Dispelling myths surrounding the CBA Negotiation p1

If you haven’t heard, the MLB announced their frustration with the negotiating process, and has officially called in a federal mediator to assist in the negotiation between them and the MLBPA, which was quickly declined by the MLBPA.

I wanted to write an article to help dispel a lot of the common myths or immediate arguments people use on both sides of the aisle. I will try to give as clear of a breakdown as possible on some complex topics and will attempt to be as unbiased as possible.

Before I start this article, I want to give a little about my background, and the background of the situation. I personally was member of a union (UA plumbers and pipe fitters), have negotiated site specific collective bargaining agreements (International Union of Operating Engineers), and managed $100 million dollar plus businesses with full P&L responsibility. I don’t say this as a way of claiming expertise, but a level of familiarity with a lot of the topics we’re discussing. I do believe unions can be a great thing providing fair working environments, but also can overstep and ask for too much particularly in a global economy. CBA negotiations are always challenging, similar to negotiating your pay for a job, but doing it for every member of you represent at once. From a business side, there has to be an ability to make a profit to continue to have a business that provides jobs.

I will fully admit, I have been very frustrated by the MLB ownership long prior to this CBA negotiation. They have mishandled every scandal, in my opinion drastically prioritized short term profits over the long term health of baseball, and continued to used very underhanded tactics to persuade the average follower of baseball. (For examples, look at black outs, cutting of MiLB teams, lobbying congress to pay minor leaguers under minimum wage, etc). Now, to be clear, getting the best possible deal is Manfred’s job, and people need to remember he is simply the elected official representing ownership interest. So while I understand the hatred for Manfred, remember, he’s just the person speaking for the owners.

This overall topic is an extremely complex one. So I am going to try to break it down as much as I can for those who aren’t savvy in these areas, but I’m completely open to disagreements and discussions in the comments.

Looking at the Financials

The most common discussion I see on twitter is that this conversation is Millionaires vs Billionaires, while the common fan suffers. To me, this is completely true. One of the biggest challenges in all of this is that the MLB does not have to open their books.

The fact MLB has this exemption is still ridiculous to me, but MLB is not required to show their profits and loss. The closest we can come is publicly traded teams who have to report profitability for federal/investor reasons. To mitigate people seeing that info, they merge it with other portions of their business which gives a blended number, often offsetting their major investments. These numbers are intentionally diluted, but let’s take a deeper dive.

The Braves are owned by Liberty Media. They own a ton of other assets, but as one of the few publicly traded teams, Liberty Media gives a convoluted but glimpse into the profitability of an MLB organization. First, you may remember that the Braves were highlighted in 2020 as they “lost” $298 million in revenue (not profit, sales) from 2019 compared to 2020. With only 60 games played instead of 162, that logically made sense but did not highlight their cost reduction. Payroll was adjusted by the same percentage, only paying the players for game played. None the less the loss of ticket sales, broadcasting rights, parking, concessions, etc. all took their toll.

You likely saw reports that the Braves were now $676 million in debt. What was lost in that translation is how much of the debt came through construction of Truist Park ($297 Mil), The Battery (massive entertainment center, hotels, etc surrounding the park for $206 Mil), new spring training complex ($30 Mil) etc.

Now you may think that’s normal baseball expenses, but to be clear, the expenses of building the Battery (roughly the same square footage as the Empire State Building are funded through the Braves) are counted against the baseball team’s profits and losses.

Last year the Braves won the World Series. That’s a different scenario that you can’t expect from 29/30 teams. Luckily, the Braves reported their Q3 earnings Sept 30th, prior to any playoffs, world series or other earnings outside of their normal.

The results? They were able to reel in $58 million in EBITDA (essentially profits) in Q3. Liberty Media has yet to report their full fiscal year, but the playoffs, WS etc. will take it to a different level. How MLB is reporting it? The Braves increased their debt from $694 to $721 Million. If you’re wondering how that makes sense, it’s due to borrowing cash for the second stage of the Battery’s construction.

