August 15, 2014

Playing with House Money: Why I think the Dolans should consider selling the Indians

The Dolan family needs to step away from the blackjack table and leave the casino with house money well in hand.

After selling STO to FOX, they need to go to the next level and sell the team before they lose any of that money they just “won.” This is the only way I know how to describe what just occurred with their sale of STO to FOX Sports for an estimated $230 million while also selling the broadcast rights for $40 million a year.

First of all, this isn’t some angry fan thing that is telling the Dolans to go away. This is purely how I see it in light of the recent business victory the Dolan family scored. Some may think it’s wrong to liken the situation to gambling when the Dolan family built STO in order to leverage the Indians’ broadcasting rights. They built a new company and sold it, so why would that be anything like gambling?

Well, first, I am trying to figure out what exactly FOX just bought. No offense to any of the STO employees. This has nothing to do with shows on the network or the broadcast quality. This is just the fact that STO is mostly co-located with WKYC in Cleveland. Presumably the only thing that FOX actually got for their nearly quarter of a billion dollars as far as I can tell, was pre-negotiated carrier fees with the likes of Time Warner Cable, DirecTV and other carriers in the Indians viewing area and a couple league partners like OHSAA.

That obviously has some value as it produces cash flow that will now benefit FOX, but think of it this way. FOX didn’t really need STO. Everything that STO does is completely within the existing competency of FOX’s business from the production and broadcasting all the way to negotiating subscription fees with TV carriers. So, did FOX just pay all that money for a minor shortcut in negotiations?

I would assume that really all FOX wanted were the rights to the Indians, which they still have to pay the Indians $40 million per year to get. Remember that FOX didn’t get a discount on the $40 million either. This number is monitored and audited by MLB to make sure that teams are maxing out value so as not to hurt the overall bargaining power of MLB as a whole.

So in essence they had to pay an estimated $230 million ransom to the Dolan family in order to get the Indians broadcast rights. All told, FOX just paid $630 million in order to acquire something that should have cost only $400 million. In any other market where FOX might bid against another TV company, they’d presumably just have to come in with the highest offer for broadcast rights without having to acquire a company they really probably didn’t even want.

And good for the Dolans. They found a way to use their ownership of the Indians to score a $230 million windfall that is outside the auspices of the game and shared revenue. It’s a one-time event though and they should probably just complete this transaction and sell the Indians now. They achieved a huge business coup making that money and now they’re just risking giving it back via spending on the baseball operations. This influx is presumably a one-time opportunity as FOX Sports Ohio is locked into the Indians for 10 years with their rights deal. And even an influx of $230 million doesn’t really help the Indians compete in an appreciable way in MLB.

The Anaheim Angels have a TV deal worth an estimated $3 billion over 20 years. That’s $150 million per year and these are the guys who will always be signing the Josh Hamilton and Albert Pujols type free agents. Even if the Indians decided to spend all of their newfound cash it means the team could only afford one really really top line free agent over a 10-year span assuming they find a guy they deem to be worth north of $20 million per year.

So, the way I see it, why wouldn’t the Dolan family sell the team?

Even based on Forbes’ sometimes fuzzy math the Indians were worth $410 million a year ago. Since that time the team signed a new TV deal and has the benefit of new national TV deals estimated to jump from about $10 million per year to $23 million per year in the near future. So, even coming off a very frustrating season on the field, it’s never been a better time to sell the team. Businesses always derive their greatest value from cash flow and revenue, and sports is no exception. Over the long run, winning will improve the value of a team, but the baseline value will almost always be driven by cash flows first and other factors second. Knowing that both those things – revenue and presumably cash flow – will be jumping via guaranteed contract soon means that the Dolans are in the driver’s seat with potential buyers.

As I said in the open, this isn’t just reactionary fan recommendation to try and get a new owner either. There is no guarantee that anyone who buys the Indians will find a way to do it better or will be willing to deficit-spend in order to put the best team on the field against impossible systemic economics in the game. You know, “the devil you know” and all that jazz. Just from a pure business standpoint, if I was a member of the Dolan family, I’d be telling my family that we just had the biggest Vegas run in history. We won, but we can only realize the victory if we take the next step and walk out the front door of the casino with our winnings. Until the Dolan family does that, the money is at-risk.

  • Penis

    Umm maybe because there are no real buyers out there?

  • http://www.waitingfornextyear.com Craig Lyndall

    So you’re telling me there was $623 million in value for the Tribe’s TV rights, but not enough value in the actual team where it could be sold? Seems silly to me. There are always people who want to buy even the worst baseball teams.

  • Kildawg

    We need a diehard Indians fan with billions (another major (recognizable) business CEO maybe, the Cavs and Browns have those owners). Wonder if Charlie Sheen would be interested as part of an ownership team? (It worked with Magic and the Dodgers right?)

  • http://www.waitingfornextyear.com/ Scott @ WFNY

    You’re defending your stance to someone who *chose* to go by the pseudonym of “penis.” Just thought I’d add some context :)

  • Steve

    I’m not sure why you are assuming that FOX is looking to buy the Indians. As we’ve seen all this tv money being thrown around, broadcasting sporting events is incredibly profitable. FOX will do just fine by just broadcasting the games.

    And why wouldn’t the Dolans sell? For the same reason someone else would buy. The team can be run profitably. If the Dolans should be stepping away from the table because they’ve likely maxed out their profit, then we’re just hoping someone is dumb enough to buy high in a market that doesn’t have a whole lot more potential.

  • http://www.waitingfornextyear.com Craig Lyndall

    I don’t think FOX should or would buy the Indians.

  • Matt underwood

    FoxNews and Warren, Ohio’s own Roger Ailes has said his life long dream (besides spreading misinformation) is to own the cleveland Indians.

  • mgbode

    Padres television rights sold for $40mil/year for 30yrs
    Indians television rights essentially sold for $63mil/year for 10yrs (so, a gamble that prices continue to rise, but also a chance at getting more later – potential may be appealing to prospective owners).

  • Huge hard on.

    What’s wrong with penis?

  • Natedawg86

    Winner Winner SHEEN dinner!

  • Natedawg86

    He may have forgotten the space. He may have meant Pen is.

  • zonk

    That was not fair or balanced Matty.

  • thepaledragon

    Who would buy the Indians?

    And if the Dolans were interested in selling, wouldn’t it have made more sense for them to bundle STO with the Tribe, and then the buyer could turn around and flip STO to FOX?

  • The_Real_Shamrock

    Randy Lerner? LooooooooooooooooooooooooooooooooooooooooooooooooL

  • http://twitter.com/danimalCarroll Daniel Carroll

    Fact: Larry Dolan bought the Indians for his family to basically run as a family business. He (and Paul, who now runs the team) are not selling.

    Larry Dolan is a good man (I’m not talking owner, he’s a good Man). He’s a fan, who bought the team to keep it in Cleveland, run it like a business (because he has to, he’s not a billionaire as everyone has mentioned), and keep it in his family.

    Paul Dolan is a smart guy. I’m sure he knows he just hit a “once-in-an-ownership” jackpot. But guess what, they aren’t walking away from the table. Not now, and not in (at least) Larry Dolan’s lifetime. Imagine if your lifelong goal was to own your favorite team. You wouldn’t sell as soon as you made a buck would you?

  • D

    I work in the Broadcast industry so let me add some context to this. Its not hard to see why FOX Sports wanted to buy STO if you put it into the larger context of what FOX is currently doing. First, the rights to the Indians games were key to the deal, yes, but they bought STO for the same reason they bought a percentage of the YES Network in New York, FOX wants to dominate sports broadcasting, period. They are gearing up for the launch of FOX Sports 1, a FOX News style national competitor to ESPN, and they want to have as many broadcast deals in place as possible to give them strong sports content to make a legitimate ESPN competitor. The STO deal, the YES deal and all of the other deals that they’ve been making are part of that. Bringing it back to a local focus, in broadcasting circles it’s currently being said that FOX may continue to operate STO as a second network so that they can expand the coverage of the content that they already have the rights to on FSO. So it was worth it to FOX to buy STO, not just for the Indians broadcast rights, which helps their national plans, but locally and statewide it gives them another network to add their content to, making them the dominate sports broadcaster in Ohio, which is what they REALLY want. Cleveland is a top 25 media market, so being the dominant leader in a top 25 market still means something.

  • Roosevelt

    I never get the discussions or surprise about broadcast rights and deals. Sports are not the only media property in the world. Surely there has to be a rough price for programming hours multiplied by the number of viewers, right? So it’s either worth the money or it’s not. How many people watch, I dunno, Jersey Shore reruns, and how much do stations pay to air it? Why do you never see TV shows with clearly discernible rating outlooks get sold for eight times as much as people thought they were worth, the way the Dodgers were?

  • WFNY_DP

    “Bringing it back to a local focus, in broadcasting circles it’s currently being said that FOX may continue to operate STO as a second network so that they can expand the coverage of the content that they already have the rights to on FSO.”

    As someone who lives in Columbus and would presumably have to watch Reds games on FSO, this is my biggest concern.

  • Chuck Schick

    Not sure, but I highly doubt that whole $230 million was profit. I’m sure that STO was not cheap to start up and run.

  • WFNY_DP

    “…then we’re just hoping someone is dumb enough to buy high in a market that doesn’t have a whole lot more potential.”

    Funny, because this is EXACTLY what Larry Dolan did when he bought the team.

  • WFNY_DP

    “I’ll take The Penis Mightier for 400 please!”

  • nktribe43420

    By buying STO, FSN-OH also gives them an opportunity to fold their alternative programming into an already existing entity, which probably makes them money in the long run when they have to pay carriage fees for them as well. Right now, FSN-OH runs the Cleveland and Cincinnati branches (CLE carries the Cavs, Cinci carries the Reds and the Blue Jackets when there isn’t a hockey strike). In NW Ohio, I get both. Now they can fold STO which basically doesn’t have a lot of winter sports to carry into the operation so instead of paying to carry 3 networks, they will only pay for 1 (since the STO fees were already negotiated).

  • steve-o

    If they sell now they will realize additional profit and get murdered in taxes. If they keep the Indians, they can save around $.50 on the dollar by investing in their team. As an added bonus, if the team improves it will increase the franchise value, yet it will still probably show a book loss. That way the Dolans can increase their wealth while also reducing their tax bill.