The Cleveland Indians: a non-profit organization

Both the link and the general thrust of the commentary comes via this BTF thread (others provided the commentary; I made the first Spaceballs reference, though) but I’d be remiss in not passing it along. The story:

Cleveland Indians owner Paul Dolan projects the team will lose $16 million this season and says the recent trades of Cy Young winner Cliff Lee and All-Star catcher Victor Martinez were necessary long-term moves.

Dolan estimates the team will draw about 1.7 million fans this season, more than 500,000 less than the team expected before Opening Day.

If you divide $16 million by 500,000 paying customers, you get $32 per customer. What’s the per-customer revenue assumption per game figuring in ticket price, concessions, parking, etc.? I wouldn’t be shocked if it was in the neighborhood of $32 a head.

If that’s right, Dolan’s “$16 million loss” is really a loss in projected revenue based on projected ticket sales. For that to be a loss in the profit-loss sense of the term — which he’s clearly implying — original budget projections had to have been based on the Indians turning zero profit. Call me crazy, but I doubt that the Indians are a 501(c)(3).

I don’t doubt that the Indians have lost some money this year — and certainly are short of their projected financial goals — but if I’ve learned anything over the past decade or so, it’s that you can’t take a word a baseball owner says about money at face value. This is post-Martinez and Lee trade P.R.

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  1. Alex Poterack said...

    Dolan might be lying, but this seems fairly dubious to me; yes, $32 a head sounds about reasonable for per-fan revenue, but it could easily be $50/head, or something like that.  Furthermore, I wouldn’t be surprised if the organization wasn’t planning on turning a profit this year—perhaps they felt it was a sacrifice they needed to make in order to have a winning season (clearly didn’t turn out like it planned), drive up attendance and be able to turn a profit in future seasons.  From what I understand, the Brewers are in a similar situation—their payrolls the past couple years have generated a loss, or nearly generated a loss, but the hope is that increased attendance will make up for it in the long-term.  I could be wrong about that, though, so don’t quote me.

    I was always under the impression in general, though, that sports franchises really don’t have that great of an ROI, and smart money-manager investment guys buy them as less of an investment and more of a toy; to again cite the Brewers, I would say that seems to be exactly how Mark Attanasio views his ownership (and as a Brewers fan, I see that as a good thing.)

  2. Michael said...

    I wonder how much of that $16 million is made up by Sportstime Ohio, the separate entity Dolan created to profit from Indians TV broadcasts?

    If a baseball team was such a crappy deal, so many rich people wouldn’t be lining up to buy them.

  3. Mike Eller said...

    The Dolan family is a complete farce. What are they trying to do with this release? Are Indians fans supposed to feel sorry for them? Like Craig said, it’s just post trade P.R. If these trades weren’t made, nothing would be made of the Dolan family financial woes.

    The sad thing is, the Dolans aren’t going to sell this team for a very long time. First, they would lose a ton of money from their intitial investment when they bought the team from Dick Jacobs. Second, the Dolans are huge baseball fans, or at least they pretend to be huge baseball fans.

    Until they sell the team, I can see us turning into the Kansas City Royals or the Pittsburgh Pirates. Constant failures and constant excuses. It amazes me that the Indians were one game away from the World Series two years ago.

  4. Jason B said...

    You can operate as a for-profit enterprise, and still earn a profit of $0.

    Not that I’m fully trusting the numbers being presented by Dolan, but you seem to be implying that if you’re projected to breakeven, then you must be either a non-profit, or trying to make yourself appear as one.

  5. Bob Tufts said...

    According to this Bloomberg story from 2008, the Indians made $ 25.72 per ticket last year using dynamic pricing techniques.

    It’s easy to assume that parking, concessions, etc. would raise that total north of $ 40

    And don’t forget that baseball team books are audited at a level below Enron and Global Crossing, as the Indians reverted to a privately held organization in 2001.

  6. jay22 said...

    So really, this is the fans fault.

    The Indians could have kept Lee and Martinez, but you losers didn’t show up for games this year and we had to cut them loose.

    Way to go fans!

  7. Detroit Michael said...

    Without publicly-available audited financial statements with related party transactions appraised by an independent auditor, then I don’t believe the whining from MLB owners. 

    In the absence of decent financial information, I will assume that (1) buyers and prospective buyers of franchises do learn of their true financial situations and (2) buyers of franchises are rational businessmen so that the prices they pay for franchises = the present value of future expected profits.  Owners didn’t get to be billionaires by overpaying for toys on this scale.  Last we knew, franchise values were high and climbing higher.  Therefore, I’m assuming that the teams make money in general (although losses in a short time period are still possible).

