It’s still early, but the Reds have a little positive momentum toward 2019. Dick Williams and new manager David Bell have crafted a forward-looking common message. Other than a broadcaster or two, the Reds no longer seem like Shakespeare’s graying Lear howling at cliff’s edge at the shifting currents of baseball.

Bell has made clear he won’t settle for players that aren’t fully prepared. That means an analytics department with effective lines communicating state-of-the-art data to players and coaches. Ownership has paid for a first-rate, up-to-date coaching staff with high expectations. Williams has endorsed the importance of new blood, new energy, and new perspectives in the clubhouse.

But while a heretofore-missing organizational message is necessary, it isn’t sufficient for winning. Success in the W-column depends on putting more talent on the field. Over the next few weeks, the Reds face thorny decisions about how much they are willing to spend to assemble that kind of team.

That spending can be in cash money or hard-earned prospects or both. Giving up the likes of Nick Senzel, Hunter Greene, Taylor Trammell and Jonathan India to acquire major league ready talent is a bitter cost to bear.

However, there is someone who can help the Reds avoid that brutal sacrifice: Bob Castellini, leader of the Reds ownership group.

*  *  *  *  *

Owners of Major League Baseball teams are getting rich. Well, richer. A lot richer.

No, don’t believe the baseball doomsayers or poverty pleaders. The woe-is-baseball narrative pointing at a decrease in attendance isn’t convincing. Not in the least, as the sports revenue soared to nearly to $11 billion in 2018.

Commissioner Rob Manfred has taken aggressive steps to assure the flood of cash will continue to surge into baseball coffers.

Need recent evidence for that? It’s everywhere. Try the new multi-year, multi-platform deal the league inked last month with Fox Sports. You’ll have dates with Joe Buck through 2028. A $5.1 billion payment to MLB in tow. That’s a jump of 36 percent over the previous year.

The 2018 All-Star Game generated nearly $45 million in ad revenue.

Manfred has worked particularly hard to attract young fans. Within the past year or so, he reached a deal with Facebook to stream 25 afternoon games at a price of $30-35 million. A couple weeks ago, Manfred struck a deal with DAZN, a subscription video service, to produce a show similar to the uber-popular NFL Red-Zone that will stream live look-ins. It will run on weeknights and use young-leaning “on-air” talent. The deal pays $300 million over 3 years and gives MLB another way to reach fans without a traditional CATV subscription.

Dwarfing all that is potential revenue from newly legalized betting. In May, the Supreme Court approved sports gambling throughout the United States. The American Gaming Association says that MLB could rake in $1.1 billion from the betting, associated platforms, programming, merchandise and sponsorships.

MLB has rushed to embrace with open arms the new pots they expect to win. Last week, Manfred announced an agreement with MGM Resorts International for the gaming company to become — you know it! — an official gambling partner of baseball. That’s just the start. Beyond partnerships with MLB as a whole, individual teams can set up arrangements with local casinos. Soon you’ll see betting windows at major league parks and an official MLB app that lets you place bets in real time as you watch games. You wonder if there will be a betting line on when Pete gets reinstated.

Those cord-cutters who supposedly threaten the financial future of the nation’s pastime, they use Facebook, stream games online and have been known to gamble a bit.

To mis-paraphrase Tom Hanks, there’s no dying in baseball. Not among team owners anyhow. Not unless one meets his maker counting cash.

*  *  *  *  *

After all, Major League Baseball is nothing more than an association of the thirty privately held individual teams. The growing pile of MLB revenues is divided and distributed back to the owners. The industry’s green gusher means more income and, more importantly, massive wealth for those lucky few.

The value of individual teams has skyrocketed over the past decade. According to analysts at Forbes, who have been studying this for more than two decades, the average major league franchise is now worth $1.645 billion. That’s an increase of 7 percent over last year. That doesn’t include the dollar value of ownership shares of regional sports networks. You’ll be relieved to find out the value of your 67-95 Reds increased by 11 percent last year (more on that in a minute).

Here’s an important point: The value of each team depends little on small swings of annual operating profits. Blips in attendance don’t matter much because ticket and hot dog sales represent an ever-shrinking slice of team revenues. Not when big stacks at the national networks, Facebook, DAZN, MGM pony up.

Here’s an example. The Miami Marlins are dead last at earning baseball revenue. Their annual loss column is as wide as the Gulf of Mexico. They have trouble drawing fans to their regrettable, inconvenient stadium.

Yet, a group of investors paid $1.2 billion for the Marlins a little more than a year ago. Billion with a B.

The Atlanta Braves provide another example. Major league teams are privately owned. So the oh-so-convenient standard operating practice is not to disclose annual revenues, expenses, profits or losses. But Liberty Media, who purchased the Atlanta Braves for $400 million in 2007, began to offer stock in the baseball club. With public trading comes transparency.

We learned the Braves lost $45 million in operating revenue from 2014 to 2016. They were going through a rebuild and moving to a new stadium. But over that same time, the club gained $770 million in value, doubling its worth to $1.5 billion heading into 2017.

Again, here’s the central point: A major league team’s value isn’t about in-person sales and annual operating profit or loss. Baseball’s revenue firehose matters much more. It’s built for the long-term and reaches league-wide.

MLB teams retain 100 percent ownership in MLBAM (tech for streaming games) and 67 percent of the MLB Network. Those assets plus the league investment portfolio add up to about $425 million in value for each team. For each team.

Enjoy cherries on top of your sundae? In 2018, every ownership group received a one-time $50-68 million payout when MLB sold BAM Tech to Disney. That covered about half or more of the Reds 2018 major league payroll. MLB still owns 15 percent ownership of BAM Tech, shared by the 30 teams of course.

To repeat, in 2018, the average value of a major league franchise is $1.65 billion, a 7 percent increase from the year before. Let me do the math. 7 percent of $1.65 billion is $115 million.

And (please be sitting down for this) those team values do not yet account for the impact of legalized gambling.

How much could action add to the value of a professional baseball team? Mark Cuban, owner of the NBA Dallas Mavericks, claims that franchise values for pro sports teams “doubled in a second” with the advent of legal gambling. “It will increase interest. It will add to what happens in our arena and in stadiums. It will increase viewership online and on TV.”


Still think the Reds have to choose between #GetThePitching and #KeepTheProspects?

*  *  *  *  *

Carl Lindner was hailed local savior when he bought majority ownership of the Reds from Marge Schott in 1999 for $67 million. Six years later, he sold the team to the Castellini ownership group for $270 million. A sweet return for civic duty.

