Editor's Note: The following is a guest post from Kosmo who writes at The Soap Boxers. The timing is particularly good with the baseball season ending today and my local teams the San Francisco Giants and Oakland Athletics dominating the local news.
George made his money in shipping and shipbuilding. In 1973, George dipped into his wallet and bought a sports franchise. Nearly 40 years later, this investment is estimated to be worth 400-500 times the original purchase price. Not a bad investment.
George Steinbrenner’s group paid $10 million for the Yankees, but the deal also included some parking lots. When CBS bought those parking lots back, the true cost of the team was a modest $8.8 million. Today, the team is worth an estimated $3-5 billion dollars.
Recently, the Dodgers were sold for $2 billion. Frank McCourt got this price even though everyone knew he had to sell the team (to raise money for a divorce settlement), public knowledge that he had used team assets as his personal piggy bank, and having his hands tied by restricted place upon him by Major League baseball.
In football, the Cleveland Browns – who have never had any sort of success in their second incarnation – were sold for $1 billion. Who knows how much a good team would sell for. Editor's Note: In 1994, Robert Kraft paid an all-time high of $175 million for the New England Patriots. In 18 years they are worth nearly ten times as much according to Forbes.
Why have baseball teams – and sports franchises in general - historically been a very good investment?
Limited supply - There are a limited number of teams. If you want to start a widget company, you can simply start a new company and compete against the existing players in the market. It may be tough sledding for a while, but it’s actually possible. You can’t simply form a baseball team and start playing games against the Cubs. You could probably win a fair number of games, but it’s simply not allowed. Sports leagues use a model of coopetition. Individually, the teams compete against each other, but collectively, they cooperate on many important issues (such as collective bargaining) and also scheduling games against each other.
Occasionally, there will be expansion, but the opportunities are infrequent and buying an existing team – with an installed base of customers and a pipeline of minor league players – is often the desired direction, unless an owner wants her team to suck for a lot of years. In recent years, there has been more discussion of contraction – dissolving a couple of franchises – than expansion.
Revenue sharing – Imagine opening your widget company, performing poorly in the marketplace, and then getting a fat check from your successful competitors at the end of the year. That sounds too good to be true. Yet, this very situation exists in the sports world.
Fans generally want to watch competitive games, and leagues take certain actions to attempt to achieve the appearance of competitive balance. One way is by having a draft where the teams that suck most have the top picks, allowing them to get the best young players. Another way is to institute a luxury tax on the teams that spend the most money and redistribute this to the teams that produce the least revenue. Generally, these teams produce minimal revenue because they aren’t investing in the on-field product (low revenue but also low expenses). The premise: when you spread the wealth around, it’s good for everybody.
Capital gains – Don’t feel sorry for the teams that are incurring massive expenses for player salaries. There are two ways to be successful as a sports franchise – by making money or by winning games. Even if a team doesn’t make an annual profit, there is almost certain appreciation. Spending money on player salaries can make the team more successful on the field and thus more desirable on the auction block. Trading annual profits for appreciation can be a smart move – the former is ordinary income while the latter is a capital gain.
Publicly-finance stadiums – Occasionally, teams will move. The Dodgers moved from Brooklyn to California decades ago, and more recently the Expos moved to DC and were re-branded the Nationals. More often, a team uses the threat of moving to get public money for a new stadium. Los Angeles doesn’t have a football team, and for years teams have threatened to move to LA to get their cities to pony up cash for a stadium. Even if a team doesn’t move far, they can play one suburb against another to get the best deal.
Why would a city be dumb enough to pay hundreds of millions of dollars to help a team build a stadium? Because they fear the financial cost of losing a team. Not just taxes on ticket sales and concession, but everything that goes along with seeing a game. For out of town fans, this could include a hotel stay, several meals at local hotels, shopping, taxi rides, and much more.
This can be tricky to quantify. Some cities could sustain losing a team more than others. Green Bay would be devastated by the loss of the Packers.
Salary control – While the big free agent signings make a splash in the news, the youngest players are almost always paid less than market value for their production. The financial value isn’t in being able to hit a ball 450 feet or throw it 98 miles per hour; it’s in getting people to pay good money to watch you do it.
