfred has stated that he feels that the best available markets in North America aren’t United States markets but rather Canadian or Mexican.  Canada only has two possible remaining markets for an MLB team, Montreal and Vancouver. Metro Vancouver has fewer than 3 million residents and would be a small market at best while Montreal has been discussed above. Mexico, on the other hand, is interesting.

Mexico has three metropolitan areas that could potentially support an MLB team; Mexico City, Guadalajara and Monterrey. According to the OECD in 2014, Greater Mexico City had an estimated population of 20.4 million people and a GDP of $421 billion ($21,000 GDP per capita). Metro Guadalajara had a population of 4.9 million people and a GDP of $70.87 billion (14,463 GDP per capita). Metro Monterrey had a population of 4.8 million people and a GDP of $117 billion ($24,400 GDP per capita). In contrast, Baltimore has 2 million people and a GDP of $114 billion ($57,000 GDP per capita). In my opinion, Mexico City and Monterrey are the two best Mexican candidates for an MLB team.

A team in these locations will still have significant challenges. These cities have a low GDP per capita and therefore teams will need to be able to attract the upper class. Oscar Suarez, an MLB player agent born in Cuba that represents multiple Mexican players, stated that Mexico is a big country and parts are heavy into baseball, but that he isn’t sure whether the general population can afford sustaining a big-league team. The Boston Globe reported that other challenges include high altitude, the lack of new stadiums and safety issues. In addition, Mexico City is 650 miles away from Houston, 930 miles away from Dallas and over 2,000 miles away from New York. Not only this, but politics will be a potential concern as there has been significant tension between Mexico and presidential candidate Donald Trump.

But Manfred does have a significant interest in having a team in Mexico. Manfred has stated that a team in Mexico could help grow the Hispanic market in the United States. As of mid-2014, Mexico had an estimated 15.4 million cable and satellite subscribers and Mexico has a robust $1.5 billion ad market. If a cable station broadcasting Mexican MLB games could charge a subscriber fee of $1.50 per month, then it could earn over $300 million in revenue. If so, one would expect these teams to earn slightly less than $100 million in rights fees starting in 2016 with significant room for growth as Mexico’s broadcast market grows and their populace becomes more prosperous, which would go a long way towards ensuring MLBs financial viability in Mexico. Best of all, unlike a team in Canada or the United States, a team in Mexico wouldn’t cannibalize another teams’ existing market. For all of the potential challenges, Mexico has a significant chance of helping the league financially rather than being a burden.

The smart bet would be to expect MLB to ultimately expand into Mexico City and Monterrey while potentially relocating a team to Montreal. Despite all of the challenges, there’s significant growth potential in Mexico and there’s a plausible path for franchises in those cities to be net assets for MLB that don’t require revenue from other markets. Even if things don’t work out, it’s still good PR. But if I was a consultant for MLB, I’d recommend looking at a different solution. I’d look into adding MLB teams in Japan.

I’d add two new teams in Japan, while also relocating the Oakland Athletics and Tampa Bay Rays to Japan, resulting in MLB having four teams in Japan with MLB having a total of thirty-two teams. These four teams would be placed in Tokyo, Osaka, Nagoya and Yokohama. The OECD states that Tokyo has a population of 35.9 million people and a GDP of $1.475 trillion ($41,000 GDP per Capita), Osaka has a population of 17.3 million people and a GDP of $597 billion ($34,508 GDP per Capita), and Nagoya has a population of 6.5 million people and a GDP of $255.7 billion ($39,300 GDP per Capita). Other sources suggest that the Nagoya metro area consists of 9.1 million people and has an average GDP per Capita PPP of $40,000. The OECD doesn’t measure the population or GDP of Yokohoma, but others rank its population at about 3.7 million with a GDP per capita of roughly $30,000. Realistically, Tokyo and Osaka should be considered large markets, Nagoya should be considered a strong mid-sized market and Yokohama would be a strong small-market.

Japan has a strong broadcast market that was projected to earn $12 billion in revenue. The NPB draws over 20 million fans to its games, proving that there is high demand for baseball. In 2014, Japan’s government suggested that baseball expansion could help it get out of its recession. If so, it’s possible that Japan would be willing to pay for necessary items such as stadiums. In short, Japan is a rich country and could potentially make current MLB owners a huge amount of money. It's worth devoting time and making sacrifices to potentially expand to this market.

