Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Baseball Ticket Pricing- 3 Teams, 3 Strategies….1 Foul Ball!!

May 1, 2009

Economic price theory suggests that optimal prices are achieved where supply and demand are evenly matched. The theory follows that, when there is an excess supply, prices should decline to a level which stimulates sufficient demand to consume the excess supply. Conversely, when supply is tight, prices should rise to a level where demand is satiated. When applied to ticket pricing by Major League Baseball teams, the task involves a measure of pre-season judgment to estimate demand at various price levels vs. a finite supply. The 2009 pricing policies of the New York Yankees, Boston Red Soc and New York Mets represent three very different approaches to the issue.

The Yankees took a course that bifurcated its ticket pricing between premium seats and non-premium seats. The premium seat policy involved per ticket prices of between $500-2,600. Their view was predicated on several key facts and assumptions:

• The quality of the Yankees’ teams makes their games a high demand event. To make sure of this, the Yankees spent heavily in the recent off-season on high priced pitchers and a slugger. The plan was to have great players to stimulate demand which would allow them to largely fill their stadium regardless of the opponent.
• The Yankees were building a new $1 billion plus stadium which they had to finance
• A finite number of premium seats with deluxe services would be attractive to corporations, hedge funds and New York’s plethora of big spending plutocrats
• The new Yankee Stadium, with reduced seating capacity and dramatically improved amenities, would enhance already strong demand
• The Yankees believed that “Scalper” prices at the old stadium were a strong reflection of the supply demand dynamic for premium Yankee tickets. Scalper pricing suggested a large divergence between prices paid for field level seats and those in less desirable locations. In many instances scalpers were attaining four figure prices per seat for top locations in the larger older stadium. A corollary was that scalper pricing pointed to an ability to raise non-premium prices, albeit at a lesser percentage increase than for premium seats (ie up 10-50% vs. 500%)
• By raising prices, the Yankees believed that they could disintermediate scalpers, achieve optimal pricing and generate significantly more revenue than in prior years.

The Yankees’ theory had merit. The scalpers’ pricing differential to face price, with 100%+ mark ups, suggested the potential for more efficient pricing. The challenge was making the right pricing decisions and factoring in the adverse economic developments occurring at the time of the Yankees annual early October exit from World Series contention.

The Red Sox’ approach to optimal pricing was dissimilar due to differing facts and strategies:

• They did not have a new stadium to finance and their payroll is significantly less than that of the Yankees and about $30 million less than it was in 2008
• The Red Sox have sold out every home game since mid-2003 despite raising prices annually to what, by 2008, were then the highest priced tickets in Major League Baseball.
• They did not have a significant base of large corporate season ticket holders. Rather, they rely on individuals, small businesses and ticket brokers for the majority of their season ticket sales. Such season ticket holders could be considered to be more economically sensitive than the likes of Citicorp, Lehman Brothers and Bear Stearns who the Yankees were counting on!
• Because the Red Sox played much deeper into the playoffs in 2008 (the Yankees did not make it at all), they were forced to start their 2009 ticket pricing deliberations at later date. This had the benefit of giving them more economic market input to influence their price thinking
• Scalper prices indicated that 50-100% premiums were being achieved in 2008. This might have provided impetus for a price increase, however, unlike the Yankees situation; there was no new stadium, no major increase in amenities nor a decrease in the supply of seats. More important, those scalper prices reflected pre-crash demand.

The Red Sox approach, which was rolled out in December, was to keep prices at 2008 levels. Flat prices were marketed as a fan friendly act in recognition of tough economic times. This was accompanied by a healthy dose of derision toward the Yankees’ pricing policy. The comparison was intended to help to make the Red Sox’ look like the Sisters of Mercy compared to their rivals in Gotham City. The goal was for goodwill and continued sell-outs despite hard times while laying the groundwork for future price rises when the economy improves.

