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Sunday, April 1, 2012 - Page updated at 07:30 p.m.
Mariners economics: As attendance, revenue dip, so do payroll and wins
By Geoff Baker
Seattle Times staff reporter
There are two versions of why the Mariners are where they sit today.
One is the for-public-consumption tale of a team building "the right way" through cheaper prospects, like minor-league pitchers Danny Hultzen, Taijuan Walker and James Paxton, or fledgling major-leaguers Dustin Ackley, Jesus Montero and Justin Smoak.
But no matter how good prospects look, taking that next step almost always depends on team ownership's ability to add pricier pieces, and the Mariners might not be capable of that. And that's the version of their story the Mariners aren't crowing about; that two owners controlling nearly 86 percent of their team have seen most of their fortunes evaporate since the end of the 2008 season — coinciding exactly with team payroll cuts.
The ability of majority owner Hiroshi Yamauchi and top minority owner Chris Larson to contribute new capital to the Mariners remains in doubt. Forbes magazine in March estimated that Yamauchi's fortune plummeted from $4.6 billion to $2.5 billion this past year alone due to falling Nintendo stock prices, while recently divorced Larson has debts of more than $100 million caused by heavy borrowing against diminished Microsoft stock holdings.
The Mariners have steadily cut payroll since 2008, insisting on not spending more than the revenue they take in, despite a losing on-field product and dwindling fan interest. That approach enabled the value of the franchise to keep rising to record levels without additional owner investment, but also has saddled the Mariners with ongoing payroll cuts as attendance revenues drop because fans are choosing not to see a losing ballclub.
When can they spend more?
There is hope for the Mariners to break this cycle of spending less as Safeco Field revenues decline. It comes from a 2015 opt-out clause in their local television deal negotiated in 2007 with DirecTV-owned ROOT Sports, an escape hatch that should enable the Mariners to join the select few clubs cashing in big on regional sports network contracts.
The recent explosion of regional TV contracts in baseball — including reported 20-year, $3 billion deals for the Los Angeles Angels and Texas Rangers — leaves the Mariners in line for a needed windfall. That money could allow the team to boost payroll, which it has appeared unwilling or unable to do.
And the ability of the Mariners to maximize that windfall could determine whether they qualify for the postseason the next decade and beyond.
"They're in a whole different market now than they were in 2007," said Chris Bevilacqua, a New York-based consultant to various sports teams on media rights. "At a minimum, they've just got to put themselves in a position of free agency so they can talk to any number of partners versus just one. That's how the free market works."
Despite negotiating their current 10-year, $450 million deal five years ago, it only went into effect last season.
Owners' fortunes fall
The Mariners spent $117 million on opening-day payroll in 2008, bolstered by secured future revenue from that TV deal and strong ticket sales following a winning season in 2007.
Former Nintendo Corp. chairman Yamauchi — who owns 55 percent of the team — was worth an estimated $7.8 billion in early 2008. Larson, though struggling to control debts, had not yet been hit by that year's September market crash.
But Yamauchi, 84, has lost nearly 70 percent of his fortune since 2008 and team payroll is down to roughly $82 million. Yamauchi's holding in the team — transferred to Nintendo of America for estate planning in 2004 — is now about a seventh of his net worth after a judge at minority owner Larson's divorce trial in December pegged the value of the Mariners at $641 million.
Larson's 30.6 percent stake in the team has become his single biggest asset and — unlike his real-estate holdings — one that he could realistically hope to liquidate short term if desperate for cash.
Trailing two division rivals
The Mariners aren't the only team that tries to spend only revenues taken in. Most teams do this, even after getting taxpayer-financed stadium deals.
The lowest spenders are teams like the Tampa Bay Rays and Oakland Athletics, who keep minimal payrolls while lobbying for new venues. The Mariners were in similar straits until Safeco Field arrived, followed by 3 million-plus attendance for four straight seasons through 2003.
But attendance has since fallen from nearly 3.3 million in 2003 to less than 1.9 million last year. Meanwhile, revenues and payrolls of Seattle's division rivals soared. With their current TV deal, the Mariners will average less than half the annual broadcast money of the Rangers and Angels. Bevilacqua and others agree the Mariners should renegotiate.
"I think you've got to start thinking about it now," Bevilacqua said. "It's 2012 now, so they're probably in that red zone. I'd give yourself 24 months at least to figure out your options."