One of the leading contenders for American League MVP this year is 21 year old Angels outfielder Mike Trout. Trout signed for a $1.215 million bonus in 2009 and spent his minor league service earning peanuts (as is the case for most minor leaguers, who often live with host families out of financial necessity). His 2012 salary is $480,000. So far in his career, Trout has made a total of about $1.75 million.
That’s a lot of money to most people. However, Trout’s on-field performance has been worth 10 wins more than a replacement level player this season (yes, this is an actual statistic). The financial value of 10 wins to a baseball team? Somewhere in the neighborhood of $25-$35 million!
Trout, who still lives with parents in the off-season, won’t be eligible to test the market as a free agent until after the 2017 season. Assuming he does not sign a long term deal, his 2013 and 2014 salaries can be unilaterally set by team (subject to certain minimums), with no obligation to reward him for his performance. His 2015, 2016, and 2017 salaries would be set during binding arbitration, where each side make a case an arbitrator choose one side’s proposed salary (the arbitration is now allowed to pick a number in between the two figures). At that point, he can finally opt for free agency and test the market.
Starting in 2012, Major League Baseball has instituted hard caps for draft spending, with substantial penalties for exceeding the cap. Many other sports have salary caps, with some having rookie salary caps or hard slotting.
How does this happen? Quite simply, the unions are happy to bind younger players to relatively bad long-term deals to get concessions for younger players. Why? Because the drafted players are not yet members of the unions, and have no say in the matter.
In the NFL , this has been sold to the public as a way to avoid overpaying JaMarcus Russell and freeing up money to pay established veterans such as Peyton Manning and Drew Brees. More often, though, it seems that we see teams underpaying young players so that they can overpay journeymen like Ryan Fitzpatrick. Luck will be paid $22.1 million over the next four years while Fitzpatrick is scheduled to make nearly twice as much annually ($59 million over six years). I like Fitzpatrick as a person, but if you can find someone (other than his mom) who thinks he will be twice as good as Andrew Luck over that next several years, do them a favor and check them into the psych ward at Bellevue. Editor's Note: I think most people would agree that the Fitzpatrick contract was an anomaly and it was widely criticized at the time it was announced. Quite often I'm surprised that good veterans don't get signed. Here are some fairly high quality players that could seemingly play a role on some teams: Bob Sanders, Randy Moss (was out of football last year and signed this year), Plaxico Burress, and Kellen Winslow.
Emergence of Regional Sports Networks (RSNs) – In particular, baseball teams have seen huge jumps in TV revenue in recent years. This is due to the emergence of RSNs, such as Fox Sports (insert geographical descriptor here). Unlike football, where the TV rights are controlled by the league and divvied out to a small number of networks, baseball rights can be auctioned off by individual teams. The Angels recently sold 20 years of rights for $3 billion. That’s $150 million per year in their pockets before they sell a single ticket, hot dog, or t-shirt.
Sports is a coveted jewel for a couple of reasons. First, it’s premium content that fans will actually pay to add to their existing TV packages. I’m thrifty in many areas of my life, but savings be damned, I’m a subscriber to MLB Extra Innings so that I can see my Rockies play (I’ll switch this to MLB.TV next year to save a few bucks). Second, many fans watch the games live, making it fairly Tivo-proof. You’re probably going to end up watching the commercials. Advertising also pervades the games in a couple other ways. If you’re watching a baseball game, you’ll see company logos plastered on walls and behind home plate – there’s really no way to avoid seeing them if you want to watch the game. You’ll also see company logos during the broadcasts, and various companies sponsor trivia contest, plays of the game, and other specific content.
Bubble? – Of course, the big question is whether we’ve hit the bubble yet. Historically, it’s been very rare for an owner to sell a baseball team for less than what they paid. It may happen at some point in the future, but I don’t think we’re quite there yet. Over the coming years, even more people are going to watch games on their cell phones or tablets, exposing even more people to advertising.
Who wants to jump into my ownership group and buy a team right now? I’ll kick in the first $100!
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