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!
Really? Nobody has ever lost money investing in a sports team?
@ Steve – I’m sure people do lose money investing in sports teams, but this seems far more rare than the chance of losing in other investment vehicles, at least within MLB and the NFL (which I know far better than other sports).
I can’t remember the last time someone lost money buying a baseball team. Maybe CBS when they sold the Yankees to Steinbrenner. McCourt was in a horrible position when the Dodgers were sold – essentially being forced to sell the team – and still made money.
Lots of teams have operating losses, but they recoup this with a huge capital gain when they sell.
Playing devil’s advocate with Steve’s comment and the NFL as an example, it is trying to expand to Europe, because they’ve used up much of the obvious growth here. I think we are close to the limit on that as you hinted in the bubble part. I don’t know how many much revenue growth is going to come from people watching at bats on their phones.
The growth of the past may not be the growth of the future.
“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. ”
Off the top of my head, Matt Cassell and Kevin Kolb.
You and I had a discussion about the Cassell deal when it happened. My thought was to let him prove himself before giving him a huge deal, and using the franchise tag to lock him up if necessary. The contract was paying him $10M/year, and it seemed unlikely (to me) that he’d have a good enough season to ask for more than that … and indeed, his 2009 season was fairly pedestrian, with fewer than 3000 yards and a 1:1 TD:Int ratio. The Chiefs bought while the stock was at its peak. Cassell did have a very good 2010, but if they had delayed signing him to a long term deal until after the 2009 season, they might have shaved a few bucks off the deal. Cassell’s only NFL success to that point was with a ton of skilled players around him in New England, so you had to wonder how much of the success was due to his own talent.
And I’m not sure what you want me to say about Kevin Kolb. The fact that he wasn’t the week 1 start this year, in the second year of a $60M+ deal has to be a huge concern.
It seems that teams have no qualms giving tens of millions of dollars to pro quarterbacks with “potential” but limited track record, but want to apply a different standard to college guys and hold a lack of NFL track record against them.
I’d like to see something like a base 2 year rookie contract, with team options for years 3-5 at steeping increasing amounts (a set percentage increase). The team can then decide whether to retain the player at the higher salary or let him become a free agent.
I wouldn’t classify Cassel or Kolb as a journeyman like Fitzpatrick. Each had been on their only team when they were signed to the big contract.
While the Chiefs did by Cassel stock at an all-time high, it is worth noting that their management who made that decision, Scott Pioli, had years of experience with Cassel in New England. They made an informed decision, not based solely on his successful 2008 season, but also on seeing him in practice everyday with the second string skill players.
Kolb was a terrible signing, but I think it was largely based on his potential, former 2nd round pick, and his young age.
Both the quarterbacks had leverage of being viewed as the best available in a limited free-agent market. Rookies don’t enjoy this leverage. I think that’s consistent with many professions. I know a few talented software engineers coming out of college that don’t make what an average software engineer with 4-5 years of experience get.
The US has about 5% of the world’s population. There’s a pretty big untapped foreign market. Even if a comparable market penetration can’t be achieved, there’s money to be made if the leagues can get people in China, Spain, Australia, and Brazil to become fans.
Watching games on phones? Probably not. On tablets? Yeah, I can see that.
I imagine that tapping the foreign market for American football might be a little like how the domestic market has been tapped with soccer. I don’t know how much revenue the NBA gets from European basketball leagues if we were to draw a parallel there. I’m not sure MLB gets anything from the Japanese leagues. I would imagine that most of the money would be spent on teams in their own countries (and I’m assuming that if there are significant people interested in the sport, there will be such teams and leagues).
I can see watching games on tablets, but the apps are given away with MLB.TV subscriptions. I don’t see people at dinner or bar pulling out their tablet to watch a baseball game. I could see it at their hotel room while on travel, but that’s still grouped into a “view via Internet” price model of MLB.TV. It would be interesting if they made an iTunes-like $1.49 or $1.99 a game on-demand store. I wonder how many people would pay that for baseball and if that really would be significant revenue growth.
I’m not saying that the Chiefs necessarily overpaid for Cassell. But since he was at his all-time high, why not see if his performance dropped in 2009 (which it did) and try to get him for a lower price. He almost certainly was going to be worse in 2009 than he was in 2008.
I’m not talking about money from foreign leagues with mediocre players. I’m talking about fans of those other countries cheering for the Bears and Yankees, because the best baseball and football players in the world are in the US.
MLB defininitely doesn’t get any money from the Japanese baseball leagues. They are completely independent and have been around for 60+ years.
Will tablet usage encourage more people to subscribe to MLB.TV (at a cost of $125/year for the mobile-friendly premium version). For business people who travel a lot, MLB Extra Innings might not make sense, since it’s not portable. On the other hand, MLB.TV is portable. If MLB gets news customers, they go from $0 from that customers to $125.
Someone (me) just realized that you can bundle minor league streaming with MLB.TV for a small fee … next year is going to be a good year :) (and baseball can bank a bit more revenue from me next year).
It would have been hard for the Chiefs to get more data on Cassel in 2009. He was going to be Brady’s back-up and not play or be on another team likely eliminating the Chiefs’ chance to acquire him.
As for whether Europe will encourage more MLB fans, I think it’s worth looking into what the NBA.TV (or whatever it is) in Europe is. Since the Olympics in the 1990s they’ve had big growth and countries are more competitive. My guess is that Spain watches more of their local Spanish league than the NBA, but I could be mistaken. Local affiliation is pretty powerful.
More on tablets in a little bit…
Oh, and one thing I forgot. MLB has been quite active in Europe lately. They are assisting various countries with national academies. As awareness of baseball rises in those countries, I’d expect more interest in MLB.
Trade for him, sure. But don’t sign him to the long term deal until after the 2009 season. He almost certainly wasn’t going to make his stock rise any further.
I’m guessing that the European basketball leagues would be closer to the NBA than European baseball leagues would be to MLB. As far as I know, there aren’t any high level pro leagues in Europe. If MLB aggressively markets itself in Europe, it could cultivate a couple of generations of fans before any decent European leagues would take root.
China and India could be the big prizes, though.
Well with the franchise tag, Cassel was going to make $14.561 million in 2009 when the Chiefs traded for him. You look at what he signed and it was $28 million in guaranteed money, which is widely considered the most important number. On average the deal was worth about $10 million a season, so Scott Pioli created a little cap room in that 2009 year for a player he watched a number of years for the New England Patriots. I think he wished it worked out better, but Cassel does have a very similar QB Rating (I’m not a big fan of the stat, but it is what it is) similar to Eli Manning, who got a 6 year nearly $100 million dollar contract.
My point with the European basketball leagues is that the popularity of the sport in European doesn’t necessarily extend to people paying to watch the US version. Maybe if MLB built the same system in Europe, they could own the leagues there, but are they willing to put in that kind of investment? The NFL tried a European league and it didn’t last.
I’m not convinced that many people are going to go from $0 to $125 in buying MLB.TV due to tablets. I pay the $125, because I want to watch my out of market team. You do the same for the Rockies. When I lived in Boston, I got most of the Red Sox games included in my cable bill via the regional sports network, NESN. There’s a segment of people who travel a lot, like baseball, and have the disposable income to spend the $125 for it on the road. I think those people probably already buy MLB.TV though and a tablet doesn’t change the game that much for that small niche. Also, these people are prime Slingbox candidates, so that dips into this niche. Some cable companies may even stream over the Internet eliminating the need for MLB.TV for these travelers. Finally, there’s the idea that if people are accessing games on MLB.TV, there’s fewer people using the RSNs and maybe those contracts become a little less lucrative as this niche audience migrates.
My point with the European leagues is that they are a reasonably decent substitute for the NBA, because the caliber of play is OK (also, the games are vastly different, so it’s not a huge shock that the interest doesn’t translate). If MLB can cultivate interest in Europe (as they are actively trying to do), there aren’t any local teams to compete with. If you want to watch high quality baseball, you pretty much have to watch MLB.
Don’t build the stadiums and create an inferior version of your product and dilute the interest. Get people to watch the real thing. Sell Boston Red Sox hats, not Bologna Butchers hats.
I think MLB could market MLB.TV and Extra Innings a lot more aggressively (in the US) than they do – and perhaps they will once Selig eventually dies.
I still don’t like the strategy with Cassell, but I’ll concede the point. As for handing Kolb a bucket of cash??
The Rangers just went through bankruptcy right before they started going to the World Series 3 seasons ago. I am not sure Tom Hicks would say that a baseball team is a good investment.
It was actually the Hicks Sports Group that went through bankruptcy. It owned the Rangers, but also a lot of other teams (include the Liverpool soccer team, which seemed to be where the biggest chunk of red ink came from). I was probably under-capitalized.
As for the Rangers … Hicks sold the team for $300 million more than he paid 11+ years earlier.