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A Business Model for the Great Recession

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You may have been too busy looking for a new job to notice how the business of sports has reacted to the Great Recession. As each sport's season comes around on the calendar, we can watch the business players at work remaking their entertainment product to fit the mood of the times and the Nation's pocketbook. All sports envision a downturn -- certainly not a surprise given the fact that millions are out of work. With a few notable exceptions, such as the Yankees who appear either to be recession-proof or mindless, baseball clubs have tightened their belts.

We will have to keep our eye on attendance figures to see whether the crowds at the games shrink. Filling Fenway Park in April had always been a challenge until the last few years of glory. You can't just look at Opening Day. I remember when I taught at Case Western Reserve in Cleveland how the massive monstrosity of a municipal ballpark -- since recycled into landfill -- would overflow for that glorious first game and then remain virtually empty for the remainder of the season. Teams with pent-up demand and recent successes on the field should do well. Any ticket holder who goes bankrupt will simply step aside, and someone else will take his seat.

I am troubled a bit by the data that shows that the average free agent in baseball signed for a significantly lower salary this winter as compared with recent years. This average includes the largess meted out to C.C. Sabathia, Mark Teixiera and A.J. Burnett by the Yankees. There were some free agents with solid careers who received no offers at all. What can explain these behaviors by the thirty clubs?

The Major League Baseball Players Association may consider the possibility that the owners coordinated their offers in some way. When this happened three years in a row in the 1980s, the union filed grievances claiming "collusion" by the owners, a tactic prohibited by the Basic Agreement between the owners and the union. This contract clause was first inserted in the Agreement in the early 1970s after management had been stunned by the joint holdout of Sandy Koufax and Don Drysdale. Marvin Miller agreed to the prohibition on collusion as long as it also applied to the owners. Since the owners could not even agree where to have breakfast, they saw no risk in making the promise mutual.

By 1975, Arbitrator Peter Seitz had ruled that baseball players who played out their option years were free agents and the race was on. Salaries of players eligible for free agency multiplied annually until suddenly the spigot turned off. One winter virtually no free agents received offers from rival clubs until their home clubs had indicated no interest in resigning the veterans. That remarkable behavior - combined with some direct evidence that Major League officials had urged owners not to sign players to "long-term contracts," a euphemism for high-priced free agent agreements - convinced two arbitrators to find illegal collusion. The owners ultimately settled these cases for a huge sum, but that "business plan" didn't work out.

What then explains the owners' behavior this past winter? Are they just exercising more individual caution in the face of expected revenue loss? Have they (excluding the Yankees) used the Great Recession as an excuse (or a reason) to cut costs?

It is a perfect time for each club to rethink its business model. Ticket prices have become as inflated as player salaries. An empty seat at the ballpark buys no beer. (That sounds a bit like a bumper sticker.) How do you put fannies in the seats? In the short run, that may require discounting fan costs to hold your customers and maintain their loyalty to the club's product. It might also require variable pricing, as some clubs have done, setting ticket prices depending on the attractiveness of the opposition.

It is apparent that the Obama administration is trying to use the financial exigency to bolster American education, energy use and environmental livability. Major League Baseball should use its potential financial crisis strategically to think long-term about the business of America's Game. Club owners make most of their money when they sell their franchises, but that only works if future prospects are solid. This can only be accomplished successfully as a result of a partnership with the players and their union. That has worked well with the World Baseball Classic, a joint endeavor. It can work well for this regular season and all regular seasons to come.