28 March 2016

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.


Anonymous said...

Having spent time in Japan and experienced their love of things Japanese and practiced exclusion of many foreign things, I cannot imagine that the market would willfully demote or replace their own league to join MLB. That idea seems very American.

Matt Perez said...

That's a reasonable supposition, but MLB is surprisingly popular in Japan.

For example:

"Almost 70 percent of MLB's international revenues are derived from the Japanese market. Playing regular season games in Japan for a fifth time in the past 14 years has helped drive such interest. Last year MLB opened an official MLB of Japan online shop, and for years it has sold virtual signage to Japanese companies to insert into the MLB International broadcasts of All-Star, LCS and World Series games.

MLB's longest-running international broadcast partner is the Japanese company Dentsu, which sub-licenses major league programming to as many as six different Japanese networks. Dentsu began its partnership with MLB in 1999 under a five-year deal worth $65 million, continued with a six-year deal worth $235 million and in 2009 signed a six-year extension (through 2015) that has been reported to be worth about $475 million. MLB's 30 clubs share equally in the haul, as they do all international revenues."




Mike Bonsiero said...

In your proof of concept schedule, how do the road-trip lengths compare to the current schedule? I would imagine that to cut down on mileage, the American teams spend multiple weeks in Japan to knock all of those games out at once to avoid multiple trans-Pacific flights. And I'd imagine it would also require the east coast teams to do Seattle/San Francisco/LA before and/or after each Japan trip.

Matt Perez said...

I'm going to write an article (hopefully) which will include the schedule so that you can see it yourself. But your suppositions are largely accurate.

I'll just note that I'm worried more about the Japanese teams rather than the American teams. It would be unfortunate for American teams if they needed to go to Japan more than once a year. But having a team like the Reds go twice a year would actually make things fairer because they travel so few miles in the States (the benefit of being in the heartland).

It would be a nightmare for Japanese teams if they had to go to America six times a year (currently there are roughly 13 out of division road series' so seven games a trip would require six total trips back and forth).

Anonymous said...

What would literally have to happen (and even this would be difficult for many Japanese to accept) would be for Japanese baseball to merge with MLB. To do that, the Giants and at least three other teams would need to be elevated to MLB status. Protections would need to be given to the other clubs or they could be organized as minor leagues. MLB would need to figure out labor rules in Japan that pay minor league players well. Copyright issues would also need to be sorted out. Sensitivities about Japan losing its homegrown talent would need to be addressed in some manner.

It is so much easier just to go into a country that does not have an established league and system. Japan makes little sense from a cultural point of view.

Matt Perez said...

I may have understated the difficulty of the politics. I do think you're overstating the difficulties of the situation though. MLB is popular in Japan. MLB earns considerable revenue from Japan. I think that Japanese citizens would come out to watch MLB games. I think MLB is an exception to the normal rule.

Japan already is losing its homegrown talent. What the Japanese are doing is following MLB teams closer to watch their favorite players. Labor rules are possibly an issue. But the cash needed to make it go away is minimal at most. I wouldn't focus on that.

If I was running MLB, I'd try to come to an agreement without having the leagues merge together. I'm not an expert about Japan, but there should be a considerable amount of money for each side if MLB can successfully expand without hurting the NPB. The cultural aspects are a problem, but the incentive to find a deal exists.

It probably would be easier to add a team in Austin or Montreal. But there's no money in it. You get to Japan, and suddenly you're in a position where you can start looking into China, South Korea and Taiwan.

Anonymous said...

They would have to redo the game, too. Teams almost all lose money. Last reported margin was about 50 million in the red from 2013 or 2014 when they considered expanding to 16 teams. Only the Giants and Tigers are profitable. The billion dollar companies that own the teams consider them to be advertising. Would a MLB baseball model work there? Can they succeed in uprooting or appropriating the existing culture?

Maybe I would be more open-minded to your idea if people here would not be embarrassed that I drive an American car. Novelties? Sure. Kit Kats and KFC are very successful here, but those are not things people think of as a replacement for something Japanese.

Matt Perez said...

Agreed that most NPB teams lose money. My understanding is that the NPB is poorly run. MLB would have to look into whether they can get their model to work. If they can figure out the politics, then having four franchise in Japan would be worth billions in revenue each year. It makes sense to maintain a sustained and serious effort. If there was a perfect spot, it would have a team already.

And if it fails, there's always Mexico City.

Anonymous said...

It doesn't. Already too many AAA players playing in the bigs already!

Jon Shepherd said...

I find it peculiar how people think baseball is less competitive now than before. It actuality it is the most competitive it has ever been. You can look at player specific differences year to year and see how much baseball has improved as a population. IIRC, baseball recovered from the previous expansion around 2006 or so. Another way to look at it is variance in performance and performance is narrowing. There really is nothing to suggest baseball is less competitive now than at any point in history.

Matt Perez said...

Thing is that MLB wants to expand, so we should expect some more talent dilution. The only question is where are those teams going to go.

Anonymous said...

I'd imagine expanding into Japan would garner a lot of resistance from the MLBPA, and probably justly so. These guys have lives, families and other considerations here in North America. How would you like to be the guy who has spent the first seven years of your career playing for, say, the Red Sox and find out you've been traded to Osaka. You'd likely barely get to see your kids, if at all. You wouldn't just be learning a new city, but a whole new culture. I can't see that being an easy adjustment in July, especially if you're mired in a 2-40 slump. The human element has to be a real factor here.

Matt Perez said...

Fair point. I agree that would be tough on the players. On the other hand, how often do they see their kids if their family is living in Boston and they're traded to Los Angeles? Probably not very often. But offseasons would also be difficult because you can't go back and forth during the school year.

Not to mention that such a shift would add another 15 DH jobs, another two teams would add another 50 MLB jobs and the extra revenue from Japan would likely result in huge raises.

There's enough cash to smooth out some of the problems.

Anonymous said...

I understand it obviously is not politically possible, but what about Havana?

Matt Perez said...

Cuba doesn't have a strong enough economy to support a single MLB team, let alone Havana. Havana might be able to support a AAA team.

Anonymous said...

Curious as to the stadium issue in the proposal. I would assume that the Tokyo team goes into the Tokyo Dome? The Yokohama team would either have to rely on the Baystars stadium, which is small, or have a new stadium built on limited land. I think that 2 teams would be more plausible, however for the schedule to work I'd image that 4 is necessary.

I do however think that this plan is plausible. Having spent 3 years there, I think that the locals would support MLB and the American players would fall inlove with the culture, safety and general atmosphere that playing there involves. Baseball is played 365 days a year there and I don't think you can underestimate being in a culture that loves the game.

As for the time difference, I've done it. Tokyo to New York is 12-14 hrs. It's not bad, and I'm sure that a "sleep therapist" would solve most issues. Look forward to a full (hopefully) article on this.

Matt Perez said...

I'm ignoring the stadium issue. Maybe I shouldn't have. Fair point that it'll be hard to house both an MLB and NPB team in a single stadium and there's limited room to build new ones. Still, I presume that's something that the parties would want to work out on their own.

If the MLB and NPB theoretically did merge, then the Giants would have to be one of the four MLB teams and not Yokohama. If they didn't, then maybe a team in Kobe or Nishinomiya makes sense instead anyway. Also, Japan does have excellent public transport. Maybe looking at locations close to but outside of the big cities and building expanded public transport to the stadium is an option?

The logistics only work with four teams. Otherwise, it would make sense to focus on Tokyo first and then try to expand into the rest of Japan. But if it was easy to do, it would be done already.