Scott Boras, Rogers and TV money

It is safe to say the the current occupants of 1 Blue Jays Way are not Scott Boras’s favourite people in the world. The animosity began when after Aaron Sanchez refused the 2017 contract offer the Jays made in search of a larger raise so he was instead renewed at the minimum (though on the team side, it probably dates back to the Franklin Morales boondoggle). More recently, at the GM meetings in November, Boras asserted the franchise is afflicted with “Blue flu“ that is in his thinking to blame for attendance falling.

The criticism continued at the Winter Meetings, specifically when Boras did an interview with Hazel Mae that included this commentary:

You see the commitments that major markets make here in the States with their teams and what they do. One of the biggest problems is if you put the right fees of the Toronto Blue Jays in the open market for sale, they’d probably be on their books four times what they’re paid. That’s a big a problem when Rogers Communications owns the team and they also put on their books a rights value because it doesn’t show the true value in revenue of the club.

And then when they talk about budgets they’re talking about revenues and the revenues are artificial. Until that equation is solved and until the true revenues of the clubs are revealed, I think we have a national treasure that’s not being given the due course and respect. The baseball people need revenue — they need dollars — to get the best payers in the world to play in Canada.

With the reference to the rights fees not reflecting the true value, Boras is almost certainly referring to the reported $36-million that the Blue Jays received from Sportsnet. Now that’s from 2012, so it may have since increased (the article notes that a new deal was being worked out). And of course Paul Beeston disputed the number. Boras is contending is that the real value is more in the neighbourhood of $150-million — which would put the Blue Jays right at the top of MLB — and the Jays are being shortchanged by more than $100-million that would otherwise be available to the business. At least some of which presumably would support higher payroll, and which would be a gamechanger.

Far be it from me to question Boras’s knowledge of MLB’s economics. He’s certainly one of the most successful agents ever. But he has a very clear agenda, and in his ideal world almost every team is aggressively trying to contend every winter and showering money on his players. As it pertains to the above referenced “Blue flu” comments, Boras attributes the fall in attendance to “not bringing in attractive players that fans find interesting”. At least in Toronto, it is well established that individual stars don’t significantly drive attendance, whereas the experience of 2015-18 shows it’s about winning, period full stop.

Even if he’s well known for his bombast and hyperbole in pursuing client interests, let’s assume Boras is right about the fair market value of the media rights. It seems high to me, but given the pan-Canadian distribution and fanbase, not totally implausible. The thing is, even if he’s right on this narrow fact, his broader thrust is almost certainly wrong or very misdirected.

As Boras himself points out, since Sportsnet and the Blue Jays are both owned by Rogers, and within the same operating division, the number that get puts down on paper is totally artificial. In fact, the only reason there really is one for public consumption is that under MLB’s revenue sharing plan, 48% of local MLB team revenues are figured into the pool. So there has to be a dollar value put on the TV rights for MLB’s purposes, and as the linked G&M article elaborates, there’s third party involvement/verification to make sure the submitted the numbers submitted are at least somewhat consistent with real market value.

That leads us to an important point: to the extent the broadcast rights are understated, it saves the Jays from having to put more money into the revenue sharing pot. Since 2012, the Jays have been barred from receiving revenue sharing as a larger market, so to the extent their “true” local revenues would be below MLB average, it doesn’t have any benefit. But if they were truly getting $150-million, their local revenues would certainly be above average and the Jays would be net payors.

At the margin, every dollar of additional local revenue above the average of all teams accrues to other teams. So, for example, if broadcast rights were adjusted to $75-million, and that resulted in the Jays having local revenues matching the MLB average, then the difference between $75-million and $150-million is not an extra $75-million — it’s less than $40-million. “Low balling” the Blue Jays, at least compared to a theoretical mega deal, serves to keep a lot of money within Rogers rather than in the pockets of other teams.

At this juncture, one might inclined to say, that’s just more profit for Rogers, who cares? If they’re screwing the Jays by $75- or $100-million, well, even $50- or $60-million more sounds pretty good. But this is where the Boras narrative veers off the rails.

Let’s go to first principles, and look at what real market value for broadcast rights is. In the conventional model, a team sells the rights for a fee. That fee in turn is based off the revenues the broadcaster can receive from advertisements and increased carriage fees for the channel(s), less the costs of doings do. So the market value of the rights is fundamentally determined by those two revenue streams.

The latter is harder to figure — how many more people subscribe to Sportsnet and pay the carriage fee because of the Jays, and how much higher is that fee than it would be without the Jays? But internally, I’m sure the Rogers Media folks have some models to estimate this. The second one is much more transparent — you know how many people are watching, how many spots there are, what what each of those spots is worth.

From a managerial perspective then, even if those revenues (and excess profits) are actually booked at Sportsnet, the executives at Rogers Media should quite easily see where they fundamentally come from and what is attributable to or driven by the Blue Jays. This is a basic and core function of management — to understand your real (marginal) revenue and cost functions, and manage to maximize profit accordingly. The only way this wouldn’t be the case is if there was a frankly stunning degree of managerial incompetence within Rogers Media (and Rogers more broadly).

To put it more tangible terms, consider the difference between running $120-million average MLB payrolls and $170-million average payrolls over the long run (holding all other baseball expenses equal). This is a hypothetical, but if spending that extra $50-million per year results in $25-million more in attendance and an extra $40-million in revenues that are booked at Sportsnet, the managerial incentive is for that higher spending. The goal is to maximize total profits, even if artificially the Blue Jays are being pinned with a smaller profit or larger loss.

So in the end, as long as Rogers Media is reasonably competent at managing its business, then the Blue Jays should receive credit for their real revenue generating capacity in terms of setting budgets and MLB payroll. Whatever Scott Boras says, It doesn’t matter what number is written down on paper to give to MLB — except to avoid revenue sharing clawback when revenues spike with success.

For those skeptical, I think it’s worth making a broader point: MLB teams are increasingly moving towards the vertically integrated model that the Blue Jays have with Sportsnet. With goes back to Boras. In that spiel quoted above, Boras is talking about the Jays, but briefly seems to make a broader point:

Until that equation is solved and until the true revenues of the clubs are revealed

Emphasis mine, on the fact that he says clubs plural when discussing “true revenues” being revealed. If I had to guess, the reason this issue is really animating Boras has less to do with the Blue Jays and that fact that their payroll is dropping for a year or two in a rebuilding cycle. It’s that several other big market teams are heading in the direction of the Jays.

Only a handful of teams other than the Jays have majority ownership of their broadcast network, where there’s an incentive to move money and profits between the rights fees paid to the team and the channel. The Red Sox, Orioles, Mariners and Mets all own 60-80% of their broadcast partner. The Dodgers are now likely in the same boat — they have a weird arrangement where they get an annual rights fee, but also an equity payout from ownership in the channel which is guaranteed at minimum levels (so like a rights fee, but apparently gets around it being included in revenue sharing).

The Cubs TV deal expires after 2019, and they’ve already announced an intentional to set up their own channel, likely with a distributor as minority partner. So they’ll soon be joining the club, and it seems like the Yankees might be too. They own 20% of YES Network, with 21st Century Fox having the 80% majority stake it built up over time as part of its suite of regional sports networks. Disney agreed to buy most of 21st Century Fox earlier this year to scale up its ownership of media content, but because it already owns ESPN had to agree to divest all the sports networks. The Yankees have expressed interest, and have first right of refusal.