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Prepare for an MLB & MLBPA off-season battle

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Everything you ever wanted to know about MLB finances but were too confused to ask.

2020 Major League Baseball Draft Photo by Alex Trautwig/MLB Photos via Getty Images

On the heels of one of the strangest seasons in baseball history, we now approach one of the most contentious off-seasons in baseball with uncertainty in regards to baseball returning to some semblance of normality in 2021 and abnormal contract cancellations giving the sense of a looming strike.

As of today, there is discussion on the idea of moving back the renegotiation of the CBA from MLB’s side, and the MLBPA has threatened to file a grievance, giving a sign of what’s to come. Why the uproar? It always boils down to money.

On October 26th, Rob Manfred had an exclusive interview with Sportico and stated that the MLB lost $2.8 - $3 Billion dollars this year. Which has driven the sport to be in a massive $8.3 Billion dollars of debt from their lenders. And was quoted saying:

“The economic losses [this season] have been devastating for the industry,” Manfred said. “You’re seeing the ramifications of that in terms of decisions clubs are making with respect to [laying off] baseball operations and business employees. I mean, you’ve never seen those type of decisions, at least since I’ve been around.”

There’s a lot to digest from the interview and the statement above. Evan Drellich of The Athletic noted that none of the numbers listed above are able to be independently verified, as the MLB does not open their books. You simply have to take their word for it, despite the obvious benefit of lying. What’s more interesting is that in this article, MLB claimed that even in 2019, the league as whole lost money, citing $10 Billion in revenue versus $10.2 billion in expenses. (Although Forbes as well as many others cited significantly different financials - estimating MLB owners to have an operating income around $1.2 Billion versus the negative $200 million that MLB representatives are claiming. )

So let’s take a step back. The first thing I want to note about all of the below, is unfortunately, the information I have is from the best sources I can find, but since the owners are unwilling to share any proof of their financial data, nothing can be conclusively proven.

The only “real” data we have is provided by teams that are owned through publicly traded companies. While limited, this at least provides some glimpses into actual financials and not just word of mouth.

Liberty Media owns the Atlanta Braves, and as a publicly traded corporation, has to release their financials. Unfortunately, it’s still not clear cut as their financials include the reporting on the Braves, 6 Minor League Teams, assets within the ballpark, and mixed-use facilities all within the Braves segment of their business. Additionally, it covers The Battery - a real estate development project including hotels, residential, event space, etc., all of which were impacted by COVID.

From a revenue (sales) standpoint they reported $442 million in 2018, and $476 million in 2019 for the Braves segment of their business. They reported adjusted OIBDA of $88 million in 2018, and $49 million 2019. OIBDA is Operating Income before Depreciation and Amortization, full explanation is here. Operating Income is not exactly synonymous but for simplicity’s sake, it’s basically profit.

If you factor in depreciation and amortization, which are accounting techniques to look at the long term loss of value in assets or paying of debt to acquire assets, the numbers look less appealing coming in at $1 million and negative $39 million. That’s right, a $39 million dollar loss.

If you’re looking at that negative $39 million and thinking, “Wow, the Braves lost a ton of money last year”, well that’s not quite true. Why? Because Sports franchises have one of the most unique benefits in the world: Roster Depreciation Allowance. Admittedly, it’s a complex concept, but SABR has an excellent article which truly breaks down the concept in depth. It’s not an easy read, but takes you through the math and live examples. It’s tough to explain a complex topic in a paragraph in an article, but Time had the simplest explanation:

“owners get to deduct player salaries twice over, as an actual expense (since they’re actually paying them) and as a depreciating asset (like Ford would for a factory or FedEx a jet).”

Truthfully, Roster Depreciation Allowance is one of the most valuable aspects to owning a Sport Franchise as this double counting of expense and corresponding “losses” are allowed to be written off from the owner’s personal taxes.

Not only that, but teams have another way of “hiding” the revenue they earn. By owning a Regional Sports Network, or share of one, the profit of the separate RSN are not counted as Revenue by the team. This can have an impact of hundreds of millions of dollars for some teams depending on their share of the RSN. Fangraphs explains the concept and estimate it as having the potential for hundreds of millions in impact for those best positioned, but even teams with smaller ownership shares see the advantage of millions of dollars of hidden revenue.

As for the Brave’s 2020 financials, there are quite a few people citing the revenue drop listed in their quarterly earnings report. Unfortunately this is somewhat misleading as it is reporting only the first 8 games of the season, and the remainder will not be reported on until the end of their Q3.

League Info

Revenue:

There are quite a few places that estimate the rough order of magnitude from a revenue perspective such as Statista , which estimated the revenues to range from $683 million (Yankees) down to $222 million (Marlins). Which makes it much harder to project on an overall basis the impact by team - particularly given the differential in TV contracts.

