On Thursday, August 6th, Indians team President Paul Dolan met with the press to discuss a variety of issues relating to the financial health of the franchise and the impact of their recent trades. During that meeting, Dolan projected that, due to a variety of factors, the Indians’ franchise would lose $16M this season.
The problem is that if sports economics has any credence, this statement is almost certainly garbage of the highest order.
In order to understand how that can be, we have to once again enter the labyrinth of sports finance - and in particular, the shady things that any pro franchises can legally do with their books.
Chapter 1:Paul Beeston and the Magical Loss Conversion
Earlier this decade, then-VP of the Toronto Blue Jays, Paul Beeston, made a statement that has since become the centerpiece of practically every serious discussion of baseball economics:
“Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every nation’s accounting firm to agree with me.”
This is the primary problem with the Dolans’ claim. The accounting practices in professional sports - specifically, Major League Baseball - are so serpentine and two-faced that owners can make statements that are technically true while simultaneously running completely counter to The Big Truth.
This is not quite the same as Bill Clinton inventing a new way to smoke marijuana, but it’s close.
The core enabler of this problem is the following absurd reality: Major League Baseball is exempt from all US anti-trust laws. In other words, they have been given a green light to operate as a monopoly.
I won’t go into the whole legal history that established this exemption. Suffice it to say that in the early 1920s, Congress claimed that baseball did not qualify as interstate commerce. A 1922 US Supreme Court ruling upheld this protection. In the decades since, the Supreme Court has shot down all lawsuits aimed at unshielding MLB…on the basis that because Congress granted the original exemption, Congress has to be the body that overturns it.
Of course, Congress is too concerned with the BCS to worry about professional sports. And in true recent Congressional fashion, they’re even managing to miss the big point there - but that’s another column.
The anti-trust exemption and a variety of other tax and accounting loopholes create a plethora of options for MLB ownership to distort their earnings. Below is a greatest hits list, which I will have to continue tomorrow.
1) Salary Depreciation
(Note: An advance thank you to Robert Whiting, the first writer I was able to find who could explain this concept simply but without sacrificing the details. Whiting primarily writes about Japanese baseball and its intersection with American baseball. I’ve read his book The Meaning of Ichiro and highly recommend it for any modern baseball fan.)
If you’re employed right now, I can guarantee you that your boss is looking at every possible loophole that will allow him to reduce his company’s tax bill this year - especially “in this new economy.” One of the best ways to reduce his corporate taxes - especially if he’s actually heading an extremely profitable company - is to use accounting tricks to show that the company is “actually” running in the red. Your state and federal government can’t tax your profits if they don’t exist.
But while they may be desperate, one thing that your boss will not and cannot do is to write off his employees’ salaries as losses cutting into revenue. If he tried this, within a matter of seconds the IRS would be jumping out of trees on the guy like it was a kung fu movie.
However, there are 30 business owners in the US who were exempt from these rules for a limited time. Who were they? The owners of the 30 MLB franchises.
Here’s something Bud Selig doesn’t want you to know: when an ownership group buys an MLB franchise, they get to take advantage of something called salary depreciation. From what I can tell, the basic reasoning is that a baseball owner’s most skilled employees - the players on their roster - are being paid for skills that can only decline over time. As a result, the owners are getting a fundamentally bad deal on the contracts to which they’re signing these employees and are thus entitled to a subsidy.
I’m not saying for a moment that I agree with this rationale, mind you. I’m just saying that this seems to be the justification.
The size of the subsidy ownership receives is staggering. For the first 5 years after purchasing an MLB team, ownership is allowed to amortize up to 50% of the purchase price on the basis of salary depreciation. What does that mean? When the Dolans bought the Tribe before the start of the 2000 season for a record $320 million, they already knew they were going to be getting a hefty savings over the long run. Specifically, they knew that from 2000-2004, they were going to be able to credit a $32M annual loss on their books, which would almost certainly be enough to show the organization operating in the red (more on this later). In the process, the Dolans would save millions in tax money, making the business of owning the Indians more profitable than it should be.
Obviously, the Dolans’ salary depreciation honeymoon is now over. But the point is that it was in place for 50% of the time that they’ve held the franchise. And the great trick of this whole franchise valuation / accounting game is that because the economy is so jacked up right now, owners only want fans to look at the short term. The last thing they want is for people like me to dig back and start looking at their cumulative earnings since they took over the team - but that’s exactly what I’m going to try to do later in this post.
That said, because this whole expose is growing at the same rate as the federal deficit, you’ll have to wait until tomorrow for that portion.
