Local Media Revenue
Even though this topic was touched on earlier, it makes sense to look at it from the issue of profitability as well as the competitive balance issue. The figures that went into the calculations represent revenue that a team acquires through local television, cable television, and radio contracts. It is no secret that local media revenue is directly affected by the size of a team’s local market.
As mentioned earlier, several teams are operated by huge media companies. This fact raises concern for financial analysts because an individual who owns both the baseball and local media organization has the opportunity to charge the television outlet far less than what the market is set at for the team’s media rights. By applying this business strategy, it lets the team owners cry poverty when discussions about labor contracts arrive. This practice also falsely exaggerates the media organization’s profits.
Take the Chicago Cubs for instance. According to the numbers, Bud Selig testified that in 2001 the Chicago White Sox local media revenue was $30.1 million and the Chicago Cubs was only $23.6 million. Remember, the Cubs are owned by the Tribune Corporation, a nationwide media corporation. According to television ratings, the Cubs are more popular than the White Sox in Chicago. The 2001 TV ratings for the Cubs were 6.8 on over-the-air broadcasting and 3.8 on cable while the White Sox were only 3.6 and 1.9, respectively. This figure doesn’t even take into account that superstation WGN airs Cubs games in over 55 million homes across the country.
This is where a red flag is raised. The Cubs are owned by the Tribune Corporation, which also owns the media company WGN superstation. The Tribune Corporation transfers revenue away from the Cubs and correspondingly lowers the costs of WGN. According to Broadcasting and Cable, the industry’s authoritative source, the Cubs’ local media earnings were $59 million. If the Cubs had reported this figure instead of $23.6 million, then their reported $1.8 million loss would have become a $33.6 million profit for 2001 (McAvoy).
As a whole, it can be assumed over $100 million in revenue each year is hidden from Major League Baseball that is recognized in related-party transactions. If this revenue would be properly reported, it would be a step in the right direction in proving that Major League Baseball has been being honest about its financial disclosures.
Several reasons exist why teams would want to keep their reported revenues at a minimum. First, Major League Baseball has imposed a 20% tax on a team’s net local revenue since the inception of the league’s revenue sharing system in 1996. So, for every dollar that is not reported in the teams’ books, a savings of 20 cents occurs. Given that WGN doesn’t have to pay any tax to the broadcasting industry, it makes perfect sense for it parent company, Tribune, to have the profits be recorded on that of WGN’s financial statements.
Second, all baseball teams, at one point or another, look to the surrounding public community in order to gain support for improving their facilities. The Cubs made such a ploy in 2002 to build higher left field bleachers so fans on the rooftops of apartments across the street would not be able to view a game without purchasing a ticket. The general feeling by teams is that the more impoverished they appear to the public, the more likely the local fans will be willing to open up their wallets and help the team out financially.
The third instance occurs whenever the time comes for the owners and players union to negotiate with each other over a new collective bargaining agreement. The owners’ side of the negotiation is always attempting to find new ways to justify limitations in the labor market which in turn will collectively lower players’ salaries. One of their claims to justify this is to make it seem as if franchises have been continually losing money year after year.
Fourth, since MLB has an antitrust exemption Congress has occasionally made the league testify in terms of why it should continue to validate its special treatment. Commissioner Selig made the case for Major League Baseball as an industry that since it has not been profitable; there is no possible way that it could be abusing its monopolistic control (Baseball and Billions, Zimbalist).
National Media Revenue
National media revenue counts as income that each franchise earned through its participation through the FOX and ESPN television network contracts. All 30 teams receive the same amount due to the revenue sharing plan, except the two most recent expansion teams, Arizona and Tampa Bay. The expansion teams netted $18,479,000 as part of their expansion fee for entering the league. The other 28 teams received $24,401,000. Only roughly $720 million out $3.548 billion in total revenue is considered to be from national sources.
Other Revenue
Other revenue consists of concessions, parking, advertising inside stadiums, luxury boxes, and club seats. The table below illustrates why each franchise is in such a hurry to build new, profitable ballparks for their teams.
