My original goal with last night’s post was to make it through the main accounting tricks pulled by MLB franchises so that I could spend tonight focusing back on the bigger picture. However, I forgot a couple, and I think it’s important to lay out as much as possible so that you get a clear scope of just how fast and loose owners can play with their books.
So without further ado…
Chapter 1, Verse 2: Revenge of the Killer Spreadsheets
4) Ownership Companies
Apart from the salary depreciation loophole discussed yesterday, ownership has another cute game they can play when purchasing a team. The basic idea is that the owner or owners - actual flesh and blood people, of course, barring some kind of bizarre ghost conspiracy that would be bigger than any analysis of sports accounting I could ever conjure - tend not to purchase teams personally. Instead, they set up limited liability corporation or limited partnership to buy and operate the franchise.
The curveball comes in how that company acquires funding to buy the team. More often than not, the company is loaned money from the personal finances of the owner. The company uses that loan to buy the team, then diverts its operating profits to repay the owner plus interest over the course of the next several years.
Once again, those loan repayments appear as a loss on the team’s balance sheet, despite that the money is going directly back to the guy who owns and operates the company. So it’s another premeditated loss of the type I’ve been discussing since yesterday. (Thanks to D. Stanley Eitzen for discussing this in “Dollars & Sense.”)
It seems relevant to mention at this point that the legal owner of the Cleveland Indians is not Larry Dolan, but rather “Cleveland Indians Baseball L.P.”
5) Related Businesses
This circles back a little bit to the “non-cash” charges item from yesterday.
As is probably clear by now, so much of this accounting game comes down to ownership directing you to all the places where they have figures to show that they’re losing money - and while you’re looking in those places, they’re basically throwing bags of cash from somewhere else out the window into a waiting truck.
There are examples of teams’ having businesses related to the franchise, but separate enough that they can just leave any profits from those businesses off their books when painting a picture of their team’s financial health. So again, cash ultimately goes back to the owner, but it takes a twisty enough path that they can justify not accounting for it when it’s convenient to show that the franchise is suffering.
The most popular of these related businesses is the regional sports network.
The cardinal sinner in this realm is the Yankees. Now, the Pinstripes’ brass has publicly claimed that the team has been hemhorraging cash for several years. Brian Cashman famously claimed that the team lost $28M in 2006. Team President Randy Levine and COO Lonn Trost asserted that the team would certainly lose money when all was said and done last season.
Now to Levine’s and Trost’s credit, they also state in that same interview that “the Yankees financially are in very, very good shape.” But even that admission may be understating the case.
The key in Yankeeland is the YES Network, the cable channel that holds exclusive broadcast rights to 130 of the Yankees 162 annual games. As pointed out by Phil Birnbaum here, the Yankees own at least 33% (and possibly more) of the Yes Network. In 2007 alone, the network had an operating profit of $150M, of which at least 33% would go directly back into the Steinbrenner coffers - or, excuse me, YankeeNets LLC.
However, Andrew Zimbalist argues in his book “May the Best Team Win” that the Yankees profits on the network are actually even higher than that. YankeeNets LLC is, fittingly, a partnered holding company that also legally owns the New Jersey Nets. Zimbalist suggests in the book (which you can read an excerpt of here for more of the gory financial details) that YankeeNets accountants are attributing an artificially high percentage of YES’s profits to the Nets.
Why is this the case? Unlike MLB, there is no revenue sharing in the NBA. Any money made by the Yankees’ organization factors into their total profit, which is the number that the league looks at to calculate revenue sharing pay-outs. So it’s to the Yankees advantage to hide away as much money as possible.
As far as the size of this hidden stash, Zimbalist suggest that in 2002 alone, it was likely in the neighborhood of $60M. In other words, YankeeNets LLC is likely masking more of their YES profits than they’re reporting.
The upshot of all of this is that the ownership shell game develops a second level. On one hand, teams are sheltering money from the league. On the other, they’re sheltering even MORE money from the public.
Another way to say this is that the figures seen by Bud Selig are not the same as the figures reported by ownership to the public. And why would they be? None of the 30 MLB franchises is publicly traded. As a result, they have no obligation or incentive to release their books - true or legally cooked - to John Q. Fan.
Ironically, the only MLB team that has ever been publicly traded is the Indians. This happened for a brief period starting in 1998. Here’s a link to their 1st Quarter 1999 report, if you’re catastrophically bored or make your living via Quickbooks.
However, the end of the Tribe’s presence on NASDAQ ended in November 1999, when Dick Jacobs sold the club to Larry Dol — er, Cleveland Indians Baseball LP. (Sidenote: hilariously, over the course of the year that Tribe stock was available, it was a better investment than Yahoo!)
All that background info aside, the question is: who owns the rights to broadcast the Indians’ regular season games? The answer is Sports Time Ohio - a cable channel owned and operated by the one, the only Larry Dolan.
There’s an important distinction here. The YES Network is owned by the same holding company that actually owns the Yankees. Sports Time Ohio is in fact owned by Larry Dolan, NOT Cleveland Indians Baseball LP. Because the two are legally separate entities, Cleveland Indians Baseball LP has no incentive or obligation to factor the profits of Sports Time Ohio into the franchise’s accounting picture.
That said, all the money made by STO is going to the same place as the money made by the Indians franchise. How much money is that? We have no idea, because - surprise! - STO is not a publicly traded company. But considering that STO owns the cable broadcast rights to not only the Indians’ season, but also the Browns, it’s safe to say that they’re turning a significant profit.
This is all the analysis I can muster for the night, so it looks like this will become Jose Mesa Is Dead’s first three-part column. I don’t know if I’ll have time to write the conclusion until Sunday. Til next time.
Back to Part 1
On to Part 3
-T