2) Ownership salary
D. Stanley Eitzen notes that another economist named Richard Sheehan has revealed that franchise owners have another unique little tool to misrepresent the financial state of their teams. Each owner normally pays himself an annual salary which, as with most other heads of corporations, is not small. There is no cap on this number - owners can pay themselves whatever they want.
The kicker, though, is that whatever the salary, it appears on ownership’s balance sheet as a “business expense” that cuts into the team’s profits. Much like the fraudulence of revenue sharing (which I discussed in my lengthy “Mythbusters: Franchise Ownership Editoin” post a few weeks back), these ownership salaries are just another means for the owner to pocket cash for personal gain.
But in this case, the salary provides a double bonus: not only does the owner get to keep the money, but he can also use that huge “business expense” to save himself serious tax dollars and to endear himself to the fans by showing that he’s basically a philanthropist. Who else would be so willing to take a major financial hit in order to help the deserving fans of the home city fight for a championship?
Eitzen references a point in the early ’80s where George Steinbrenner paid himself a “consulting fee” of $25M for - I kid you not - negotiating the Yankees’ cable contract. That figure appeared on the Yankees’ balance sheet as a $25M loss.
This, ladies and gentlemen, is why you hire accountants.
3) “Non-Cash” Charges
The third and final trick concerns another accounting term that I will try to distill into layman’s terms.
A ”non-cash” charge is an accounting expense only. That is, ownership doesn’t actually pay any money out to cover the expense. In layman’s terms, I believe it’s OK to think about it as an “assumed loss.” You as the owner estimate the devaluation of your goods and deduct that estimated amount from your revenue stream…even if it’s completely divorced from reality.
There are two main areas that MLB owners use this clause. The first is the minor leagues. The second is their ballparks.
According to Forbes, MLB teams have a tendency to tilt the lens in a favorable direction by factoring in the losses incurred by their minor league affiliates.
The trick? They don’t factor in minor league revenue.
It’s not immediately clear to me why they’re allowed to factor in the negatives without also applying the positives, but considering the source, I’m OK with assuming truth on this one.
As a reference point, the average MLB team claimed a $14M operating loss for associated with their minor league affiliate. But Forbes’ independent analysis concluded that the real number was something more like $8M - in other words, a 40% difference between what ownership wants their fans to believe and what’s true.
The other highly popular non-cash charge for MLB owners is ”stadium depreciation.” The basic idea is that (like those declining players) the ballpark they’re using gets crappier every year. The owners estimate a depreciation value and claim that value as yet another loss on their books. On average, that number ends up being more than $5M per team.
Is anyone sensing a theme here? You’ve got a day to think about it before I come back with Part 2.
Tomorrow I’m planning on writing a much more highly involved and heavily researched column on the Dolans’ claim that the Indians will lose $16M this year. So to counterbalance that, today will just be a quick thought or two on an entirely different topic.
I had the mixed pleasure of catching some of last week’s Indians-Angels series on TV, thanks to the local Angels’ affiliates. Anaheim’s Trevor Bell recorded his first major league victory in one of the games of that series. During the course of that broadcast, the Angels’ crack announcing team - Steve Physioc, perhaps the only baseball announcer with frosted tips, and Rex Hudler, who has the Captain-Queeg-like compulsion to hold a baseball in his hand any time the camera is on him - felt the need to wax poetic about their young pitcher.
Specifically, they discussed how Bell came with a high pedigree by virtue of having once been Baseball America’s top 14 year-old pitching prospect.
They followed this comment up by pointing out that another young pitcher on their roster, Sean O’Sullivan, was once rated the top 12 year-old pitching prospect by the same illustrious organization.
I’m profoundly troubled by the encroachment of professional scouting and the professional sports media on youth sports. I love competitive athletics and think that kids should be encouraged to at least try them in some capacity. There are a lot of positives at work, but the primary one among them should be that sports can be fun and social.
That said, we’re all familiar with the fact that kids are entering the pros in various sports at younger and younger ages - or were, until David Stern put a cap on the NBA system that allows the NCAA to continue to get fat off the hard work of kids getting nothing in return but some sorority trim. Also, there was that whole regrettable Maurice Clarett incident, which insured NCAA football would continue to thrive on its own monopoly. (Expect a more thorough assault from me on the NCAA around the opening of this year’s college football season. Guns will be drawn.)
In principle, I’m fine with an 18 year-old kid going pro. If he’s old enough to be drafted by the Army and sent to die for country in a foreign war, he should be old enough to be drafted by a sports franchise and sent to ball for city in a road arena. I think there’s a particularly strong case to be made when you consider how often the kids in question are coming from home environments with grim opportunities for survival, let alone advancement. This is true in the NBA, where a healthy portion of the talent pool comes from crime-ridden housing projects and damaged families - as well as in MLB, where a healthy portion of the talent pool comes from South or Central American countries where outside of athletics their options for the future are equally bleak.
