In August of 2010, Deadspin.com got a hold of a few MLB teams’ internal financial statements. This was kind of big deal, since baseball teams are private companies, and private companies do not typically go around disclosing their financial activity to anyone and everyone with an internet connection. We were finally going to get to see things like total revenue figures not just for home attendance, but for revenue sharing deals, broadcasting rights, and stadium naming contracts. On top of that, we’d get to see various expense items as well as bottom line figures like net profit (or loss). In other words, we’d be privy to a bunch of stuff that MLB and its teams hoped to keep hidden. Yes, this made the voyeur in all of us very happy. It also made MLB very mad; Selig petitioned a New York judge to “help plug its leaks”. Gross? Maybe. Fun? Absolutely.
It turned out that despite my most ardent wishes, the Indians were not among the six teams whose private finances were leaked. Oh, the times we could have had, Internet! The Pittsburgh Pirates weren’t so lucky, and their dirty secrets were particularly dirty: in 2007 and 2008, the Pirates averaged $51 million per year in player salaries (that’s low), yet they had some of the biggest profits of any revealed team—nearly $22 million in 2008 alone.
This was not well-received news in Pittsburgh. After all, the Pirates’ owners had consistently cried poor throughout the 2000’s when fans and media questioned the club’s exceptionally low payrolls. How was it that this team, sporting the longest-tenured streak of losing seasons in professional sports history, was making money? How was it possible especially when teams like the Rangers and Angels, who were spending money and making it to the playoffs, were losing money?
Well, from there, it wasn’t too far of a jump for people to superimpose the Pirates’ finances onto the Indians’ reality. After all, it’s hard to imagine a team more similar to the Indians than the Pirates: low payroll, low revenue, rust belt city, best days behind them, etc. And if the Pirates were making profits hand over fist, well, hey, anything is possible, right? I even wrote a piece wondering about it all.
But really, I didn’t have anything to go on when I wrote that piece. Sure, I knew that the Pirates were making money, but that didn’t mean all low-payroll teams were making money. The Marlins, after all, had their documents leaked too. And they made a whopping $3,900 in 2009. That’s a used Datsun.
So why bring any of this up now? Well, a few things happened this offseason that intrigued me and got me thinking about team finances all over again. The Angels used their new TV deal—worth $3 billion over 20 years—to sign Albert Pujols and CJ Wilson. The Rangers countered by using their new $1.6 billion TV deal to sign Yu Darvish from Japan. The Padres recently signed a new TV deal for $1 billion that could provide up to $70 million annually once the deal matures.
The natural question, in light of all this, is to wonder how the Indians are stacking up (or how they can possibly stack up) with these sorts of figures. The Indians, as I’m sure you are aware, are broadcast on STO, a network that is wholly owned by the Dolans, the same family that owns the Indians. However, STO and the Cleveland Indians are entirely separate operating entities, so the network actually pays the team a fee for the broadcast rights. I wondered if there wasn’t anything interesting to find by barking up this tree, despite the private nature of both companies.
A few short searches later, I came across a piece from the Plain Dealer written by Bill Lubinger last month. Bill does a nice job of establishing the growing influence of TV contracts on MLB revenue streams and the consequent effect on player salaries, but what interested me most were a couple of quotes regarding the Indians’ current TV situation:
“STO has paid the Indians about $30 million a year for broadcast rights since it was founded”
And later:
“STO had about 3 million subscribers in 2011, with $85 million in operating revenue and $21 million in cash flow.”
Bill cites SNL Kagan—a market research and analytics firm covering, among other things, the media and communications industries—as his source for those figures. Unfortunately, the company’s materials are buried behind a subscription service and I wasn’t able to look at the numbers or models myself. Instead, I emailed with Bill briefly to discuss the figures and, if accurate, what they might mean for the Indians.
What I took away from the article and the subsequent emails was, to be honest, pretty troubling on at least two accounts. First, if STO is actually generating $85 million in revenue and $21 million in positive cash flow, that would make the company itself a fairly profitable enterprise.* Now, far be it from me to begrudge a private company its hard-earned profits, but pocketing $20 million off of an incestuous TV deal while telling the fanbase that “now isn’t the right time to spend”? Well, that certainly doesn’t look very good, and I hope these sorts of questions are posed to the ownership group at some point. Furthermore, despite MLB’s assurances that these sorts of deals are assessed at fair market value, if SNL Kagan’s numbers are accurate then it would seem that Indians are giving STO something of a sweetheart deal here.
*I should mention that in a prior life I worked in market research, and I know firsthand how impenetrable private companies’ financials can be. Without impugning the integrity of SNL Kagan or its methods, we should at least admit that these numbers are at best approximations and at worst complete fictions.
If, on the other hand, STO is in financial trouble and is up for sale—reported last year by Vince Grzegorek at Cleveland Scene and later by WFNY—then we’re really no better off.* In the first scenario, the ownership is shifting piles of money from one property to another in order to trim the team’s payroll. In the second, there’s no money to shift. Neither bodes particularly well for the team going forward.
* I was not involved in the WFNY report regarding STO and did not speak to the sources discussed therein.
But even more than these particular problems, I was struck by the amplifier effect that TV deals seem to be having on MLB’s growing economic parity problem. It’s one thing to have trouble selling tickets, where the difference between 2 million and 3 million fans in terms of total receipts is, in the big scheme of things, fairly minor. The difference in these TV deals is, on the other hand, massive. The Angels’ new deal will pay the team roughly $150 million per season for the next 20 years. That’s five times what STO is reportedly paying the Indians. There is no competing with that, and no matter who pays to broadcast the Tribe games down the road, the team will never be able to generate that sort of revenue stream. There just aren’t that many TVs in Ohio.
From this perspective, it would hardly matter if the Dolans are using STO to divert some money toward their pockets: it’s all chump change when you compare it to what the larger media markets can expect. If you think about it too much, you just get depressed and reach for the decanter. At least I do.
But perhaps this is all a good thing for the sport. I’m starting to come around to the notion—popular in middle-age, I’m told—that things must get worse before they get better. As the money from local TV contracts continues to explode, the disparities in revenue will become markedly more defined. There will develop more entrenched and permanent distinctions between the “haves” and the “have nots”. Things will become so obviously broken that it will become impossible to ignore: no wallpaper will be able to cover the gap between the rich and the poor, and the fans will start to look away in disgust.
That, of course, is the best case scenario. There’s also the possibility that we’ll all just have another hot dog and root-root-root for the home team.
