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Forbes has published its annual estimates of baseball franchise values and profitability. As usual, the buzz about the Forbes list has focused on two features.

  1. Baseball teams are worth a lot of money. Forbes estimates the aggregate value of the 30 teams is over $49.3 billion, ranging from $900 million for the Rays to $4.0 billion for the Yankees. Every single team rose in value last year, with increases ranging from one percent for the Pirates to 16 percent for the A’s.
  2. Baseball teams make a lot of money. Forbes estimates overall revenues of $9.46 billion and operating profits (defined as earnings before interest, taxes, depreciation, and amortization—EBITDA in finance parlance) of $889 million. That’s a healthy operating margin of 9.4 percent. All but five teams turned a profit last year, and two of the unprofitable teams—the Blue Jays (loss of $1.3 million) and Mariners (loss of $2.4 million)—had a loss of less than one percent of revenues. The Orioles ($26 million, 10 percent of revenues), Tigers ($46 million, 17 percent of revenues), and Marlins ($53 million, 24 percent of revenues) were the only clubs to suffer significant losses.

Those are valid observations, and some very talented writers have and will dissect them. I would like to look at the Forbes numbers from a different angle, though. As I have often written, admittedly repeatedly, arguably ad nauseam, I think the way to view a baseball team is as an investment, not as a going-concern business.

By that I mean, say you and I just graduated from college and we decide to open an Ethiopian restaurant. We had better sell a lot of injera, because we’ve got a lot of bills. We have to pay for the restaurant space itself, our food, our supplies, and our staff. And we have our own rent, car payments, utilities, health insurance, and groceries. We probably have student loans to repay. And it’d be nice to at some point get off our parents’ cell phone and Netflix subscriptions, and stash away some extra cash for a rainy day. We have to turn a profit in order to survive, basically.

That’s not the case for any baseball team. No owners are dependent on their team for their income. Well, the Steinbrenners, sort of, but they’re crazy rich and will be crazy rich regardless of whether the Yankees make money. For baseball owners, I’ll contend, the team represents an investment, not an income source.

For an investment, the important thing isn’t how much money it returns to you every year. It’s how much it appreciates in value, how much money you can get when you eventually sell it. If I buy 1,000 shares of Tesla, or an ounce of gold, or a Warhol, I’m not going to make a cent while I own it. In fact, I’ll incur expenses for things like storage and insurance. I’ll make money when I sell it. It’s about the capital appreciation, not the current income.

And to me, the Forbes numbers are saying that baseball’s economics are screwed up, because the owners are making out-sized returns. Way out-sized returns.

For each team, I looked at the Forbes estimate of the team’s 2018 value and how much the owners originally paid for it. (I also did my own research into the initial purchase prices, and in the handful of instances where my figure differed from Forbes’, I took the higher figure in order to be conservative.) I then calculated the compound average growth rate (CAGR) of each team’s investment. That expresses how much the team made, on average, year after year. It’s compounded, which means that dollar value of the returns grow as the underlying value grows.

Here’s the list, with all dollar values expressed in millions:

Team Purchased Price Value CAGR
Yankees 1973 $9.0 $4,000 14.5%
Dodgers 2012 $2,150.0 $3,000 5.7%
Cubs 2009 $845.0 $2,900 14.7%
Giants 1993 $100.0 $2,850 14.3%
Red Sox 2002 $660.0 $2,800 9.5%
Mets 1986 $431.5 $2,100 8.5%
Cardinals 1996 $150.0 $1,900 12.2%
Angels 2003 $184.0 $1,800 16.4%
Phillies 1981 $32.5 $1,700 11.3%
Nationals 2006 $450.0 $1,675 11.6%
Astros 2011 $680.0 $1,650 13.5%
Braves 2007 $450.0 $1,625 12.4%
Rangers 2010 $593.0 $1,600 13.2%
White Sox 1981 $20.0 $1,500 12.4%
Mariners 2016 $1,200.0 $1,450 9.9%
Blue Jays 2000 $150.1 $1,350 13.0%
Padres 2012 $800.0 $1,270 8.0%
Pirates 1996 $92.0 $1,260 12.6%
Tigers 1992 $85.0 $1,225 10.8%
Diamondbacks 2004 $238.0 $1,210 12.3%
Orioles 1993 $173.0 $1,200 8.1%
Twins 1984 $44.0 $1,150 10.1%
Rockies 1992 $95.0 $1,100 9.9%
Indians 2000 $323.0 $1,045 6.7%
Brewers 2004 $223.0 $1,030 11.5%
Athletics 2005 $180.0 $1,020 14.3%
Royals 2000 $96.0 $1,015 14.0%
Reds 2006 $270.0 $1,010 11.6%
Marlins 2017 $1,200.0 $1,000 -16.7%
Rays 2004 $200.0 $900 11.3%

