Breaking Balls: Profits and Losses

Mariner president Chuck Armstrong was quoted on MLB.com this off-season, mentioning “I haven’t attended an arbitration hearing in my 11 years with this ownership, but this one is too important. (Garcia’s request) is way out of line…If I’m going all the way to Florida,” he said, “I’m going there to win.”

He lost.

Now, I’m all for an owner aggressively pursuing team goals and trying to keep the budget down, but if you think you’ve got a star young pitcher, and you’re concerned about his emotional maturity, perhaps the best way to handle a situation like this would be to give it to some competent representatives and let it go. Make some noise about how it’s all business, nothing personal, and how you look forward to having Freddy back no matter what the outcome of arbitration. The Mariners had very little to gain and much to lose by making this such a high-profile, confrontational issue in front of the public.

The team is smart though, and it didn’t take long for the Mariners to turn the setback into something they could use. They immediately seized on their loss for PR purposes. “We’re over our payroll budget,” the team said. “We’ve raided the contingency fund. We had the Moose shake down kids on the tour for their milk money. We’ve raised the prices on beer stands near Derek’s seats. Again. We’re not going to be able to make any kind of mid-season acquisition, so go ahead and lower those expectations…lower…lower…that’ll do.”

The Mariners claimed a payroll of $92 million, a $12 million increase on their 2002 Opening Day payroll. The Seattle Times (“If we were any more in bed with the Mariners, we’d be a mattress pad”) verified this, running a story titled “Major League Baseball on 92 million a year.”

In the article, the Times is willing to bend over backwards and still doesn’t get to $92 million. Not only did the paper use salary figures that were way high for every player but Garcia–who the Times had at $5.5 million, and not the $7 million he won–there’s also a note that states: “Adding pro-rated signing bonuses ($3 million), a contingency fund ($2.5 million) and contract buyouts ($1.6 million) would bring the Mariners’ payroll to approximately $91.25 million.”

Yeah…Not many teams include contingency funds in their payrolls.

Myself? I got to $93.3 million in Opening Day payroll. To do it, I had to start with salaries and include:

• Ichiro‘s pro-rated signing bonus and potential incentives;
• Edgar Martinez‘s buyout from his previous contract and potential incentives;
• Kazuhiro Sasaki‘s pro-rated signing bonus and potential incentives;
• Jeff Nelson‘s potential bonuses;
• Arthur Rhodes‘s potential bonuses;
• Shigetoshi Hasegawa‘s buyout from last year;
• James Baldwin‘s buyout;
• … and some high estimates on what kind of contracts would be given to players under team control where the numbers haven’t leaked out yet.

Normally teams don’t include incentives in payroll calculations, which composes about $7 million of my figure. And those incentives are what the “contingency fund” was supposed to be for anyway; the only thing that gets the Mariners back close to $90 million is if you count Ichiro’s posting fee at $13.25 million over three years, and then you’re back up to $89 million.

Now, usually at this point I’d launch into a rant about the value of honesty and the ongoing degradation of man, blah blah blah…but you know, I’ve given up on the Mariners. I acknowledge that I’m enabling their behavior, but I don’t have the energy to fight them anymore. Last year they fibbed about their budget and payroll, and I fought them here and in the local press, but this year they’re fibbing about their budget and payroll. Which leads us nicely into the latest bit of Seattle Mariners news.

They’ve released financials. Sort of. But first, minor digression.

The Mariners are the future of baseball business. They play in a taxpayer-built stadium they pay almost no rent on, they do an outstanding job with their media contracts, and have built a regional fan base to support the team. They exploit every money-making opportunity that comes their way; profits on MLB-licensed merchandise are shared, so the Mariners have opened up their own Mariner Team Stores so they could clip the profit. They tried demand-based pricing for seats, and abandoned it after a public backlash–but don’t think it won’t be back. Their ticket packages are a mastery of value pricing: game with the Yankees, sure, but also you get a game against KC. And so on.

They’re all about customer experience, offering season ticket holders discounts off the face value of their seats, ticket exchange policies, and a hotline to call for more tickets. The Mariners cultivate their season ticket holders to an extent that must seem alien to clubs that still don’t get it.

Their business acumen has brought them success second only to the Yankees in recent years. And unlike the Yankees, we the people have some insight into what’s in the Mariners’ books. They’re required to disclose financial information to the Washington State Public Facilities District every year, because when the Mariners ownership group has retired its collective debt, it then has to profit-share with the public. It doesn’t make up for living practically rent-free, and having such a large incentive to not retire the debt they claim they ran up will almost certainly mean the team will be engaging in creative accounting to move revenue off the books and turn payments to owners into book losses. But at least it’s something.

