Franchise Expenses
Included in this category are salaries for managers, coaches, and scouts; signing bonuses for drafted players and foreign free agents; the minor league system; stadium expenses; front office payroll; and the operating costs for MLB’s main office in New York City. These categories all seem to be about the same from team to team, all except the cost to operate the respective stadiums. The table below however, shows that certain teams take a different approach and use more funds than others to achieve a smooth, functioning franchise.
Table 6
TEAM BY TEAM EXPENSES, EXCLUDING PLAYER PAYROLL
Team | Non-player Expenses | Operating Revenue | Percentage |
Seattle Mariners | $84,222,000 | $202,434,000 | 41.6% |
New York Yankees | 83,413,000 | 242,208,000 | 34.4 |
San Francisco Giants | 79,110,000 | 170,295,000 | 46.5 |
New York Mets | 75,195,000 | 182,631,000 | 41.2 |
Los Angeles Dodgers | 72,873,000 | 143,607,000 | 50.7 |
Colorado Rockies | 65,245,000 | 131,813,000 | 49.5 |
Atlanta Braves | 61,540,000 | 146,851,000 | 41.9 |
Pittsburg Pirates | 58,463,000 | 108,706,000 | 53.8 |
Cleveland Indians | 57,870,000 | 162,242,000 | 35.7 |
Arizona Diamondbacks | 57,850,000 | 125,132,000 | 46.2 |
Texas Rangers | 57,806,000 | 134,910,000 | 42.8 |
Boston Red Sox | 55,799,000 | 176,982,000 | 31.5 |
Houston Astros | 54,266,000 | 124,629,000 | 43.5 |
Philadelphia Phillies | 52,996,000 | 81,515,000 | 65.0 |
Chicago White Sox | 50,648,000 | 111,682,000 | 45.4 |
St. Louis Cardinals | 50,442,000 | 132,459,000 | 38.1 |
San Diego Padres | 49,784,000 | 79,722,000 | 62.4 |
Detroit Tigers | 49,074,000 | 106,791,000 | 46.0 |
Anaheim Angels | 49,061,000 | 91,731,000 | 53.5 |
Milwaukee Brewers | 47,801,000 | 113,350,000 | 42.2 |
Toronto Blue Jays | 47,605,000 | 78,479,000 | 60.7 |
Baltimore Orioles | 47,059,000 | 128,302,000 | 36.7 |
Chicago Cubs | 46,886,000 | 129,774,000 | 36.1 |
Tampa Bay Devil Rays | 46,438,000 | 80,595,000 | 57.6 |
Florida Marlins | 46,204,000 | 60,547,000 | 76.3 |
Minnesota Twins | 44,305,000 | 56,266,000 | 78.7 |
Oakland Athletics | 38,761,000 | 75,469,000 | 51.4 |
Kansas City Royals | 37,126,000 | 63,696,000 | 58.3 |
Cincinnati Reds | 36,533,000 | 70,887,000 | 51.5 |
Montreal Expos | 35,014,000 | 34,171,000 | 102.5 |
AVERAGE | $54,646,300 | $118,262,533 | 46.2% |
Source: MLB financial disclosures
When a closer look is taken at some of the team’s reported figures, it makes sense that some of the better operated franchises spent more money on overhead than some of the perennial losers like the Expos. The better teams tend to spend more on their scouting programs and give the coaches higher salaries than other teams. The cheapest, most cost effective way to improve the product on field is to invest heavily into the club’s farm system. The easiest move a franchise can make is to have a top of the line executive front office.
From this list, the Oakland A’s seem to be the most puzzling. Only three teams spent less money on their respective front offices, however only the Mariners had a better record during 2001. Oakland does not appear to be neglecting any of the important areas of its organization. The farm system has been arguably regarded as the best in baseball for the past five years. Other franchises have seen Oakland’s blueprint for success and have been hiring away top assistants over the same five year time span and have been promoting them to improve other struggling clubs. All other front office employees in Oakland must be getting compensated fairly well compared to the rest of the league thanks in part to the inflated living costs in the Oakland – San Francisco Bay Area.
What is puzzling is that the average franchise spends about 50% more than the A’s did to accomplish significantly less in terms of wins. If all other 29 of the franchises were to reduce their non-player expenses to levels that of the Athletics, Major League Baseball could have saved over $500 million. If Oakland could find a way to make it work, why couldn’t all of the other franchises find a way to succeed? This is just one more factor that makes experts believe that Major League Baseball has been over estimating its vulnerability in terms of its lack of profitability.
In regard to signing bonuses, it seems that franchises tend to expense them, especially for amateurs. The proper treatment would be to prorate these bonuses over the expected useful life of a player’s contract. Expensing the bonuses artificially adds to present costs and lowers profits as a result. To make sure, some teams expense signing bonuses in the first year when the bonus itself is paid out over the lifetime of the contract.
Another report that was issued by Major League Baseball as a supplemental source to a blue ribbon panel on baseball economics showed that from 1995 through 2001 non-player expenses had actually risen faster than players’ salaries.
Table 7
THE GROWTH RATE OF NON-PLAYER EXPENSES, 1995 - 2001
1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 1995-2001 | |
Revenues | $1,385 | $1,775 | $2,067 | $2,479 | $2,761 | $3,324 | $3,548 | +2,163 |
% Increase | 28% | 16% | 12% | 11% | 20% | 7% | +156% | |
Player Salaries | $927 | $939 | $1,116 | $1,272 | $1,490 | $1,743 | $1,971 | +1,044 |
% Increase | 1% | 19% | 6% | 17% | 17% | 13% | +113% | |
Other Expenses | $784 | $1,033 | $1,127 | $1,345 | $1,497 | $1,666 | $1,809 | +1,025 |
% Increase | 32% | 9% | 19% | 11% | 12% | 9% | +134% | |
Claimed Operating Losses | ($326) | ($197) | ($176) | ($138) | ($226) | ($85) | ($232) |
Source: MLB Updated Supplement to The Report of the Independent Members of the Commissioner's Blue Ribbon Panel on Baseball Economics, December 2001.
According to the numbers above, Major League Baseball actually admitted that its yearly revenue has risen by an astonishingly 156% through the six years that this data had been collected. These numbers also indicate that the actual players have been receiving less than half of the $2.1 billion in new revenues whereas non-player expenses have increased by 134%.
The major question here is where is all of this extra revenue going? It is obvious that teams are not spending more on their minor league systems and haven’t increased salaries for various franchise employees. The cost of rent for teams to play in given ballparks hasn’t dramatically jumped either, nor have inflation rates. The only explanation is that it is filtering into the owners’ already rich pockets. Up until MLB’s commissioner decides to let someone who knows these answers explain them to the public, critics of Major League Baseball will continue to see the league’s cry of poverty as a hoax and an attempt to fleece local markets of even more funding.
Revenue Sharing
The concept of revenue sharing was first introduced to Major League Baseball for the 2001 season. The formula to determine what teams pay is 20% of its local receipts minus stadium taxes. Once all the amounts are totaled together, 75% of the pool is divided equally to all 30 teams, while the other 25% is split by teams with lower than average local revenues. Of those teams, the lowest revenue teams will receive the most.
According the Major League Baseball, the purpose behind revenue sharing is to “give small market teams a chance to compete.” Two main areas of concern exist with this thinking. First, it does not make franchise recipients try and compete. The owners can just pocket the income by treating it as financial support. The second concern deals with whether a “small market team” represents a “low revenue team” or “team that plays in a small metropolitan area.” The second definition is more fitting since a team’s revenue is mostly dependent on its on-field performance and marketing strategies. However, Major League Baseball elects to consider a “small market team” as a “low revenue team.”
As illustrated in the table below, this is not the greatest way to calculate revenue sharing.
Table 8
2001 MAJOR LEAGUE BASEBALL REVENUE SHARING
Team | Local Revenue | Metropolitan Population | Per Capita Local Revenue | Revenue Sharing |
Milwaukee | $88,949,000 | 1,689,592 | $52.65 | $1,744,000 |
Seattle | 178,033,000 | 3,554,760 | 50.08 | (18,791,000) |
Cleveland | 137,841,000 | 2,945,831 | 46.79 | (11,373,000) |
Colorado | 107,412,000 | 2,581,506 | 41.60 | (6,029,000) |
St. Louis | 108,058,000 | 2,603,607 | 41.50 | (8,229,000) |
San Francisco | 145,894,000 | 3,519,861 | 41.45 | (6,308,000) |
Pittsburg | 84,305,000 | 2,358,695 | 35.74 | 1,782,000 |
Arizona | 106,653,000 | 3,251,876 | 32.80 | (4,432,000) |
Atlanta | 122,450,000 | 4,112,198 | 29.78 | (10,647,000) |
Boston | 152,581,000 | 5,819,100 | 26.22 | (16,438,000) |
Tampa Bay | 62,337,000 | 2,395,997 | 26.02 | 12,384,000 |
Cincinnati | 46,486,000 | 1,979,202 | 23.49 | 13,404,000 |
Chicago Cubs | 105,373,000 | 4,578,770 | 23.01 | (6,568,000) |
Kansas City | 39,295,000 | 1,776,062 | 22.12 | 15,997,000 |
Houston | 100,228,000 | 4,669,571 | 21.46 | (5,185,000) |
Texas | 110,509,000 | 5,221,801 | 21.16 | (8,744,000) |
N.Y. Yankees | 217,807,000 | 10,599,933 | 20.55 | (26,540,000) |
San Diego | 55,321,000 | 2,813,333 | 19.66 | 8,668,000 |
Chicago White Sox | 87,281,000 | 4,578,770 | 19.06 | (4,201,000) |
Detroit | 82,390,000 | 5,456,428 | 15.10 | 5,127,000 |
N.Y. Mets | 158,230,000 | 10,599,933 | 14.93 | (15,669,000) |
Los Angeles | 119,206,000 | 8,186,823 | 14.56 | (9,107,000) |
Oakland | 51,068,000 | 3,519,861 | 14.51 | 10,520,000 |
Baltimore | 103,901,000 | 7,608,070 | 13.66 | (6,807,000) |
Toronto | 54,078,000 | 4,763,200 | 11.35 | 9,830,000 |
Minnesota | 31,865,000 | 2,968,906 | 10.73 | 19,089,000 |
Florida | 36,146,000 | 3,876,380 | 9.32 | 18,561,000 |
Philadelphia | 57,114,000 | 6,188,463 | 9.23 | 11,752,000 |
Anaheim | 67,330,000 | 8,186,823 | 8.22 | 9,954,000 |
Montreal | 9,770,000 | 3,474,900 | 2.81 | 28,517,000 |
Average | $94,264,000 | 4,529,342 | $23.99 | - 0 - |
NOTE: Population figures adjusted to represent number of teams in a given market (ex: Anaheim and Los Angeles, or Oakland and San Francisco)
With Major League Baseball centering on the total revenue that franchises are able to generate, the league is in essence punishing the franchises that are being run efficiently in the smaller cities like St. Louis and Colorado, while at the same time rewarding the poorly run franchises in larger cities like Philadelphia and Anaheim.
Take St. Louis and Philadelphia for example. Both teams play in stadiums that are over 30 years old (Philadelphia moves into a new stadium in 2004.) St. Louis produced $50 million more in local revenue than Philadelphia despite the fact they play in a market that is more than half as small. As a result of the Cardinals being more efficient, they paid over $8 million in revenue sharing whereas the Phillies collected just about $12 million.
Major League Baseball is missing a major point here. The league has to understand that just like any other business sector, poorly run corporations should lose money. MLB franchises are no different; terribly run franchises aught to lose even more money. However, the Expos - dead last in attendance, local media contracts, and revenue – were run well enough so that there were eight teams that lost even more than the Expos did in 2001.
This whole situation could easily be fixed by computing market size into the revenue sharing formula.
Overall Profitability
When a franchise owner decides to sell the team, he or she does so by gaining a much larger sum of money than when he/she bought the franchise in the first place. The majority of owners receive tax breaks and capital gains when they sell the team. The evidence that appreciation in franchise values has skyrocketed over the past few decades is proof enough. It has been estimated that the annual rate of return to baseball franchise owner ship was 12.4% between 1960 and 2003. This rate is significantly higher than the rate of return to common stock ownership, 6.9% annually, for the same period (http://www.wsj.com/).
With all things considered, many experts find it difficult to accept the sky-is-falling analysis being presented by Major League Baseball. By rejecting this disastrous scenario, it does not mean that the game itself is free from economic problems. There is too much imbalance throughout the league and there may very well be in upwards of ten franchises that have persistent financial problems that are not caused by poor management.
In the end, it is almost impossible to say whether there is an authenticity to the financial numbers presented by Major League Baseball, or not. There just is not enough detail in the numbers. It is important to reiterate that all MLB franchises are privately owned. As a result, the level of reporting supplied by MLB is not nearly as comprehensive as financial statements that have been issued by publicly owned corporations like Microsoft or General Motors. It would be practically impossible to encourage MLB to make available more detailed information. In essence, what the league and Commissioner Selig said to Congress was that MLB had lost money, but they were unwilling to trust Congress with all of the details.
- posted by Hot Rod @ 8:22 PM