Table 4
OTHER SOURCES OF INCOME PER TEAM
Team | Other Local Operating Revenue | Stadium Opened (Renovated) | Stadium Owned By |
San Francisco | $61,524,000 | 2000 | Team |
Seattle | 56,211,000 | 1999 | Government |
N.Y. Yankees | 47,057,000 | 1923 (1976) | Government |
Cleveland | 45,295,000 | 1994 | Government |
Los Angeles | 41,100,000 | 1962 | Team |
N.Y. Mets | 38,162,000 | 1964 | Government |
Atlanta | 37,692,000 | 1997 | Team |
Milwaukee | 37,010,000 | 2001 | Gov’t: 64%, Team: 36% |
Houston | 36,826,000 | 2000 | Government |
Colorado | 35,197,000 | 1995 | Government |
Texas | 34,561,000 | 1994 | Government |
Arizona | 32,970,000 | 1998 | Government |
Chicago Cubs | 30,642,000 | 1914 | Team |
Baltimore | 29,691,000 | 1992 | Government |
Boston | 29,485,000 | 1912 | Team |
Tampa Bay | 28,633,000 | 1998 | Government |
St. Louis | 27,581,000 | 1966 | Team |
Pittsburg | 26,598,000 | 2001 | Government |
Chicago White Sox | 26,291,000 | 1991 | Government |
Anaheim | 26,195,000 | 1966 (1997-99) | Government |
Detroit | 21,018,000 | 2000 | Government |
Toronto | 14,255,000 | 1989 | Private |
Oakland | 13,932,000 | 1968 (1996) | Government |
Kansas City | 13,270,000 | 1973 | Government |
San Diego | 8,504,000 | 1969 (1997) | Government |
Philadelphia | 7,739,000 | 1971 | Government |
Minnesota | 6,987,000 | 1982 | Government |
Cincinnati | 6,523,000 | 1970 (2001) | Government |
Florida | 4,037,000 | 1993 | Ex-Owner |
Montreal | 2,829,000 | 1976 | Government |
Sources: MLB financial disclosures; Munsey & Suppes Ballparks site (http://www.ballparks.com/)
The top 15 teams are included in one of these categories: the team either owns its stadium, plays in a stadium that is no less than ten years old, or calls its home in New York City. Both New York teams are currently attempting to receive funding for new facilities despite the fact that the Yankees were second and the Mets were sixth on the list.
The majority of all franchises play in ballparks that are owned by local government. The reason behind this is thanks in part to owners threatening to move or even contract their franchises in order to get local taxpayers to publicly finance the majority or all of the cost of a potential new stadium. One of the more recent examples of teams that are near the top of local revenue that have built new ballparks includes the Seattle Mariners who received $372 million in public funds to help build Safeco Field in 1999. More about the stadium issue later on.
Most teams have suspicious looking numbers that do not necessarily add up to the expected revenue totals of other teams. When Bud Selig went before Congress in 2001, he repeatedly said that all financial data was given to auditors so that the financial figures could be studied properly.
When Major League Baseball first released financial figures for its teams in 1985, it was found that the St. Louis Cardinals were hiding revenue by sheltering it in a connected business. The Cardinals were found to have allocated around $2 million in concession and parking revenue off of their books by assigning it to a related business and keeping it from being taxed my MLB.
After the Florida Marlins won the World Series in 1997, economist Andrew Zimbalist was brought in as an independent source to review the Marlins’ books. Franchise owner Wayne Huizenga told the Miami community that he had lost $34 million that year and that he would need the public to fund a new stadium in order to keep his team in Miami. Huizenga also happens to own Pro Player Stadium where the team plays. He authorized roughly $38 million of revenue from luxury suites, club seating, parking, concessions, advertising, and the naming rights to the stadium rather than to the Florida Marlins financial statements. If this revenue had been accounted for on the Marlins’ books, the franchise would have recognized a $4 million profit. Instead, the team claimed to be burdened with debt and had a fire sale of all of its best baseball talent when it had actually turned a profit.
Player Salaries
Current MLB Commissioner Bud Selig previously owned the Milwaukee Brewers for over 30 years publicly complaining that small market teams cannot compete with the high rollers in baseball, such as both New York and Chicago teams, Los Angeles, and Boston. The table below indicates that several teams are allocating as much as three times as some of the other franchises on players’ salaries.
Having one of the highest payrolls in the game does not guarantee success by making it to the postseason. Only one team out of the top three in payroll, the Yankees, made the playoffs in 2001. In contrast, the Athletics had the second highest winning percentage with the 26th ranked payroll. The term “small market” is usually considered to mean the same as “low revenue.” According to Doug Pappas of http://www.baseballprospectus.com/, “a team’s revenue, and the payroll it can support, is more a function of the team’s recent success than of the size of its market. As the population data shows, metropolitan Minneapolis is larger than Cleveland. Miami is larger than Seattle. Philadelphia is larger than Phoenix and St. Louis combined.” (http://www.baseballprospectus.com/news).