Breakdown:

Now you may wonder where that revenue comes from. Without public figures, it’s tough to say but using the report that the MLB used in negotiation:

  • 39% - Local Gate & Other In Park Revenue
  • 25% - Centralized Revenue
  • 22% - Local Media
  • 11% - Sponsorship
  • 4% Other

So what is Centralized Revenue? It’s controlled by MLB and distributed to the teams for any national sources (network tv such as ESPN, MLB.TV, owned assets, merchandising, etc). The simplest way to put it is if the money should be split across multiple teams - it comes through here (such as dividing up the franchising fee for a video game like MLB: The Show).

But the revenue lost is not simply the in-person revenue from tickets, concession, parking, in stadium merchandise right? Well, yes and no. FiveThirtyEight has a great article from this years’ standoff that highlights that while there is some lost revenue, the other portions of the deal are not impacted in the same ways you’d expect. While I highly recommend the whole article, the portions in regards to TV revenue are particularly noteworthy, similar to how the NBA was minimally impacted by the change in season length.

So we’ve talked through the revenue component. We also need to look at cost, players took a pro-rated salary this year earning just 37% of what they normally would. But that’s not all, with huge furloughs, layoffs, limiting of the draft, elimination of 42 minor league teams, cancelation of minor leagues, elimination of stadium positions or upkeep costs, even pro-rating things such as Umpires pay. The owners have taken extensive measures to cut costs.

There are quite a few people out there that are skeptical that the owners will suffer any actual losses this year. (To clarify, the businesses will not make nearly the profits they normally do. But they may not have actually lost money).

With that said, baseball IS a business. People don’t want to admit it. The love affair with the game blinds us to it. A lot of teams don’t just have one owner, but even for the ones that do, it’s an investment and an asset. Just like you’d try to maximize the return for the money you put into your 401k, baseball owners are no different.

So as we approach this off-season, we’re going to be in a very tough place. People that were used to earning $1.2 billion in profit, looked at a much lower return and even potential losses.

The owners have notoriously out negotiated the MLBPA, although sometimes bending the rules to the point of collusion, which the owners have been caught and fined for 3 times previously. In 2020 though, I personally believe that the MLBPA actually won in negotiation, having the actual leverage of a deal that the MLB didn’t think through that did not pro-rate the salary of the players other than by the percentage of games played.

Now, the shoe is back on the other foot, with the owners having leverage of signing and negotiating with the ability to utilize this pandemic to depress salaries. And a quote from the article by FiveThirtyEight earlier “British Prime Minister Winston Churchill: “Never let a good crisis go to waste,” rings true as they head into another set of negotiations.

In seemingly minutes after the postseason ended, there was a flurry of news of teams cutting personnel and even extremely reasonable contract options not being picked up. So begins an off-season that will likely see contract values plummet from where they previously were, a large number of short term contracts, and worst of all a new ugly battle between the MLB and the MLBPA.

Unfortunately, it looks like the nasty public battles to get to an agreement in 2020 will likely pale in comparison to what we will see in the 2020-21 post season and leading up to this next collective bargaining agreement negotiation.

In a time when the world could use a distraction, it seems like baseball is barreling towards a head on collision with another strike/lock-out. And while I’m understanding of both the players and the owners - I hope neither forgets that it hurts the fans who at the end of the day pay the bills.

TLDR

MLB’s books are private and only visible to the owners. Any statements about losses are not able to be supported by data (this does not mean it’s untrue). The owners have a vested interest in this information looking as if they were losing money, not only this year but in general. Independent sources that have studied, believe that the MLB made less money this year, but did not actually lose money. None of this is able to be definitely proven as the books are private, but make logical sense particularly given the reporting that is required from the Braves.

All of this will lead to an off-season of turmoil and a battle between the MLB and the MLBPA.

Interesting Quotes:

Former MLB commissioner Bud Selig took the practice of allocating costs towards player contracts in order to maximize depreciation deductions to new heights when he bought the Seattle Pilots in 1970. Selig bought the Pilots for $10.8 million.28 He allocated 94 percent of the purchase price (or about $10.2 million) to the purchase of player contracts, even though the contracts themselves were only for $607,400 worth of salaries, according to Baseball-Almanac.com.29,30 The remaining purchase price was allocated to the equipment and supplies ($100,000) and the value of the franchise ($500,000).31 The court upheld this allocation.32

Fangraphs quote:

“Over the last four years, player payroll has not moved while baseball-only revenues have increased by a $1 billion, to say nothing of baseball-related revenues that have put billions more in owners’ pockets. Keeping EBITDA close to zero is an accounting strategy that reveals little about the financial health of the sport or its value to its owners. In addition to the large annual increases in franchise value, there’s evidence that owners have reaped $5 billion to $7 billion over the last three seasons above and beyond the costs of owning and operating a franchise.”

Other Links of Interest: