Lingering Items--Indians Business Edition

One of the abiding questions of recent times about what’s happening with the business side of the Cleveland Indians revolves around the Dolans’ recent sale of SportsTime Ohio.

The Dolans went to some difficulty and expense to first cancel its television broadcast contract with Fox Sports Ohio and then launch their own cable venture m 2006 with Indians games as the centerpiece.  Yet just a handful of years later they abandoned the project and sold STO, ironically to Fox Sports.  Did the Dolans cash in?  Is that what funded this past season’s free agent splurge?  Hard to know in either case, but perhaps they sold for a more mundane reason: it may not have been generating the profits they thought.

On the surface team owners establishing their own cable networks to broadcast their games seems like a good business plan.  Essentially they sell the broadcast rights to themselves, one pocket to the other, and get cable television subscribers to fund it.  What could go wrong?

Maybe nothing.  Maybe everything.  The Dolans aren’t disclosing anything other than corporate speak to explain the rationale behind why they abandoned STO but perhaps a story in Tuesday’s Wall Street Journal shed some light on what was really going on: cable operators don’t want to pay huge fees to carry a channel the overwhelming majority of cable subscribers don’t even watch.

As a backdrop, the Dolans weren’t the first to establish what amounted to an in house cable network as a way of enhancing their revenues.  In some sense they were probably a bit late to the party on that one.  But as it turns out, those ventures weren’t nearly as foolproof as club owners thought they would be.

Tuesday’s story focused on a similar operation in Houston that was dedicated to broadcasting Astros and Rockets games but there’s no reason to think the same math doesn’t apply in Cleveland.

In Houston as in Cleveland, owners and investors wanted to cash in on what seemed to be ever increasing licensing fees passed merrily along to increasingly strapped cable television subscribers.  It’s kind of a “cake and eat it too” plan.  The team sells its television rights to its own network.  That network goes to the various cable operators and demands that the channel be carried on basic cable at a huge per subscriber fee. The owners get huge licensing fees and nearly all the advertising revenue.

And for years, that’s exactly what’s happened.  Indeed, the single biggest content fee passed along to subscribers is that charged by ESPN to cable operators.  Those operators don’t want to alienate viewers and thus carry the channel, passing along the cost to the entire subscriber base.  It’s made ESPN rich enough to bid on the broadcast rights to baseball and football which, in turn, has given ESPN the clout to charge even higher fees to operators which, in turn, has further increased the monthly cable bills of all of us.

As ESPN thrived under the model, a mini explosion of similar channels followed, mostly focused on more discrete subjects such as the NFL, major league baseball, the Big 10, the SEC, and the like.

It works for just about as long as cable operators are willing to offer the channels and pass along the costs.  That is becoming an increasingly more difficult task.  Cable operators often argue that they are merely protecting the interests of their customers who don’t want to keep seeing their monthly bills increase.  That’s true, but a convenient truth.

There is significant evidence, according to the Wall Street Journal story, that sports on television isn’t nearly as popular as perceived.  According to Nielsen ratings cited by the Journal, aside from the NFL and the biggest games in a handful of other sports, the TV audience for sports is about 4% or less of households on average.  That’s a pretty stunningly low number.  For basketball and hockey, it’s less than 3%.  Ouch.

That means that somewhere around 96% of all cable subscribers are tuning in, if at all, only for the biggest games.  For the most part, they could care less.  That means that the same 96% of cable subscribers are paying so that the more rabid 3-4% can watch a midweek Golden State vs. Utah basketball game.

A more reasonable person might ask: why can’t the 4% who want to watch sports on a regular basis simply pay for it themselves?  The answer to that is simple and two-fold.  First, there is a point at which even that 4% would not continue to ante up.  There simply aren’t enough viewers willing to pay enough money to justify the network’s investment into broadcasting the sport.  Second, it’s more lucrative for networks to sell advertising time if they can plausibly argue that their reach is 96% bigger than it really is.

The other truth for the cable operators is less, shall we say, “consumer oriented.”  You see, many cable operators like Time Warner, also own and produce their own content that they like to have broadcast on their cable systems.  Adding content they don’t own competes for eyeballs with the content they do own, although perhaps not as much as they think.  The bigger issue though is that as high cost sports networks push cable bills higher, customers abandon cable for something else, like the internets.  That’s bad for cable operators who have seen flat to declining customer growth for the last several years.

