Questions about who will be playing for the Reds come April inevitably end up as discussions about service time with the idea being that the Reds should try to keep players cost-controlled for as long as possible. The implication here is that the Reds are a small market team and on a budget and blah blah blah.

I don’t buy it.

News broke recently that Jeffrey Loria is looking to sell the Marlins for at least $1.4 billion. That’s billion-with-a-B. The Marlins. This, kids, is not a marquee franchise.

I understand exactly why teams manipulate service time. It’s the same reason they get cities to build them stadiums. They like to keep as much money as they can. But not wanting to spend money and not being able to afford something are not the same thing.

And so here is my belief: I believe that every major league team has much, much more money than they pretend they do. If the Marlins are worth more than a billion dollars, then they are making money hand over fist. The Marlins. And if that team is making that much money then EVERY team is making a ton of money and can absolutely afford to call up players when they are ready and not worry about service time.

And, by logical extension, any noise we hear about budget constraints is also nonsense.

Let’s not forget that Major League Baseball has an anti-trust exemption. The owners literally have permission to maintain a monopoly. In recent years as revenue and revenue-sharing have exploded, it has been noted that the players’ chunk of the pie has gotten smaller on a percentage basis. The owners can afford to pay players more. They have more money than they are using.

So yes, the Reds will likely make some decisions based on service time. But those decisions are likely not about what they can afford. Rather, they are about what they want to spend and we should constantly remind ourselves that those are not the same thing.

32 Responses

  1. Moses

    What someone can afford is not always the same as what is a smart business decision…

    I would be very interested to see a story/statistics about the top prospects (at the time) who were obviously held back for service time reasons and how many of those even made it to arbitration with the same club or were a grade A/B free agent six years later. In short, with how many of these guys does it really even matter?

  2. Simon Cowell

    Sounds like an attack on the owners. Since when does the owner have a demand placed on him to stream profits to the players? Why not stream the profits into lowering ticket prices instead or improving the product with modernized stadium? It isn’t like the players are poor and are being treated harshly they are more than compensated for their work. Even those that show up to spring training out of shape.
    Here is simple logic. If baseball owners pay the players more, the baseball owners will charge even more for fans to see the product.
    the Marlins are worth 1.4 billion dollars because their stadium is near to Miami, Florida. Have you seen the cost of real estate down there compared to Cincinnati? Here is another comparison to Reds Baseball since 1997 Marlins have 2 WS Championships Reds have 0 winning affects value of a franchise as well. Reds are hard luck losers and the Marlins have a much better long term future than the Reds. Like it or not. It is what it is.

  3. Jason Linden

    I am always confused at how quickly people defend the owners. All I am saying is, they Reds can afford to put a better team on the field than we’re likely to see at the start of the year and I don’t feel the need to pretend otherwise. It may be smart business, but it won’t make for the best baseball.

    • Simon Cowell

      nor will higher ticket prices. If the Reds pay the players more we the fans will pay the owners more. Business 101. Not a defense of the owners, rather, that is how business works.

    • Chuck Schick

      Could the Reds afford to spend more right now? Probably.

      Would increasing payroll by 20 million enable them to win more games? Probably.

      Would that increase enable them to win the division? Probably not.

      Would that increase enable them to win a Wild Card? Maybe, but still unlikely.

      Does a 80 win Reds team have more revenue than a 70 win team? Usually.

      Would that 20 million increase in spending create more than 20 million in revenue? Highly unlikely.

      In summation, spending what they could
      ” afford” makes little business sense and in all likelihood very little baseball sense. They would in all likelihood be simply less bad..and have less flexibility to spend when they’re ready to compete.

    • The Cynic

      Thank you Jason. Great article and spot on response. The owners who continually short sell their fans by putting an inferior product on the field, cough, Reds, and then blame it on a small market deserve no sympathy from fans. But their getting it, which is probably why cities keep publicly funding stadiums.

  4. Chuck Schick

    Teams invest millions each year in player development. The vast majority of players never contribute at the major league level. Without having the ability to recoup their development cost, the vast majority of teams cannot field a competitive team. Retaining control for the first 6-7 seasons enables that to occur.

    What basis do you have to conclude that teams are secretly making money hand over fist? It’s pretty easy to determine an approximate level of revenue for most teams and an approximate expense level. In most cases, the actual amount of cash profit is relatively minor. If the Reds clear 5 million on 200 million in revenue then that’s a 2.5% profit margin….about the same as buying a 10 year treasury bond. Yes, the teams value has increased but one’s ability to extract that is limited….unless you sell….and lose 20-30% of your gain to taxes.

    The Marlins have a great stadium deal and are the only MLB team within a 300 mile radius of one of the wealthiest areas in the country that will see significant population growth. They are also the gateway to Latin America where baseball is extremely popular. They have been so poorly run there is an enourmous amount of financial upside. Do the Reds, Brewers, Pirates, Royals have the same amount of ancillary factors that enhance their value? No way.

