The Imbalance Sheet: Sizing Up Markets

So you may have heard that the NBA is having its own small-market problem.
Yes, salary cap and all, the vaunted NBA is suffering from a post-Jordan
malaise that is about to take one of the league’s two newest franchises,
the Vancouver Grizzlies, on the road to a new home. And the league’s
commissioner, David Stern, expects us to buy it when he blames the whole
thing on the city of Vancouver and its unloving fans.

I don’t think anyone needs to know much about basketball to realize what a
load of Selig this is. The Grizzlies do have a dismal attendance record,
one that makes the Expos look like Manchester United by comparison. But
there’s a simple reason for that: The Grizzlies stink. They have won a
total of 91 games in more than five full seasons in the league, for a
winning percentage under .250. They have never topped 22 wins in a season.
And despite top-six draft picks in every year in which they’ve been
eligible for one, they’ve only been able to produce one marginal star in
Shareef Abdur-Rahim.

The Grizzlies are the embodiment–or half the embodiment–of the
Baseball Prospectus adage on team attendance and revenues: if you
don’t put a winning product on the field (or ice, or court), the fans and
revenues won’t be there. Heck, even the Yankees suffered from reduced
attendance and revenues during their down years in the early 1970s and the
early 1990s. The Sacramento Kings and San Antonio Spurs are good NBA
examples of the positive side of that equation. All of this just proves
that a salary cap–particularly one as porous as the NBA’s–does nothing to
combat incompetence on the part of "small-market" executives.

This discussion is relevant to baseball fans because of the ongoing debate
over the fate of the league’s lowest-revenue franchises: the Expos, Twins,
and A’s. The A’s are widely expected to end up in a new stadium in San Jose
or elsewhere in Silicon Valley, once the matter of the Giants’ territorial
rights is settled.

These rights are another of baseball’s wonderful anachronisms that no one
mentions when discussing the economic state of the game. Anyone who thinks
that a San Jose resident is going to sit on Highway 101 for three hours to
see a Giants’ game is on crack. One wonders why the A’s don’t just announce
the move, then sue the Giants directly (not MLB, mind you, but the Giants)
if they’re blocked.

The Expos and Twins, however, sit in more tenuous situations, and some
pundits have proposed eliminating the franchises entirely. This isn’t going
to happen, of course, since it would be a complete destruction of the value
the franchises currently have in sale, and a would-be owner could always
sweeten the pot by offering a little cash to MLB itself as part of the
transaction.

But it’s a bad idea for other reasons, not the least of which is that
removing the bottom two teams in terms of market size (or revenues or
karma) creates a new bottom two teams, probably the A’s (pre-move) and the
Royals or Pirates, once the good people of Pittsburgh realize that their
new stadium doesn’t change the fact that their team stinks. If baseball
comprised 28 teams in roughly equally-sized markets and two teams from
Podunk, then removing the last two teams might reduce revenue inequities
(although winning percentages would still weigh pretty heavily into the
equation), but that’s hardly the situation we have in front of us.

Furthermore, baseball has not done a good job of maximizing its penetration
into the American sports market. Andrew Zimbalist pointed out in his 1990
book, Baseball and Billions, that the United States could probably
support as many as 40 major-league baseball franchises, based on the
following logic:

Take the smallest market, as measured by metropolitan area population per
team. (I used 1999 Census estimates; I ignored income and other possible
variables because the 2000 Census data isn’t out yet.) That turns out to be
Milwaukee-Racine, with 1.65 million people for one team.

Now assume that that number represents the minimum population required to
support a baseball team, and that any metropolitan area with that many
people can support one. Two metro areas have more people but no team. One,
Portland, Oregon, is finally getting a Triple-A team after a lengthy
absence of high-level minor-league baseball, and this could be a precursor
to an eventual step up to the majors. The other, Sacramento-Yolo, is often
mentioned as another possible site for the A’s, although the Valley’s
income levels would have to make it the clear favorite. If you wish to
consider the Triad/Triangle area of North Carolina as a single MSA (the Census
breaks it into two: Raleigh-Durham and Greensboro-Winston-Salem-High
Point), they meet the threshold as well.

Next, assume that any metropolitan area with at least N*1.65MM people can
support N teams. This is a patently optimistic assumption–it says that the
greater New York area can support 11 teams–but consider its broader
conclusion:

• New York has about 20 million people in its metro area and just two teams.
• Los Angeles has about 16 million people in its metro area and just two
  teams.

• The Washington-Baltimore corridor has more than seven million people
  and just one team with a really greedy owner.

• Dallas-Fort Worth added more than a million people in the last ten
  years to fall just short of five million people, with just one team.

New York, of course, previously had three teams coexisting nicely in a
different economic era, albeit one characterized by the domination of the
Yankees. Washington, D.C. had two teams, both characterized by on-field
ineptitude, so there is some evidence that both markets could support
another team.

Expansion into an occupied market has an interesting effect of placating
the Chicken Littles of the world. It reduces the size of the market of each
large team, at least after the new team has had a chance to take root. The
effect would not be drastic, as diehard Yankee fans won’t just drop their
allegiances to root for the Westchester Socialites, but over time it would
serve to stem the growth in the Yankees’ market while also expanding the
overall reach of the game.

The second point that jumps out of this analysis is that the population of
the United States is shifting to the south and the west. Las Vegas, one of
the largest markets in the U.S. without a major-league franchise
(Norfolk-Virginia Beach is larger), grew by nearly 5.5% a year in the
1990s, a rate that, if it continues, would put them over the magic 1.65
million threshold by 2003. Austin, Texas, would reach it the same year if
its 3.4% annual growth continues, and Austin is characterized by a rapidly
growing income level as well. And the Miami-West Palm Beach corridor
(technically two MSAs together) will top five million people within 18 months.

You can go two ways with this cursory analysis. One conclusion is that there
is plenty of room around the country for the 30 teams we have now, as well
as perhaps two or four more. The other is that a baseball team needs at
least two or three million people to survive, a position that flies in the
face of the profits that the Twins and Expos typically turn.

The Grizzlies may be ready to turn tail for the States, but when you
consider that their market is far from the smallest in the United States
and Canada (even if you factor in higher tax rates and ignore the city’s
high quality of life), it appears that there are opportunities for
franchises to survive and even compete both in current small markets and in
markets as yet untapped.

Keith Law is an author of Baseball Prospectus. You can contact him by clicking here.