As you may remember, David Stern came out during All-Star Weekend to declare that the league was on pace to lose $400MM in 2009-10. He used this figure to support the idea that the financial structure of the NBA (specifically, player salaries) needs to be dramatically altered in the new collective bargaining agreement so the NBA can continue to exist.
The linkabove leads to an article by CBS Sports’ Ken Berger (@KBerg_CBS for you Twitter addicts) about the Players’ Association’s disputeof thatnumber. Tothem,the $400MM is all smoke, mirrors,andaccountingtricks.
My guess—as you may recall based on our Pinocchio Story series (Parts 1, 2, 3, and 4)—is that the NBPA is totally on point. Anxiously awaiting the final findings of economist Kevin Murphy at my alma mater to find just how on point they are.
Like many teams in the NBA and other American professional sports, the Sacramento Kings are advocating for a new arena to be built in their hometown — with the lingering threat that if this doesn’t happen, the team may be “forced” to move elsewhere.
As I’ve discussed before, the economics of new stadiums basically math out to highway robbery of the public by some of the wealthiest men in the country. The article above turns that statement into an exclamation. It covers a study done by a Sacramento consulting firm (at no cost to the city) that demonstrates that building a new $500M arena would result in a grand total of 229 new permanent jobs for the city, the majority of which (I’m guessing) would be low-level customer service and operations posts like working at vending stands, the team shop, ushering, etc. Not exactly the type of jobs that are going to position Sacramento as a hub of future growth and opportunity in a shifting global market.
Traditionally, the creation of a huge tide of new jobs is one of the primary arguments that franchise owners make for why they shouldn’t have to bear the burden of paying for their own new stadium. As the article makes plain, it’s a completely bogus argument. Good to see that someone telling the truth about it is getting a little pub. (Thanks to ESPN’s John Hollinger for tweeting the link.)
Considering that the Cavs play 3 games in the next 4 days, I figured I’d try to post about one of the other sports tonight. And while it’s not technically Cleveland-related, I saw the ESPN update that the Phillies are on the verge of completing two simultaneous but separate deals: 1) shipping Cliff Lee to Seattle for prospects, and 2) nabbing the much sought-after Roy Halladay as his replacement.
Apart from my continuing affinity for Cliff, the main reason I want to look at this is because it functions as a good reminder that the Tribe is far from the only team in baseball that let economics override the prospect of success.
You’ll remember around the MLB trade deadline last season that Halladay was seen as the huge prize, and when the Phillies traded for Lee instead, there was somewhat of a backlash from their fan base. That said, the backlash was brief, since Cliff went on to be basically dominant for the stretch run of the season and the playoffs.
Fast forward to today. The Phillies essentially decide to trade Lee for Halladay. Is it because he’s a significantly better pitcher than Cliff?
The career comparison is a little skewed by virtue of the fact that Halladay has 12 seasons of experience vs. Cliff’s 8 seasons. And if you look at the year by year break-outs for Halladay (here) and Lee (here), Halladay’s performance has been more consistantly remarkable in all categories for longer (2001-9) than Lee’s. Cliff can really only go toe-to-toe with ”Harry Leroy Halladay” (true full name - thanks Baseball Reference!) the past two seasons.
However, if you isolate the sample size to just those two seasons, Halladay has still been better overall in the categories we care about — but not by leaps and bounds. And statistics aside for a moment, it’s impossible to say that Lee was the reason the Phillies didn’t repeat as World Series champs this past season. So “upgrading” him isn’t necessarily the move that I’d be trying to make if I were running the team.
That said, one thing that has always stuck with me from taking Econ in college was the concept that if you’re presented an opportunity that results in a net gain — no matter how small — you should take advantage of it, no questions asked. So from that standpoint, the Phillies’ “trading up” for Lee is completely defensible.
