I’ve been spending time lately thinking and writing about the future of Major League Baseball. We could discuss the upcoming offseason, and what we could see from the Pittsburgh Pirates. However, with the new MLB Collective Bargaining Agreement looming between now and then, it’s almost impossible to make any predictions.
I’ve written already about how MLB is making money, despite seemingly losing fans in every avenue over the long-term. That’s not a trend that will hold up long-term, although MLB is set up well financially through at least 2028.
What I see when I look at Major League Baseball is a massive organization that is set up for, and might be moving toward more vertical integration.
For those of you who didn’t become indentured servants with a lifetime of student loans to get a business degree and become a sports writer instead, vertical integration is when a company owns multiple stages of production.
In the real world, that would be a company that sells chicken in grocery stores also owning the farms that raise the chickens, and the slaughterhouses that process the chickens. From the moment that chicken is born, to the moment it is sold to you in a store, it is owned by the same company. By owning every stage of the production process, this company can greatly reduce costs.
The alternative would be one company owning the slaughterhouse, and another owning the farms. That presents three different companies to keep afloat. The main company that sells chickens needs the production companies, and the production companies would be nothing without the main company ensuring their product would be sold.
Let’s translate this to baseball, and try to remove ourselves from the section of the metaphor where baseball players are chickens.
Instead, let’s just use Baseball as the product being packaged and sold across the country by Major League Baseball.
The production process begins in the minor leagues, aka, the farm.
Most of the minor league affiliates are owned independent of MLB owners. MLB teams reach affiliate agreements with the owners of these minor league teams. The agreements allow MLB teams to use the stadiums and team names to train their future baseball players. The minor league teams get to market and sell the ability to see these future MLB players.
MLB restructured the minor leagues this year, removing 40 teams, and eliminating short-season leagues. Those leagues still remain, but now have a looser affiliation, working as feeder and showcase leagues for the MLB draft. Rather than being under MLB’s Farm System umbrella, they’re now in that space between NCAA/Prep teams and MLB.
This independent designation will make it difficult for those former Minor League Baseball franchises to survive. Their marketability goes down moving from “Come watch these Future MLB Players” to “Come watch these guys who could be Future Future MLB Players.”
In my evil capitalist brain, I see an opportunity for MLB. They have greatly devalued a lot of existing minor league teams with a lot of existing minor league franchises. Eventually, some of those franchises will go out of business. That creates an opportunity for MLB to purchase the franchises and stadiums at a massive discount.
If I were MLB, looking to vertically integrate, I’d want to first own the entire minor league system, rather than depending on and helping three or four independent businesses to survive. MLB needs the minor league teams, and the minor league teams need MLB. I think we’re going to see exactly how much that is the case by tracking what happens with those 40 teams who were recently eliminated as MLB affiliates.
Why is this important? Those existing minor league teams enter into deals with MLB because they know they can market the future MLB players and make a profit. If MLB owns the affiliates and stadiums, they get that extra profit. It wouldn’t make sense for MLB to buy an existing affiliate, as the cost would be too high.
However, if a former affiliate — let’s say for example the former West Virginia Power — goes out of business, then MLB could buy that affiliate for much cheaper than an existing MLB affiliate, like the Greensboro Grasshoppers. And I don’t think any MLB team cares if their minor league team is in West Virginia or North Carolina, as long as they’re maximizing revenue.
The next area for potential vertical integration in the game comes from the distribution factor. In my previous articles about the game, I focused on TV deals and ratings. However, those are relics of an old and dying form of consuming what we commonly call television.
These days, you can watch an MLB game from anywhere in the world, on the phone that you carry around in your pocket. The world isn’t going back to a format where a family sits in front of the one TV in their house, receiving only the programming that TV studios provide.
In the future, cable companies that offer packages of channels — like TBS and FS1 — will go out of business as more and more companies survive independently with a la carte streaming services. We’re currently moving toward that as a society now.
MLB is making that jump, with the talk that they are going to offer in-market streaming via MLB.tv, even to people who don’t have a cable company.
Let’s put this in perspective using Pittsburgh as an example. The Pirates have an agreement with AT&T SportsNet to broadcast their games. AT&T SportsNet pays the Pirates an unknown amount each year (Seriously, how do we not know this figure, but we know every dollar that every player on the Pirates can possibly make?), and in return, AT&T SportsNet can market the Pirates as part of their channel, using that to sell advertisements.
The ad dollars are higher with higher ratings. If MLB moves to a system where fans can buy directly from MLB, via the MLB.tv service, then it would reduce the amount of people watching on AT&T SportsNet. That would reduce the amount they could bring in selling advertisements. And eventually, MLB might not even need deals with those regional TV networks.
Eventually, everyone will have the internet. Some future president is going to push us into the future with an infrastructure bill that would ensure high speed internet in every home, just like we currently provide TV in every home. At that point, why would MLB offer their product on TV at all? Why not just sell directly to the consumer through MLB.tv?
Every stadium is essentially equipped as a production studio. Every MLB field is a stage of a program that we watch live on a nightly basis. MLB could use that to sell their product from their own service, without having to worry about filling 24 hours of content to justify a network like AT&T SportsNet and every other regional network has to worry about.
The advantage here is that MLB is currently leaving money on the table. AT&T SportsNet wouldn’t pay the Pirates tens of millions of dollars each year if they didn’t know that they would be making more than that in advertisements. If MLB owns the main distributing company (MLB.tv), they can sell those ads for themselves. In that scenario, the Pirates and every other team would be making more money by selling directly to the consumer, cutting out the middle man.
Why am I focusing on vertical integration today? MLB will continue to face challenges from the massive streaming wars that are starting up. There is so much content out there from so many companies, and so little time. Baseball is just another option for content. It’s not immune to competition from the endless TV shows released by Netflix, Disney+, Hulu, Apple TV, and so on.
MLB will continue to see their viewership decline, unless they greatly improve their product to make it consistently watchable in all 30 markets. I don’t see that improvement happening any time soon. Therefore, the best way for MLB to continue growing financially in the future would be to maximize revenue through vertical integration. And they’re currently set up well to do that in terms of minor league ticket sales and MLB TV ad dollars.
I’ve been working to move the 13-year history of Pirates Prospects over to a new server. Once this process is finished, I’ll be ready to get things on track over there with daily features about the farm system.