About those leaked financial statements…

For months now, I’ve had a half-written post about how revenue from sources like MLB Advanced Media (MLBAM) is reducing the need for revenue sharing at its current level in Major League Baseball. However, I was having trouble making my point without the financial data to back it up—financial data I knew I’d never get my hands on. So, I left my post to take up space in my drafts folder, never to see the light of day.

Then Christmas came early … this week the financials for a number of MLB teams were leaked. Personally, I don’t care who leaked them. (Although, if I find out, I’ll send thank-you note. Hand-written, even!)

The financials for the Angels, Mariners, Rangers, Rays, Marlins and Pirates gave me all the ammunition I needed to make my point. And that point is…drumroll please…revenue sharing has improved the overall picture in MLB, but it’s no longer needed at such a high level.

What we’ve learned

Operating in the red is the exception, not the rule. There have been a number of claims over the years regarding clubs operating in the red. The financials that were released happen to be from several clubs that would seem most likely to be operating at a loss. Turns out, they’re not.

The leaked financials show at least two years of figures for each club, although some are for 2007 and 2008 and some are 2008 and 2009. Only the 2008 Mariners showed a negative value for operating income (earnings before taxes and interest). The others showed income of anywhere from approximately $11 million to just over $39 million (the latter being the 2008 Marlins).

Even after subtracting items like taxes and interest, all except the 2008 Mariners club showed a net profit, ranging anywhere from just under $4 million to just over $29 million. Although just a snapshot of the league, the numbers are telling considering the clubs we’re looking at here.

Clubs are using their revenue-sharing dollars. If you need a refresher on the current version of revenue sharing, you can see a detailed explanation here. If you just want the quickie version, here it is: There are three revenue sharing components, two of which apply to every club. First, there’s the base plan, which requires each club to pony up 31 percent of its net local revenue (which is essentially local revenue from gate receipts, local TV and radio, concessions, etc. minus stadium expense). That money is then split evenly among all 30 clubs.

The second component is the central fund, which attempts to move around the amount that would be moved under a 48 percent base plan. This is the part of the plan which effectuates redistributing from the rich to the poor. Each club was assigned a positive or negative performance factor in the last collective bargaining agreement. Once you have the value that would have been moved that year in a 48 percent base plan, you multiply it by the performance factor to get the amount each club will either pay into or receive out of the central fund.

Back to my original point. The leaked financials indicate that revenue-sharing dollars are being used by recipients as required by the collective bargaining agreement. If you don’t know, the only requirement is that a club should use the money to “improve its performance on the field.” The CBA is incredibly vague on how revenue-sharing money must be spent. As long as player salaries and player development costs add up to more than their revenue sharing disbursement, they’re technically operating within the rules.

With that in mind, the relevant expenses shown on the financial statements are major league salaries, scouting, player development and farm system expenses. I’ve used the actual headings from the financial statements below. This may be overly simplistic, since some farm club operation costs might not fall under improving on-field performance, but it’s a close enough approximation of the overall picture to be helpful.

Let’s look at the Tampa Bay Rays first:

 


Revenue Sharing: $39,380,813 Revenue Sharing: $35,345,277
  2007 2008
Major
League Salaries and Related Costs
$35,563,605 $56,018,335
Scouting,
Player Development and Operation of Farm Clubs
$20,017,186 $21,900,693
TOTAL $55,580,791 $77,919,028

Next up is the Pittsburgh Pirates:


Revenue Sharing: $30,302,652 Revenue Sharing: $39,046,312
2007 2008
Player
Salaries
$50,871,186 $51,040,233
Player
Development
$21,166,850 $23,182,677
TOTAL $72,038,036 $74,222,910

And last, but not least, the Florida Marlins:

Major
League Players’ Compensation

Operations
and Administration – Baseball


Revenue Sharing: $47,982,000 Revenue Sharing: $43,973,000
2008 2009
$29,739,000 $43,002,000
$24,806,000 $23,646,000
Amateur
Players Signing Bonuses
$6,324,000 $5,218,000
TOTAL $60,869,000 $71,866,000

As you can see, each team is technically spending as much on player salaries and development than it is receiving in shared revenue.

