August 27, 2013

Manufactured Runs

Are The Astros Really the Most Profitable Team in History?

by Colin Wyers

It’s that time of year again, when Forbes gives us its estimates of baseball team finances and baseball teams dispute the estimates. This year’s reporting comes with an especially sensational headline:

2013 Houston Astros: Baseball's Worst Team Is The Most Profitable In History

This is what’s known as “doing the Loria.” But is Forbes on the money with their reporting? Let’s take a look at the meat of their claim:

The regional sports network Comcast SportsNet Houston pays the Astros $80 million a year to show their games — about $50 million more than the Astros got under their previous deal.

The massive boost in revenue means that the Astros have plenty of spare money. They could pay for their current payroll six times over with money from their local television deal alone. And they bring in nearly $40 million from other television and radio deals.

Forbes doesn’t cite sources on that, however, and there’s reason to believe that they’re reporting incorrect figures. CSN Houston is in the middle of a wide-ranging dispute with a number of carriers over whether or not to carry the channel. Right now, CSN Houston covers 40 percent of the 2.2 million households in the Houston TV market, at a solicited price of $3.40 per subscriber per month. That’s Comcast subscribers only, and in Houston—other cable operators haven’t picked up the network, especially with the kind of regional coverage that CSN Houston wants.

So, it’s some simple math. 2.2 million households times 40 percent times $3.40 per month times 12 months equals annual revenues of about $36 million. So that tells us how much money the network brings in, roughly. How much are they losing right now? As Forbes itself notes:

But CSN Houston has run into problems. Since launching last fall, the network has had trouble signing deals with local satellite and cable providers who do not want to pay their pricey rate per subscriber — $3.03, 38 cents above the average for regional sports networks, according to SNL Kagan. CSN Houston is shown in just 40% of the TV households in Houston, according to the Houston Chronicle. As a result, the network lost $63 million last year, according to SNL Kagan, which analyzes the business of television.

As the largest stakeholder in CSN Houston, the Astros absorbed the brunt of those losses. FORBES considers regional sports networks separate businesses and does not include their losses or gains in its operating income estimations. But even if the Astros’ roughly $23 million loss were included, they would still have an estimated operating income of $71 million, higher than any team in history.

If the network lost $63 million and brought in $36 million, that's about $99 million total. Forbes wants us to believe that $80 million of that went to the Astros, and the remaining $19 went to the Rockets, the Dynamo (MLS team), and to operating the network itself. It's totally implausible; the Astros' broadcast revenues are likely well under the $80 million suspected by Forbes, and a substantial chunk of those are going back to CSN in terms of loss coverage. And this isn't simply paper losses: CSN Houston has made multiple cash calls to its owners, of which the Astros are the largest. Forbes can consider losses or gains to CSNs separately from the sports teams that own them all they like. But that seems to be a problem with how Forbes does its estimates, not evidence of profitability for the Astros.

Also, note how that quote refers to “estimated operating income,” which is what Forbes calls profit in its headlines. Conflating the two is inaccurate—operating income is part of what’s known as earnings before interest and taxes. So to get from operating income to profit, you need to know the amount of non-operating income (which are gains and losses from things not related to the typical income of the business), interest, and taxes.

And the Astros may owe a fair amount of interest. As Forbes notes:

But [Crane] will likely use some of the cash flow to pay down the reported $275 million debt he took on when buying the team. He financed the purchase with a $220 million loan from Bank of America and assumed $55 million of debt from a previous loan with Major League Baseball, according to the Sports Business Journal.

The Bank of America loan may be Crane’s own debt, but the $55 million is almost certainly the Astros’ own money. Ignoring that in estimates of profit is sloppy use of terms at best.

Add it all together, and the Forbes claim that the Astros are "the most profitable team in history" is a serious exaggeration. To be fair to Forbes, teams are notoriously shy when it comes to revealing financials, so those of us on the outside have to work off of incomplete and sometimes contradictory public reports. That said, details on the current struggles at CSN Houston aren’t hard to find (Forbes even makes reference to them), and a significant finding like that in the headline should have made Forbes go back and evaluate that information before going to press.

The Astros made this formal response:

As MLB will confirm, the information reported in the Forbes article relating to the Astros’ revenues, the Astros’ media rights fee from CSN Houston, and CSN Houston’s per subscriber rate are all significantly inaccurate. As a result, the conclusion about the Astros’ operational profit is significantly inaccurate.

The Astros will continue to operate the team in a fiscally responsible manner that will make the City of Houston proud. We are very excited about our accomplishments and we remain steadfast in our commitment to this rebuilding process. We have established a basis of young talent on our MLB roster that will continue to improve. And our minor league system is now one of the best in MLB. As our young prospects develop, we will move them up to the Major League roster and increase our payroll to a level that will allow the Astros to compete for World Championships. The success of CSN Houston is a vital piece of that process and we continue to work toward establishing full distribution.

Let’s focus on the least important part of that statement for just a second. The Astros dispute Forbes’ estimate of the per-subscriber rate. Notable, Forbes doesn’t cite a source for that, and all other media accounts I could find list the solicited (admittedly not actual) rate at $3.40, not the $3.03 cited by Forbes. Is 37 cents significantly different? Or is the actual rate Comcast is paying for Comcast SportsNet carriage lower than what CSN Houston is trying to get from other providers? We don’t know.

The rest of the Astros’ claims seem backed up by the reporting on CSN Houston, however. And we are reminded of the old Sherlock Holmes story “Silver Blaze”:

Inspector Gregory: "Is there any other point to which you would wish to draw my attention?"

Holmes: "To the curious incident of the dog in the night-time."

Gregory: "The dog did nothing in the night-time."

Holmes: "That was the curious incident."

The union has access to much better financials than Forbes. If the Astros were truly historically profitable on their current meager payroll, we would’ve expected the union to object by now. But they haven’t barked.

Colin Wyers is an author of Baseball Prospectus. Follow @cwyers
Click here to see Colin's other articles. You can contact Colin by clicking here