    • Simon Cowell

      Yup. You sir should write more often.

    • The_next_Janish

      Good points Chuck.

      I’ll add “value of a perpetuity”, explains a bit of this.

      Also, if poor grandma’s house in San Fran is worth $2M. She might be a millionaire but she can’t spend like one until she sales the house.

      Value and Cash Flow are not always the same.

      • Chuck Schick

        If Bob C. took 50 million out of the banana company and invested in payroll it would not increase his revenue by anywhere near 50 million nor would it necessarily increase the value of the team at all.
        It is estimated that Reds gross $30 per fan inside the stadium. They would need to draw an additional 1.7 million to simply break even on that investment. That means the Reds would need to draw 1 million more than they ever have. Since media deals and sponsorships are long term contracts, attendance is the only thing that can generate an immediate return and the math simply doesn’t jive.

      • Chuck Schick

        The Cardinals haven’t spent much more than the Reds over the past few years. They win because they invested in a player development system that enables them to produce cheap, able replacements when guys become more expensive than they are worth.
        The Cardinals are a brilliant business. Only the Yankees, Dodgers and Cubs make more…yet they generally spend more like the Reds and Brewers and continue to win.
        They own their stadium, own the parking lots around the stadium and own their version of “The Banks”…they are literally printing money…and yet they win without spending like a drunken congressman.

        If the Reds drew 40,000 per game, their revenue would increase by about 30-35 million. The Cardinals and Cubs would still be able to dramatically outspend them.

  5. Kurt Frost

    If it’s only two weeks down for a year of service then its a no-brainer.

  6. reaganspad

    I am for controlling the players in a Reds uniform as long as I can

    always will be.

  7. Chuck Schick

    This shows that the Rays and Pirates have modest profit margins and are by no means cash generation machines. If your net profit margin is 5% you don’t have much margin for error.

    • Chuck Schick

      You’re confusing MLBAM revenue with profit. The teams do not get a check for 40 million per year from MLBAM.

      The estimated revenue for MLBAM is about 1.2 billion or 40 million per team. Most of that money is reinvested as technology companies will always have a need for constant capital as their
      “Product” becomes outdated rather quickly. The last published estimate is that each team receives around 10 million per year from MLBAM….about what Homer Bailey is paid from opening day to July 1.

  8. sandman

    So, basically, you’re saying that the Reds really aren’t a small market team bcuz they are probably making money “hand-over-fist”…just like Miami. I never knew about this service time stuff until the Reds started this rebuild. Never knew it existed. But then I started to understand it and how it gives a club an extra year of control. I can see how that could be (or is) a good thing for a club. So when I saw your headline to this article I was intrigued. I didn’t think there could be a downside to keeping a plyr under control for an extra year. So I checked out the article and it wasn’t the argument I thought it would be. I don’t know exactly what I was expecting but it wasn’t this. BUT!, that’s not to say that it still wasn’t an interesting and intriguing article. You just might be on to something here. Good points.

    • Simon Cowell

      This. Chapman would fill more seats than Jesse Winker… at least for the first few years.

  9. docmike

    If the purpose of this article is to argue against keeping players down until after the Super Two cutoff date, then you have an argument.

    But if the purpose is to argue against keeping players down until the cutoff point to have another year of control, then it’s way off base. A team like the Reds can only hope to be a long-term contender if they maximize control of their young players for as long as possible. Trading 2 weeks now, for an entire year later on, is simply a no-brainer.

  10. jaY jOHNSON

    I posted basically the exact same concept months ago on this sight.Not one person thought that what I was saying was valid.My entire point was that sports franchises make the big $ when they sell the franchise.Year to year profit is basically just an excuse to claim things like”small market”,”we cant afford to sign a player”and similar b.s.
    I was told by responders one after the other about accounting principles and that teams have to show profits now and then or some consequences come down on them.
    I was shocked that literally not one person could see that in the end Bob C and associates will cash in big time.They all felt that it was critical that management had to make $ now.If a franchise had zero fans buy a ticket for an entire season they would still make $.Between tv and profit sharing they more than break even.
    Great article
    Very real

  11. Sliotar

    MLB franchises are appreciating year-to-year, regardless of $ spent on salaries, for other reasons, such as scarcity and MLB’s anti-trust exemption status.

    I own 2 small businesses. The number one piece of advice I received from other business owners, 2 of whom have bigger revenues than the Reds, “never tap credit or personal assets to improve cash flow, unless it’s an emergency ‘keep the doors open’ situation.” It’s kept me very solvent during the worst business climate since the Great Depression.

    At the risk of “supporting ownership”, I tend to take Bob Castellini at his words in this old article. In a state full of snake oil salesmen sports owners, he seems better than most.

    http://www.cincinnati.com/story/sports/mlb/reds/2014/03/01/reds-finances-are-sound-but-castellini-wont-blow-this-franchise/5938765/

  12. Abdul

    Unfortunately one thing for sure will happen…the Red’s management will choose the wrong players.