The by-product of this scenario, though, is the descent of scouts on an age bracket that should be more concerned with establishing a driver’s license or a date to Homecoming than their draft position. But if people are going to be able to enter the pro ranks at a younger age, they need to be scouted at a younger age. To use the world’s most dated cliche, it’s a double-edged sword.
But are there no boundaries anymore? NBA scouts checking out a high school phenom is one thing. But Baseball America rating kids who are 12 FREAKING YEARS OLD?! To me, that’s as disturbing as the non-lesbian scenes of “Mulholland Drive.” Can’t we allow our youth to at least grow a grimy peach-fuzz mustache before they have shady chain-smoking men with clipboards analyzing their OPS? For God’s sake, just listen to how dirty that sentence sounds when you say it out loud! If that in itself isn’t an indictment, I don’t know what is….
I tried checking Baseball America to see if 12 is even their floor. But I couldn’t find anything definitive. Most of the sight is “members only” (you know, like a hipster jacket), and to be honest, this is one case where I’d rather not know what’s going on behind the curtain.
Beyond the Trevor Bell / Sean O’Sullivan mention, there are plenty of other signs of this trend. The LeBron documentary “More Than A Game” - which chronicled his senior year at St. Vincent-St. Mary - had its local premiere less than 7 days ago. The Little League World Series is televised on ESPN this week. Sportscenter’s “Top Plays” now regularly include highlights from high school games. And earlier this summer, ESPN announced the expansion of its ESPN Local wing, which sounds like it will spread gradually across the country over the course of the next several years.
I can’t find it right now, but ESPN’s program director announced the ESPN Local expansion by envisioning a future where (paraphrase alert) “dads can instantly upload the scores of their son or daughter’s Little League games for coverage.” As if parents haven’t gotten crazy enough on their own about their kids’ leagues. Now we’re going to bring in one of the biggest media juggernauts in the country to fan the flames.
So where does this lead us? The title of the LeBron doc is telling. Sports have indeed become more than a game. I’m just troubled by the accompanying expectation that parents will want their sons and daughters to be more than kids.
An article appeared late last week in The New York Times about MLB batting helmets and player safety. The occasion for said article is the pending release of a new helmet by Rawlings called the S100 (pictured above).
The structure and materials of the S100 make it the most protective batting helmet in history. It gets its name from the fact that in laboratory testing, it was able to withstand direct hits by fastballs at speeds of 100mph without denting. (Apparently, the model currently used by most major league hitters will dent if hit by a pitch in excess of 70mph.)
However, rather than jumping at the opportunity to upgrade to the newer model, a lot of players are rejecting the S100 outright.
Their main beef? Apparently, it offends their fashion sense.
“No, I am absolutely not wearing that,” Mets right fielder Jeff Francoeur said with a laugh after seeing a prototype, as if he were being asked to put a pumpkin on his head. “I could care less what they say, I’m not wearing it. There’s got to be a way to have a more protective helmet without all that padding. It’s brutal. We’re going to look like a bunch of clowns out there.”
For reference, here is a picture of Jeff Franceour (at right):
Here are some pictures of other Major League Baseball players:
[Ryan Franklin, St. Louis Cardinals]
[Bronson Arroyo, Cincinnati Reds]
[Ryan Howard, Philadelphia Phillies]
[Johnny Damon, pre-New York Yankees]
My point is this: most baseball players are doing a bang-up job of making themselves look like complete dufuses even when a helmet isn’t involved. So to reject the S100 on the basis of style impairment is ridiculous.
(Sidebar: can we all just take a moment to appreciate the fact that the image of Johnny Damon that best illustrated his goon-ishness came from his WEDDING?! OK, let’s continue…)
By no means am I petitioning for some kind of new equipment mandate. I’m a big believer in freedom of choice. Baseball players are grown men, and if they would rather put themselves in greater danger of injury rather than wear a bulkier helmet, I’m fine with that.
However, I am also a big believer in making choices based on evidence. Proof of that belief is all over this blog. And choosing more dangerous headgear based on style when: A) you’re already wearing a league-mandated uniform, B) that uniform already includes a helmet when you’re in the batter’s box, and C) off the field, your sport is unofficially known as the most ridiculously dressed of any professional sport…it just doesn’t hold up.
The more interesting question than any of this Joan Rivers analysis is…how necessary is a more protective helmet for player safety?
This is an especially pertinent time to ask this question because of what happened this weekend. Ian Kinsler got intentionally tagged in the head by a 91mph fastball Saturday. David Wright got beaned in the dome by Giants ace Matt Cain the same day. The velocity on that pitch? 93mph.