ESPN has enough market clout and diverse programming to mostly get what it wants.  Rarely do you see cable operators drawing a line on them.  But increasingly they are drawing a line with others.  Time Warner, for example, refused to carry the NFL Network for years until the NFL lowered its economic demands and agreed to allow Time Warner to put the network on a sports tier that is paid for separately by the customers who want it.   Undoubtedly that’s hurt the financial model of the NFL Network even as it has expanded its theoretical reach.

All of this gets us back to STO.  The Dolans didn’t get into too many skirmishes with cable operators over the subscriber fees but they had to lower their financial demands to accomplish this and that in turn lowered the profits, not to mention the quality of the overall product.  Outside of the Indians’ game, the programming on STO mostly has the look and production values of a local cable access show and with about the same size audience.

So STO was sold to Fox Sports.  But in many ways this is a different Fox Sports.  In the last few years Fox Sports has been expanding its footprint and is launching its own ESPN clone of a network.  Having regional programming that feeds into a national platform gives it a significant head start in its head to head death match with ESPN.

Given Fox’s imperialistic plans, the Dolans undoubtedly realized a profit in the sale and perhaps that, more than anything else, likely funded the free agent shopping spree this last off season.

While the STO venture was mildly successful for the Dolans, it wasn’t nearly as successful as they imagined.  To the extent that has an impact on future budgets for the team itself, and undoubtedly it does, it makes it less likely that fans will see similar shopping sprees in future off seasons.  Welcome to 2009, Indians fans.

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Speaking of business plans and because there are no such things as coincidences, the Indians have gone full Monty into what they like to call dynamic pricing, according to Crains Cleveland Business.

Essentially the Indians vary ticket prices like Las Vegas varies hotel prices.  Buy early and you’re likely to pay less, irrespective of the opponent.  Wait until the last minute against a desirable opponent and expect to pay more.

Crains used the example of bleacher seats for the upcoming game against Texas on July 27th, which is a fireworks night.  Initially tickets were sold for between $10 and $26, depending on location.  The prices right now range from $30.25 to $36.

This has generated some mild complaints among some fans and has spurred a slight increase in advance ticket sales, which is the Indians’ goal.

Fans who are complaining do so because they want the right to wait until the last second to buy a ticket without any consequence attached to it.  But that’s not a reality in most any other purchase and there’s no compelling reason it should be the reality when it comes to Indians ticket purchases.

If I book a flight at the last minute, I expect to pay more.   That may seem unfair except that by buying late I gave myself the maximum flexibility to change my plans.  That flexibility came at a cost, of course, and I could have traded that off by taking more of a risk by buying it earlier and hoping my plans didn’t change.  It is a choice.

The same holds true for sports tickets.  It can be hard for a fan to plan in April to attend a game in July without knowing how his plans could change. That’s why many don’t choose to buy tickets that far in advance.  They don’t want to take the risk that they’ve wasted their money.  But there’s no reason, moral, ethical, economical, that the Indians or any other team have to assure fans that tickets can be had at the same price the day before the game.   It’s simple risk shifting and there’s nothing wrong with that.

As mentioned, the Indians are seeing some success with dynamic pricing which can only mean that there’s no going back.  That’s a radical change from the days when you could literally walk up the day of the game and buy a good seat for the same price that the person sitting next to you paid two months prior.  But on this issue, there’s no faulting the Indians or the Cavs and Browns when they inevitably follow suit.  Sometimes a business needs to be run like a business.

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The Indians beginning the second half of a surprising season leads to this week’s question to ponder: Who is more deserving of the first half MVP, Jason Kipnis or Terry Francona?

Lingering Items--Bigger Truths Edition

If I had just one wish as a sports columnist, it would be to write with the absolute clarity and sense of purpose of Jason Whitlock.  He doesn’t duck important issues, particularly when race is involved.  He doesn’t adhere to conventional wisdom or anyone’s party line and doesn’t write to meet anyone’s expectations but his own.  Time and again he’ll be on the opposite side of where you’d thought he’d be on a particular issue and where you might be.  When you're finished, he'll change your mind.

