How much would you pay to watch the Nationals on TV?

If you’re reading this, you’re likely a fan of the Washington Nationals, so allow me to ask you a question. How much would you pay to watch the Nationals on TV? Sure, technically you already indirectly pay to watch the Nats on TV through your cable bill, but I’m posing this hypothetical as if cable TV didn’t exist. If it was the only way to watch the Nats on TV, how much would you pay for a Nats.TV internet streaming package?

$20 per season? $100? $200?

I ask this question because that’s the direction we’re headed. The cable industry is dying. Slowly, to be sure, but it’s dying. The Washington Post had an interesting article this morning about Disney, the owner of ESPN, and their looming financial trouble due to cord cutting. According to the article, ESPN has lost seven million subscribers over two years, which is a big considering how much money ESPN has been paying sports leagues to televise their games (ESPN is paying over $1 billion per season to both the NBA and the NFL).

(I wrote about how cord cutting may affect the Nationals here and here.)

What’s happening is a shift in consumer appetites. Viewers are opting out of cable in its entirety and instead relying on cheaper and more flexible providers of entertainment, including Netflix, Hulu, and Amazon. As noted in the article, this gives sports networks like ESPN a tough dilemma. Do they jump into the growing internet streaming marketplace? Offering an ESPN streaming service might generate short-term profits, and offset the losses from lost cable subscribers, but it only increases the consumer’s incentive to cancel their cable service. I, for one, still pay for a cable subscription. Once live sports are available via streaming, I’m probably opting out too. ESPN built their empire on cable subscription fees. Once cable dies, ESPN as we know it dies too. ESPN’s dilemma is not too dissimilar from the record industry last decade: do they jump into digital music sales, even if it means people will buy more individual songs and fewer albums? History tells us the record industry saved itself from collapsing in its entirety, but sales will probably never go back to it’s peak, when consumers were forced to buy CDs if they wanted to listen to music.

ESPN has just over 90 million subscribers who pay around $7 a month for ESPN. Of course, not all of ESPN’s subscribers are sports fans. The Washington Post article noted, using basic math, if one third of current ESPN subscribers—30 million—paid $21 a month, ESPN could survive in its current state. Would you pay $21 a month to watch Monday Night Football, the MLB Wild Card Game, and the NBA Playoffs? Somewhere, an ESPN executive is praying 30 million people would answer yes to that question.

Put simply, we’re witnessing the collapse of a broken system. Cable subscribers are forced to pay for networks they don’t watch. MASN is no different than ESPN. Washington/Baltimore area cable subscribers are forced to pay for MASN even if they don’t care about the Nationals or the Orioles. The majority of non-baseball fans are actually subsidizing those of us who do watch baseball on TV.

Which leads me back to the original question. Once the cable industry implodes, whether that’s five years or 10 years from now, the cost of televising baseball on TV will likely be paid by the actual people who watch it—you and me. So how much money would you pay to watch the Nats? ESPN is hoping one third of their subscriber base like sports enough to pay three times as much. The percentage of actual baseball fans in DC is much smaller. Let’s say 10% of the area actually cares enough about baseball to pay for a MASN.TV streaming service. That audience would have to pay 10 times as much as MASN currently charges cable companies to provide the channel. Any way you slice it, a cable streaming universe probably means less money for baseball teams. Bryce Harper better sign that $500 million contract before it’s too late.

 

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An outside the box idea for a Bryce Harper contract extension

Twice I’ve tried to project what a Bryce Harper contract extension would like. The first time, I followed the Mike Trout model, which included the last few years of arbitration and then a few free agency years (at a high average annual value-AAV), spitting the player back on the market when it’s the best age to be a free agent.  The second time, I followed the Giancarlo Stanton model, with a lengthy deal at an AAV you’d expect for a player of Harper’s skill level.