But since the Phillies are not directly trading Lee for Halladay, wouldn’t the best possible move be to retain Lee for the final year of his contract AND still make the deal for Halladay? That 1-2 pitching combo would instantly become the toughest in either league. Short of a meteor striking their spring training facility, it’s difficult to imagine a set of circumstances that would prevent the Phillies from getting back to the Series in 2010 if they were running those two guys out their back-to-back for an entire season in the weak-hitting NL.
Apparently the obstacle, though, is financial. According to ESPN’s Jayson Stark, if the Phillies were to use the nuclear option, so to speak, their payroll would balloon to something in the neighborhood of $160M. The franchise also has an internal rule to not sign starting pitchers to deals longer than 3 years.
After initial talks with Lee’s agents, the Phillies’ brass came away convinced that it would take a “CC Sabathia”-level deal to keep Cliff after this year. (As a reminder, the Yankees are paying CC 7 years / $161M, or $23M per). Halladay, on the other hand, has made it clear that he’s willing to take a voluntary paycut to come to Philadelphia. Reportedly, an extension of 3 years and $60M will put him in red through 2013, unless the trade breaks down in some other capacity.
This strategy brings up all kinds of questions that I don’t have the wherewithal to siphon through today. I’m most fascinated by the fact that the Phillies are taking a sort of third way between the extremes every other franchise seems to be gravitating toward. They’re apparently willing to spend but with definite caps and only with relatively short term deals.
However, I know this: if the Indians made these two moves I would be pissed. Throwing away a golden opportunity to have arguably the two best pitchers in baseball on your team is inexcusable — especially for a big market team like the Phils. I understand what they’re trying to do, but I don’t agree with it. You can’t make the hunt for the World Series title half of an arm’s race. Either go in and try to win today, or trade away Lee for prospects so you can save money. The middle road doesn’t end in victory.
I was a little concerned about how to get back into this series because I never intended it to become a trifecta. (If you’re behind, here are links to Part 1 and Part 2.) Things got broken up in ways that I didn’t necessarily anticipate, which threw me off a little.
However, last night I read a recent PD column by favorite Mesa target Terry Pluto, and it resolved all my concerns. Pluto unhesitatingly chugs the Kool-Aid served by Paul Dolan on the Indians’ financial difficulties in a follow-up interview to his infamous August 6th presser. Pluto’s blind acceptance of Dolan’s talking points demands what they refer to in the military as a “swift and forceful response” - and it leads perfectly back into the Pinocchio Story throughline:
Chapter 2: The Big Swill (“Ooooh Yeah!”)
Here’s a recap of the points from Pluto’s pow-wow that are relevant to our discussion:
1) When Dolan stated that the Indians’ would lose $16M this season, he meant that $16M was the amount they’d already lost “in late July.” The total loss they were heading toward for the entire 2009 season was closer to $20M. However, because of the much-publicized trades they are now softening those projections to a loss of about $12M.
2) Had they not made the trades, the Indians’ calculations showed that the team would be on track to lose about $30M during the course of the 2010 season.
3) Sports Time Ohio - the Tribe-owned cable network that holds and sells the rights to telecast the Indians’ games - is in Pluto’s words “‘profitable,’ according to Dolan.”
4) The Dolans have “no plans” to sell the team.
OK, let’s address the above point by point:
1) Paul Dolan made the statement with the infamous $16M loss figure on August 6th. He retracted it on August 29th. Here’s the problem: Garko was traded July 28th. Lee was traded July 30th. Martinez was traded August 1st. So by the time Dolan made the statement about the Indians’ 2009 losses on August 6th, his number-crunchers should already have known that they were going to save $4M by making those trades. But instead, he went into the press conference touting the sweet $16M loss.
I’m not accepting the counter-argument that the analysts didn’t have enough time to run those numbers in the time between the trade deadline and Dolan’s press conference. It’s not a complex formula. Take your already-existing projections for profit / loss, deduct the total pro-rated salary saved by trading away those three players, add in the total pro-rated salaries from adding Masterson and the 7 prospects. Done. We’re not exactly bending spoons in half with our minds here.