(Source: Forbes, except for CAGR calculation and some purchase prices.)

The average team’s value has appreciated 10.6 percent per year since the current ownership purchased it. And keep in mind that’s an unlevered return, excluding debt financing (borrowed money). For example, according to Forbes, debt represents 10 percent of the Rangers’ value, or $160 million. Assume that ownership borrowed $160 million toward its $593 million purchase price. That means if it were to sell the club today, it’d get $1.6 billion – $160 million due its creditors = $1.44 billion for its initial investment of $593 million – $160 million borrowed = $433 million. That CAGR is 16.2 percent instead of the 13.2 percent in the table above.

I contend that return is too high.

This isn’t a redistributionist rant. It’s based on how investments work. A long-term annual return of eight percent is a realistic goal for stock market investors, based on historical data. For investors like private equity, which invest directly in companies, typically including taking over management, as baseball owners do, the desired return might be more like 12 percent. Desired, not necessarily realized, but let’s go with that.

So shouldn’t baseball teams expect to earn 12 percent per year? No, they should not, for a number of reasons.

  1. As I’ve written, purchasing a sports team is like purchasing a Lamborghini or a first-growth Bordeaux. It’s a vanity purchase. You’re buying it in part to be able to hang out with jocks and get interviewed by the press and get your face in the media guide. That’s part of the return, and it should whack a few percentage points off that 12 percent figure.
  2. Baseball teams face no competition. That’s a huge, huge advantage. Competition put Toys R Us out of business. Competition means your grocery store can’t raise its prices for milk or chicken thighs or Cap’n Crunch by 10 percent because you’d just buy them elsewhere for less. Competition is why Walgreen’s can’t gouge you because there’s a CVS and a Rite Aid nearby. By contrast, for all their bellyaching, the Marlins will never have to compete with another baseball team in Miami.
  3. Baseball teams receive taxpayer subsidies. They may be in the form of stadium deals, or infrastructure improvements, or tax abatements, or exemptions from labor laws.
  4. Baseball teams can’t go bankrupt. The McCourts ran the Dodgers into the ground. A confluence of events made the Expos nonviable. They didn’t just go under as Toys R Us did. The league won’t let it happen. So there’s an implicit floor on investment returns.

As this article from The Economist explains, the economic term rent-seeking occurs “when companies extract outsize profits relative to the capital they deploy and the risks they take.”

Baseball teams, I’d argue, are rent-seekers. You and I can buy shares of a company that faces competition, doesn’t get subsidies, and could go bankrupt, wiping out our investment. Yet we’ll get inferior returns to a club of rent-seeking rich guys who make vanity purchases that are insulated from competition and insolvency and dig into citizens’ wallets for help with their operating costs.

Sorry, but that’s a perversion. I’m all in favor of people making healthy returns on their investments. (I have a career as an equities analyst to show for it.) But when baseball owners make substantially better returns on their investments despite similar deployed capital (on a relative basis) and much lower risks, that’s wrong.

I’m proposing that the returns baseball teams earn are too high. The solution, it seems to me, would be for them to become less profitable. For example, here’s the same table as above, but I’ve added an extra column entitled “loss.” That’s the amount of money, in millions, each team could’ve absorbed during each year of ownership and still wound up with the same eight percent annual return you and I can expect on our much less coddled stock investments, by including the losses in their return.

