April 5, 2011

The Payoff Pitch

Probing the Forbes Figures

by Neil deMause

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For sports economics geeks, it's a rite of spring right up there with unpopular politicians throwing out first pitches: the annual release of Forbes magazine's baseball team value numbers. The tradition goes back to 1990, when Michael Ozanian first published estimates of MLB teams' finances for Financial World magazine; when Financial World disappeared in a puff of mismanagement in 1998, Ozanian took his spreadsheets to Forbes, where they've appeared ever since.

For years, sports economists treated the Forbes numbers as kind of a business-side equivalent to fielding stats: probably not all that accurate, but worth looking at because, hey, they're all we've got. All of that changed, though, after last summer's Leakgate, in which internal MLB documents leaked to Deadspin revealed the financial details for several MLB teams—and the income numbers matched the Forbes figures almost exactly. All those team execs who'd been complaining that the Forbes figures didn't reflect their actual losses—like the Florida Marlins' David Samson, who griped in 2007 that, "They look at revenue sharing numbers and the team's payroll and take the difference and see profit without looking at our expenses"—were, it turned out, blowing smoke.

So, with this year's newly validated Forbes figures now in hand, what can we learn from them? Let's take a quick tour through some of the takeaways, as those J-school kids today call them:

Team buyers like shiny things: The top three MLB teams last year in how much their value went up from 2010 to 2011 were the Rangers (25 percent), Twins (21 percent), and Giants (16 percent). The Rangers had some extenuating circumstances—at this time last year they were headed for bankruptcy court, as a result of then-owner Tom Hicks' historically awful investments—but also reached their first World Series last fall. For the Twins, the bump in value was all about opening Target Field (while sticking Minnesota taxpayers with most of the bill); for the Giants, it was $80 million worth of thong.

Meanwhile, the bottom three teams to change in value were the Mets (-13 percent), Indians (-10 percent), and Padres (no change). The Mets' owners, of course, have had that little Ponzi scheme problem, but the value drop is more about their team's on-field woes: After four straight seasons of turning at least a $20 million per year profit, the Mets lost $6 million last year despite a reduced player payroll, mostly because fans stayed the hell away from watching Omar Minaya's Finest impersonate major-league ballplayers.

The Padres are a bit of a mystery: They led the NL West for most of the season (except for the important bit at the end, of course), attendance jumped 11 percent (though since ticket prices had been slashed, ticket revenue was roughly flat), and after revenue sharing they turned a nifty $37 million profit—tops in the majors, in fact. Still, Forbes calculated the team's value as slipping slightly, from $408 million to $406 million; either this is an acknowledgement that the team was overvalued before, or somebody at Forbes really isn't a fan of Casey Kelly.

The Mets' and Dodgers' debt messes are overblown: Though an accompanying Forbes article referred to the Mets' and Dodgers' ownership situations as "debt disasters" that are "a dark cloud threatening the game," that's not what the team value numbers show: The Dodgers jumped from fourth place to third, while the Mets slipped only from third to fifth—behind the Cubs, who themselves are only recently removed from a financial mess. The Tribune Corp. train wreck is actually instructive here: Sam Zell bought the media company (which then owned the Cubs) by borrowing billions of dollars—then promptly declared bankruptcy because he had loaded down his new properties with unmanageable debt. The Cubs—and for that matter the Chicago Tribune, Los Angeles Times, and other newspapers saddled with Zell's red ink—were still a fine business taken in a vacuum, but it was hard to remember that with headlines about bankruptcy flashing before you.

Similarly, their dubious owners notwithstanding, the Mets are still a decent team with an all-but-completely-publicly-paid-for stadium in North America's biggest baseball market, and that's reflected in their fifth overall ranking in team value. Whoever ultimately takes the Mets off the Wilpons' hands should do quite nicely, especially if they can get them at a fire sale price.

The debt problems are huge for the owners in question, absolutely, and could certainly cause some short-term cash-flow problems for the two teams' front offices. (We've already seen this with the Dodgers' tight-fisted offseason, and you have to wonder if the Wilpons will be willing or able to spend to reload the Mets' roster next winter, if they still own the team by then.) But the underlying franchises themselves are just fine—you wouldn't balk at buying a house just because the owner was selling because he ran up a mountain of credit card debt, would you?

Baseball has been bery, bery good to its owners: Contrary to the old saw that "the best way to make a small fortune in baseball is to start with a large fortune," it's actually really hard to lose money owning a team. Notes Forbes: "Only three teams had a negative operating income in 2010: the Detroit Tigers (-$29 million), Mets (-$6 million), and Boston Red Sox (-$1 million)." The Red Sox were likely a one-year aberration after missing the playoffs and all the revenue goodies that come with October baseball—their value still went up 5 percent, indicating that Forbes doesn't see any underlying problems. And that's before accounting for profits offloaded into the teams' cable networks (the Mets and Sox own SNY and NESN respectively, and can shuffle income around by manipulating how much they pay themselves in rights fees), not to mention tax gimmicks like amortization of players as if they were industrial machinery, one of Bill Veeck's old dodges that continues to earn owners untold millions in tax breaks.

If you want a team to worry about, it's the Tigers: Attendance is plummeting despite lower ticket prices, they've lost money three years in a row, and Miguel Cabrera's and Justin Verlander's contracts aren't going away anytime soon. (To be fair, at least Cabrera and Verlander are likely to be worth the outlay, unlike some other teams' long-term albatrosses.) Oh, and did I mention that they play in a city that seems to be determined to be the first U.S. city to completely disappear through attrition? It just goes to show that a new stadium can't help if there's nobody there to sell fajita wraps to.

Contracting teams would be insane: I already addressed this a few weeks back, but the Forbes figures make it even clearer: The Rays and A's combined are worth $638 million, up $27 million from the year before, and who in their right mind liquidates an asset that keeps gaining in value without even trying? Stuart Sternberg may be trying to scare St. Petersburg into letting the team open stadium talks with Tampa by dropping contraction threats—at least I think that's what his latest oblique statement about "my patience is greater than Major League Baseball's" was meant to threaten—but the numbers still don't pan out. (Which makes Ozanian's own rumor-mongering about zapping the Rays especially puzzling; doesn't this guy read his own magazine?)

The new Yankee Stadium has paid off for the Yankees: According to Forbes, the Yankees are clearing $20 million in profits per year, even after revenue sharing payments and $64 million per year in stadium costs. (Though the latter, remember, are deductible for purposes of calculating the former, thanks to the Steinbrenner loophole.) The lesson here: If you can charge $50 per ticket and $12.50 for a beer, you can make money even if some of those high-priced seats go unsold, and even if you had to build your stadium with your own money—though it's worth noting that without the $1.2 billion in stadium costs chipped in by taxpayers, the Yankees would have been far better off staying put in The House That Ruth Built.

Albert Pujols isn't predestined for Wrigley: This is actually my own conclusion, as Forbes predicts the opposite, saying Pujols will sign with the Cubs next year and placing the blame on the Cardinals' $20 million in annual stadium debt payments. (The Cardinals are the only team other than the Giants in the last half-century to pay for more than half the costs of a new stadium, even if they're allegedly trying to stiff the city on part of their end of the bargain.) That doesn't make sense, though, given the magazine's own figures: With $19.8 million in operating income, St. Louis could afford to double Pujols' current $14 million a year salary and still have profits left over. Plus, don't forget, their revenues would almost certainly plummet if they didn't re-sign Pujols (both because of fan backlash and because the team would suddenly be godawful). Even Forbes, apparently, sometimes forgets: Players are investments, not just costs, and $30 million per year in expense for a player who generates $40 million in value would generate a fine ROI indeed.

Neil deMause is an author of Baseball Prospectus. 
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