I don’t want to belabor this point because it’s not hugely impactful on its own. However, I think it’s indicative of a general pattern: owners (especially the Indians’) spewing out garbage facts that even a rudimentary analysis can bring into question. If they’re lying about things that are this simple to dispute, how can anyone realistically be expected to believe the bigger picture?
2) I’m sure that every team does projections of next year’s revenue numbers. As Dolan demonstrated, those projections are subject to change based on a variety of factors. The whole thing is speculative. I would just make two points about this particular case.
First, when you’re interested in making your financial situation look dismal, it’s particularly convenient to make projections a year ahead of time while a) we’re still in the grip of the worst economic downturn since the 1930s, and b) the team you own is seemingly stuck at 14 games under .500.
Second, it’s worth noting that Dolan didn’t put forth a revised number to show the softened losses thanks to unloading all those contracts.
To do a quick calc on our own, Cliff was due $8M if the team picked up his 2010 option. Victor was due $7M. Garko would’ve been up for arbitration in the off-season and would’ve commanded north of $2M. We’ll say that’s a total of $17.5M in outgoing salary.
Meanwhile, of all the players they got back in those three trades, only one is actually in the majors, and that one guy (Masterson) is making $415K this year. Though I’m having some issues finding his salary for next year, I can’t imagine it’s going to be a drastic raise.
If we assume that the other 7 players acquired by the Tribe are making something in the same neighborhood as Masterson - let’s assume for the sake of argument they’ll all make 500K next year, which is generous on my end - that brings the total for all 8 incoming players to $4M.
To me, $17.5M - $4M = $13.5M in savings. So if Dolan is to be believed, the Indians should now be coming in for the smooth landing of a $16.5M loss for the 2010 season. But he didn’t want to put that on the record, likely so that the fan base could be scared by the $30M number and its potential consequences for the team’s continued stay in Cleveland. It’s an implicit way of saying “Hey, get to the ballpark, or else.”
3) In the same vein, I love that Dolan was content to just say that Sports Time Ohio was “profitable,” without actually telling Pluto how profitable. Truly startling that he would keep the profit numbers hidden but trumpet the supposed losses.
Now, I’m not saying that STO is the YES network, but they’re clearly making bank off of it. Though until someone does some serious muckraking, we won’t know how much bank.
This leads us into…
4) The Dolans have no plans to sell the team.
Let me repeat that: despite the fact that their current “projections” show that the Indians are a financial sinkhole slated to bleed the family fortune for $28.5M over the course of 2 years, the Dolans are so philanthropic and dedicated to producing a winner for the city of Cleveland that they will not even explore the possibility of unloading this investment.
Obviously, this is the point I’ve been harping on since the beginning of this series – and really, even all the way back in my “Mythbusters” posts last month. If these teams are so gut-shot financially, why are their owners so willing to dig in their heels and try to weather the storm when their own math says that the smart play is to get the F out of Dodge?
The answer is, of course, that the numbers are a lie. It’s just hard to prove because the few people who seem to be paying attention don’t have access to the real figures…with a few notable exceptions.
One of these is Forbes Magazine. Every year, Forbes runs an independent accounting of the 30 MLB franchises. Shockingly, they come back with vastly different financial pictures of each team than the League itself presents. Why? Because in theory, Forbes takes into account all of the accounting tricks I detailed in parts 1 and 2 of this series.
If we go back to the 2001 season -the first for which Forbes ran this independent analysis - here’s the story: Forbes found that as a whole, MLB had an operating profit of $75M. Meanwhile, Bud Selig had just testified before Congress that MLB had a total operating loss of over $200M. Not only that, but Selig also swore that in the previous five seasons, only two teams made a profit.
In other words, Bud Selig testified that MLB was on life support. The only problem was that there was a $275M difference between his figures and an independent analyst’s. Not surprisingly, Selig also testified that Forbes’ numbers were “pure fiction.”
