CODNP Day 90: Baseball Not Profitable? Really?

Let me preface this, as I do often when ownership comes up, with the following statements.  I’m glad that the DeWitts are in charge of the Cardinals.  I most definitely appreciate their tenure as owners, as it is not a coincidence it comes at the same time as the best stretch of baseball in Cardinal history.  I’ve often disagreed with those that find them cheap (my first series I ever did was on the topic a long, long time ago) and while that’s been a bit harder to swallow of late, there still is plenty of evidence that they spend money.  (You could argue how or when, but that’s a different story.)  All in all, there are much worse owners in baseball and have been worse ones in Cardinal history, for those of us that remember the last years of brewery ownership.

That said, I don’t know that Mr. DeWitt did himself any favors in an interview with Frank Cusumano yesterday.  Here are some of the highlights.

Where to begin….

*If baseball isn’t profitable, if it’s not at least a good source of income, why in the world would anyone buy the Kansas City Royals for $1 billion?  It’s not that KC is such a great place to live.  It’s not because the Royals have some sort of cache.  It’s because those looked at the numbers and felt they would make more than they were shelling out.  That wouldn’t happen if there wasn’t a good return on investment happening.

*No major league baseball team, without some sort of outside problem, has filed bankruptcy recently.  From this list, which itself is from 2011 and pretty sure there’s not been any since then, you have the 1970 Seattle Pilots, who had been in the league just a year and weren’t on the steadiest of footing (this also got us Bud Selig as commissioner indirectly, so it’s got its own problems), the 1993 Baltimore Orioles (because Eli Jacobs’s main source of income, Memorex, hit the skids), and the 2010 Texas Rangers (the article states that Tom Hicks defaulted on his loans, though not sure if they were baseball or otherwise).  The article was written because the Dodgers were going into bankruptcy in 2011 because Frank McCourt was a terrible owner.

*Which actually leads me to something I read just a few minutes ago.  Still trying to work through the last pages of Selig’s book, he briefly touches on the McCourt era and talks about how bad of an owner he was, “like a ham-fisted shortstop” was the description.  He almost destroyed a crown jewel of baseball….and then sold them for $2 billion.  If someone that had no sense at all, who is beset with all sorts of problems, can make that kind of money on a sale, that has to be mean there’s something to this.

Now, let’s be fair.  There’s the view point that this is an investment, not a cash flow generator.  A person might buy into a team that isn’t making money on the idea that, in 10-15 years when they want to sell it, it’ll be worth double what they paid for it.  After all, that’s what a lot of people do with their retirement, right?  They put it in a mutual fund and don’t necessarily look at the daily ups and downs of the value until it is time for them to retire and cash out.

That said, though, value doesn’t just go up because time has passed.  There has to be some sort of underlying economic boost to it.  If teams continued to lose money on a regular basis, the value of major league teams wouldn’t increase, it would decrease.  There wouldn’t be a market for a money sink.  After all, it’s got a better return than the alternatives.

*I think Jon Doble may well have a point here:

Most all of the MLB owners have made money in businesses outside of baseball. A LOT of money, which is how they were able to buy a baseball team (well, their group) in the first place.  While knowing how to run a specific business doesn’t mean you’ll be good at another specific business, they should have a pretty good grasp on a lot of business concepts.  When you look at all the money coming into baseball, if they aren’t making a profit, that might indicate a significant lack of business acumen, something that they’ve not shown in the rest of their lives.

Craig Edwards, who seems to have a good piece out every day, has one out showing the per-game losses given the information that we have.  It should be noted that, even without fans, about five teams would make a profit even without national TV money being included.  Granted, teams like the Cardinals, who rely more on the 3.5 million fans coming through the turnstiles, aren’t well off, but it is actually possible to make money without fans in the stands and that is a crazy concept.

*Mr. DeWitt says that the players have audited financial statements.  From all indication, those financials were heavily redacted, so if that’s the case then it becomes difficult to know exactly where the issues are.  Also, some rights fees might be less than market value given that the team owns the broadcaster (like the Yankees) or has a share in their broadcaster (like the Cardinals).  If the footnote disclosures don’t line all that out, the bottom line might look much less rosy than it actually is.  If he is accurate in saying that they are audited financial statements, then (and I say that as a auditor of financial statements), that’s good.  There’s an independence that’s required for an audit and I imagine those statements are used for bank loans and the like.  So I would not believe the numbers are false, but there are a lot of ways to make things dance.  An assumption here, a principal there, and suddenly it’s a different situation (especially if they are ones different than given to the bankers).  Of course, those sort of financial statements showed that the Braves are making quite a bit of money for their publicly-owned corporation owners.

Let’s look at this whole thing from the perspective of the owners, though, for once.  They are paying all their front office staff, they are paying the minor leaguers, they have advanced money to the major leaguers.  They’ve got mortgage payments on stadiums and various baseball facilities.  They are paying for scouts and their travel as we get ready for the draft (though obviously that travel is much more limited than it normally is.)  There’s a lot of money going out and, as we’ve said above, this may not be exactly a huge cash flow machine for some owners anyway.  I have no doubt that they are feeling the pinch without television revenue coming in.  I can understand why they would want to try to stem some of the tide of money going out by asking for cuts or trying to reduce the season.  There’s some merit there.

It’s just counteracted by the fact that when times are good, they are still trying to squeeze every nickel.  When all that money was flowing, the free agent market went cold.  When everything was roaring right along, they wanted to contract the minor leagues to save what amounted to pennies.  And, of course, even in this stoppage and in this pandemic, Bill DeWitt can buy an $8 million house in California.  If nothing else, man, read the room.  Use some shell companies if you have to get it now.

Without fair and open accounting, the players are never going to trust the owners and the owners aren’t going to back off on their demands.  Seems like that small sample size of a season is heading our way!

EDIT: Later in the afternoon, Jeff Jones talked with John Mozeliak, who as GM would find himself sort of in the middle on this whole thing, I would think.

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