Team Purchased Price Value CAGR Loss
Yankees 1973 $9.0 $4,000 14.5% $9.6
Dodgers 2012 $2,150.0 $3,000 5.7% NA
Cubs 2009 $845.0 $2,900 14.7% $105.4
Giants 1993 $100.0 $2,850 14.3% $30.7
Red Sox 2002 $660.0 $2,800 9.5% $18.4
Mets 1986 $431.5 $2,100 8.5% $2.2
Cardinals 1996 $150.0 $1,900 12.2% $19.9
Angels 2003 $184.0 $1,800 16.4% $46.5
Phillies 1981 $32.5 $1,700 11.3% $5.6
Nationals 2006 $450.0 $1,675 11.6% $30.1
Astros 2011 $680.0 $1,650 13.5% $61.2
Braves 2007 $450.0 $1,625 12.4% $36.8
Rangers 2010 $593.0 $1,600 13.2% $52.1
White Sox 1981 $20.0 $1,500 12.4% $5.7
Mariners 2016 $1,200.0 $1,450 9.9% $46.6
Blue Jays 2000 $150.1 $1,350 13.0% $20.6
Padres 2012 $800.0 $1,270 8.0% $0.0
Pirates 1996 $92.0 $1,260 12.6% $14.0
Tigers 1992 $85.0 $1,225 10.8% $20.5
Diamondbacks 2004 $238.0 $1,210 12.3% $22.1
Orioles 1993 $173.0 $1,200 8.1% $0.2
Twins 1984 $44.0 $1,150 10.1% $3.5
Rockies 1992 $95.0 $1,100 9.9% $5.0
Indians 2000 $323.0 $1,045 6.7% NA
Brewers 2004 $223.0 $1,030 11.5% $16.2
Athletics 2005 $180.0 $1,020 14.3% $25.9
Royals 2000 $96.0 $1,015 14.0% $17.3
Reds 2006 $270.0 $1,010 11.6% $18.4
Marlins 2017 $1,200.0 $1,000 -16.7% NA
Rays 2004 $200.0 $900 11.3% $13.5

What this means is that the Yankees could’ve been purchased for $9 million in 1973, lost $9.6 million in each of the 44 subsequent seasons (note: they didn’t), and still yielded an eight percent annual return to the current value of $4 billion.

Wait, I know—if the teams had lost that kind of money every year, the valuations wouldn’t be what they are today. Fair enough. So cut the losses in half. Or reduce them by three quarters. Or more. Heck, eliminate ‘em; make baseball an operational breakeven business. It doesn’t matter. The point is, baseball teams do not need to make a profit in order for their owners to make returns in line with those of non-rent-seekers.

Proposing all of this is easy. Enacting it is hard, and I certainly am not suggesting some sort of legal remedy. There aren’t a lot of ways for baseball teams to earn less. I mean, they could voluntarily negotiate less vigorously for their television contracts, or choose to tack on an extra 10 percent to their electric bill every month, but that would be stupid. They could charge less for tickets, but that’d be stupid too. (Hold your fire. I’m going to address this in a future article.)

I think there are two more realistic courses of action. First, they could pay their employees more—major-league players, minor-league players, front office personnel, and seasonal workers. But there are collective bargaining agreements, bought-and-paid-for legislation, a massive supply/demand labor imbalance, and, I don’t know, penury or something, respectively, militating against those.

The second is for politicians to stop showering teams with taxpayer-provided welfare. My dad’s small business had to build its own warehouse. Let major-league teams build their own stadiums and other facilities. And pay for the roads and traffic signals and freeway off ramps leading to them. And not get breaks on their property taxes. Treat them like, you know, other businesses. (And that means you too, Congress.)

Will any of this happen? Probably not. So let me close with a reiteration of my point. Yes, baseball teams are, collectively, worth $49 billion, and that’s a lot of money. Yes, the average operating margin was 9.4 percent last year, and that’s pretty healthy. But the number that strikes me is that 10.6 percent unlevered return on investment. In an advanced market economy such as ours, that’s way, way out of line with the low risks and high non-financial rewards that baseball owners reap.