But that was way back in 2001-2. What about this past season? The Biz of Baseball website did a league-wide financial analysis of 2008 based on that year’s Forbes findings. As a whole, BoB found that the league increased in value - but only because the gains by the Mets and Yankees were so inordinately large that they were able to pull the entire league of the red.
On the other side of the coin, 10 teams decreased in value between 2007 and 2008. One of those teams was the Indians.
They decreased in value to $399M.
If you recall, the Dolans bought the franchise for $320M.
So if Forbes’ analysis is correct, the Dolans have made $79M since acquiring the team in 2000. That’s roughly a 25% ROI over the course of 8 years. Not bad.
Before we go on, I should emphasize that there are two separate categories that we’re considering here: operating income and total value. Operating income is, again, single-season profit before taxes, interest, and depreciation. Total value includes earnings plus the value of the team’s stadium, so it acts as a more complete picture of a team’s financial well-being.
I bring this up to highlight that you could theoretically have an operating loss for several consecutive seasons, but if the total franchise value after those losses is still higher than what you paid for the team, you’re still in the black on the investment.
That said, let’s look at what Forbes calculated as the Tribes’ yearly operating income, from 2002 to 2008:
2008 OI: $29.2M
2007 OI: $24.9M
2006 OI: $34.6M
2005 OI: $27.2M
2004 OI: $10.4M
2003 OI: -$1M
2002 OI: -$3.6M
NET 2002-2008: $121.7M
Obviously, there are 2 years of Dolan ownership not accounted for in this analysis. And as discussed above, operating income is trumped by total franchise value.
To me, those numbers are pretty eye-opening - especially if you consider the fact that Forbes supposedly did not take into account the “related businesses” aspect of the 30 franchises. In other words, profits of the team-owned cable networks are not reflected in their analysis…and despite that, they’re still showing massive yearly windfalls for the Indians.
To try to bring this to a close, here’s what I can’t do: I can’t provide hard evidence that says definitively “Paul Dolan’s projections differ from economic reality by $___M.”
However…operating income is what Paul Dolan is referring to when he states that the Indians are going to lose $12M this season. So if we accept the Forbes analysis despite its flaws, Dolan’s projections require us to believe that this year has been so utterly catastrophic that the team’s annual operating loss will be 3.333x greater than the biggest operating loss on the books since 2002. Or another way to look at it, a -$41.2M single-season crater ($29.2M in 2008 to -$12M in 2009) that would’ve nose-dived to a -$49.2M single-season difference without shipping off Victor, Cliff, and Ryan.
This is not only unlikely, it borders on the financially impossible. Short of adopting a string of promotions like ”Hepatitis C Day” and “Feral Dog Give-Away Night,” there are few circumstances that could swing the pendulum so far from black to red in one year.
So we end where we started: the Dolans’ numbers shouldn’t be believed. And that’s a good thing to keep in mind, since they’re not going anywhere anytime soon.
Obviously, the MLB non-waiver trade deadline is in the rear view mirror. The Indians, as has been well documented, went to the swap meet with Cliff Lee, Victor Martinez, Rafael Betancourt, and Ryan Garko and came away with a gang of giant young pitchers and a few other prospects.
In the process, the Indians’ fan base reacted loudly and bitterly. From what I was reading and hearing, it felt like we were one trade away from people massing in Public Square with torches and pitchforks to storm the Dolan family compound like the castle of Dr. Frankenstein.
The centerpiece of the anti-Dolan movement has been that they are unwilling to spend money to make the Tribe a contender. Hence, the jettisoning of Betancourt (due $5M next year), Lee (due $9M next year), and Victor (due $7M next year) in exchange for a battalion of players with almost no actual major league experience and thus, comparatively tiny contracts.
In other words, the fans believed that the motivation for these moves was just plain cheapness.
People screamed. They cursed. They flooded talk radio. How could ownership do this to them? How could they throw in the towel for the sake of saving a few million bucks? What heartless, unworthy owners are they, that they wouldn’t spend to the hilt for the sake of having the best possible chance of winning?