The Mets’ strategy was the most innovative. Arguably it had to be because the team lacked both consistent on the field performance and a level of fan support equal to that of the Red Sox or Yankees. Other facts and issues were also important:

• Citi Field was replacing Shea Stadium. It is a beautiful new state of the art ballpark with somewhat reduced seating capacity than Shea Stadium and an even more dramatic increase in amenities than at the new Yankee Stadium
• Because of their consistently weaker on field performance, the Mets corporate season ticket support is much less than that of the Yankees. Their season ticket holder base more closely resembles that of the Red Sox with a high level of individuals and small businesses
• In recent years the Mets rarely sold out games at Shea Stadium except for a few games with the Yankees, serious contenders or with teams with special appeal like the Dodgers for old Brooklynites.
• Scalper prices saw minimal price premiums to face value and limited demand for many games other than with top teams or in big game situations

Given these facts of life, the Mets chose a 2009 pricing strategy to achieve a balance of supply and demand on a game by game basis rather than on a seasonal basis. This meant higher prices for Yankee and Dodger games than for the Pirates or the Marlins. Premium seats, with far greater amenities, saw prices double from 2008 levels while non-premium seats experienced lesser increases in the 10-20% range (justified by reduced capacity, greater non-premium amenities and a unique new stadium). The net result is that premium Met seats behind home plate for Yankees games now range from $200-500 per ticket, while they are only $100-300 for the Marlins. Prices for similar seats at Fenway Park range from $85-500 for every game. At Yankee Stadium, they cost from $500-2,600 per ticket.

Which team had the best 2009 micro economic strategy? The answer is not easy. The Mets are filling their stadium for games against teams like the Marlins (it helps that the “Fish” are playing well). The Red Sox continue to sell out regardless of the economy. What is easy to say is that the Yankees did not achieve optimal pricing. Empty premium seats abound. Scalper prices are below face value and the Yankees have just announced that premium season ticket holders will receive incremental free premium seats as a concession to over pricing.

Reasonable people are questioning whether the Yankees are compounding prior economic mistakes with these latest steps. Though the market has rejected their pricing strategy for premium seats, they are neither making refunds nor reducing the aggregate cash outlay for their customers. Rather they are just admitting that they have an excess inventory of premium tickets and giving away unsold high priced seats which they probably can’t sell. If the team’s on the field performance does not improve, it will be like a parent rewarding a child for eating much hated cauliflower by giving him more to eat!! This “great deal” is only being offered to premium season ticket holders who bought 82 game packages. It offers nothing to those who bought less thn 82 game premium packages except to dilute the value of their tickets as full season premium ticket holders unload their newly received tickets at discounted prices. Perhaps worse, from a public relations perspective, it does nothing for loyal fans who downgraded their seating locations when the per ticket prices of their season tickets went from $10-12,000 to $40-80,000. While I am not a behavioral economist like my scholarly namesake at the University of Chicago, my guess is that the policy will be less than well received by the majority of Yankee Season ticket holders (see attached article from the New York Times).

Why were the Red Sox and the Mets approaches more successful than the Yankees? Were the Yankees blind to economic realities or just completely insensitive to their fan base? Arguably the same answer works for all of the questions. While it would be nice to say that the Red Sox and Mets were more sagacious than the Yankees because they are owned by self made entrepreneurs rather than 2nd and 3rd generation arrogant rich boys, that is probably only a secondary factor. The real answer is that the Yankees’ revenue base dwarfs that of the Red Sox and Mets. Unlike the Red Sox and Mets, they can afford to be wrong in their pricing strategy. For this reason, they were willing to take a pricing risk for even more revenue. The Yankees do have the potential to inflict long term damage to their brand but it probably won’t happen. As in the past, they will spend ungodly amounts of money to improve the team and, at some point, do a high profile “mea culpa” with free tickets to poor kids and a cut in ticket prices for all. Then, as the economy improves, the price increases will return to obscene levels. Red Sox and Mets fans could be upset if this happens. They should not be. Rather, they should view this as like hitting the daily double. The Steinbrenners will have to admit to an egregious mistake and Yankee fans will have to admit that they supported a team that tried to screw them!!!

Josh Beckett Dominates!!

April 7, 2009
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The Red sox opened their season today. The weather was fine and Fenway looked great. The festivities started with a touching moment when Ted Kennedy threw out the first ball to Jim Rice. Both are Hall of Famers in their respective games and belong in the Pantheon of Boston greats!