There are a number of challenges that this expansion would face. By far, the largest challenge would be the distance between Japan and the US. In addition, MLB would need to come to an agreement with Japan’s baseball league, the NPB. But NPB franchises have historically struggled and it should be plausible to come to a mutually beneficial arrangement.

Solving the distance challenge would be difficult, but not impossible. A 152 game season compared to a 162 game season might cost MLB as much as $500 million in revenue per year, but I’d expect the actual losses to be half of that number. Meanwhile, a successful entry into the Japanese market would be worth billions of dollars of revenue per year not to mention that the extra rest could potentially improve player health. MLB would have to be willing to significantly restructure the schedule and cut between 6-10 games out of the season in order to make this plan work. Still, better schedule optimizing techniques and different scheduling structures will offset MLB travel mileage.

In fact, I developed a proof of concept schedule for a potential expanded league in which every team traveled far less than 50,000 miles. If I spent the time to use better optimization techniques, I’m reasonably confident I could ensure that all teams travel fewer than 45,000 miles. To put that in context, the Mariners are expected to travel 46,000 miles in 2016 and the Angels are expected to travel nearly 45,000. In the second installment, I’ll discuss how a potential division realignment could look, how the schedule would be required to change, and what a possible schedule might look like if MLB did expand to Japan. Based on my initial results, I’m convinced that expansion into Japan could work if MLB decides to do so.

Where MLB Receives Its Revenue

Recently, there was an article in Forbes claiming that MLBs Revenues were $9.5 billion in 2015. This is interesting information, but doesn’t explain much detail. Does MLB receive the majority of its money via media deals, attendance or maybe merchandise? Furthermore, there are certain categories of revenue that are split evenly between all thirty teams such as licensing fees, national media payments and MLBAM revenues and there are certain categories of revenue that are kept by the team that earned them (even if they are subject to revenue sharing). How much of MLBs revenue is in each of these categories and how does that impact free agent spending?

In 2010, Deadspin received financial documents that discussed the amount and where certain teams received their revenue. The categories were the following: gate receipts – otherwise known as ticket sales, concession sales, broadcasting revenue – including both local and national media deals, sponsorship and advertising, merchandise and MLBAM.  These are largely the areas where MLB receives its revenue.

Likewise, in 2004, when Deloitte prepared a document discussing how the creation of the Nationals would impact the Orioles, they noted six areas where the Orioles would be impacted. These areas were attendance, broadcasting, concessions and novelties, premium seating, future naming rights and advertising.

MLB had roughly 73,760,000 fans attend a regular season game in 2015.  The average standard ticket cost $28.94 in 2015 while the standard premium ticket cost $96.84. If 13.7 percent of tickets are premium and 86.3 percent are standard, then MLB would earn roughly $2.8 billion via gate receipts. This revenue is subject to revenue sharing but is kept by the club that earns it.

The MLB Fan Cost Index also predicts each fan to spend roughly $24 in concessions and novelties on average including programs and parking. For all 73.8 million fans, this comes out to $1.75 billion. However, not all concession money goes to the MLB clubs themselves. Some of this cash goes to the state and the companies that actually sell the concessions. The document from Deloitte discussing the Orioles 2004 revenue suggested that for each $5.40 that the team earned from ticket fees, they earned $1 from concessions. The documentation from Deadspin suggests that in 2008, the ratio decreased to roughly 5 to 1. Presuming that this ratio remains accurate, it’s reasonable to presume that MLB earned roughly $560 million via concessions and novelties. This revenue is subject to revenue sharing but is kept by the club that earns it.

These numbers don’t include postseason revenue. While some postseason revenue goes directly to the players, the rest goes to the Commissioner’s office and the teams themselves. It is reasonable to presume that MLB earns another $100 million in postseason gate receipts and concessions. Much of this revenue is subject to revenue sharing but is kept by the club that earns it.

Fangraphs claims that the national TV contracts, pay MLB $12 billion from 2014-2021. Presuming a standard 4% increase per year, then MLB would have received roughly $1.35 billion for its national TV rights in 2015 split equally among each team. In addition, MLB Network’s subscriber revenue is predicted to be $222.5M and probably earns over $250M in revenue when taking advertising revenue into account. Any profit earned from this revenue is split amongst each team equally.