To be clear, recovering the costs needed to acquire the business, business operating costs, etc. must be covered for a business to continue to operate. BUT The losses that are claimed are not related to baseball. Of the $234 Million reported revenue in Q3, Liberty Media received $222 million from baseball and $12 million from the Battery. While the Battery’s continued development added another $27 million in debt.

These are crazy numbers. Imagine you owned a business that produced $222,000 in sales (revenue). Of that, you were able to keep $58,000 in salary (profits) after paying employee salaries, expenses, etc. You decide to invest into a huge multi-family house for $400,000+ next to your business, of which you were able to rent out a part for $12,000, and then decide to expand the property. Unfortunately, all in, you “lost” $27,000. Don’t get me wrong, I’m not disagreeing with it being a good investment strategy, but claiming you lost money on the business is simply false. The business made a profit, and you aggressively invested to a point of increasing how much you owed.

In addition to the operating profits listed, there is an intrinsic value to an MLB team that allows for a significant tax shelter, and allows for a team to claim significant losses as the value of the team “depreciates” over the course of the next 15-years.

When acquiring a professional sports franchise, the value of the organization is largely tied to what are classified as intangible assets. Up until 2003, teams were able to claim up to 50% of the purchase price as an intangible asset for the Player contracts. Teams claimed that other aspects such as media rights, facility naming rights, stadium lease agreements, concession agreements, sponsorship agreements, luxury suite agreements, season ticket holder lists, etc. were all assets that lost value every year and should be amortized as intangible assets.

The IRS fought about these classifications for years, ultimately spending hundreds of millions of dollars and establishing specialized enforcement. Why? The IRS believed things such as a TV deal were not an intangible asset, as once the current TV deal expired, it would be replaced by another TV deal. Ultimately, the 2004 American Jobs Creation Act was written which drastically simplified the process allowing for up to 100% of the purchase price to be allocated to intangible assets/goodwill and amortized across 15 years. The IRS’ belief was that the reduction in annual tax benefit by spreading it over more time, thus reducing turn-over in sports franchise ownership would result in additional taxes being collected.

The team, and their owners, are able to show the organization “losing value” as time passes and show a reduced profitability thus reducing what they owe in annual taxes (and claim that the league is losing tons of money).

I am not able to find any detailed break-out of what Liberty Media classified as intangible assets with their purchase of the Braves, although they have claimed roughly $71 million (2019), $76 Million (2018), and $67 Million (2017) in depreciation/amortization. Not all of that is related to the purchase of the team as there are depreciating tangible assets as well.

How important is the tax benefit? Bloomberg highlighted it in this quote:

“So clearly, part of what a sports team buyer is paying for is this tax treatment. How big a part? University of Michigan sports economist Ray Fort estimated in 2006 that tax breaks and a few other ancillary benefits to owners might account for 19 percent or more of the sale value of Major League Baseball teams.”

19% is a huge percentage of a teams value for a tax benefit not often highlighted. Why is this so valuable?

Being extremely conservative (as there are estimates of 90%+ of an organization being amortized this way), we will say that the Braves are amortizing 66% of the ~$1.275 billion acquisition price (What the Nets used, prior to the policy change and one of the only fully detailed break outs I could find).

That means Liberty Media would be stating $841.5 million of the $1.275 billion in value is lost over the next 15 years. Assuming they use a straight line model, it would mean that they can claim $56.1 Million a year is “lost” on the value of the player contracts, sponsorship, tv rights, etc.

So while the Braves business had an operating profit of $54 Million in 2019, from just this very conservative estimate, they’d not only not pay taxes on the $54 million, they’d also be able to eliminate an additional $2.1 million in taxable profits from other business units (or personal for other organizations). The estimates of tax savings are often in the hundreds of millions over the course of the deal.

When the organization is sold, they of course will have to pay taxes on the gains. These gains are taxed at a lower amount due to their classification, and paying these taxes in 15 years of course does not have the same monetary value as paying them today due to inflation.