When the game got down to business, so did the Red Sox. Dustin Pedroia got things going early with a home run in the first inning. Beckett rang up ten strikeouts in seven innings while giving up only 2 hits in a quick 93 pitches. Jason Varitek hit his first homer, the team struck out 14 Rays and Jonathan Papelbon finished with a 1-2-3 inning! After the Yankees abysmal opener and the Sox knocking off their other significant AL East rival, at least for tonight, all is right with the world!! With any luck, the question will be, whether the Yankees or Orioles can beat the Rays for the Wild Card slot.

A Tale of Two Cities (2):

April 3, 2009
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The attached cartoon tickled me. Even my friends who are Yankee fans will get a kick out of it. Sometimes you just can’t make this stuff up!

A Tale of Two Cities-Red Sox/Yankees Economics in the 21st Century

March 31, 2009
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The last five years have been the best of times for Red Sox fans. Starting with their infamous collapse in 2004, they have been the ugliest, if not the worst, of times for Yankee fans.

One could argue that the performance dichotomy is the result of two disparate economic strategies. The Yankees continue to follow strictures established by Col. Jake Rupert in 1920: spend significantly more than any other team to hire away the biggest names in the majors. The Red Sox operate with a hybrid version of Money Ball relying heavily on home grown talent, making strategic bets on reclamation projects like David Ortiz, Bill Mueller, Mike Lowell, Brad Penny, John Smoltz et al. and using Sabremetrics to execute on the field as well as in drafting players.

The two strategies are also seen in their approaches to free agents. The Yankees tend to use muscle to outbid others for big name free agents regardless of the cost. In dealing with free agents, their own and other teams’, the Red Sox tend to have price limits and stick to them (this even was true with Daisulke Matsuzaka). The Yankees hardly ever are outbid in auctions unless it is a onetime sealed bid process where they do not have a chance to up their offer (this is how they lost Daisulke Matsuzaka). This year, the Yankees out did themselves with signings of CC Sabathia, AJ Burnett and Mark Texeira. The Red Sox made a run at Texeira but would not match the Yankees bid. Their real focus was to add four reclamation projects (Takashi Saito, Brad Penny, John Smoltz and Rocco Baldelli) for a combined annual compensation level less than any one year salary of the three big Yankee additions.

Surprisingly, though the Yankees are the huge spenders, they exhibit less alacrity than the Red Sox at jettisoning stars or exploring new strategies. Mid-season trades of Manny Ramirez and Nomar Garciaparra were bold moves by the Red Sox which improved team chemistry without significantly reducing run generating firepower. The Yankees seem less willing to adopt new approaches. Perhaps this is why they still stick with the almost 90 year strategy of Jake Rupert.

The sad reality is that, since 1978, their high priced players strategy has been a bust. The Yankee championship teams of the late 90s were built along the lines of the Red Sox model. This happened during a period when George Steinbrenner was banned from baseball. In Steinbrenner’s absence, Gene Michel and Buck Showalter were able to develop home grown players like Derek Jeter, Bernie Williams, Jorge Posada, Mariano Riveira and Alphonso Soriano who took them to the promised land. As those players aged, and Steinbrenner was reinstated, it was “déjà vu all over again” with more spending, off the charts payrolls and diminishing performance.

One has to wonder what goes through the Steinbrenner’s heads. If there is a proven strategy to win more games win with less expense, why not try it? It could result in less gut wrenching failure and greater profitability. Red Sox fans regularly thank the lord that George and his boys have not figured out the new paradigm. They do this because they know that God IS a Red Sox fan!!!

For another take with some interesting statistics, check out Alex Speier’s piece, “A Different Shape to the Red Sox-Yankees money Wars”.

