Business Update with Mark Lacter

Will the money spent by the Los Angeles Dodgers pay off?

KPCC's business analyst Mark Lacter examines the financial decisions of the Dodgers' new owners.

Steve Julian: Mark, for the Dodgers, money apparently can't buy happiness.

Mark Lacter: Ain't it the truth, Steve. It's been three weeks since that big trade with the Red Sox - the one that brought in Adrian Gonzalez - and since then, the Dodgers have a record of six wins and nine losses. They've also fallen further behind in the National League West - as well as in the wild card race. And for all this, the Dodgers will be shelling out millions of additional dollars in contract obligations both this season and next.

Julian: Let's also not forget Hanley Ramirez and the other guys picked up this summer. It's a lot of money!

Lacter: It is a lot of money, and it's also a cautionary tale in spending so much over such a short amount of time, not just for pro sports teams but for your typical business owner and manager. Just because you have access to a fat checkbook doesn't mean you're going to use it wisely. It's hard to upsize - in some ways a lot harder than to downsize. Expectations are suddenly raised, you need to bring on people who complement the folks already on staff (personality-wise, as well as talent-wise), and - of course - they need to perform as advertised. You know, the Yankees are always cited as being successful because they have such a large payroll, but the reality is that money does not guarantee success. Going back 20 years or so, the teams that increased their payrolls from one season to the next improve their record only 50 percent of the time.

Julian: The Detroit Tigers tried that a few years ago.

Lacter: That's right, they added more than $40 million to the payroll in 2008, and wound up winning 14 fewer games the following season. Meanwhile, the 2004 Texas Rangers cut almost $50 million off the books, and won 18 more games the next year. Now, it's entirely possible that the Dodger trades will turn out to be a big plus for the club. But, you do have to wonder about the huge amounts of money being spent by the new owners, Guggenheim Partners. And, you also have to wonder whether these expenses will eventually be felt by fans going to the ballgame.

Julian: But, aren't the new owners really focused on the money from TV rights?

Lacter: They are, and whatever deal they cut will certainly be higher than the $3 billion agreement that former owner Frank McCourt worked out with Fox Sports last year, and which was then nullified by Baseball Commissioner Bud Selig. The numbers now being thrown around over a 20-year period are $5 billion, $6 billion, $8 billion - numbers that a few years ago would have been considered unthinkable. I mean, we are talking about just one team. It's been reported that Fox and the Dodgers have begun preliminary talks about renewing their TV deal (they can't start real negotiating until next month).

Julian: What options to owners have?

Lacter: Three choices really: work out a conventional TV rights deal with Fox or perhaps the new Time Warner sports channel (that's the channel televising all the Lakers games); have the Dodgers start their own network - much as the Yankees and Red Sox have done (This could become a cash cow because it means collecting cable fees - and we're talking about a potentially huge market. But dealing directly with cable operators isn't always easy); a hybrid in which the Dodgers do their deal with a sports channel, and then get an ownership stake.

Julian: Getting the benefits of the first two options, I suppose…

Lacter: That's right - they get a piece of the action, and they don't have to start a network from scratch. The TV deal is huge, Steve, because it will help defray the cost of buying the team, which many in the sports world still believe was sold at a very high premium. And it wouldn't hurt if the Dodgers are a championship-caliber team - for ratings and for ad revenues.

Julian: That explains the willingness to pay crazy salaries.

Lacter: Now if it only works out. The current contract with Fox expires at the end of next season.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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