Both of those approaches have the their merit. In Trout’s case, if he continues to play at his current level–a safe bet–he’ll probably maximize career earnings. The Angels agreed to give Trout such a high AAV for his contract because it’s of a relatively short duration. Trout will cash in long term when he finally hits free agency. Meanwhile, he’ll have huge annual salaries ($34 million) for his first few free agency years already in the bank. The reasoning behind Trout’s approach is simple: it’s better to hit free agency when you’re 29 than when you’re 26. A 10-year contract at 28 is more valuable to the player. A 10-year deal at age 26 spits you back onto the free agent market when you’re a declining player, whereas the 10-year deal at 29 locks you into large salaries well into your late 30’s.

Stanton’s approach gives the player more certainty, but likely diminishes overall earnings. While Stanton’s total money, $325 million, looks huge, he’s actually giving away money on the front end of the deal. Stanton at his peak is worth more than the $27 million AAV he’s earning. Stanton has the option of opting out of his contract at age 30 and locking in another huge contract, but at that point he’s already been underpaid for three years of his prime. Stanton is essentially trading earning potential for certainty, which is a fair deal considering he’s already guaranteed himself $325 million. (Here’s a good read from the economist how opt-outs in contracts often benefit the team as well the player opting out).

Here’s my outside the box idea for a Bryce Harper contract extension. It follows the Trout model but carries it even further. Scott Boras is the type of agent who wants to make his client money, but also blow up the current market, rising the tide for every boat. The safe money right now says Bryce Harper will take his talent to free agency where he’ll get a record setting deal. But as demonstrated above, his deal may be record breaking in total value, like Stanton’s, but he may be selling himself short on total career earnings, even if the contract contains an opt out.

Bryce Harper is scheduled to hit the free agent market when he’s 26. For total career earnings, he would be better off hitting the market when he’s 29. A 12-year contract at 26 would pay Harper handsomely at a high AAV until he’s 38. A 12-year contract at 29 however, would pay him at a high AAV until the end of his career. Hitting the market at 38 when he’s well past him prime would give him a much smaller contract than whatever he could secure for himself if he were to sign a deal at 29.

So I propose giving Harper a 3-year “bridge” contract at age 26. But not just any bridge, a bridge that blows up the current market like Boras wants and resets what an elite player can expect to earn per season. One of the ironies of modern baseball contracts is that players who sign as free agents are actually underpaid in their primes (like Stanton). Players usually make up for this by locking in long term deals which are essentially back-loaded when you consider most of the player’s production comes on the front end.

Bryce Harper put up a 9.8 WAR season according to Baseball Reference and a 9.5 WAR season according to Fangraphs. The Nationals have their own proprietary WAR formula that we can assume is in the neighborhood. But to be safe, let’s round down to 9 WAR. Bryce Harper might regress next season because his 2015 was absolutely amazing. But what if he doesn’t? Why would he? He’s only 23. That’s the scary thing about Bryce. He’s only getting better. The Nats have to assume he’s worth at 9 WAR for the foreseeable future.

The market rate for free agents according to Fangraphs is $8 million per WAR, making Harper was worth $79.5 million last year to the Nationals.

So here’s my “radical” proposal: pay Bryce Harper what he’s worth. Offer him $70 million per year for three years. Blow up the market. Dare him to say no. Worst case scenario for Harper, he’s back on the market at the perfect time to be a free agent, with over $200 million already in the bank.

Paying that much money to one player per year seems like lunacy. It would be a tough pill for the Nats to swallow. But I’m guessing it would be tougher to see Bryce Harper walk away and win MVP awards for someone else.

 

What does the pursuit of Jason Heyward say about the direction of the Nats franchise?