  8. Alex Poterack said...

    Just to be clear, I would never deny that teams make money in general.  I do think, however, that sports franchises are probably not the most profitable investment; if someone gives you a big bundle of cash and asks you to maximize the return, you could undoubtedly do much better than running to buy a baseball team with it.

  9. Brad said...

    Before the season, the Indians implied that they were counting on making the playoffs to cover their payroll after the Kerry Wood signing.  That put them over the budget but they were hoping that it would also vault them in to the playoffs.  Of course, they’re smart enough to know that wasn’t a sure thing, but the Dolans have shown that they’re willing to spend what their finances allow (despite what many Cleveland fans think).

    I’m tired of hearing all the whining from Indians fans about the Dolans.  They’re willing to spend what they make, but fans expect them to take a $20 million loss every year or they’re not happy.  That’s just not feasible.  Cleveland fans don’t realize that the situation now is different than in the 90’s.  When Jacobs owned the team they were selling out every season and he could spend big money on payroll but that’s just not going to happen any more.  The 90’s were a special time for the Indians—a new ballpark, a great team, no Browns (who still dominate Cleveland sports) and the Cavs were terrible.  That’s not going to happen ever again, which is why the Indians payroll is right with other mid-market teams.  But too many idiot Cleveland fans do nothing but whine about the Dolans because they’re not spending like the Yankees and Red Sox.  The just don’t know baseball economics.

    But the Indians did the smart thing by trading Lee and Martinez (though I hated it as an Indians fan) and we’ll be in a great position to compete again soon.  That’s how mid-market teams have to work in this baseball economy.

  10. Hizouse said...

    I don’t understand your point here, Craig.  The projections would have zero profit only if the per person revenue is $32 or less.  Which is a number you pulled out of the air.  But as Bob Tufts points out, it’s likely more than that.

  11. The Rabbit said...

    I’ve always believed the following was the perfect logic of baseball franchise ownership:

    Lone Starr: Listen! We’re not just doing this for money!
    Barf: [Barf looks at him, raises his ears]
    Lone Starr: We’re doing it for a SH*T LOAD of money!

    I personally believe that Craig has the correct interpretation of this announcement, i.e., that this “loss” is based on some budget projection.
    I would think the most important financial reason that one invests in a MLB Franchise is the asset value appreciation of an asset that has limited availability, not an ROI calculation based on an annual income statement.
    Without boring you with details of my career, let me just say that it’s extremely difficult to accurately analyze the financials of a publically held corp. Cooking the books, alternative accounting methods, and one-time writeoffs are just limited examples of the problems, particularly when they are stated as percentages of a prior quarter or a corresponding quarter of a prior year.  The problem is compounded when attempting to evaluate a privately held corp. especially when comprised of subsidiaries.

  12. Mike said...

    As long as an organization thinks of players and their salaries as liabilities rather than assets, they will be doomed to be perennial also-rans.

    Attendance follows an entertaining product, not the other way around.  The neighborhood restaurant doesn’t promise better food if more people dine there.

  13. Disgusted Tribe Fan said...

    Does that $16 million loss include the $8M+ they have saved THIS year from trading Lee, Martinez, DeRosa, Garko, and Betancourt?  Were they on pace to lose $24M?

    It looks more and more like the Indians traded Lee and Martinez primarily to save money next year with the “maximum value in return” argument a secondary consideration.  Even though both come at great discounts (relative to free agency) in 2010, the Indians did not want to pay $9M for Lee and $7M for Martinez.

    As an aside, $32 seems like a very reasonable approximation of per fan revenue.  Keep in mind that it is single-game ticket sales that are worse than projected (season ticket sales were already known).  These tend to be cheaper tickets.  The team does not own most of the parking and parking is cheap (less than $15/car so that would only add a few dollars per fan).  Concessions would probably add $4-10 more per person.

    Overall, the Dolan’s constant cheapness and whining is making it hard to root for the Indians.  Shapiro is operating with a razor thin margin; he is constantly one bad signing (David Dellucci, Kerry Wood) away from ruining the season.

  14. Kevin said...

    Tell you what, if the Indians are always losing money (weren’t they losing money in 05, 06, 08, and just barely broke even in 07?) why haven’t the Dolan’s sold?  In a bad economy, with a team that owners don’t want to actually invest in – why continue losing money?  Because it’s not a losing proposition.  Doing the same thing over and over again expecting different results is insanity.  So either the Dolan’s are crazy or the Indians aren’t losing money (or at least at the amount suggested).

    If I tell you that I budgeted for myself to make 200K a year then spent 50K and earned 80K, did I ‘lose’ 120K?  NO!

  15. Chip said...

    Kevin, the Indians likely weren’t losing money those years. And, at least according to Forbes, the team is worth 399 mill now, compared to the 323 mill Dolan bought it for. Most of the time the Dolans are making money. This year, supposedly and very likely, they aren’t.

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