The Business of Baseball

Original piece written for Jockpost.com

Major League Baseball is a capitalistic, for-profit enterprise in which private owners try to do two things: 1) make money off their ballclub and 2) win world championships. The order of importance of these two items depends on which owners and teams you are talking about.

One of the biggest misconceptions about Major League Baseball seems to be that teams like the Yankees, Red Sox, Phillies and Dodgers “buy their players” in an effort to win world championships. That alone isn’t the misconception, it’s the fact that the ignorant water-cooler-chatter-type fans who complain about this do not realize that all clubs “buy their players!”

When you take into account the fact that most fans are grossly ignorant about how the business of baseball works, this misconception becomes extremely widespread.

Unlike other professional sports, Major League Baseball does not have a salary cap. This means that owners are free to spend as much as they would like to build their business (the team) and/or to try to win a title. I say “and/or” because there is an important distinction: some owners purposely avoid paying top dollar to recruit or keep the best players so as to ensure their investment remains profitable, knowing that their team will not have a very good chance to win a championship.

One of the most common complaints heard is from Cleveland Indians fans, who often whine about how the Yankees “buy their players” and how the Indians cannot afford to pay the same salaries as New York. What these fans, and many others, do not realize is that nearly every major league club (including the Indians) is owned by a billionaire who can afford to spend as much or as little as he chooses on player salaries in an effort to field the best team possible.

The Indians, for example, are owned by billionaire Larry Dolan. Besides owning the Indians, which he bought for $323 million, Dolan also owns SportsTime Ohio, the cable network home of the Indians and Cleveland Browns. The Dolan Family is estimated to be worth around $2.6 billion. Arguing that Dolan doesn’t have the resources to pay players as much as the Yankees is ignorant and laughable. After all, he found $323 million to buy the team and as you’ll see below, he makes around $20m/year from it.

I believe fans are confused because they cannot get over the “small market vs. big market” thought in which they believe that because teams like the Yankees, Mets, Red Sox, Angels, Cubs, White Sox, Dodgers & Phillies are from larger metro areas, they make more money and can afford to spend more than other teams. The fact of the matter is that it is up to the owner of the team to determine how much he is willing to invest into his asset. If you’ve ever hear the clichΓ© “you have to spend money to make money” you should understand that just like any other business, investing in your asset is crucial and a Major League Baseball team is no different.

Furthermore, spending money doesn’t guarantee a winner or a profitable investment, it simply increases the odds. If money spent equaled titles won, why don’t the Yankees and Red Sox and other big spenders win the World Series every year?

In the past 10 years, the Yankees have spent around $2 billion on players salaries, with one world championship to show for it. They have spent this money in an effort to field the best team possible every year, which in turn gives them the best possible chance to win a title. This makes their fans very happy because despite the on-the-field results, the Yankees at least contend nearly every year, whether the club is profitable or not. In other words, the owners are willing to invest as much as they need to put a winning product on the field, even at the risk of losing money.

Some teams, like the Indians for example, stop short of paying top-tier players because they care more about making money.

Below you’ll find charts from Forbes.com showing a list of teams from most profitable to least profitable from 2007-2010. You may be surprised to see that both the Yankees and Red Sox actually lost money in 2007 while chasing a world championship ($47 million and $19 million), while the two most profitable teams were the Washington Nationals and the Florida Marlins.

Major League Baseball teams in order of 2007 Operating Income

Source

The Red Sox returned to profitability in 2008, although they still didn’t make as much money as “small market” teams like the Minnesota Twins, Baltimore Orioles, Tampa Bay Rays or Florida Marlins. As for the Yankees, they cut their losses to $3.7 million, finishing ahead of only the Detroit Tigers for least profitable club in the league.

Major League Baseball teams in order of 2008 Operating Income

Source

In 2009, the Yankees finally got back in the black, posting a $25m profit, yet still not making as much money as the Twins, Cubs, Mets, White Sox, Padres, Dodgers, Nationals, Red Sox or Marlins. Note: The 2009 profit still had the Yanks far from making up the losses from the prior 2 years.

Major League Baseball teams in order of 2009 Operating Income

Source

2010 was another solid year for most teams, including the Yankees who finally made up their losses from 2007 and 2008 to finish the 4 year period at a break-even. Over that same 4 year period, every other team in baseball other than the Detroit Tigers posted a profit. The Cleveland Indians made nearly $72 million between 2007-2010. Plenty of Indians fans complain that their club doesn’t have the money to compete, but I guarantee Larry Dolan and company aren’t complaining about the $72 million dollars the Tribe put in their pocket… at the expense of putting the best product possible on the field.

Major League Baseball teams in order of 2010 Operating Income

Source

Some people will read everything above, look at the charts and still dismiss everything they see because they will dwell on the Yankees being the most valuable franchise in baseball. This too is ignorant and has nothing to do with how much ownership of the Yankees, or any other ballclub, chooses to pay their players.

Another way to look at this might be through real estate. Real estate investors typically purchase real estate for one of two reasons: cash flow or appreciation. In places like the mid-west, real estate can be bought at a price that allows the owner to cash flow. In other places like California and New York, however, investors often lose money on their investment, hoping that it will appreciate during their holding and that they will be able to sell it for a profit. The same can be said of the Yankees. Their owners have created a brand that makes them the most valuable franchise in the MLB, regardless of if they are cash-flow positive from year to year. The Yankees certainly weren’t the most valuable franchise in baseball in the 80s and early 90s while they were competing with the Indians for “worst team in the American League.” Their brand needed built, and their owners, specifically the late George Steinbrenner, built it. (In a cruel and ironic twist, it is commonly know that Steinbrenner, an Ohio native, originally intended to buy the Cleveland Indians!)

George "The Boss" Steinbrenner

The owners of teams like the Yankees, Red Sox and Tigers are willing to spend whatever it takes to put the best team on the field, while the owners of teams like the Marlins, Nationals and Indians are more concerned with staying profitable, often at the expense of their fans.

Often times these fans will call for a salary cap, and honestly, I don’t know if I’m for one or against one. However, I can tell you who’s certainly against a salary cap: the players! This little irony makes me laugh… your typical disgruntled Indians fan who believes a salary cap will level the playing field doesn’t realize that the players he is “arguing for” would not have his back! The last thing the players want is a restriction on how much money they are allowed to earn. Can you blame them?

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About donniccolo

Logic. Common Sense. Open Minds. www.nicknicastro.com
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