Once upon a time, back when we were all young and idealistic, people talked about the Nationals having a “window of contention” that would close after the 2015 season. At the time, it sounded like a somewhat reasonable thing to say. The Nats had a star pitcher (Jordan Zimmermann), solid pitcher (Doug Fister), star shortshop (Ian Desmond), and ace reliever (Tyler Clippard) all scheduled for free agency after that season. Then, a few funny things happened. Clippard was flipped for a player with team control beyond 2015. Ian Desmond regressed so badly he suddenly looks replaceable. Fister regressed so much he won’t even be missed. Zimmermann regressed a little, but his “replacement” named Max Scherzer is already on board.

The 2015 season wasn’t the closing of a window at all. It was just another season the Nats had a chance to make the playoffs, just like the 2016 season will be. Mike Rizzo has never appeared to believe in windows of contention. He has a one year plan, a three year plan, and a five year plan. Tyler Clippard may have fit into the one year plan last offseason, but he didn’t fit into the three year plan. So Rizzo flipped him for a guy that did, Yunel Escobar. It’s only appropriate Escobar himself was just flipped for a guy that fit into this year’s five year plan, Trevor Gott, a young reliever under team control until 2021.

Rizzo has always been willing to sacrifice a little bit this year to make himself a little more competitive a couple of years down the road. Some people despise this approach and there’s merit to the criticism. Flags fly forever, and it’s a shame to see a team miss out on a championship when they’re a few attainable pieces short. But Rizzo wants this team to be in the race every season. His fear is a Phillies situation, where a team has an extended run that suddenly turns into a long, miserable rebuild. As someone who lived through a long miserable rebuild in DC from 2006-2011, I see merit in this approach as well.

So, Jason Heyward. Where does he fit? It’s somewhat surprising to see the Nationals so heavily in the bidding. I won’t try to pinpoint the value of Heyward and whether he’s worth the $200 million figure being thrown around. Any discussion of Heyward’s value inevitably devolves into a wormhole of WAR and the reliability of defensive metrics. I’m more interested in what the signing of Heyward would mean for the direction of the Nats franchise.

Heyward seems like an odd choice for the 2016 season. Sure, he makes the Nats a better team, but there are less expensive options to fill whatever hole Heyward is filling. A Werth-Taylor-Harper outfield seems like a solid outfield. If you fear further injury/regression from Werth, there are cheaper insurance plans. If you don’t believe Taylor is ready for a full time job, there are more affordable outfielders available until the Nats organization produces a full time CF. The Nats don’t need Heyward next year; there are other more noticeable holes on this roster (catcher, middle infield, 5th starter, and of course bullpen).

But if there’s one pattern we’ve noticed with Rizzo and free agent signings, it’s his willingness to use the free agent market to fill long term needs over short term ones. The Nats didn’t need Werth when they signed him in 2011, but signing him then made sure he was on board when the Nats expected to contend in 2012-14. The Nats didn’t need Max Scherzer last season, but signing him last year ensured he’d be in the rotation in 2016, when the team would otherwise be lacking an ace. Heyward would fit this pattern. The Nats may be able to scrape by this year with their current outfield, but 2017 (Werth’s last season) and definitely 2018 will need him.

Here’s another completely different way to look at it. Rizzo may not believe in windows. I do. Bryce Harper will only be here three more years. It’ll be the same three years Scherzer is still at his peak, Rendon will be entering his prime and Ryan Zimmerman will be finishing his (whatever that looks like). Some Nats fans have expressed misgivings over devoting so much money to a guy like Heyward when they believe the Nats limited resources would be “better spent” on a Harper contract extension. Folks, there’s no guarantee Harper wants to stay here. There’s not even a guarantee he’s willing to take seriously the prospect of avoiding the free agent process by signing an extension. Instead of worrying about keeping Harper past 2018, wouldn’t you rather maximize the Nats chances while he’s actually here?

Mike Rizzo’s actions in the past indicate he doesn’t believe in windows of contention. Loading up on free agents now while this roster appears to be somewhat close to a championship might be the first sign Rizzo is changing his mind.