His recent column on Jay-Z’s entrée into the world of sports as an agent is brilliant in both its simplicity and logic.  Jay-Z may be a cultural phenomena, Whitlock argues, but that doesn’t qualify him to represent athletes.  More to the point, Jay-Z only trusts his musical career to the best in the music business. Athletes like Kevin Durant and Robinson Cano should do likewise, meaning trust their athletic careers to the best in that business instead of a wanna be athlete living vicariously.  It’s such a solid, simple view that it reveals, in clear sentences contained in short paragraphs, the illogic of Durant firing his current agents only to be represented by Jay-Z.  It can't and won't end well.

But this isn’t a fan letter about or to Whitlock.  It’s more to emphasize that issues of race and politics and business and sports occasionally intersect and when they do sorting through them is tricky business.  The issues reveal themselves often enough that there's no need to contrive them, except if your the Plain Dealer's Bill Livingston.

Livingston never met a sentence he couldn’t torture or a thought he couldn’t mangle.  It’s usually best to ignore him, like his bosses do by relegating him to the back pages of the sports section waiting out his retirement.  Occasionally Livingston gets lucky, the Indians are off, the Browns and Cavs aren’t doing something stupid, and there’s a big hole to fill on the front page.  When that harmonic convergence occurs, we’re left with a column from Livingston like last week when he kind of sort of defended celebrity chef Paula Deen’s blatant racism by ham handedly using the Gordon Gee situation as a counterpoint, as if the situations are at all similar.

To put Deen and Gee in the same column is idiotic.  One is a racist and a hypocrite.  The other wears a bow tie.

Deen’s in trouble because she couldn't bring herself to settle a lawsuit/shakedown brought by someone who had the goods on her.  Now she's really paying because, well, she said what she said.  Yea, the legal system sucks sometimes.  Yea, the woman and her attorney were engaged in a legal form of extortion.  But ultimately Deen brought on her own demise because she hasn’t the good sense to understand that by not purposely escaping the vestiges of a racist upbringing you're damned to repeat them.

When it comes to Gee, what he said and did can’t credibly be argued as even remotely similar.  Making jokes at the expense of the boobs that run Notre Dame or mocking the modest academic achievements of certain SEC schools is a weird thing for a college president to do in any context but it isn’t racism or hypocrisy.  It’s just an uber geek unable to read the room.

The implication that Gee escaped his foibles as Deen is being unfairly punished given her recent change of heart is so off the mark that it makes you wonder if anyone at the PD bothered to even try to edit the column.    Gee was forced to retire.  His income, always less than Deen’s, was impacted.  Deen fell further because she had much further to fall.  Ohio State is as big of academic platform as anyone could want but it pales in comparison to the platform that Deen used very profitably to push her lard-based recipes on the public while hiding both the diabetes that her cooking style induced and the fact that once diagnosed she became a paid spokesperson for the pharmaceutical industry while still pushing the country toward obesity.

A sports columnist works best when he or she can take sports related events and find their inner truths in the context of a larger world.  That’s Whitlock’s unique talent and Livingston’s biggest problem.  With the Plain Dealer going to a mostly internet based platform, Livingston will now be forced to compete almost directly with Whitlock.  I suspect his retirement, like Gee’s, will be forced and will be soon as well. Good riddance.

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The Indians have been one of the consistently worst teams in major league baseball the last 10 years.  Their attendance has been at or near the bottom in each of those years.  Some may see cause and effect but not club president Mark Shapiro.  He sees a different truth, one that requires no introspection on the failures of his front office reign.

Whether you view Shapiro has incompetent or unfairly hamstrung by cheap owners is probably missing the point.  Shapiro is a survivor of the first order because the chief skill he possesses is the ability to sell his genius to a gullible ownership that has bought everyone of his excuses without question or exception.

In a column in Crain’s Cleveland Business, Kevin Kelps unwittingly falls victim to Shapiro’s snake oil charm by advancing a Shapiro theory that the Indians’ attendance hasn’t really tanked, it’s been market corrected.  Under the Shapiro theory, per Kelps, the Indians’ sell out streak and attendance in the early 2000s was the result of a new stadium and a lack of competition from the Browns.  The loss of corporate backers that have moved out of town, increased competition from the Browns (as if) and a recession have all served to create a new normal where the Indians will be one of the worst draws in baseball because, well, they just will be because, I guess, we suck as fans.

Like most Shapiro theories, it has enough truthiness to pass muster among gullible owners and columnists.  But what’s far more fascinating is the utter lack of blame that Shapiro places on himself and his charges in building one of the worst teams in the league, year after year.  The underlying message from Shapiro is that wins and losses aren’t all that relevant to attendance.  Market size and competition within that market is what matters most.

What’s interesting about that theory is that it’s merely a rehash of what pre Jacobs field/Jacobs ownership tried to sell as well as if baseball games are to be enjoyed on their individual merits, like any other form of entertainment.  They, like Shapiro, sold that yarn because they couldn’t do what it really took to boost attendance: spend.  If fans are spending their discretionary cash on anything but the Indians, then that's the Indians' fault, not the fans.

There are true baseball fans among us but they are and always will be a minority here and elsewhere.  Baseball, like other major league sports, is not a collection of individual games but a pursuit with an overarching story, like a movie.  Brad Pitt can open a movie based on his name but he can’t make it profitable if the movie sucks.  Movie studio execs wouldn’t argue that the paying public should just be grateful to attend movies without regard to whether or not it’s entertaining so why should a baseball exec like Shapiro?

The Indians lousy attendance is directly and almost perfectly correlated to their performance.  It’s true that a particular game might be entertaining but most fans are tourists and not natives and so when they spend their money they want to maximize the chance that the product they’ll see will be entertaining.  A team that loses more than it wins doesn’t maximize the odds the average fan needs to make the investment and if there’s one thing we know about the Indians of the last decade it’s that they lose more than they win.

Shapiro has strangely held on to a job in which he’s been abjectly unsuccessful for most of it, assuming you judge success by wins and losses.  He’s not come close to building or sustaining a team that is more likely than not to win day in and day out.  He’s facilitated an ownership group that has repeatedly disappointed its fan base by refusing to make the needed investments despite promises to do so.

All I hear right now is that the Dolans did spend in the offseason.  They did.  But it doesn’t vitiate the previous decade when they didn’t. The indifference of fans now is that they already have the singe marks from the previous times they got too close to the flame.  You can't blame them for wanting to see more from a team and a franchise then a starting pitching staff that can't go 6 innings on a nightly basis.

Shapiro is smart enough to know that he’s selling a load of crap and smart enough, hopefully, to not actually believe that load of crap.  The truth is that the potential of this market is known and it’s much higher than what we’re seeing now because the team has been so bad.  Is it as high as it was in 2001?  Perhaps not.  But this town has more than demonstrated it will pay up and show up when given a consistent reason to do so.  Shapiro has more than proven an inability to give the fans their reason and the only ones who truly don’t get that simple point are the most important: the Dolans.

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The Cavs' pursuit of rickety and underperforming free agent center Andrew Bynum is perhaps one of the most fascinating free agent pursuits in years.  By almost any measure, Bynum isn’t worth even half the money the Cavs have thrown at him.  He’s basically the basketball equivalent of Grady Sizemore, drawing interest based on his theoretical value unrelated to his actual production because all too often he's injured.

What makes it fascinating is that the Cavs offered to make him richer in one year than the average fan will see in a lifetime and yet they still couldn't keep him from pursuing a contract elsewhere.  Bynum and his agent felt obliged to test the greater fool theory to see if there’s anyone dumber or more desperate than the Cavs.  There could be.  Sports owners and executives are generally a nervous bunch. It didn't turn out to be the case.

The plight of the Cavs is such that they literally have to throw that kind of money around to even get in a conversation with a player of any credibility and it’s a stretch right now to even but Bynum in that category.  Cleveland is a miserable place to be in the winter and that’s the heart of the NBA season.  The Cavs have nice facilities but so does everyone else.  What they lack is something they can’t change: the weather.  They also don’t have enough horses to be considered an upper echelon team at the moment so whoever comes is coming into a rebuilding project that may or may not take.  It's not Shaquille O'Neal sidling up to LeBron James.

Twelve million a year is  certainly enough to get me to live even in Michigan during a football season but that doesn’t mean I’d like it and it may be enough to get Bynum to Cleveland even if he won’t like it.  But if either Atlanta or Dallas had gotten close to the Cavs offer, Bynum wasn't coming and the Cavs and they could have continued to stockpile cash and cap space in the misguided belief that LeBron James sees the errors of his way and returns to a city he didn’t much like in the first place.

The Cavs will be built, if at all, organically.  Free agents show up in basketball when they think they are the final piece and not the first.

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There are plenty of sports questions to ponder, but the biggest question to ponder this week (and last): will it ever stop raining?