Here’s the reality that no one seems to want to acknowledge: successful businessmen buy sports franchises not because they want to win for the good people of the host city, but because owning a pro franchise is IMMENSELY profitable.
Why is this the case? Suffice it to say that the individual owners in each sports league for all intents and purposes form a cartel - by definition, a group of competitors who decide to band together for their mutual benefit. In other words, the Owners Association in each sport exists so a bunch of rich guys can figure out how to use their sport to get as rich as they possibly can.
Owners cash in through a variety of different methods. TV contracts, ticket sales, merchandising, tax breaks, public subsidies, creative accounting - all of these contribute directly to the bank accounts of franchise owners.
Just to paint the picture a little more clearly, let’s look at some specifics. In 1997, four national TV networks - Fox, CBS, NBC, and ESPN - struck deals with the NFL for the rights to broadcast weekly NFL games through the 2005 season. The combined amount of these deals totaled $17.6 billion, orabout $75M per team per season.
True to form, the current NFL licensing deals increased when they were renewed at the start of the 2006 season. The total haul for NFL teams is now $20.4 billion through 2011, or a toal of $96M per team per season.
Admittedly, the NFL has by far the priciest TV deals of any of the major sports. But the point is that every owner in every sport is getting paid handsomely just off of broadcast rights alone.
Meanwhile, the stadiums each team plays in are generally subsidized almost entirely by public funds. As we all know, owners are quick to talk about the necessity of a new, state of the art stadium for their team. They feel so passionately about this issue that they’re willing to hold cities and states hostage over public funding for the architecture, with the threat that if taxpayers don’t help them meet the astronomical costs of building a new gym or field, they’ll be forced to move the team elsewhere for financial reasons.
Here’s the reality: this is highway robbery any time it happens. I’ll avoid the obvious example for us Clevelanders and go to one that, economically speaking, is even more heinous. Paul Allen - owner of Microsoft and one of the richest men on the planet - owns both the Portland Trail Blazers and the Seattle Seahawks. In 1997, he demanded that the state of Washington cover 75% of the cost of a new stadium for the Seahawks, or else he would move the franchise to another state that would help him lift the heavy burden of owning the team. The total estimated cost to build the stadium was $425 million.
At the time, Paul Allen was worth $40 billion.
What happened? Rather than lose the team, the citizens of Washington collectively forked over $319 million to subsidize a guy who was worth more than the GDP of entire countries. This left about $106 million to be paid by Allen himself - or about $30M more than what he made from the NFL’s national TV deals that year.
The real kick in the balls is that once any new stadium is built with taxpayer money, the revenue from concessions, ticket sales, merchandise, parking, sponsorships, and non-sports events held there all go directly back to the owner, not the public. So the taxpayers invest hugely in something for the unique and strictly emotional / psychological prize of having a pro team to follow.
Meanwhile, all the monetary rewards for their investment go toward making the rich even richer. D. Stanley Eisen refers to this as “reverse welfare.” (His article ”Public Teams, Private Profits” in the March/April 2000 issue of Dollars & Sense is the origin of some of the specifics I’m using in this post.)
Even better, a new stadium immediately boosts the value of the franchise for when the current owners decide to sell the team. In 1993 (the year before the opening of Jacobs Field), the Indians’ net worth was estimated at $81 million. When Jacobs Field opened in ’94, the franchise was re-valued at $100 million, or about a 25% increase.
In 1999, the Dolans bought the Tribe for $320 million. So in the three years after the opening of the new stadium, the Jacobs family’s return on investment was a gargantuan 295%.
My point in all of this is that the fan base should be realistic about ownership’s motives. No owner views his team as a charitable foundation for the entertainment of the fans. He views it as (shock and surprise!) another business. So the idea that the Dolans are operating differently than the Jacobs family is on some level a misinformed one.
But if it’s true that owners make money for next to nothing just by owning the team in the first place, what’s the motivation to create a winner? And is it not only possible that the Indians made these trades to try to become a better baseball team, but likely?
These questions and more to be answered in part 2.
