In the world of Major League Baseball franchise ownership, here’s what doesn’t matter. Owners being excessively wealthy, or being a lot richer than the owners of other Major League Baseball teams.
The commonly repeated myth goes something like this: “rich” baseball owners are able to write endless checks at their whim to secure multi-year deals for high end players year after year. You know, because they’re so wealthy.
Recently no team has been accused more than the Los Angeles Dodgers– AKA the West Coast New York Yankees– of having free-wheeling, serial check-writing owners.
The inside out of MLB franchise ownership and financial management is complex, and the nonexistent business degree on my office wall only hints at the lack of my corporate finance expertise. (But I do have a research degree– thank you Cot’s Baseball Contracts, FanGraphs, MLB Trade Rumors, and the L A Times).
There are many popular myths about how all this ownership stuff works begging to be debunked. Nothing illustrates that better than the many misconceptions about the Guggenheim Baseball Management group, who purchased the Los Angeles Dodgers out of bankruptcy court in 2012.
Baseball Franchise Ownership 101 (there is no Baseball Franchise Ownership “100”)
The obvious starting point: baseball owners get to be owners when they purchase a baseball team. (OK, the easy part is over.) But the Dodgers’ new owners group did not write personal checks to cover the $1.6 billion cost to purchase their new team.
They actually put down about $159 million in cash, and then paid the remainder via equity financing– that is, adding partners to the owners group who purchased shares which created assets that could be used or borrowed against. Even that $159 million cash down payment was likely financed via loans, stock or bond options, or any number of “paper” asset transactions.
As opposed to writing a personal check or dropping off large bundles of cash.
Obviously, once the owners group “owns” their team, they start receiving any and all revenue generated by the team and also have to start paying the various costs of owning the team.
That tipping point– money generated versus money paid out determines, 1) the amount of profits an ownership group will receive each year; 2) the resources available to be reinvested into the team and its brand, making it even more valuable and profitable; and, 3) the growing overall worth of the franchise itself, key to being able to finance non-baseball projects like real estate development.
The new Dodgers owners’ immediate goal was to revive the tattered brand of an historic baseball franchise that had not only fallen into disrepair, it wasn’t generating anything close to its potential bottom line. The Dodgers were the quintessential fixer-upper, the rundown mansion on an upscale block in a toney neighborhood waiting for an influx of investment to fully bloom.
The first good news the Dodger owners got was the revised value of a new local media contract package set to kick off in 2014. In determining the franchise’s sale price back in 2012, Major League Baseball factored in the Dodgers’ new TV contract which they estimated to be about $3 to $4 billion over 25 years.
Turns out the final deal between the Dodgers and Time Warner to create SportsNet LA, a 24 hour “Dodger” TV channel with expanded regional coverage, ended up being worth $8.5 billion over 25 years. (If you’ve run out of toes, that’s over twice as much.)
Major League Baseball takes about 34% of a team’s local media revenue and distributes to the other teams. In the Dodger’s this case that’s $2+ billion in checks that will be distributed throughout baseball (including to the San Francisco Giants).
Even with that the Los Angeles Dodgers ended up with over $6 billion, which works out to about $240 million a year in local TV revenue. Every year for 25 years.
The new SportsNet LA starts on February 25, 2014.
National TV Contracts Double in 2014
At the same time, Major League Baseball just negotiated two new 8 year national TV contracts, with ESPN ($700 million) and TBS and Fox ($800 million). That doubled the payment for every MLB teams over the previous national TV contracts.
Which means that each MLB team will now receive a $51.67 million check each year from Major League Baseball as their share of the new national TV contracts. Every year for the next 8 years.
Add up the national and local TV contracts, the yearly revenue-sharing checks most teams receive from the League office, and the broadcast revenue sharing checks mailed out each year and you begin to get an idea of the benefits of franchise ownership. The Dodgers, for instance, will be getting about $292 million a year in media revenue alone.
Please pass me some cavier for my hot dog.
And the owners still get to sell game tickets, luxury boxes, branded gear like T-shirts and jerseys, as well as beer and food. If you are one of four lucky teams that actually own their ballpark (San Francisco Giants, LA Dodgers, Chicago Cubs, Boston Red Sox) you can market additional events in the off-season like Bowl games and rock concerts.
Different Markets Mean Different Piles of Cash
TV deals can be radically different in various markets, reflecting the demographics and a team’s branded value. For example, the Texas Rangers and the LA Angels both have $150 million a year local TV deals; the Seattle Mariners bring in $115 million a year.
On the lower end, Pittsburgh banks $18 million yearly under their current local TV contract and the Oakland A’s are at about $45 million in local media revenue each year.
The San Francisco Giants have a seemingly modest $30 million per year coming in from local media, but the Giants chose to go a different route– they own a large percentage of their flagship radio station KNBR and that asset could play out to be much more valuable than a larger contract.
So Being a Very Rich Baseball Owner Doesn’t Matter?
Having more money always matters (I read that somewhere). But Dodger owners aren’t raiding their personal bank vaults to pay for Clayton Kershaw ($215 million) or Zack Greinke ($147 million) or any other players.
Every dime spent by modern baseball owners or owners’ groups comes from the various revenue streams created by team ownership or is borrowed off the team’s assessed value (to be paid off later by projected team revenues).
International Big Business Rule #4 clearly states, “Never use your own money in business.” It’s a great rule.
One Other Note About Wealthy MLB Team Owners
In 2013 San Francisco Giants principal owner Charles Johnson was listed by Forbes as the 74th richest person in America. Mr. Johnson has a reported net worth of $5.6 billion.
If Mr. Johnson wished to, he could buy and sell the Los Angeles Dodgers’ ownership group and all their assets tomorrow morning and still get to lunch early.