But that windfall pales in comparison to the trick the current ownership group has turned. Forbes puts the value of the Reds now at $1.01 billion. This chart shows the growth in the value of the Reds organization in millions of dollars over the dozen seasons it has been owned by the Castellini ownership group.

That steep upward trend line has accelerated in recent years despite hand-wringing over attendance at GABP. The Reds have continued to do well in annual operating revenue. Yes, gate receipts were down in 2018, but thanks to MLB’s money cannon and the Reds new contract from FSO (will get to that in a second), Forbes estimates that Reds revenue overall grew from $229 million in 2017 to $243 million in 2018.

Sure, ownership and their apologists shake a finger at fewer fans cranking the GABP turnstiles. But let’s put someone who knows the numbers under oath and ask if the team made or lost or made money last year. Remind them about the lump sum $50+ million check from Disney. Then let’s see what answer we get.

Forbes breaks down the Reds $1 billion in value this way: 44% from the worth of the sport overall, 30% from the city of Cincinnati and surrounding area market size, 18% from the stadium and just 8% depends on the Reds specific brand.

The Reds also have a new deal with Fox Sports Ohio. The contract will transfer to a new company this spring when FSO is sold along with 21 other Fox regional sports networks. Neither the Reds nor FSO has revealed the terms.

We do know the step-increase payments began in 2018. Forbes and others estimate it’ll reach $65-75 million a year, more than double the previous contract of $30 million. That sounds about right based on comparisons to other clubs. That would be $30-35 million in new revenue annually. Plus the Reds negotiated an equity share in the local network.

*  *  *  *  *

To analyze Reds’ major league payroll, let’s start by looking at what they’ve spent the past 13 years under the Castellini ownership group.

From 2007-2011, Reds payroll spending was flat, factoring inflation. The level jumped a bit in 2012, then bigly from 2013-2015, before declining back to previous inflation adjusted levels with modest steps up in 2017 and 2018. The spending bump beginning in 2013 coincided with a $25 million per year increase per team from a new set of national broadcast rights agreements which is still in effect.

For more context, let’s compare Reds payroll spending under the Castellini ownership group to the median MLB payroll. Median payroll is where half the major league teams are above and half are below. In this chart, the Reds are red, league median is blue.

The Reds have been below median payroll every year except 2013-2015. Notice how median spending shot up the past two seasons. The Reds fell far behind.

This is probably the place to point out these payroll figures do not account for spending on the amateur draft, the international market, minor league coaching, sports science and other player development expenses. The Reds have stated it has been their plan the past couple years to shift money from major league payroll to these other areas.

Last chart. Let’s look at payroll spending as a percentage of the estimated value of the Reds.

This chart highlights the fundamental point of this post. After several years of maintaining a steady percentage, the ownership group has not taken into account the sharply growing value of the organization, and its own wealth, when it sets the major league payroll.

*  *  *  *  *

Bob Castellini has long maintained a policy that the Reds major league payroll would fluctuate based on annual operating expenses and revenues. If the Reds gain or lose a few million in income, payroll will be adjusted accordingly.

At first glance, that seems quaint, even generous. Hey, everyone, the owners aren’t looking to make any money on the Reds! That’s certainly what’s implied.

But oh, my goodness, have they made money.

If the Reds ownership group had parked its $270 million in the stock market in 2006, they would have enjoyed a strong 6.6 percent rate of return. Instead, they bought a professional baseball team and earned almost double that.

In the past four years, the Reds have gone from spending above middle-class on payroll to tens of million dollars below. Meanwhile, the Castellini ownership group has gained $400 million in wealth from owning the team.

Thesis statement: Focusing on year-to-year operating profits or market size obscures the modern financial reality of owning a baseball team because it doesn’t account for the most profitable aspect: the value of the franchise. When your team is worth over $1 billion and that value is growing by more than $100 million a year, you can afford to spend a lot on your major league payroll.

Plenty of other major league franchises are in a similar situation. The value of their team has exploded in recent years — I’m not sure the argument in this post could have been made even five years ago — but ownership hasn’t taken advantage by boosting payroll.

Could spending on payroll be the new Moneyball?

It has been well documented that the Reds’ rebuilding phase was impaired by ownership’s reluctance to trade players in a timely manner. Less well appreciated is how the roster has been further diminished by ownership sticking to its arbitrary break-even policy, all the while awash in the tremendous accidental wealth generated by owning the franchise.

The Castellini break-even formulation, while objective, is arbitrary. Given the enormous wealth the ownership group has gained through its investment, it’s also absurd. Anyone pleading small market poverty in this context is performing an obscene charade. I’m sorry, but billion-dollar baseball teams that act small do so by choice, not destiny. If owners don’t take advantage of their resources, it’s due to small thinking, not a small market.

Bottom line: Reds ownership can and should leverage a tiny fraction of its newfound wealth and authorize a payroll north of $150 million. Whatever it takes to acquire several impact players without trading away the organization’s prized prospects.

With enough money to spend and a few smart decisions by Williams and Bell, Reds fans might just see real progress.

104 Responses

  1. msanmoore

    Brilliant explanation, Steve. Thanks for the detailed analysis that blows away the “we’re stinking poor” smokescreen. I immediately thought of comedian Chris Rock’s bit about the difference between rich and wealthy when comparing the great NBA Shaq to club ownership. Rock says, “Shaq is rich. The man who signs Shaq’s paycheck is wealthy.”

    And you are now vying for the offseason quote of the year (against a bunch from MBE, as you might imagine):

    “Other than a broadcaster or two, the Reds no longer seem like Shakespeare’s graying Lear howling at cliff’s edge at the shifting currents of baseball.”

  2. Alex

    Great article. I am really souring on pro sports in general. The fair weather fan crap is done. DONE! Fans owe nothing to these owners or teams. The Florence freedom is a fun community event. The reds are a business. A big business. Complete with 8 dollar hot dogs and horrid baseball. The NFL acts like this capitalist patriotic America league despite the fact it’s run in a completely socialist manner with revenue sharing and public funded stadiums.

    Say hello to your 2019 reds free agents, we call them the killer H’s! Billy Hamilton, Derek Holland and Matt Harvey!

    PS. My friend works for big bob in the IT dept of his banana stand. He put in about 80 hours last week dealing with a virus outbreak in there database. It’s possible big bob wasn’t in the office when hamilton was released lol.