The Mariner owners claim that they lost $200 million between 1995 and 1999, even though at times they would make slips and talk about how they broke even or made a modest profit in a given year, when they were drawing massive crowds in the Kingdome. This never gets questioned. On top of which, they claim payroll costs much higher than they actually incur (more on this later this week), getting outfits like the Times to run a story on ‘baseball at $92 million a year.’

That’s beside the point, though. How’d the team do last year?

• $10.72 million in “audited” net income, up from $7.5 million
• $36 million in reduction of previous cumulative losses, bringing mythical cumulative loss total to $130 million
• Retired loan to cover $100 million in stadium cost overruns (this saga’s a whole other topic too)
• Set season attendance record of 3,540,658 (up from 2001’s 3,507,975, and at this point as high as can be reasonably expected to go without a post-season)

If the Mariners continue to draw well, don’t engage in fiscal hijinks, and steadily retire their debt, the taxpayers could start to see the spigots reversed in four, five years. They won’t, but they could. We all need things to wish for, right?

This is all accounting, of course. MLB reported that the Mariners made $15.475 million after revenue sharing, placing them second in all of baseball behind (Surprise!) the Commissioner’s own Brewers. And the Mariners only showed the PFD $7.5 million in profits? If they could make their finances look worse than MLB could, well, as I used to say when my friends tore up my castle walls with perfect cannon-hit spacing, “I don’t like it, but I have to respect it.”

It’s situations like this that call on a team’s clutch ability, and ask for those who can perform under pressure to step up and plant foot firmly in mouth. Like this, quoted in the Times:

“Safeco has allowed us to be successful on the field as well as off the field. Prior to 1999, there were no profits to report. Since 1999, we have had profits to report. The whole project has done what it intended.”

–Randy Adamack, Mariners’ vice president of communications

No profits to report? Well, why would you report them before you had a stadium deal that required you to open your books for auditing, while the project was enduring massive cost overruns you were largely responsible for, had promised to cover, at the same time fielding some good teams and some pretty bad ones?

This number, this $11 million net profit, is a fiction. It’s a made up accounting number, and it has been carefully chosen for a couple of reasons: (1) It’s large enough to look significant–that the team is financially healthy in their new, publicly-funded digs; but (2) it’s also small enough that the team’s fortunes could head south given a slight turn in the market or on-field performance, making it easy to start claiming losses again. If the team doesn’t turn a tremendous profit now, when things are good, how bad will the M’s claim they’re doing when things are awful?

The Mariners made at least $50 million in profit last year, just from the top-line obvious stuff: the net income and the repayment for hypothetical past losses. I think the actual minimum team profit is about $80 million. Besides paying themselves off, though, what are the Mariners doing with all this money?

They’re being smart is what they’re doing. They’re pushing a lot of it into things like baseball academies overseas and international scouting and development to better the farm system (they’re not using it sign domestic draft picks, letting both their first- and third-round picks head off to college). They’re also trying to build loyalty in the cash-generating luxury suites by putting in hardwood floors and air conditioning.

They’re getting a new video screen: Not only did the Real One Video Screen keep re-buffering and crashing during the replays, it was also using retinal reflections to keep track of fan attendance, whether or not they watched the dumb mid-inning video distractions, and collating that data for third-party marketers who would call fans at home and spam them with offers. (I kid because I hate Real One Player. But the M’s did spend $1.7 million to replace the center-field video board.)

As an added bonus, as part of their lease, the Mariners may get reimbursed for those costs down the road, when their swank parking garage bonds have been retired. In fact, they’ll get their capital costs plus interest, which is a nice little perk for the team.

The Mariners also enjoy a level of indulgent press coverage that feels like an all-too-comfy blanket. The story that the Mariners, who are required to keep more open-and-straight books than most, turned a 2003 profit was greeted here by headlines like Bob Sherwin’s “M’s float a profit on baseball’s Red Sea” over at the Times, which included gems like: “A profit is an aberration in the major leagues. The Commissioner’s Office estimated that the 30 teams lost a collective $450 million last season and claimed that just four teams turned a profit.” It’s nice to see that even if the local media can’t be counted on to be skeptical observers–or even particularly astute ones–they can at least be relied on to be consistent in their behavior, just as I expect in a year that the Mariners will announce they’re over budget even before the season begins. Sure, they made a profit the year before, but not much of one, really, if you look at it the right way.

You would think that given the amount of money at stake, and the potential for profit-sharing for battered local governments, that someone in power would aggressively pursue the Mariners for better accounting of their current spending. But no one’s asking the questions. Maybe it’s because Chuck Armstrong’s in such a bad mood after traveling to Florida and losing at arbitration.