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--Depth Edition

Bad games and bad weeks happen in baseball.  They are far more easily absorbed then in football.  So if your team is otherwise fundamentally strong and soundly built then a bad week simply represents the usual bumps and bruises along a very long 162-game season.

The Cleveland Indians certainly had a series of bad games culminating in a very bad week.  After an emotional, perhaps too emotional, 3-game sweep of the Detroit Tigers, the Indians laid 3 colossal eggs in Chicago, undoing pretty much all that was done against the Tigers.  It didn’t get much better against the usual punching bad, Kansas City, thereafter and they fell out of first place.

It’s not the losses that are troubling, occasioned as they were bad some lousy pitching.  It’s the injuries and what they reveal about this team.  It’s not deep, intentionally.

The Indians by design are mostly held together by players without a great deal of experience.  It’s cheaper to do it that way.  But when the front line players are barely experienced, what does it say about the replacements behind them?  You’ve seen the results, you make the call.

It’s also troubling that once again Travis Hafner is hurt.  Perhaps the least versatile player in the major leagues, if not major league history, Hafner probably doesn’t even own a glove at this point.  All he needs to do is keep himself relatively in shape, step into a batting cage occasionally while his teammates are in the field, and come to the plate 4 times a game.

If you ask the average person off the street to do that task, he might not get the same results at the plate as Hafner but he’d at least be available for the entire season.  The Indians require very little physically of Hafner and he still can’t stay healthy enough to play a full season.  He’s out for the next 4 to 6 weeks (!) after having arthroscopic surgery on his right knee.

You can’t really blame a player for getting injured, but you can stop rewarding him.  Grady Sizemore is collecting millions for doing exactly what everyone outside of Chris Antonetti and Mark Shapiro thought he’d be doing, spending time on the disabled list.  Hafner will collect millions this season for doing exactly what everyone outside of Antonetti and Shapiro thought he’d be doing, muddling through the final year of his contract with indifferent results while occasionally spending time on the disabled list.  There isn’t any chance whatsoever that either player could come close to performing at their contract’s worth and that was a given before the season started.

In the case of Hafner, you can argue that the Indians didn’t have much of a choice.  He’s in the last year of a contract and even if he had been cut the Indians would still be on the hook for his salary.  True, but the other side of that coin is that a deeper, better financed team would simply have cut its losses with Hafner and let him instead spend some time on some other team’s DL while the Indians developed a better alternative.

As it is, the Indians have not developed a better alternative and now have no real plan in place for how to cover the loss of Hafner, except the usual “by committee” approach that teams with a lack of depth tend to employ.  The committee approach is understandable when a team’s closer goes down.  It’s rather ludicrous when it’s a designated hitter.

The Indians’ offense was already an iffy proposition and that was with a supposedly healthy Hafner who was having a decent but not great year anyway.  It begs the question though of how much better off if at all the Indians would have been had they made alternate plans instead of continuing to rely on Hafner solely because of his millstone of a contract forces their hand.

It’s just this kind of thing that tends to reveal the fissures in a team that needs absolutely everything to go right if it’s going to compete.  For the initial part of the season that seemed to be happening.  The injuries, always the fear on a team this loosely constructed, have started and the holes they create underscore why the skeptics out there looking for reasons to not believe in this team have their Exhibit A.

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Not to continue to beat the dead horse over attendance too much more, there is an additional point that rarely gets mentioned in the debate as to why the Indians don’t draw better.  Virtually every game is on television. 

There’s always been an argument over how game attendance is impacted by the fact that the games are otherwise televised.  There’s no good way to do that study mainly because it relies on the opinions that may be earnest but inaccurate.

To most, attending a game is an event.  The cost is certainly a factor, but there is a certain hassle factor involved.  And one thing I’ve come to appreciate the older I’ve gotten is how much the hassle factor really does figure into whether or not I attend any particular event.

When you’re younger, the thrill of an event tends to outweigh any hassle factor.  You don’t mind parking far away from the venue because you’re young and can walk.  The late night isn’t that much of a problem because what’s a few lost hours of sleep anyway?

But as you get older, the hassle factor takes on a bigger role to the point where you weigh the thrill against the hassle.  And the older you get, the more the hassle factor dominates.

Indeed, that’s one of the reasons every game is broadcast in Cleveland and elsewhere.  Owners understand that the vast majority of the people can’t attend on a regular basis.  So they make their product available in another way—through a cable package that they control.  The Dolans own Sportstime Ohio, for example.  They get the revenue it generates through the sale of its programming to cable operators.  They also get a piece of the advertising revenue those games generate.

In other words, in the larger sense when you consider attendance you can’t just focus on butts in the seats at Progressive Field.  You have to take into account the eyeballs on the screens in all the households and bars in the greater Cleveland area.  If those ratings are down as well, then the Indians do have an attendance problem. 

I’ve not seen ratings yet for this season, but last season the Indians were 7^th in the major leagues in local ratings, up 105% from the previous year.  That’s impressive not just in theory but in practicality.  That gives the Dolans’ cable operations the ability to charge more for carriage of Sportstime  Ohio when it comes up for renewal and also makes the available advertising minutes more valuable.

The point though is that the Indians are still a popular draw locally when you take into account more than just those who watch from Progressive Field.  Certainly the team would be more profitable with higher attendance, but let’s not completely bemoan the lack  of support, mainly because it just isn’t true.

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There’s little doubt that the Miami Heat are headed back to the NBA Finals and when that happens Cavs fans can recharge anew their angst meters.  The thought of LeBron James hoisting a championship trophy and wearing a championship ring is a unifying measure of anger for most of the locals.

Sooner or later, though, this is just something that we’ll all have to face.  James will win a championship at some point in his career and it won’t be with Cleveland.  And whenever it occurs it will be before the Cavs make it back.  Those are pretty well givens at this point. 

Still it’s hard to see at the moment the Heat actually winning the championship this season.  Both Oklahoma and San Antonio look deeper and better coached, assuming the Heat get past Boston.  James may be the star that shines more brightly but it’s not like Tim Duncan or Kevin Durant are dim bulbs.  They have better supporting casts, Dwyane Wade and Chris Bosh notwithstanding.  (Indeed, Bosh is proving that he always was about the 93^rd best player in the NBA anyway.  He’s been gone now for several days and no one has much noticed.)

If this doesn’t end up being the Heat’s year, then look for the kind of off-season in Miami that Cavs fans used to know.  James and his confederates will work to get Erik Spoelstra  a new title, “ex-coach.”  Then there will be the usual positioning of grabbing other players that fit more with James’ vision of how the team should be constructed.

The only saving grace for Miami is that Pat Riley is a far stronger figure at the head of the franchise then Cleveland has ever had.  Having one several championships, Riley has a good working knowledge of difficult personalities and there’s every reason to believe he’ll be able to control the lunacy just enough to actually build the Heat into the kind of team that James really needs to win a championship.

I suspect that Riley will get it right eventually and James will win his championship.  If Cavs fans have any aspirations in this regard, it should be that the Heat doesn’t go on an extended run once they do get that first one under their belts.  The longer they wait, the less likely it will happen.

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As Indians’ closer Chris Perez becomes a more vocal and hence more controversial figure, this week’s question to ponder:  At what point will Perez’s act start to wear thin? (hint: it’s directly related to how many saves he blows).