Baseball Braces for a Less Hopeful Season

The end of spring training is usually a time of unlimited possibilities for baseball players and fans. Not this year.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

April 3, 2009

Major League Baseball will prove anything but recession proof this time around. With regular season play set to begin Sunday, the sport is looking ahead to a bleak 2009. Rising unemployment has consumers worried. They're gripping their wallets with white knuckles, ensuring that ticket and concession sales will fall this year. So will advertising revenue, both from stadium billboards and from TV and radio commercials. But even all that just scratches the surface of the teams' worries.

The industries that have been baseball's strongest benefactors in years past, banks and carmakers, are among the worst hit by the recession. Those that are accepting federal bailout funds -- or even facing bankruptcy, as in the cases of GM and Chrysler -- are being forced to slash anything that could be construed as unnecessary spending. That means abandoning leases on private boxes and suites, a huge source of revenue for the teams.

"Congress is putting a lot of pressure on companies not to be spending money on what it sees as luxuries," says Lisa Delpy Neirotti, an associate professor of tourism and sports management at George Washington University. Neirotti notes that companies use their suites as a marketing tool, as a way of luring or keeping customers. But it's a hard case for troubled firms to make, given recurring populist anger over executive compensation. "It's an image thing. People see it as a luxury perk and don't understand there's a business motivation behind it," Neirotti says.

The image problem is playing out on a much larger scale in New York. Citigroup had signed a $400-million deal with the Mets for naming rights to the team's new stadium. Citi Field, the replacement for now-demolished Shea Stadium, will host the Mets' first home game of the season April 13. But the troubled financial services giant is seeking an exit from its stadium marquee pact. If Citigroup manages to get out of its contract, other ballpark sponsors may follow suit.

Baseball has a buffer, thanks to the organization's long-term broadcasting contracts. That will help smaller market teams, which benefit from revenue sharing agreements with richer franchises, particularly the New York Yankees and the Los Angeles Dodgers. But the teams are also locked into multiyear contracts with players. That's no problem as long as the player continues to perform, but it becomes a liability if he's injured or if his playing erodes as he ages.

The free agent market provides a window on team owners' concerns. Back in December, the Yankees signed multiyear contracts with three free agents: Mark Teixeira, CC Sabathia and A.J. Burnett for a cumulative $423.5 million. But those signings proved the exceptions in an otherwise dreary off season.

"Something like 100 free agents were unsigned a week before spring training began. That's a record by a large margin," says Andrew Zimbalist, Robert A. Woods Professor of Economics at Smith College. "Teams are being cautious because of expectations of low revenues and owners being clobbered by [losses on] other investments."

State and municipal governments are deep in the red and can provide no assistance to franchises seeking new stadiums or to renovate their current homes.

Teams will offer discounts to keep the fans from drifting away. The San Diego Padres and concessionaire partner Delaware North are offering fans at PETCO Park a deal of five concession items for $5. A single game ticket for the mezzanine level of Cincinnati's Great American Ball Park runs for $22, but for another $8, Reds fans get all they can eat. The Baltimore Orioles are offering fans who sign up on the team's Web site a free ticket on their birthday. The Orioles are also partnering with Chick-fil-A to offer a package of tickets to 10 games for $17 to children 14 and under.

A few teams, including the 2008 World Series champion Philadelphia Phillies, are shunning such discounts, counting on large, loyal fan bases to carry them through the hard times. But most franchises will have no choice. Indeed, by midyear, lower attendance will force some teams to slash ticket prices.

For franchises already in trouble, this year or next could break them, forcing them to uproot and move to a new city in search of larger ticket sales. Teams that have only recently relocated, such as the Washington Nationals, will be given more time to get their bearings. But more storied franchises showing weak returns are at high risk. Among the most troubled teams are the Reds, the Pittsburgh Pirates and the Kansas City Royals.

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