  3. Andrew

    Great article Steve. Everything you laid out makes perfect sense. Problem is: Bobby has spent too many years looking just a few blocks to the west at Mikie. Seeing he spends no money and makes even more. I have little faith unfortunately.

  4. James H.

    “It has been well documented that the Reds’ rebuilding phase was impaired by ownership’s reluctance to trade players in a timely manner. Less well appreciated is how the roster has been further diminished by ownership sticking to its arbitrary break-even policy, all the while awash in the tremendous accidental wealth generated by owning the franchise.”

    As a Reds fan, I feel like I’ve been fleeced by this franchise. When they should have invested in free-agents when they were winning, they didn’t. When they should have traded for mid-season talent to get them over the injury hump when they were winning, they didn’t. When they could have traded players at high value, they didn’t. When they should have re-upped talent, they didn’t, and then compounded the bitterness by trading them at low-value. Now we hear reports of Castellini’s interference on trades, and combined with Jockety’s past history of sitting on his hands, I wonder now how far that interference went considering the level of income the team earned over the years.

    Unless this team somehow commits a coup and can pull off trades among baseball’s have-teams seemingly getting everything (Yankees, etc.) without decimating the minor league pipeline, AND Castellini opens the coffers and pays for pitching, OR this new coaching staff pulls a miracle and gets this team going in a positive direction with the pitching busts (looking at you, Bob Steve), this season is going to be miserable again.

  5. Ghettotrout1

    I agree that they should spend more money. But I do want to point out that the value of the franchise increasing doesn’t really actually matter to the yearly P&L. They will only realize that value when they sell the franchise. So in reality they could still be making very little actual profit year over year. Not trying to be a nay sayer or saying that they shouldn’t spend the money I just wanted to point out that the actual value doesn’t really matter until the franchise is sold.

    However, with that being said I do find it hard to believe that they have no money to spend based on all the different revenue streams and the severe drop in payroll over the last 3 seasons. As you pointed out I seriously doubt the drop in payroll 1 for 1 equals the drop in attendance revenue.

    • Taylor Jensen

      This is spot on. They haven’t realized any of those gains, so they don’t have that profit to spend. They also can’t go out and spend an extra 50 million a year because their club has appreciated— in 10 years, they’ve paid out all the money that they had “made”. Of course, the club probably will continue to grow, and I wholeheartedly want them to spend more. I just have a hard time basing it on the value of an appreciated assert that they haven’t realized the gain from yet.

    • Patrick Jeter

      Bob could sell 0.5% of the team each year to fund a $50M payroll increase. Don’t need to sell it all.

      Also, Bob has plenty is his coffers. He could spend that, then recoup at any point he needed more cash for a different venture.

      As Steve points out, P&L, operating income, cash flow, etc, etc, etc are irrelevant. Bob and ownership can afford to spend much more and should unless they want to forever be lip servicers.

      • Steve Mancuso

        Good to have you back, Patrick.

      • lwblogger2

        Patrick, first to echo Steve, it is great to see you posting again. P&L is never irrelevant in business, any business. In MLB it may not be as important as Castellini and company make it out to be but it can’t be dismissed. Another thing to consider is that while Castellini may be able to take an operating loss, some of the minority partners may not be able to.

    • lwblogger2

      I agree 100% here. I love this piece from Steve and it is clearly well thought out and well researched. What isn’t mentioned is what you hit on about the value only being realized when the franchise is sold. I’ll add one more factor in that, finding a buyer. Selling the team for full value to a buyer planning to keep it in Cincinnati may not be easy.

  6. turbobuckeye

    I’m not sure I agree with your thesis or the many people that make similar arguments. In my opinion, it’s flawed thinking. The increasing value of an asset (in this case, the team) has no bearing on the cash flow that said asset puts off. The recent FanGraphs article on the Braves’ P&L that you reference drives that point home. Yes, ownership could “unlock” some of that value by taking on debt (similar to how a homeowner could take out a HELOC to get some cash out of an increased valuation of their house). How sustainable that is in the long term is up for debate.

    Now, in no way am I trying to defend MLB owners or Big Bob in any way. I’m as sick of the mismanagement of this franchise as the next guy. I also think the people that claim baseball has greater parity than other sports are silly. Of course the Reds are at a disadvantage to the Yankees or Dodgers! Given equally good management, we will always lose out on X free agents and a free agent miss here or there will have potentially devastating long term impacts to a small market team.

    Let’s not confuse “wealth” with cash flow. And as much as it pains me to say it, it’s Bob’s team and Bob put up the money to buy it. He outbid others at the time to purchase this asset, thereby taking on a level of risk that other groups deemed unacceptable. Obviously, his bet has paid off handsomely. As hard as it is to say so, he has a right to spend however much he feels like. And quite frankly, from a business perspective, there is little incentive for him to spend big. As your article does an excellent job of illustrating, local fan interest has minimal impact on the bottom line.

    • Ghettotrout1

      This is pretty much what I was saying as well. The value of the assets has nothing to do with the year to year income/cash flow/expenses etc. Well said.

    • Steve Mancuso

      Annual cash flow is irrelevant to my point and worrying about it misses the point. Although I think the Reds had plenty of cash flow last year (that check from Disney, growing MLB revenues, new FSO contract) I’m hoping readers *don’t* confuse wealth with cash flow. As you recognize in your comment, ownership only need unlock a tiny fraction of the $1 billion in value by taking on debt or other ways super-wealthy people pay for things they want. Are you really saying billionaires can’t buy things?

      • Ghettotrout1

        I don’t believe anyone is trying to say billionaires can’t buy things. The point I believe both of us are trying to make is that just because an asset appreciates in value it doesn’t necessarily mean you are receiving that value in the form of yearly sums in which you could use to spend on payroll, unless you are willing to run the business at a loss. Regardless of how much the Reds are worth there is a breakeven point every season at which the amount of cash or revenue that comes into the franchise, if you want to look at it that way, equals what expenses or cash outflow you have. And if you look at it that way I can all but guarantee there is a huge difference in the annual income or cashflow that the Yankees or Dodgers make compared to the Reds. Which is reflected in the payroll that we see as fans.

        I’m not advocating not to spend money and or not to spend more than you make if you own the Reds because to me I want the Reds to win at all costs. But I think the example of the home equity loan is a perfect example. Just because your house appreciates in value you don’t see any of that unless you sell it so its somewhat irrelevant to how many expenses you incur for your house, and in this comparison the expenses for the house would be the players salaries.