Those include renegotiating with ROOT Sports, going to rival Comcast, or creating the team's own network — in which they could even partner with potential Seattle NBA and NHL teams and bundle programming to leverage more revenue.
But that would require the acquisition of TV studios and on-air talent, while negotiating deals with other networks. The Houston Astros — joining the American League West next year — got around such infrastructure needs by launching their own network with Comcast as a business partner.
Such partnerships let the network provide the broadcasting infrastructure while the team controls on-air and branding decisions. Owning their own network also helps teams shield broadcast income from MLB revenue sharing.
A windfall is coming?
No matter which way they go, the Mariners will make more money.
The question is, how much and how soon?
"The only way I can see for them not to be able to get a windfall is if the carousel stops, when the music stops," said Adam Chase, a Washington, D.C-based lawyer with Dow Lohnes LLC specializing in media rights. "It seems like it's at a pretty feverish point. Will it stop at some point? Potentially. If you have the opportunity to get the money now, I'd say you have to seriously consider taking it."
The Angels acquired free agent Albert Pujols in a $254 million deal as a marketing centerpiece, then announced their TV deal with Fox Sports 24 hours later.
"The timing of those two announcements couldn't have been coincidental," Chase said. "Think of the programming. Pujols is one of those few players who has put up historic numbers."
The challenge for the Mariners becomes scoring a similar deal without Pujols and in a smaller market.
The Mariners also haven't been to the playoffs since 2001. There are no NBA or NHL clubs to partner with yet, and as for starting their own network, the team's owners hardly seem positioned to make bold new investments.
"We're thinking about it," Mariners president Chuck Armstrong said of the TV situation the day a 20-year extension of the team's spring training lease in Peoria, Ariz., was announced. "But we've got other things. We've got this (spring-training-lease extension) on our mind, we've got the Japan trip ... we've got a nice TV deal now and it's only 2012.
"I think it's up to the TV people. I think it's up to the ROOT Sports people to initiate that."
Needing more fan interest
If the Mariners simply take "their cut" of the new going rate from ROOT Sports or Comcast, relative to their market size, it would likely result in a smaller deal than the Rangers and Angels got and could leave Seattle playing catch-up in terms of AL West playoff contention.
That's why rekindling fan interest ahead of any TV deal is important for the Mariners to leverage value. Part of it involves playing closer to .500, while also selling fans on the vision of a contender down the road.
The Mariners insist payroll cuts are part of rebuilding "the right way" with a younger, cheaper core. But the main part of that core — including Hultzen, Walker, Paxton, Smoak and Montero — wasn't even in the organization when the Mariners slashed payroll ahead of a 101-loss season in 2010 after telling fans to "Believe Big" in marketing ads. Ackley had yet to play a professional game when that payroll decision came down.
Rather than being part of a master plan, the cuts seem a byproduct of owners not wanting to risk franchise value no matter how badly the team performs. Minority owner Larson tried to sell a third of his Mariners holdings in 2009, but testified in his divorce case he backed off when an appraisal of his stake came back too low after a money-losing 2008 season.
Since then, the value of the Mariners has risen steadily, thanks to payroll cuts approved by Larson and other owners. Should Larson wish to sell today, he'd walk away with quite a bit more money.
Challenging their profit-loss statement
The team's $7.3 million operating loss for last season came from $9 million spent on new scoreboards and other Safeco Field improvements. Because of that, last year's operating loss might not negatively impact franchise value.
"That amount of money really isn't a big deal," said Michael J. Cramer, director of the Sports and Media Program at the University of Texas and a former president of the Texas Rangers and Dallas Stars. "If you'd told me they'd spent $50 million, I'd ask you why, because that's a beautiful ballpark they have. But to spend a small amount like that on scoreboards, or whatever, you can make that back in a year."
Without those upgrades, the Mariners could have turned a profit in 2011 despite losing 95 games.
Whichever way they go on a TV deal, it's not a matter of whether they'll get more money — just how much more.
And that could even attract interest from bidders looking to buy a ballclub. Safeco Field is still state-of-the-art, the team has its spring training site locked up for 20 years and the franchise value is higher than ever.
The Mariners have avoided big free-agent contracts as they wait for Ichiro's deal to expire this year. They have younger players to peg hope on and the promise of that new TV cash just a few years away.
All that remains to be seen is how close the Mariners are to winning something by then. And whether it will be the team's current owners trying to vault their developing young core over the top.
Geoff Baker: 206-464-8286 or email@example.com.
Illustrations by David Miller / The Seattle Times:
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