Teams also earn cash from local TV media deals. In 2013, an article in Fangraphs listed terms for each teams’ local deals. All of these deals are certainly out of date. NESN may have paid the Red Sox $60M in 2013 but paid closer to $100M in 2015. Likewise, YES paid the Yankees $90M in 2013 but $98M in 2015 due to standard inflation.

On the other hand, other numbers are completely incorrect. MASN paid $36M in 2013 to both the Nationals and Orioles, but $42M in 2015 while Fangraphs claimed that MASN paid both clubs $29M in 2013. For some reason, Fangraphs decided that the Angels received $150M in media rights fees in 2013 based on a new media deal that doesn’t go into effect until 2016 and starts at roughly $60M with a 4% increase. Likewise, the Dodgers received $220M in 2015 compared to the $340M annual average value of their deal. Fangraphs made similar mistakes for the Astros, Rangers, Padres and Mariners deals resulted in them significantly inflating the value of local media rights.

Per Fangraphs, the total value of each of these local deals combined is $1.7B in 2013. However, after taking new contracts, inflation and errors into account, it is more likely that teams earned about $1.8B in 2015 from both cable and radio deals. Without knowledge of each media deal, it is impossible for me to do anything more than make an educated guess.

According to the MLB IEG Sponsorship Report, MLB earned roughly $778 million in sponsorship money in 2015. This is an increase from $700 million in 2014.  The Orioles were one of seven teams that had below average sponsorship revenues. Fortunately for the Orioles, sponsorship money is split between all teams equally regardless of the source.

The Baltimore Sun suggests that MLB had a total of $3.4 billion in merchandise sales in 2014. Forbes argues that MLB broke $3 billion in merchandise sales in 2015. In general, MLB merchandise sales have remained around $3 billion per year over the past ten years. Scott Sillcox from the Licensed Sports Blog suggests that MLB receives a royalty payment of 12% of the $3.4B in sales or roughly $400 Million that is split equally between all teams.  In addition, MLB receives an unknown amount of licensing revenue from other sources.

MLBAM had revenues worth roughly $900 million in 2015 and has been earning a steady profit for MLB. Its revenues will likely take a hit as a result of the Garber settlement that forced it to offer single-team packages and reduce prices. This revenue is split equally amongst every team.

This comes out to roughly $9 billion compared to Forbes’ projected revenue of $9.5 billion. Some of the difference is due to other minor categories, while other differences are due to different methodologies.

In this article, Forbes creates a graphic that shows from which categories MLB earned $8 billion of its revenue in 2015. It ignores the $800 million earned via MLBAM, as well as another $200 million from other areas such as the all-star game where they claim money doesn’t filter down to the teams.

Their graphic looks like this:



My graphic looks like this:



Using this data and basic multiplication, it is possible to create a graph that shows where my calculations and Forbes calculations differ (numbers in billions).



There’s not much of a difference. My results have slightly higher attendance revenue and local media revenue, which is probably due to standard inflation. Prices increased from 2014 to 2015. Their results have slightly higher national media revenue, sponsorships and licensing fees. Their articles seem to indicate that they look at average media revenue as opposed to actual media revenue which would inflate their results. Their results also indicate that they’ve either been overestimating the amount of money MLB earns via sponsorships by over $100M or that the source I use is incorrect as well as potential differences in licensing. But, at minimum, our results are similar. This is a good sign given that we presumably didn’t use the same methodology and sources.

Gate receipts, premium seating, concessions, local media and postseason cash are subject to revenue sharing and are kept by the team that earns it, whereas national media, sponsorship, licensing, MLBAM and other revenue is not subject to revenue sharing and are split equally among each team. This is how the pie looks for revenue that is kept by individual teams and not shared equally for both Forbes 2014 numbers and my 2015 numbers.



Roughly 65% of unshared revenue comes from attendance while the other 35% comes from local media fees. This shows that while the amount of unshared revenue is increasing, it still lags far behind revenue from fans attending games despite the fact that the amount of total revenue earned via media (local, national and internet) is greater than that earned from attendance (gate receipts, premium seating and concessions).

The impact of media on MLBs revenue is considerably large. However, since most media revenue is split equally amongst teams, it has less impact on free agent spending than attendance revenue. It seems likely that attendance revenue will have more of an impact on free agent spending than media revenue until MLB is able to truly go international and convince people in Asia, South America and Europe to purchase their product.