In today’s business world, baseball players’ salaries are seen more of in terms of investments. If a franchise spends its budget wise and accordingly, the ball club wins a higher percentage of games, which means more fans attend games and public interest rises. With the added interest comes more lucrative contracts with the media which turns into more money for the owners. On the other hand if organizations do not spend their money wisely, fans will not want to come out to the park to see a losing team and will result in less money for the future.
The following table is a break down of payrolls for each team during the 2001 season.
Table 5
TEAM BY TEAM PLAYER PAYROLL
Team | Player Payroll | Adjusted Player Payroll | Winning Percentage | * Marginal $ / Marginal Win |
Boston | $118,471,000 | $118,471,000 | .509 | $3,115,000 |
N.Y. Yankees | 117,936,000 | 101,936,000 | .594 | 1,867,000 |
Los Angeles | 116,077,000 | 116,077,000 | .531 | 2,754,000 |
Cleveland | 102,491,000 | 100,491,000 | .562 | 2,061,000 |
Atlanta | 99,671,000 | 97,042,000 | .543 | 2,135,000 |
Arizona | 99,434,000 | 86,434,000 | .568 | 1,691,000 |
N.Y. Mets | 99,144,000 | 99,144,000 | .506 | 2,581,000 |
Texas | 92,793,000 | 92,793,000 | .451 | 3,262,000 |
Seattle | 83,946,000 | 76,409,000 | .716 | 941,000 |
Toronto | 83,801,000 | 83,801,000 | .494 | 2,253,000 |
St. Louis | 80,148,000 | 78,660,000 | .574 | 1,479,000 |
Baltimore | 79,783,000 | 79,783,000 | .391 | 4,530,000 |
Chicago Cubs | 78,091,000 | 78,091,000 | .543 | 1,653,483 |
San Francisco | 72,185,000 | 72,185,000 | .556 | 1,427,000 |
Houston | 71,577,000 | 71,058,000 | .574 | 1,308,000 |
Colorado | 69,983,000 | 69,983,000 | .451 | 2,329,000 |
Chi. White Sox | 66,721,000 | 66,721,000 | .512 | 1,564,000 |
Detroit | 57,184,000 | 57,184,000 | .407 | 2,549,000 |
Tampa Bay | 57,000,000 | 57,000,000 | .383 | 3,272,000 |
Pittsburg | 53,227,000 | 53,227,000 | .383 | 2,992,000 |
Anaheim | 52,239,000 | 52,239,000 | .463 | 1,486,000 |
Milwaukee | 51,164,000 | 51,164,000 | .420 | 1,963,000 |
Philadelphia | 49,384,000 | 49,384,000 | .531 | 972,000 |
San Diego | 46,089,000 | 46,089,000 | .488 | 1,086,000 |
Cincinnati | 45,410,000 | 45,410,000 | .407 | 1,870,000 |
Oakland | 43,821,000 | 41,135,000 | .630 | 526,000 |
Kansas City | 42,704,000 | 42,704,000 | 401 | 1,815,000 |
Florida | 42,084,000 | 42,084,000 | .469 | 1,062,000 |
Montreal | 37,676,000 | 37,676,000 | .420 | 1,269,000 |
Minnesota | 30,494,000 | 30,494,000 | .525 | 480,000 |
* Marginal salary per marginal win = (adjusted player payroll - $13,000,000) / ((winning percentage - .300) * 162)
The formula above takes a look at marginal dollars per marginal win. The cheapest possible team that an owner could assemble is roughly $13,000,000. A given team’s marginal spending per marginal win thus equals its payroll, minus postseason revenue and the $13,000,000 minimum, divided by win percentage minus 0.300, multiplied by 162 games (http://www.baseballprospectus.com/news).
In hindsight, the average franchise spent $1,943,000 per marginal win. The four teams that were the most efficient were the Minnesota Twins, Oakland A’s, Philadelphia Phillies, and Seattle Mariners. The Twins, A’s, and Phillies broke the trend and had winning seasons despite lower payrolls. The Mariners, who were one win shy of breaking baseball’s most winning record that year, did so with a win margin of $941,000 – about half the average. Conversely, there were four teams who paid over $3 million per win in 2001. Those teams included the Red Sox, Rangers, Tampa Bay, and Baltimore who paid over $4.5 million for each win.
- posted by Hot Rod @ 8:30 PM