        It would be like saying dude your house has doubled spend some of that money on a pool guy, a lawn guy, a cleaning person and someone to make your dinner for you. Those yearly costs aren’t offset until you sell your house.

      • Steve Mancuso

        It’s really saying, dudes you own a billion-dollar thing, can’t you come up with some extra money for payroll this year?

        The entire point of the post is to challenge the framework you’re suggesting, that payroll for major league teams should be geared primarily to small changes in a few million here or there. Instead, spending should come from wealth, not necessarily the yearly sums that come in. (Although, again, MLB money cannon, Disney check, FSO contract … )

        I get the point that people are sometimes viewed as wealthy but are cash-tight. I just don’t think that applies very much once we’re in the territory of hundreds-of-millions or a billion.

        Must suck to be a billionaire and not be able to buy anything because of cash flow. Super-wealthy people have ways to spend money.

      • Redgoggles

        I was going to say a similar thing, but your house value appreciation illustrates the point perfectly. Could Bob leverage some of the appreciation of asset value to generate the cash flow needed to increase operational expenses (payroll), yes, most likely. But the premise of the article feels like it is suggesting he is swimming in cash and/or that attendance matters little because the asset has grown substantially in value, which isn’t always true. It’s kind of like owning a stock that has tripled in value, you don’t see the profits/cash until you sell it.

      • Streamer88

        You can trade and or purchase on the margins in the stock world so yes you can accrue wealth without selling the stock.

        Steve- awesome article. I think any argument about yearly ins/outs is missing the point. The Braves ran at a loss in 2014-2016 for example. And we’re not talking about a high interest home equity loan here. There is no chance there’s a market crash on franchise value. This isn’t the Las Vegas real estate market circa 2007. It’s a franchise worth a billion and it has a 99.9999999% chance of being worth 2 billion by 2028. The bank that gets the privilege of receiving a loan request from such an entity would pop champagne the moment the phone rang. Lowest interest rates in history. More iron clad than the US government. The home equity loan analogy is not even close.

        A smashing Eugenio line drive homerun of an article Steve. Congrats!!

      • Bobby Dents

        Dude, you can’t increase the operational spending without ALL teams doing it. You don’t get how the business works. 2ndly, the Reds started rebuilding because players were self-destructing quickly(Latos and Bruce first, then Bailey) and they didn’t have anybody to fill those holes.

      • turbobuckeye

        Steve, I don’t think worrying about annual cash flow is is irrelevant to your point. In fact, I don’t see any other way to support it. We both mentioned taking on debt (you also mention “other ways super-wealthy people pay for things they want” but that is at best vague and offers no substance or particulars to your argument) so let’s focus on that.

        Financing the ongoing operating expenses of a business by continually borrowing against the equity of said business is not a sustainable strategy. I’m assuming we can both agree on that. Even if you don’t, banks and other senior lenders do not support these sorts of loans beyond a certain point. So, let’s focus on the question of a one time debt undertaking to finance a short to medium term increase in payroll with the goal of supporting the opening of a competitive window. For the purposes of this argument, let’s assume a competitive window is 4 years. We don’t have many data points to work with here in terms of what the Reds’ break even payroll is (based on yearly revenue). Let’s use $130mm. Let’s further say that Bob takes out a loan of $100mm against the equity of his asset. A typical lending rate for a business like the Reds would be L+2 – 2.5 (LIBOR–which at time of this writing is 3.13%). That means the Reds would be paying a net rate of, let’s say, 5.25% on that loan. Let’s be simplistic and say that the $100mm is equally spread over 4 years to support the signing of one big ticket FA pitcher at a rate of $25mm per year, resulting in an interest cost of $13.125mm (total borrowings of $25mm, $50mm, $75mm, $100mm over the life of the contract with each year’s borrowings at 5.25%) resulting in a total yearly payroll of $155mm during the 4 year competitive window. Of course, the loan doesn’t go away at the end of the window. Indeed, you’re paying full boat interest as the facility has been totally drawn down at this point (i.e., you’re paying $5.25mm per year). So now you owe $100mm in principal and an additional $5mm per year in debt service.

        How do you repay the bank that money without selling your asset? I believe the only answer to that question is by slashing payroll of the big league club.

        Now, if the answer to the above question is simply “Bob is a billionaire, he has plenty of money and can pay for it out of his own pocket,” then fine. I absolutely agree with you that that’s a valid point of view. Perhaps this is what your comment “Are you really saying billionaires can’t buy things?” was hinting at. Of course billionaires can buy things. So can you and I. However, I don’t expect nor begrudge Bob for not spending out of his own pocket. If your neighbors came to you and said “your house has increased in value by 100%, we now want you to do renovations X, Y, and Z because that will further our enjoyment of looking at your house” then I don’t think any of us would react too well to that.

        All told, that leaves us with three ways to finance an increase in payroll beyond the level current yearly revenues support:
        1. Increase yearly revenue
        2. Borrow against the equity of the business
        3. Bob pays out of pocket

        The last two are essentially variations on the same theme as Bob owns the business.

        You and I have an emotional attachment to the Reds. Hell, from everything I’ve read, Bob does too. But they’re still a business and an asset. I wish more than anything the Reds were run in a more efficient manner and had a higher payroll. Our lives would all be a lot more fun (especially after the last few years). But as my previous post (sadly) indicated, it is not clear that the yearly sustainable revenue is present to support said payroll nor that it is in Bob’s own best interests to do so.

      • Steve Mancuso

        That’s an awful lot of math to then concede the point that billionaires can afford it. Yes, that’s what I’m saying. The owners of the Reds should spend more of their own money (if necessary) to increase payroll. Pretty sure banks won’t have trouble lending money to people who own a billion-dollar major league baseball team that is appreciating in value at 10% a year. Let alone those people are pretty well off to begin with.

      • turbobuckeye

        Agreed, it was a lot. As were all of your charts, graphs and links to dress up the simple claim that “Bob has a lot of money, he should spend more.” That’s not a new assertion from a team’s fan base to its owner–it’s as old as baseball itself.

        It would be more fun for all of us as fans, but I would never expect a business owner to intentionally run a company at a loss. Nor do I think it’s a reasonable expectation (regardless as to their net worth). I think we understand each other’s positions.

        Good to have differing viewpoints. Kudos on a well-written article.

      • Kettering Reds Fan


        (1) For the most part, I agree with your thesis. The last chart in the sequence pretty much sells the case.

        (2) Now, the BUT: Yes, increased payments out of the MLB media streams and revenue sharing -do- actually increase the club’s immediately accessible free cash flow, enabling them to sustainably increase reinvestment in the franchise.

        (3) BUT the Reds are not the only beneficiaries. The rest of MLB is also seeing increased flow from the same streams. Often more so because they are in larger markets or have better/deeper equity in those streams. Thus, the Reds ability to invest has grown in -absolute- terms relative to their past. However, in -relative- terms, since everyone else is -also- getting enhanced cash flow, the disparity in competitive terms still exists – maybe narrower, maybe not. Yes, we can pay more for free agents, but some of the other bigger fish can pay -more- more and will therefore still be more successful bidders for marquis talent. If you doubt this, cross the pond and look at wage inflation throughout European football (not just the Premier League). Fortunately, the timely introduction of modern analytics has temporarily put a break on payroll inflation in MLB – for now. The only thing that keeps the Big Powers in European football going is they have backers willing to literally spend unlimited sums – it becomes an ever accelerating treadmill until the music stops, as it ultimately will.

        (4) So, yes, we better be spending more, but we still have a disproportionate burden compared to larger teams and that can only be lightened by spending smarter and more creatively – like the investments in exploring overseas markets, introducing metrics and modern training methods, etc. In the short term, yes, we need better talent now and free agency will provide some of it. In the long term, though, I’d rather have a continually replenishing developmental system that keep the dependency on free agent signings to a controllable level. Should ownership borrow against franchise value to pursue this – only if a limiting discipline is set up first to keep debt below a certain low percentage of the franchise value. Because franchise values do not grow to the sky forever. And I harbor a suspicion that the saturation point may be closer than anyone thinks. Ex. gratia: Once upon a time, the value of individual radio stations kept growing – first linearly, then exponentially. Then they didn’t.

      • CaptainHook

        I think your argument fails to recognize that the reason Bob is a billionaire is because of his ownership of non-liquid assets like the Reds and his company. We don’t know if he has a $50 million or $100 million in cash sitting around…

    • Matt V

      My first thought was similar: that cash flow can still be prohibitive to paying out cash money to free agents, even if the team is valued richly and building a lot of wealth for its owners. Basically, you said what I wanted to say but better.

  7. gusnwally

    Really great eye opener Steve. It will put a halt to my way of thinking we are at a financial disadvantage. Let’s go get some some serious pitching.

  8. Jim Walker

    Outstanding Steve. Puts the disingenuous clarion call of “small market team” into a 21st century context.

  9. jay johnson

    great stuff
    I have been crying b.s. to “small market” for years to deaf ears.Each time I present your argument stating that the $ is made when the team is sold I get ridiculed relentlessly.
    I guess charts and graphs spell it out much better than mere words.
    Your article is spot on.
    Teams,all teams,should be spending based on yearly value not the $ that is juggled by accountants and ownership they portray as the yearly bottom line.
    The most important number is never included in the yearly bottom line:
    The dollar increase in the teams value which is enormous.

  10. sultanofswaff

    That last graph is jaw dropping stuff. GREAT article!

  11. James

    You make good points. But I’m not sure if “team value” is the same thing as “money available for overhead expenses.”

    • Jim Walker

      Steve identified several revenue streams which will be generating money for MLB and presumably lead to ongoing distributions to the teams. Bear in mind that other than the local TV contract none of these streams directly relate to the Reds specific activities and a deft accountant would (will) have no problem generating a P/L statement for local operations which does not include them.

      • James

        I said this on Twitter, but I’ll add here: seems like MLB is a booming business and the Reds in particular is a profitable franchise. Maybe what is what ownership wants: a profitable business. And they’ve got it. From that standpoint, there isn’t much incentive to spend big on payroll. Dwindling attendance and poor play appear to have no influence on revenue and profit.

      • Jim Walker

        This is one of the reasons they need a salary floor. They should also attack tanking by creating financial disincentives for teams (like the Reds) which are habitually at the bottom of the heap.

      • James

        Agreed. I’d like MLB to more socialist about revenue, like the NFL.

  12. davemoorewvu

    Regardless of ‘cash flow’, ‘team worth’, or ‘breakeven points’… I think this article explains that ‘small’ market teams no longer have an excuse.

    Thank you Steve for the info and all of your hard work in researching and writing this article. This is exactly why redlegnation is my go-to website for all things Reds.

  13. Scott C

    This is an outstanding piece of journalism Steve. It is something we don’t often think about and probably for good reason. As I read the article, I got more amore upset at ownership, there is no reason the Reds or any team for that matter can’t spend money on players. Bottom line is they do not want to.

    It also points out the hypocrisy that is found in baseball. I liked the line “you wonder if there will be a betting line on when Pete gets reinstated.” Hey Pete you can’t be in the Hall of Fame because you bet on baseball, but we are going to make billions allowing you and other to place bets. No wonder the Apostle Paul said “the love of money is the root of all evil”

  14. bouwills

    $150MM payroll in 2019 does not get the Reds the division championship or even a wildcard slot. Adding $50MM in payroll might get you 3 impact players(pitchers), using the QO (about $18MM/year) as a guide. What 3 players available might make the Reds competitive with the Cubs, Brewers, & Cards this season? Besides you’ll have probably added $50MM to the payrolls of 2020, 2021,& 2022. Even so, the Cubs, Brewers, & Cards will only raise their payroll to compete. It’s entirely usual for teams in a rebuild to slash payroll as the Reds have done. I want the Reds to spend when it counts & that’s not quite yet.

    • Steve Mancuso

      Waiting, then tip-toeing up to some imaginary time when the Reds will be competitive with the Cubs, Brewers and Cardinals seems like a recipe for falling further behind. Two good frontline pitchers and a top OF, for example, would go a long way. Didn’t say stop at $150 m.

      • bouwills

        “tip toeing” …………” some imaginary time”? You don’t engage in serious discussions with capable debaters very often, do you Steve?

      • Steve Mancuso

        A capable debater would have addressed more than one word of my reply.

      • bouwills

        But replying with the idea that Reds ownership/management is “tip-toeing up to some imaginary time when the Reds will be competitive” is absurd, ludicrous, & blatantly dishonest. The Reds have made several serious mistakes in this rebuild (mostly early on), but to claim they’re disingenuous, or don’t care, or aren’t trying is just wrong.

      • Steve Mancuso

        In “tip-toeing” I was describing the course of action *you* were advocating (“I want the Reds to spend when it counts & that’s not quite yet.”). In contrast, the Reds appear to be planning on spending around $130 million in payroll, which you seem to think is too early because the team isn’t competitive enough yet. I deleted your personal attacks on me, which violate the guidelines of this site. I found when I coached debate for 25 years that people resorted to ad hominem attacks when they couldn’t hang in on the substance of the issue. If you continue to do that, your commenting privileges will be rescinded.

    • Scott C

      I hardly hear anyone talking about competing for Division title in 2019 but adding two front line pitchers and a decent CF will certainly raise our overall competitiveness. Strengthen the middle infield D w/o sacrificing offense (namely putting Senzel at second) and you have a team that can at least compete at the top of the division. That may not happen in 2019 but I certainly would like to see the Reds win over 80 games this year.

    • Streamer88

      I’d argue the days of rebuilding for 5 years and then winning 100 games for 3-4 should be old news. The best bet is to aim for 82-84 wins a year sneak in wild card and hope u get hot. I think smart increases in spending can get us there.

      Essentially the goal is to keep 92 wins always 1 SD away and see if you can get hot/lucky.

      • lwblogger2

        I think ideally, this is where you want to be. It’s how I’ve felt for a while and is kind of along the path the Cardinals take, or at least the general idea. It requires an excellent player development pipeline that very few teams can probably manage.

  15. Bill

    I’ll agree with those pointing out the value of the team does not correlate to having more money. That doesn’t mean they can’t spend more. If the Reds can’t turn an operating profit, the owners aren’t kicking in their personal cash reserves to pay the salary. If that point is $130 million or $180 million I don’t know, but it is likely we’ll above what they are spending now. I will agree that there is a case to be made for putting more money in despite making a temporary loss. If that temporary loss puts fans in the stands and sponsorship money into the future, while increasing the teams value even more that is a wise decision. I don’t think any of us have the data to determine that payroll, but we can agree $150 probably isn’t too unrealistic if it provides a winner

    • Jim Walker

      The changes in the competitive balance tax system made in the current CBA clearly have turned it into a functional soft salary cap. The players need to dig in and get a functional floor instituted. Then we will start to get a picture of the true scope of the revenue streams.

      • Tom Mitsoff

        A hard cap has worked out well for the NFL. The star players are getting paid more than $100 million over the course of a contract in some cases, but there are no teams in dire straits financially. The NFL’s revenue comes more from TV rights than ticket sales, which is the way baseball is definitely headed, if not there already in some cases. The baseball union will never agree to a cap, though, unless it is unmistakable that the sport is in true financial trouble. Not going to happen any time soon.

      • Jim Walker

        The MLB owners pushed through the new provisions of the CBT to rein in the very top end of their won ranks. For whatever reason the players sat back and let it happen. Now the players need to pushback for a floor.

  16. Joe Farfsing

    This post clearly illuminates why fans complaining about players’ wages drives me bonkers. Owners are taking in so much money and salaries deserve to proportionately rise as well. Well written Steve. Teams that refuse to spend are a much bigger problem than teams like the Dodgers and Yankees spending a ton. The Rays and A’s constantly skimping is a travesty and the Reds skirt pretty close to that line since Bob took over

    • Bill

      If Bob C is taking home a few hundred million in profit every year, I could agree with you that he is refusing to spend. If the team is only making a profit of $20 million per year that significantly changes things. The last estimate I saw for the reds was an operating income of $14 million.

      Think of it this way. If I bought 10% of the Reds when it cost $250 million I would have paid $25 million, which is most likely financed. The Reds value increases to $1 billion and my share is now worth $100 million, which is a nice profit if I sell the team. , If I don’t sell, lets say team profit is $20 million a year with a $130 million payroll. I should expect $2 million a year coming into my bank account, so I am not breaking even until sometime beyond year thirteen when accounting for interest on the loan. That may be acceptable to someone, but change the payroll to $150 million year and I am now only getting 10% any increase in revenue as the result of winning. Now your break even point is over 25 years possibly much longer, which isn’t as appealing.

      Of course if you are just in it as an investment then you sell your share for $100 million and walk away with a nice paycheck. If you are just a rich fan who really wants to own the Reds don’t mind spending millions of dollars every year then maybe you aren’t concerned with profit, but everyone else is

      Another point is that if Bob C sold the team to someone for $1.5 billion that group would need to turn an even larger profit to cover that purchase price. Which is why the Marlins ownership immediately cut payroll and traded all their stars away. Billionaires don’t become billionaires by losing money on a business just to impress people. They are billionaires because they have very profitable businesses and invest wisely.

  17. jreis

    Great Article Steve. Very thought provoking. I think the reds attendance has reached it’s baseline and cant really get any lower. now days fans travel so much that there is always at least a couple thousand fans at the game from the opposing team. obviously more when the cubs, cardinals, dodgers come to town. plus there seems to be a base attendance of 10k of reds fans that are always there no matter how bad they are so I think this takes the pressure off the club to “win now at all costs”.
    I really hope we don’t trade our main prospects. Winning is just so much more gratifying when you follow the players from Aball up to the pros and then watch them develop into a winning team. the main thing I am looking for as a fan that shows up to gabp no matter what is effort and passion. honestly I didn’t see that under Price. Riggleman had the guys playing hard for a while then he seemed to loose interest at the end of the season.

    I hope Bell can be that motivator I am looking for. He Seems like a quiet guy, but so was Dusty and the players played for him. I just hope he doesn’t get too deep into the woods with the analytics and puts players out there that really want to be there and play hard.

  18. Tom Mitsoff

    Fantastic piece, Steve. I hope your conclusion comes to pass, but I won’t be convinced until I see it happen. I saw what Corbin signed for, and the first thought for me was, well, that sets the bar for these free agent pitchers and there’s no way Castellini will go there. All of the signs since the season ended of new manager and coaching staff and the willingness to let Hamilton go are all positive. Unfortunately, I find myself still waiting for that wave of optimism to crash to earth.

    The Reds need to #getthepitching that is difference-making. I hope I am wrong, but I just don’t see them being willing to outbid big spenders for the level of pitching talent they need. You would love to see them make a Jon Lester-type of move that the Cubs made when they had just completed year four of their rebuild.

    The Winter Meetings next week will be very interesting. We’ll have a good gauge on just how serious the Reds are about acquiring difference-making talent.

    • Bobby Dents

      Corbin? He didn’t want to go to Cincy. Maybe 33 million a year gets him………….and he still doesn’t want to be here. You see how you don’t get it? Stop thinking like a fantasy baseball bum.

      • lwblogger2

        Huh? I’m a little lost on this whole comment. The Corbin deal basically tells us what a baseline for signing the top tier of free-agent pitching might cost. It’s not about Corbin in particular.

        I don’t think anyone is thinking like a fantasy GM or owner.

  19. James

    It’s my understanding that SCOTUS did not legalize sports gambling throughout the U.S., but only that congress couldn’t prohibit it federally. It is now up to the states. Ohio had not previously legalized it, so it is not legal now. Ohio would need to pass a law legalizing it first. This limits the Reds locally w/respect to what they can do w/the gambling stuff

    • Steve Mancuso

      This is right. It’s up to each state. Hard to see any passing up the revenue and watching it go next door. Reds would still benefit from gambling revs elsewhere through revenue sharing.

  20. Bobby Dents

    I frankly, think you don’t get it. “Money” is not the problem. It is how you spend it. The Reds have had a drafting philosophy since 1997 of “swing big”. Hoping they get the 90’s Indians. Even the Indians by 2010 figured out that was not the way(and they did it better than the Reds).

    The Reds need consistency of skill and talent.

    • Steve Mancuso

      Not an either-or problem. Best World is smart and having money to spend.

  21. Davy13

    Steve, tremendously thorough piece. Thank you! The bottom-line: ownership/management are without excuse to not financially put in more for better talent on the field. The reason not to do so increase payroll would be to enjoy the windfall of very large net profit margin at the expense (pun intended) of the fan loyalty + experience.

    Do you think that with all these outside lucrative revenue streams outside of ticket sales that it will lessen the owners’ motivation to spend more in order to keep the fanbase happy?

    I actually live in Miami, FL and have attended that “regrettable, inconvenient stadium” for several games. Have you been there?

  22. jveith1991

    I agree that the Reds need to/can afford to spend more money on payroll in 2019 and beyond. $130 million should be the absolute minimum. Given that the Reds’ payroll in 2015 was $115 million and the Reds have since signed that new television contract and received the $50+ million from Disney, that should not be a problem. That is not to mention the money they have saved in payroll the last several years. As of right now, this should give the Reds at least $33 million to spend on additional salary for 2019.

  23. Old-school

    Pause on 2019.
    Goldschmidt to Cardinals.
    Corbin to Nationals.
    A huge spending spree by the NL superpowers is still coming.
    The Reds can’t win 90 games in 2019.its not their window.

    Yes, increase payroll to 150 million but do it for the 2020-23 window. Stay committed to the prospects. But purge the scooter and Bailey contracts and use 2019 to figure out what you need.

    The Reds have 3 proven healthy position players committed past 2019. – JV, Suarez and Barnhart. Castillo is the only SP and Iglesias the only bullpen piece that are top takent proven pitchers.

    Winker/Senzel and Schebler need to get healthy and play. Peraza needs a year to decide if he’s the SS. Garrett/ Lorenzen/ Mahle/could take huge steps forward… Or the couldn’t. Disco ??? No idea.

    The reds are passing the Brewers and Cubs and Cards in 2019? It’s not happening.

    • roger garrett

      100% agree.Wasn’t going to be our year in 2019 to begin with so look to the future and lets see if a young pitcher or two will improve.Its one thing to improve your team but we always are going to play catch up because the Cubs and Cards will look to get better even if they win 100 games.That’s why winners stay winners year after year.Its all about ownership and what kind of commitment they make to their team and fans.

    • jveith1991

      I personally think the Brewers will take a large step back in their record in 2019 due to regression from the starting pitching.

    • Davy13

      “…use 2019 to figure out what you need” Hasn’t the team been doing just that since 2014? Why would season 2020 be any different than now? There will be teams then that will do what is being done now: spend money to acquire high-priced FA or trade prospects to become contenders? That is what competitive teams do. It is time for the Reds to seriously show that they want to be competitive.

  24. Mason Red

    Meanwhile many teams have been busy this offseason including the Cardinals today. It might be early December but as Tom Hanks famously said in Apollo 13 “the earth is getting big in the window.” Meaning spring training isn’t that far away.

  25. Klugo

    A day late and a dollar short. That’s our mantra. The Reds Way. The excruciating agony of being a Reds fan in the 21st century. Tick tock goes the clock while we wait for our overwhelmed FO to do something. Or maybe it’s all just lip service for the real plan. Draft, develop, and wish upon a star. Sometimes I wish I could just be a Cardinals fan.

  26. WVRedlegs

    Suffering sucatash! Get the pitching.
    Someone wake Walt up, it’s time to go to Las Vegas for the winter meetings.

    • roger garrett

      I agree on the pitching but could we just not disturb Walt.Just pains me that he might actually still have a voice even when I know he does.

  27. Old-school

    The Cardinals are desperate to win now. Ozuna/Carpenter/arent controlled much longer and Molina will be retired in 2 years.

    Reds need to add players who will pieces to the puzzle in 20/21/22.

    Trade scooter for a great bullpen piece and unload his $11 million price tag. Put Senzel at 2b, sign Pollack for CF with the $16 million saved from hamilton and gennett and sign a lefty mid rotation starter for 2-3 years.JA Happ or similar. Then sign the big FA next year to finish the rebuild – Gerritt Cole, etc. Prospects stay.

    • jveith1991

      Pollock cannot stay healthy for an entire season and is asking for a deal for $80 million over five years. He’s only played more than 137 games in a season once. If I were the Reds, I’d be interested, but only to the tune of 4 years/$56 million. Given that the Reds have Senzel, Trammell, and India coming within the next two years or so, the Reds could then potentially trade him.

      • old-school

        Lets say 4/60. that’s $15 million AAV. Injuries are a concern for anyone. By cutting Hamilton and trading Gennett- its a revenue neutral move and allows for investment in pitching the next 1-2 years. Pollock is a difference making RH bat at a prime position-CF. GABP would only help him. It allows Schebler and Winker to man the corners with Trammell in the wings for 2020. Senzel goes to 2b. This one piece would solidify the starting 8 for 3-5 years -assuming Peraza takes that next step.

      • old-school

        Increasing payroll to $150 million by 2020 would be key but allocating it between SP, the everyday 8-9 and the bullpen and young v old players is more important. The only way to secure top shelf pitching is to play the young cheap elite prospects , freeing up payroll.

        An outfield of WInker, Schebler and Pollack would be 550k 550 k and ~15 million.

        Total Outfield Budget 16 Million plus 2 bench players at minimum salaries.

