Joe Posnanski has an interesting post up about the relationship between revenue and payroll. As he's so skilled at doing, he turns a common assumption on its head:
You know, we focus a lot here on team payrolls … and those payroll numbers can be pretty stark. This year, for instance, the Yankees $206 million payroll is $44 million more than any other team and at least double the payroll of 22 teams (and six times the payroll of the Pittsburgh Pirates).
But people who know a lot more about accounting and such have told me for a long time that payroll is not the issue — REVENUE is the issue. And when you look at the Forbes numbers, yes, it does seem to ring true that salaries are driven by revenue and not the other way around … that is to say that your ticket price didn’t go up because Roy Halladay got a $60 million extension, but instead Roy Halladay got a $60 million extension because of the price of your Philadelphia ticket (and all the other Phillies revenue streams — the Phillies made $233 million in revenue in 2009, sixth-most in baseball).
As you surely know, the Dodgers are trending in reverse. After bringing in $247 million last season, fourth-most in baseball, the Dodgers have trimmed their payroll to about $95 million (according to USA Today). Those Phillies, on the other hand, parlayed their $233 revenue in 2009 to a 2010 payroll of about $142 million.
To put this in some perspective, using Posnanski's methodology: the Dodgers' revenue grew by $7 million from 2008 to 2009, yet the payroll dropped about $30 million from 2009 to 2010.* Conversely, the Phillies' payroll jumped by $13 million from 2009 to 2010* on the strength of a $17 million revenue increase from the corresponding previous seasons.
*The 2009 figures are Forbes', which accounts for total player costs. The 2010 USA Today figures only consider the Opening Day roster.
The Phillies aren't the only example, of course. Suffice it to say that the norm is exactly what Posnanski suggests: increased revenues lead to increased payroll, not the other way around. Another way to approach the topic is the percentage of revenue spent on baseball operations (a figure which includes payroll). If a team spends 100% of its actual revenue on baseball operations, it neither gains nor loses money on the year. In 2008, the Dodgers spent 93% of club revenue on baseball operations, 61.5% of which went to payroll. In 2009, the Dodgers spent 86.5% of club revenue on baseball operations, 58.4% of which went to payroll. This season, the Dodgers figure to do wonderfully at the gate, while the team carries the second-lowest payroll of the McCourt era.
I'm not sure that any hard conclusions can be drawn from this data. Forbes' figures aren't gospel, and we know the financial structure of the Dodgers is quite complex. It's certainly interesting, though, that the Dodgers' ratios are inverted. The club is spending a little more on non-player expenses while taking more of the revenues out of the team. All winter long, Frank McCourt wanted us to know that the divorce hasn't affected the organization. And yet, every time numbers come out tracking the Dodgers' income and expenses, spending on the team looks down and profit-taking looks up. Considering, as we've been asked, that Frank doesn't have any cash to spare, one has to wonder where the heck it is.
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I think we can assume that non-player baseball expenses will continue to increase as the McCheap's keep borrowing money and their interest expense keeps rising. Seems very similar to our state and federal government budgets. The big difference is that the feds can print money when they need it and the state can raise taxes. Put can the McCourt's raise prices on everything in the stadium when they put a product on the field that looks like the current Dodgers?? I mean seriously, we have a knuckleballer for a starter???
ReplyDeleteThe McCourts were probably under certain restrictions from Private Placement investors to keep overhead down on conditions of the loans.
ReplyDeleteWhat is scary is that they took out more loans or use the loans to open credit lines, which is just a very dangerous practice. Ticket Sales, for example aren't going to the Dodgers, but a bank or private placement investors, because Frank hocked them for short term cash.
I am really concern that Frank and the Dodgers have wreck their credit rating that they can't get commercial paper, or any type of unsecure loan.
If there is a business that practices creative accounting, it is major league baseball and major league baseball teams
I don't have a problem with monetizing the ticket revenues. It's smart business. Now, taking something like 15% of that cash off the top for personal use is a little ridiculous when placed in this context.
ReplyDeleteBut you're completely right about the murkiness of the numbers. How far up and down the McCourt Enterprise structure did Forbes look? Were the entities Forbes didn't look at gaining or losing money?
It isn't smart business to collateralized the ticket sales for short term cash, when pretty much every piece of other part of the business is secure for loans. It gives management very little wiggle room. It is just more debt..
ReplyDeleteForbes's valuation of MLB baseball team is a bit subjective. A large chunk of valuation is marketplace. It is difficult to appraise a team's value based on marketplace, because the value is based on future earnings and market potential, rather what is in the bank. Credit rating of the Dodgers is a better valuation.
For example, the Dodgers have plans to start their own network after the Fox contract ends in 2014. Given its market, fan loyalty, the revenue streams of YES and NESN, it should be a no brainer. However, the Dodgers have to go to the Banks or raise capital to start the network, which isn't going to be easy if they have nothing to secure the loans.
My guess is they will sign up with a major media conglomerate to get the quick cash for the TV rights in 2014, or re sign with Fox. The Dodgers don't have much financial wiggle room.