So while teams are not lying when they say they lost money based on tax accounting, it’s a very misleading statement and has little to do with the actual day to day profitability of the team itself.

With that said, the owners SHOULD be making money. Baseball, as much as we hate to think of it this way is a business.

Players Create 100% of the Value

For all of those who claim that the players make 100% of the product, that’s simply incorrect. While the players are the primary visual representative of the product, there’s obviously a ton that goes into making baseball profitable. Starting with the things you actually see, there are announcers calling the game, umpires making the calls, trainers improving the players, coaches leading the strategies.

And that’s still just the tip of the iceberg. There’s an entire maintenance staff that is larger than the 40-man roster maintaining the stadium, security guards, people selling concessions, people selling tickets, people collecting tickets etc. Then you get into the broadcasting team putting the team on major networks, marketing people to draw fans to the stands, entire front office and analytical staff which the Astros in particular can attest to the importance of. The list is nearly never ending. All are a part of what people buy as a product in an MLB team. There’s simply more to a team than the name on the back of a jersey.

Player Salaries Drive up the Price of Tickets

Let’s dispel the notion that player contracts directly correlate to the ticket pricing. While it conceptually makes sense that it would, the team will be charging what they believe the market will allow.

To dispel this myth, I wanted to take a look at 2 different metrics. First is the average cost of a ticket which Statista shows rising from $29.94 in 2015 to $34.21 in 2021 (14.2% increase). According to Forbes, total MLB Salary last year came in at $4,050,986,036, which was a 3.99% increase over the 3,895,420,333 in 2015.

NBC wrote an article about how the payroll and cost to attend are not linked, with a very similar finding from Rob Arthur’s column on Baseball Prospectus. Neither of these articles or the ones completed by Jon Morgan in 1998, nor Nater Silvers back in 2003 found a high degree of correlation between player salary and ticket prices.

“The reason for this is manyfold, starting with the basic observation that the equation for an owner to set team prices is dependent many more factors than just his player payroll. Things like the team’s current competitiveness and general popularity, the presence of impactful marketable players, the area in which the team resides, and the general place on the expendable income ladder most of the city’s residents stand can all impact the price, arguably much more than player salaries.”

Additionally, there have been numerous times where despite slashing payroll, teams have increased ticket costs. Mercury News wrote an article about the A’s massive jump in ticket pricing going into 2022, even as all indications point to them being major sellers to the point of Ken Rosenthal stating the team will likely trade almost every player with value on their roster, and allowing their manager to leave to save $4 Million.

They’re overpaid to play a kids game

The last argument I consistently see is that people can’t feel bad for the players, making millions just to play a kids game. Now that’s an argument I don’t believe anyone can dispel as it’s a gut feeling. I’d argue it’s no different than a person paid millions just to sing, or do any other entertainment skill to the highest level. But let’s start with the “millionaires” portion.

The vast majority of players aren’t millionaires. Our sister site, Beyond the Box Score did an excellent in-depth article in 2019 on the, to analyze the percentages. If you’re looking at just the 40 man rosters (and IL), just 31.4% of players reached the millionaire status. (admittedly, there focus was on salary, not net worth)

They took it a step further, looking at the miniscule wages of the minor league players, and while the top 64 on the draft had hefty signing bonuses, 40% of draftees received a signing bonus of $10,000 or less. They then played for less than minimum wage for 3-6 years, including not being paid for things like Spring Training at all.

With all that said, I do understand the sentiment of players being paid too much, particularly when the focus of every off-season is about the players who do make it to their big pay day.

In the next article, we will take a detailed look at the different asks by both the MLB and the MLBPA and I’ll try to explain the impact and whether I personally believe the asks to be fair or not. I look forward to the comments section, and encourage people to debate parts of the article you disagree with. Tell me what your thoughts are as baseball continues to be in the stalemate of a lock-out.