Losing might be more profitable than winning. This again might be an exception to the general rule, but there is some evidence to suggest it.

Let’s start with home gate receipts. All the documents released provided a separate line item for gate receipts. However, the Rangers document lists “Net Ticket Income,” so I have not used it in the chart below. I have compared gate receipts totals from the leaked documents to numbers published by Sports Illustrated following the 2001 season.

                    2001            2007            2008            2009
Angels         $30,208,000                    $103,209,000    $100,116,000
Mariners       $76,570,000     $70,015,000     $66,324,000
Marlins        $16,756,000                     $20,985,000     $21,529,000
Pirates        $48,610,000     $34,422,311     $32,129,368
Rays           $18,193,000     $27,963,739     $39,013,069

*As a side note, just for comparison’s sake, the Yankees were said to make $98 million in 2001 on gate receipts, according to the Sports Illustrated article. In 2007, the New York Daily News reported gate receipts totaling $188 million.

The most interesting part of this to me is the difference in the Pirates and Rays. Since 2001, the Pirates have been building on a pro sports record for consecutive losing seasons. Up until 2008, the Rays posted losing seasons right alongside the Pirates. However, the Rays shocked the baseball world by contending for the World Series in 2008. In 2009 they saw another winning season, although falling just short of the postseason. At the time of this post, the Rays are fighting for the lead in the AL East, swapping the top spot with the Yankees throughout the season.

So, the real question is: Are some clubs better off losing than winning? As you can see above, the Rays caught up with and surpassed the Pirates for gate receipts in 2008, their first winning season—and without a new stadium. The Pirates moved into their new digs in 2001, which would explain the elevated gate receipt total for 2001 in the table above.

Digging deeper into the numbers, here’s a little more comparison between the two:

                            2007          2008          2007          2008
                          Pirates       Pirates         Rays          Rays
Total revenue           $138,636,326  $145,993,437  $133,777,450  $160,961,576
Total operating expense $122,438,772  $124,203,035  $112,089,881  $146,759,370
Operating income         $16,197,554   $21,790,402   $21,687,569   $14,202,206
Net income               $15,008,032   $14,408,249   $11,066,191    $4,016,163

So, in 2008 the Rays posted a winning season, one in which they competed for the World Series title. However, they cut their net income by nearly a third, despite receiving a little more than $11 million in net income from the postseason. Why? Well, they spent nearly $21 million more on player salaries, almost $2 million more on scouting and development, and nearly $4 million more on sales and marketing. In addition, the Ray’ distributions from the MLB central fund and MLB revenue sharing decreased from 2007 to 2008. So, in the year of their first World Series berth, the Rays made significantly less money than in the previous season when they posted a league-worst 61-101.

Meanwhile, the Pirates posted yet another losing season in 2008. Their distribution from revenue sharing spiked by roughly $9 million, while the Rays’ distribution dropped by approximately $4 million. There was only a $2 million change in the Pirates’ expenses from 2007 to 2008, and their home gate receipts took a $2 million hit, but their revenue grew by over $7 million, mostly as a result in the increased distribution form revenue sharing.

Bottom line: It’s time for some changes

I’m optimistic that there will be changes, especially in light of the leaked documents that every club will have devoured by the time negotiations begin in October. Historically, revenue sharing has been adjusted with each collective bargaining agreement (you can read all about the changes from agreement to agreement here), so even without the leak, I’m sure changes would have been made.

For the continued health of the league as a whole, there have to be safeguards in place to prevent the situation described above. The Pirates should not be receiving increased profits while fielding a losing team, while the Rays are effectively punished for increasing their expenses and fielding a winning team.

In addition, the increased profits from sources like MLB.com and MLB Network should be reducing the need for the current level of distributions through the revenue sharing plan. Of course, since the numbers from before the current agreement aren’t available, I can only guess that these numbers have drastically increased over the past four years.

I’ll leave an in-depth analysis for a future post, but I have long said that MLB Advanced Media would reduce the need for revenue sharing at its current level. In 2000, each club contributed a little less than $3 million to launch MLB.com. The numbers are scarce, but what I have shows enormous growth from $36 million in 2001 to $450 million in 2007.

MLBAM doesn’t just profit from baseball either. It manages content for the NCAA basketball tournament and tennis’ French Open as well. The last information I have says the MLBAM streams more live events per year than any other web producer in the world. Basically, the sky is the limit for MLBAM. MLB Network has launched since the last collective bargaining agreement as well, which I would imagine has changed the landscape. It was expected to generate $201 million in 2009 and projected to be worth over $1 billion in 2015. I hear there’s plenty of room to grow.

Last I heard, MLB Network was in 50 million homes, charging the cable companies that carry it 24 cents per subscriber per month. By contrast, ESPN is in hundreds of millions of homes worldwide, charging $3.65 per subscriber in the U.S. Major League Baseball owns two-thirds of the network, so the impact on the league should be immediately tangible and ultimately limitless.

I only wish I had data from prior years for comparison’s sake, but it seems obvious that central fund distributions should have grown significantly since the last collective bargaining agreement. On the leaked financials, distributions from the central fund are shown to be more than $30 million per club per year. Some quick math shows that money from national sources varies from 13-61 percent of overall income for the teams whose financials were released.

While I do think revenue sharing is necessary given the variance in clubs’ ability to profit from local revenue, should over half of a team’s income be coming from national revenue sources?

I am not an economist and do not claim to be, which is why I’ve focused on how the financial data illustrates various provisions of the collective bargaining agreement at work. I encourage you to take a look at the work done by those who are much better with numbers than me, especially my friend Maury Brown over at Biz of Baseball.

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Comments

  1. Jeffrey Gross said...

    Something doesn’t pass the smell test about the Pirate’s comments about their financials. In a post-gazette article, they wrote “According to the Pirates, the Nuttings tried to convert the Pirates’ debt to equity in the team, but the minority owners objected.”

    No business in the history of the universe has ever rejected an equity conversion which did not buy out additional ownership rights. Unless that was the case, which there is absolutely no indication it was, this seems more like a cover up hoax for a payout, which I would not put past management. You have to remember that MLB owners are generally greedy men who are above the law. They make profit hand over fist at the expense of fans (and young players). All other industries require transparency, so I agree. Let the transparency era begin.

    Also, on a side note, how does JEFF LORIA get approved to own a team, but MARK CUBAN does not? The former hordes money, the latter spends it. Does Boston/New York/Chicago have a monopoly on spending money?

  2. Charles Ferry said...

    Operating at a profit, yes, but each team is well over-leveraged in debt and relies heavily on revenue sharing. Revenue sharing accounts for over 32% of the Marlins’ revenues and MLB revenues 60%. Meanwhile they’re still $61 million in debt. The full picture of the finances point to the insecure financial position of these major league franchises.

  3. Dave Studeman said...

    Hey Jeffrey, you’re misreading what happened.  The other Pirate partners didn’t want to exchange equity for debt, because that would dilute their equity position.  Makes perfect sense.

  4. Dave Studeman said...

    Matt Swartz had a really nice piece at Baseball Prospectus about the revenue sharing scheme, and how a better one would be based on an incremental tax on payroll along with an incremental refund on payroll at certain levels.

    For instance, you could tax payrolls over $100 million and reimburse payrolls between $50 and $70 million or something like that. You’d effectively use the incremental tax dollars to lower the cost of free agents signings for teams with middling player salary budgets.

    Makes a lot of sense because incentives would line up better—though the devil would be in the details.

  5. BobbyRoberto said...

    Would the leaking of these documents be potentially beneficial to the big market teams, such as the Yankees?  Most of the analysis I’ve seen have suggested that revenue sharing should be decreased, which would help the Yankees the most.  I wonder if that’s where the documents came from.

  6. Kristi Dosh said...

    BobbyRoberto, teams don’t share their financials with one another, so the Yankees wouldn’t have had all of these.  It has to be someone within MLB headquarters, the insurance company that’s been suggested or someone else with access (which isn’t a very long list).  That’s part of what makes it so intersting.  Not only do fans and players get a rare glimpse at this information, but all the other teams do as well.

  7. Kristi Dosh said...

    I just want to clear up something I’ve seen discussed elsewhere.  The MLBPA has a right to certain financials, including audited financial statements, as a result of the revenue sharing provision in the CBA.  So, these statements should have looked familiar to them.

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