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ChicagoOriole
4/12
What do the owners opportunity costs look like? After all, as you point out these were successful business people before the purchase. Actually, they had outsized success. If they kept their money in their non-baseball activities, what would their earnings have been? Perhaps they are losing money as against their other opportunities, and thus are more justified in the retaining the profits you point out than it would appear. How much did the Steinbrenners make from shipping, Angelos from law, Ricketts from investment banking, etc.?
Rob Mains
4/12
Yeah, one of the things I don't get about really rich dudes (see JNossal's comment below) is how they always want more money. For most of us, there's a level where we'd say, "OK, that's enough, I've got enough for what I want to do, gonna kick back." These guys never reach that level. I don't get it. Anyway, to answer your question, I don't know that most owners have cashed in their previous investments/businesses in order to get into baseball. Loria's still an art dealer, etc. And more to your point, yeah, I can see if you start a business from the ground and you wind up a billionaire, your returns are going to normalize over time, and you might have the thirst to grown 25% annually like you did in the past. Not that it's something you should expect, much less deserve, of course.
jnossal
4/12
"Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different. "
Rob Mains
4/12
Well, as I said in my response to ChicagoOriole, there's a part of me that just doesn't understand these dudes.
jfranco77
4/12
Imagine, if you will, a 31st major league team. They have a huge market cap and massive YoY valuation growth, but their annual profits are small (relatively speaking). They are in the process of soliciting huge government subsidies to build a new facility. Sadly, we're going the opposite way of not subsidizing these kinds of companies. We're giving the ridiculous tax breaks to other industries too. This 31st major league team is Amazon. And yes, we've always had subsidies for big companies. This isn't totally new.
Rob Mains
4/12
Hence my gloomy first two sentences of the last paragraph. You wanna help the business community, municipal leaders? Quit cutting deals for MLB and other big companies. If you're going to subsidize structures, infrastructure, and tax payments, do it for restaurants and independent retailers and accounting firms and small manufacturers. They employ a lot more people than the local MLB team ever will. (To be clear, I don't believe in subsidies, but if you're gonna have 'em, at least direct them to the true job creators.)
will23
4/12
Are owners making too much money? Perhaps, but that only concerns me if it jeopardizes the health of the sport, and, there are some indications that excess profitability could be detrimental. Owning a team has become such a good business that it is inherently profitable. So much revenue is inelastic to winning that teams no longer have to build their business plan around success on the field. In fact, the only way to not make money, is to try too hard to win. If owning a team becomes too good of an investment, it will undoubtedly start attracting investors who are much more interested in making money than winning games. In a way, we are already seeing that in the way so many teams have been willing to retrench and engage in extended rebuilds. We've gone from having owners who, perhaps recklessly, were willing to win at any cost, to some who now seem happy to profit at any loss. If that pendulum swings too much, we may need another blue ribbon panel.
Byron Hauck
4/12
What's funny is that at least some people say it was private equity rent seeking that did Toys R Us in: https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us-downfall-is-ominous-reminder-about-debt-laden-deals We can't escape this stuff, even in intended counter examples!
Rob Mains
4/12
Taking out a lot of debt, especially in cases where it's used to pay dividends to equityholders, in one of the most unappealing characteristics of modern PE. (And you've got to wonder who the hell the lenders are.)
Michael McKay
4/12
The finance professor has three comments on your piece: 1) fully agree that MLB owners are aggressive and successful rent seekers. It's disgusting. It isn't going away. 2) In the same spirit that there are a finite # of Picassos and Monets, there are a finite # of MLB franchises. In a world where the top 0.001% are seeing their incomes grow 10% per year, the price of a unique asset is going to match pace. As you point out, largely independent of its cash generating ability. 3) the only thing that will cause a reset of franchise values would be a reset of broadcast TV contracts. It's not going to be a reset of labor contracts, or ticket prices, or disappearing government subsidies -- those habits are way too well set to change. But -- declining value of live sports on TV (witness subscriber losses at ESPN and broader declines in live sports ratings, including the NFL) -- that will ultimately put the ever-escalating broadcast contracts at risk. PS -- 10% industry profit margins -- that's very close to the average of the S&P 500. Nothing extraordinary there.
Rob Mains
4/12
Hey, Michael. Yeah, agreed, the EBITDA margins don't excite me much; it's the growth of asset values that I find offensive. I agree that the shock to the system is most likely to come on the revenue side, too. I just question the timing. We'll see.