Incidentally, Dodgers pitcher Hiroki Kuroda was victimized by a line shot hit back at him while he was on the mound last night, as well. Not that we can realistically expect pitchers to wear batting helmets while they’re pitching, but it’s just another reminder that this is a game that’s based on a hard ball being thrown or hit at speeds in the triple digits.
In all three of the above cases, it appears that the guys involved are going to be OK. Wright was diagnosed with nothing more severe than a concussion. The team placed him on the 15-day DL today with the caveat that he could miss the rest of the season, though I assume that that’s more of a precautionary measure than anything else. Kuroda was released from the hospital with nothing but a mild headache and will apparently make his next start. Ian Kinsler didn’t even come out of the game after he was plunked.
In separate segments, former sluggers Dave Winfield and Joe Morgan both made an interesting claim: the problem isn’t the helmets. It’s that today’s batters “don’t know how to get out of the way of a fastball.”
To me, this seems strange. Getting out of the way of a fastball doesn’t strike me as a highly specialized skill - at least, not in the same sense as landing an airplane or cracking a safe.
However, I immediately put stock in just about anything baseball-related that comes out of Joe Morgan’s mouth. And considering that both he and Winfield played in an era where the batting helmets didn’t even have earflaps, both guys arguably had more incentive for working on their evasive action.
Either Buck Showalter or Peter Gammons also made a companion point: pitchers today simply don’t know how to pitch inside the way the guys in the previous eras did. Brush-backs were much more of an art back then, and batters had more to fear because they didn’t have the elbow guards, hand guards, body armor, etc that allow the current crop of hitters to crowd the plate with near impunity.
My question is whether or not pitcher’s today are throwing (on average) harder than pitchers were in the days of Dave Winfield and Joe Morgan. I was unable to find any real data on this, although - full disclosure - I didn’t exactly spend my whole day trying to hunt it down. I wasn’t even able to find when radar guns started being used in major league baseball, but I can now tell you that the first use of the machine was in 1954 by an Illinois State Highway patrolman. And man, would I have loved to see the reaction of the guy who got pulled over as a result of this pioneering use of technology.
Anyway, my suspicion is that there is a velocity difference, and that even if it’s only a few mph, that extra heat could be the difference between a batter getting completely clear of a fastball and getting hit, or even between turning a direct hit into a glancing blow.
One of the main arguments for the helmet currently favored by the pros is that in almost all cases, players still react enough to make sure that the ball isn’t striking them dead-on. Therefore, it’s completely irrelevant that the helmet will “fail” if hit squarely with a 71mph ball.
So sadly, the upshot of all of this is that I don’t know really know whether older ballplayers were more dexterous, older pitchers had better control on the inner half of the plate, or everyone’s just spewing garbage. Which, to be honest, really disappoints me.
Ironically, though, the last player quoted in the NYT article was fully in favor of the new helmet. That player? David Wright.
“If it provides more protection, then I’m all for it,” said Mets third baseman David Wright… “I’m not worried about style or looking good out there. I’m worried about keeping my melon protected.”
As this picture of Wright confirms, he’s serious about that second to last sentence.
Didn’t see this immediately when the Roid Sox Nation story broke (fittingly, thanks to the New York Times), but…can someone explain to me when Jose Canseco decided to start talking like a cross between a conspiracy theorist and a Blackfoot shaman?
“When you tell me something I didn’t already know, I’ll be surprised…It’s not about naming names,” [Canseco] said. “I’ve never had anything against the players. It’s always been against Major League Baseball. I know who’s on that list, but like I said, it’s not about attacking the players. It’s about the machine that allowed this to happen. What I speak out of my mouth is the truth. It burns like fire. Just remember, I have never lied about this subject.”
My favorite thing about this: Canseco is right. He’s been absolutely on the ball every time - including when he claimed to have “stuff” on A-Rod. And while that’s not good news for Bud Selig, it’s great news for anyone like myself who is looking for Jose Canseco to stay in the pocket long enough to spout more wacky shit to reporters.
Oh, I also just stumbled on this on Canseco’s Wikipedia page. It’s got absolutely nothing to do with steroids, but it’s awesome enough to bear mentioning…
Apparently three days after the infamous outfield blooper where Canseco’s head turned a routine fly ball into a home run, he asked his manager to let him pitch the 8th inning of blowout loss to the Red Sox. During the course of that inning, Canseco blew out the ligaments in his elbow. He had to have Tommy John surgery and was out for the remainder of the 1998 season.
Needless to say, I now like him even more than I did when I started this post. Long live the Havana half of the Bash Brothers.
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.