  13. big5ed

    On Mike Leake, though, controlling him an extra year would have required the Reds to pay him about $8 million in arbitration (a guess, and maybe conservative) in the middle of a rebuild. In his case, did losing him a year early actually hurt the Reds? I suppose they could have traded him for more than Duvall, but it seems pretty much a wash.

    I’m with Patrick on service time shenanigans. If a guy is ready, then play him. With Amir Garrett this year, for example, holding him back if he is otherwise ready tells the team that competing–playing good, hard-nosed baseball– is not important for now.

  14. Tom R

    At their price point, we’re probably looking at a sale price that is around 7 times EBITDA (earnings before interest, taxes, depreciation, ammoritization) – so basically, profits. If the sale price is $1.4b, That would suggest an annual EBITDA of $200m for the Marlins. Now, they’re probably asking for a bit more than 7 times EBITDA to anchor the negotiation – so maybe annual EBITDA is really closer to $150m – still a big hunk of money not allocated to salaries.

    • Chuck Schick

      The Marlins estimated revenue is 200 million so an EBITDA of 150-200 would not be possible. Their actual EBITDA is likely in the 25 million range.

      • Tom R

        If true, and I think the numbers are closer to yours than mine, then the asking price of $1.4b makes zero sense. At $25m of EBITDA, an asking price of $1.4b is 56 times EBITDA- which is insane.

      • Chuck Schick

        There is no sanity with this stuff. Teams sell for about 100 x’s earnings.

  15. Brian K

    First of all, thanks to Redleg Nation (Jason) for posting this editorial and facilitating this awesome discussion. For me, I find the business analysis to be very much beside the point when looking at professional franchises. That doesn’t mean they aren’t run as corporations with business principles undergirding decisions, it just that business owners (I own my own) do not operate in the same business universe as professional sports. I find this to be the implicit argument made by Steve and company, and I am on board.

    I’d like to offer as evidence, this odious example in the NFL:
    https://theringer.com/oakland-raiders-las-vegas-relocation-stadium-bank-of-america-8c4522ee4388#.hk4rz7za8

    Owners are not subject to the normal constraints of businesses (with all due respect to Sliotar, who is spot on in a normal business sense), owners of sports team are extremely powerful individuals with undue influence over the government at the local, state and federal level, and frequently work their influence to guarantee financial windfalls unavailable to rest of us. If they want and need to go out of pocket, they should without moralizing. Whether Bob C. has to go on credit is irrelevant, as he made the vain and egotistical choice of getting into sports team ownership. If he wants to win, spend, and hopefully get that money back and then some with a ludicrous resale value.

    That does not make the players victims or powerless, but the owners aren’t one of us, they are should play there best players every game possible as far as I’m concerned. If playing Nick Senzel the first week in April in 2018 gets the Reds one game closer to winning the division and a championship, play him on opening day and every game afterwards. After that, the other advice dished out by this website on drafting and developing new players can help the franchise continually compete through replenishing its talents and also lets these players get paid earlier in their careers.

  16. Sean Lahman (@seanlahman)

    There’s little correlation between the sales price of a team and its revenue. You seem to be arguing that if the Marlins are selling for $1.4 billion they must be dramatically under reporting their revenues. I think it’s more likely that some one is dramatically overpaying. Forbes set the value at $675 million last spring.

  17. James Abernathy

    I don’t think this article criticizes owners for maximizing profit. Its criticism is that owners should at least be honest about it. Pleading poverty is a facade and a method to hold cities hostage and get taxpayer funded stadiums (and more favorable CBAs). The worst part is the gov’t protects the owners’ interests due to the monopoly. In many ways, the employer is MLB, not each team–as is the case with all professional sports. There is no free market in professional sports.

    And people want MORE gov’t to limit corporate power. HA! The gov’t IS the problem!

  18. Chuck Schick

    All kinds of businesses are given tax abatements, incentives and inducements to conduct business in a certain city. Many cities have given away the farm to sports teams. Reasonable people can debate whether that was a good idea or not, but it’s tough to argue that it’s the team’s fault.

    All kinds of businesses are given favorable tax treatment for research and development. Companies are given patent protections that enable them to recoup their investments and enjoy a price monopoly for a set number of years.

    A very small number of players that are drafted ever play an inning on the majors. If teams aren’t able to recoup their investment during the controllable years then the business of baseball doesn’t work. The MLBPA understands that their members are better served if teams are profitable and if all teams have the ability to compete. The Reds were successful because they could under pay Votto, Bailey, Chapman, Cueto and Leake for 6 seasons. Those players ultimately received market based pay. Players ultimately make more when the game is successful and being able to earn an return on player development enables that to occur.

    • Chuck Schick

      The entire cost of development. From bonuses to bats for anyone outside the big league club