Sports’ Cable TV Bubble is still inflated, and the Nationals still can’t cash in

The sports business is a weird little business. Zack Greinke, a 32 year-old pitcher, signed a six-year, $206.5 million contract with the ARIZONA DIAMONDBACKS and it hardly anyone was surprised. And why would they be? Greinke’s contract wasn’t even the largest contract signed by a pitcher that week. Even the entry of Diamondbacks into the $200 million marketplace wasn’t that surprising considering Arizona recently signed a $1.5 billion TV contract.

Instead of the usual hand-wringing about rising salaries in sports, a significant amount of the commentary centered around this counterintuitive point: baseball players, even with all their guaranteed nine-figure contracts, are actually underpaid considering how much revenue baseball teams create in the new Cable TV marketplace. Indeed, the players’ shares of revenues has actually decreased since 2002 from 56% to less than 40%.

In the short term, we can expect to see more Zack Greinke-like deals. The lucrative local TV deals being signed by MLB teams means many owners are sitting on mountains of cash, and many of them can spend it on players like Greinke while keeping significant profits for themselves. It’s really hard to imagine this trend reversing itself in the immediate future. Baseball free agency structure keeps young players out of the free agency marketplace for at least six seasons, most of which are in the players’ prime years. Players like Greinke who are fortunate enough to remain productive long enough to see free agency, can continue to expect to see huge contracts as long the Cable TV bubble doesn’t pop. A few months ago, considering his age and productivity, I projected Bryce Harper would be worth over $500 million on the free agent market, and I didn’t even feel silly doing it.

In the long-term, however, the Cable TV bubble will pop, or at least suffer from a slow leak. It has to. The current model is completely unsustainable. Cable TV companies bankroll their billion dollar baseball deals by charging all their customers, not just the baseball fans, monthly subscriber fees to carry regional sports networks like MASN. Cable customers don’t have the option of opting out. They do have the option, though, of cancelling cable altogether, which is exactly what’s happening. ESPN, the King of Sports Networks, has lost seven million subscribers in the past two years, and the network’s highly-publicized layoffs indicate they expect to lose a lot more in the near future. The biggest threat to baseball owners isn’t a labor strike or the threat of a recession. It’s Netflix. And Amazon. And Hulu, or any other entertainment alternative to traditional cable. We forget, with all the publicity sports receive, most of the general public simply doesn’t care and when these folks opt out of cable and stop paying for sports networks they don’t watch, they’re not coming back.

So, where do the Nats fit in? A few months ago, I speculated whether the shifting marketplace would cause the Nats to miss out on cashing in while the cable TV bubble was at its most inflated. With the recent MASN court ruling, a resolution to the Nats uncertain TV situation is even further in the future. Meanwhile, more teams like the Diamondbacks will lock in billion dollar deals, and many of those teams will give out Greinke-like free agent contracts.

The time bomb in this scenario, of course, is Bryce Harper. The Nats can survive on the field letting players like Jordan Zimmermann leave via free agency as long as they’re drafting and scouting well. Harper, though, is the only player irreplaceable both on and off the field. Losing Harper would be a demoralizing blow to the fanbase and would also rip a once-in-a-generation talent out of the lineup just as he’s entering his prime.

So as we speculate about the Nats future, it’s only fair to consider sports’ Cable TV bubble. If the Diamondbacks can afford to give 32 year-old Zack Greinke $200 million, the Dodgers can surely afford to give 25 year-old Bryce Harper $500 or $600 million. While rooting for the Nats on the field, perhaps we should be rooting for the Cable TV bubble to leak a little bit faster. If the Nats can’t cash in while the bubble is still inflated, their best hope is that it goes away altogether. Tell your friends who don’t watch sports to cancel their cable. Get an Apple TV. Tell them to stop paying for sports networks they don’t watch. The people who continue to pay $200 a month for cable are the ones who allow the D-Backs to pay Greinke far more than he’d otherwise be worth, and they’ll be the ones who allow the Dodgers to give Harper an offer he can’t refuse when he finally hits free agency.