Survival Guide for Red Sox Fans in New York City

March 26, 2009
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While New York is a truly interesting and dynamic city, the months from April until the end of October can be difficult. Native New Yorkers, with exception of die hard Met fans, can be hard to endure when it comes to baseball. They have yet to learn that in the new millenium the baseball firmament has been reordered. Yankee fans are particularly obnoxious in October, which has been a very cruel and empty month for them this century. Freud would call their nastiness toward Red Sox fans in New York a “wicked bad” case of projection. The good news is that there are multiple places and ways to avoid them and surround yourself with the more cultured, educated and amusing species of New Yorkers know as the Blohards (Benevolent Loyal Order of Honorable Ancient Red Sox Diehahhhhhd Sufferers of NY). The folks can be found at their semi-annual meetings at the Yale Club when our team comes to town as well as some truly extraordinary watering holes around Manhattan. If you are such a cultured, educated and amusing individual, please check out the attached list of “Life Lines” as well as the general site of the Blohards

An Iconic Pitcher Hangs Up His Cleats

March 24, 2009
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Yesterday Curt Schilling announced his retirement from baseball. Baseball will be poorer for his absence. While many, the author included, disagreed with his political positions, these are the reflection of an American with a point of view. They don’t make him a bad guy, they add to his story. He was a special player in so many on and off the field ways that you can only shake your head and say: WOW! As a pitcher, he was the biggest of the Big game pitchers we have seen since Bob Gibson and Sandy Koufax. If you don’t believe it, look at the records or ask members of the ’01 or ‘04 Yankees!

His detractors will tell you that he definitely had a “big mouth”. It is absolutely true and even he would admit it. Unlike many pros, however, when he made outlandish predictions or comments, he usually delivered. On Arriving in Boston in ’04, he said he was “coming to overturn the Curse”. He Delivered. What red blooded Red Sox or Yankee fan can forget his famous comment prior to the ’04 ALCS about his expected effort: “I can’t think of any scenario more enjoyable than making 55,000 people from New York shut up.” He Delivered. In that respect, he more than Karl Malone, was the true Mailman!

And then there was the famous “Bloody Sock”. Unlike so many high paid players who will avoid anything that would jeopardize their ability to keep playing and being paid, Schilling took a huge career risk and submitted to an unconventional surgical technique to pitch in Game 6 of the ALCS. Pain and pressure be damned. Bloody Sock and all, Schilling pitched seven innings of one run ball against the mighty Yankees in their home park. He scattered a meager four hits over the seven frames; something very difficult for any pitcher regardless of his physical condition. Was he insane, a total unselfish team player, an ego maniac or one of the most courageous players in the history of the game? He was probably all of the above. The performance now ranks in baseball history with Babe Ruth’s called shot and Bobby Thompson’s home run off Ralph Branca as the three most memorable acts in baseball history.

Off the field, Schilling was as intense and driven as when in uniform. We have already mentioned his political activism. Though he has a different political perspective, he rightly should be compared to film icons Sean Penn and Susan Sarandon, who are both exceptional actors who bring out their best in the most difficult roles. Without making judgments about anyone’s specific political views, the important thing is that he thinks about issues and is committed to using his celebrity in a positive manner to support such ideas. Can one think of many other ballplayers who have thought about US foreign or economic policies (other than their own tax rate)??

In charitable endeavors, Schilling was a tireless advocate for fighting ALS (Lou Gehrig’s disease). He has raised millions and been a strong advocate for increasing American awareness of this terrible disease. Less well known are his activities to fight skin cancer. As with his politics and on field bravado, he follows up his outspoken comments with action, energy and commitment.

While all of the above make put Schilling in a small cadre of professional athletes, perhaps most unusual is the fact that he has no agent, choosing to represent himself in contract negotiations. Some might say his choice is “penny wise and pound foolish” yet he has been among the highest paid pitchers in baseball for more than the last ten years. He has kept the 10-15% that would otherwise go to an agent (read that as tens of millions of dollars) without hurting his relative position in the compensation firmament. It is also worth noting that, compared to a number of Scott Boras clients, including Johnny Damon, Jacoby Ellsbury and Derreck Lowe, one cannot find Schilling’s name on a roster of investors swindled by Stanford Capital.

Whether or not he makes it to the Hall of Fame is for the sports writers to decide. Regardless what happens, he will be missed!

for another take, please link to the following

About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan!