Cash Flow

Fields and Streams

Major-league clubs may keep their books differently, but they get their money from the same sources. Some just get a lot more than others.
Stephen TaubFebruary 14, 2002

In his appearance before Congress on December 6, Major League Baseball Commissioner Bud Selig painted a bleak picture of the economic health of the game. Selig said league debt tops $3 billion. Add deferred compensation and future guaranteed obligations to players, noted the commissioner, and that figure approaches $8 billion. “Needless to say, those numbers are the highest in baseball history,” Selig told lawmakers contemplating baseball’s antitrust exemption. And, he added, “they are still growing rapidly.”

Moreover, Selig told the House committee that, from 1995 to 1999, teams lost more than $1 billion in operations alone. During that time, just three teams — the New York Yankees, the Colorado Rockies, and the Cleveland Indians — turned a profit. Cumulative operating losses over the seven-year period ending in 2001 swelled to almost $1.4 billion. Only two teams were in the black (on an operations basis) during that period: the Indians and the Yankees.

Keep in mind, however, that the old days when clubs made their money mostly off tickets and hot dogs is long gone.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Generally speaking, major-league clubs have three sources of income. Local revenue, which includes ticket sales, skybox rentals, local TV, cable and radio broadcasting rights fees, concession sales, parking fees, and team sponsorships, generates the biggest chunk of change. Teams that have seen their payrolls skyrocket — and that’s most of them — simply pass on those increases in SG&A to fans.

According to Team Marketing Report, average ticket prices have more than tripled the rate of inflation over the past five years. Hence, a family of four typically spends, on average, $145.83 each time it attends a baseball game, up 36 percent from 1997.

Clubs also get a cut of central fund revenues — cash generated by national TV contracts and licensing deals. In addition, many teams receive some sort of revenue sharing. Introduced in 1996, revenue sharing is intended to redistribute 20 percent of total local revenue (net of expenses) from higher-revenue teams to lower-revenue teams.

Last year each major-league team received $24.4 million from the central fund. These national revenues played very different roles on teams’ income statements, however.

For example, the payouts accounted for more than 70 percent of the Montreal Expos’ total operating revenues of about $34 million. Revenue-sharing funds composed about 43 percent of the Minnesota Twins’ total operating revenues of $56.3 million (excluding money received from other teams).

Compare those percentages with that of the New York Yankees, whose central-fund revenue accounted for only 10 percent of the more than $242 million in turnover the club reported last season.

What accounts for the huge disparity in the overall revenue generated by the 30 teams in Major League Baseball? Local revenue. Clubs in the largest cities, such as New York, Chicago, and Los Angeles, charge higher prices for tickets, sky boxes, and rights fees to broadcast the games on TV or radio.

Those teams can also charge more for advertising. For example, Los Angeles generated $92 million in 2001 from all local sources, excluding broadcasting rights — third in the league. Only the Yankees ($145 million) and New York Mets ($112 million) reported higher numbers.

In addition, many teams now play in new stadiums, which offer scores of expensive sky boxes, as well as elaborate concession operations. In 2001, for instance, the Cleveland Indians, who play in spiffy Jacobs Field, racked up nearly $70 million in ticket sales alone — and nearly $115 million from all local sources (again, excluding broadcasting rights).

The Baltimore Orioles, a team that had a lousy season but played in a great stadium, actually did better than that, raking in around $83 million in nonbroadcasting local revenues. New stadiums also boosted nonbroadcasting local revenues for the San Francisco Giants ($129 million) and Seattle Mariners ($133 million).

Local media revenues also differ by a wide margin. Smaller-market cities such as Kansas City, St. Louis, Milwaukee, and Minneapolis each generated only $6 million to $8 million from local TV, cable ,and radio, according to Commissioner Selig’s report.

This contrasts with the Yankees, which brought in $56.7 million from their local broadcasting rights. Their crosstown rivals, the Mets, received more than $46 million. In fact, the two New York teams alone accounted for roughly 18 percent of Major League Baseball’s total local media revenues last year.

This explains why teams like the Yankees, Mets, and Dodgers can afford to pay more for players. Overall, the average MLB team paid more than $71 million in salaries and benefits last year. But the Red Sox shelled out a whopping $118 million on payroll, with the Yankees spending just slightly less than that.

By contrast, the two teams once rumored to be getting the boot from MLB kicked in far less. The Montreal Expos only ponied up about $38 million on salaries, while the Twins spent a paltry $30 million on its players. Neither team made it to the playoffs.

Moral of the story: It’s hard to compete when you’re outspent by a margin of almost four to one.