        The infield would be Suarez $8 million AAV ’19-20, Peraza est $3.5 million, Nick Senzel 550K and JV $25 million. That’s $37 million

        Barnhart and Casali combined will be $4 million.

        That’s a starting 8 with 2 catchers at $ 60 million.

        Purging the contract of Hamilton, trading the contract of Gennett and freeing up Baileys contract after 2019 allows for tremendous potential investment in pitching in 2019/20+

        The Reds could then get a JA Happ or similar mid rotation starter now for 3 years and then land a #1 next year for 2020-23 and get more bullpen help. It also would allow extensions to young players.

        2020 Opening Day lineup

        Senzel 2b
        Votto 1B
        Suarez 3b
        Schebler LF
        Pollack CF
        Winker RF
        Barnhart C
        Peraza SS

        Position player budget ~ 55-60 million

        Sp #1 Gerritt Cole or similar- 5/150- sign in offseason before 2020opening day.
        SP#2 Luis Castillo-$ 2 million
        Sp #3 JA Haap-3/42 or similar
        SP #4 FA or Disco 5 million
        SP #5 Mahle/Reed.Santillan- 550 K

        SP rotation $50-55 million

        Bullpen- Iglesias/Lorenzen/Garrett/Hughes/FA lefty/ elite major league ready arm from Gennett trade/Romano/

        Bullpen $30 million

        Bench and extensions $10 million

        Total Budget $150 million and prospects stay and Santillan and Trammell and Tyler Stephenson and India and Greene and a 2019 top 7 pick are still in the farm system.

        Use 2019 to evaluate players for extensions or to re-establish their health to see what gaps need filled in 2020.- Garrett, Peraza, Castillo, Lorenzen, Disco.

      • lwblogger2

        Not sure it could come together like that but this is kind of the idea that’s in my head after a very disappointing 2018 season. Small improvement in 2019 and get ducks in a row. Go all in for 2020 and beyond. Keep the prospects too.

  28. Sliotar

    I disagree with Steve’s premise. On many levels.

    However, that does not mean I am an apologist for Castellini or any of the other 50 minority owners (just slightly overstating that number, there are many).

    Blustery Bob is among the worst owners in US pro sports, IMO. Easily in the Top 10.

    • Sliotar

      It was reported that the BAM Tech windfall was given to the owners, not the club, as they were the one who put up the $ to get the project started.

      I don’t remember seeing any MLB team state the BAM payout was being applied to payroll. If there were, they were few in number that announced it.

      In the Reds case, Castellini/Williams said that the BAM $ might go towards a dividend/payout to the owners, since they claim the owners had never taken any $ out of the club since Castellini bought it.

      If you look at Operating Income, which Steve did not list in his piece….I would say that is probably true.

      For 2018, per Forbes, $14M in Operating Income from $243M in Revenues is less than 6%. Not a lot to split up, especially depending upon the tax implications for the club and the individual owners of sending out payments.

      I respect the passion to want the team to spend. However, as others have noted, conflating the long-term appreciation of the team’s value and its year-to-year operating revenues to date isn’t the best way to argue for it, IMO.

    • Jeff Reed

      It seems to me that Cincinnati has more than it’s share of the worst owners in U.S. pro sports, Castellini and Brown.

  29. Mark Tokarski

    I struggle with baseball statistics, every time I turn around a new one .., Fmho, Hooj, Jwiwik .,, I am making these up. The last one is Jee whiz I wish I knew. But this piece, hard dollars, I understand. Reds ownership does not need to field a winning team to make money. In the insurance business, that is called a “moral hazard.”

  30. OKIE Red

    I just love how everyone wants to spend other people’s money. Steve, your article is well written and I totally understand where your going, however, I basically only agree with one point. The only way the Reds payroll is going to increase in a substantial way is if Mr. Castellini adds money from his personal account. We can all argue on whether or not he should, hence, spending other people’s money.

  31. Sliotar

    “ownership only need unlock a tiny fraction of the $1 billion in value by taking on debt”

    “spending should come from wealth, not necessarily the yearly sums that come in”

    Beyond the fact that strategy isn’t taught in MBA school, would it even work in this case?

    If the spending was for a new minor-league instructional center, or a club-owned spring trading stadium….perhaps. Something that depreciates over a longer period of time, with a greater confirmed revenue stream.

    For player salaries? On a 67-win club?


    -Too much risk (Keuchel could easily go through a Bailey-like injury stretch, for example)

    -No guarantee of return on investment (spending $175 million does not guarantee a playoff spot, and the debt does have to be paid back).

    Get a real salesperson in charge, and sell all those empty seats if you want more immediate revenue. Too much complacency in all of Reds business operations. Flat out lazy marketing.

    • Jim Walker

      Somebody asked C.Trent yesterday in his chat session how he thought FC Cincinnati might impact the Reds.

      Don’t recall his exact response and don’t to put words into his mouth but it was something like to date the Reds are politely dotting all the i’s and crossing all the t’s in welcoming FCC to town but at some point there would probably have to be some adjustment and reckoning in the Reds marketing efforts because much of teams’ seasons are concurrent. Guess we will see if the mountain wakes up and moves a bit.

  32. Davy13

    Since I was not an MBA, I’ll take your word that what Steve presented would not accord with business strategies in an MBA school. But then again, Steve’s analysis is about the business strategy of a professional sports team which runs on business principles that are different and , in some cases, unique from typical businesses.

    + A professional baseball team, like the Reds, does work under the normal laws of a supply & demand and antitrust business structure. For example, baseball has held a unique exemption from antitrust laws. Much of its income is from revenue sharing which is not part of a typical business/economic capitalistic structure. It does not allow for anybody to start a baseball franchise without approval from a group of owners (form of oligarchy and anti-capitalistic).
    + Professional sports is a really an entertainment business. It produces games whose primetime (not so ready primetime) players’ skills perform through competitive play before paying patrons (fans in the seats or viewing audience through media outlets) for their entertainment which involves the enjoyment of victory of one’s rooting interest. The business strategy of the entertainment business is different that your retail business because your main commodity to attract customers and make a profit is your players who also happen to be your employees. In order to present a movie or stage production that is attractive and believe it can attract a large audience, a production company has to invest its own money (or take a loan out) to pay the performers that hopefully will perform well, provide an quality production (possibly award-winning), and bring in a large audience. A sports franchise like the Reds need to do same. In order to make money and sustain, the teams to invest money in its players (performers) that will provide a winning product and as result attract a larger audience/patrons

    So Steve’s business strategy may not be taught in MBA school but professional sports is not a typical capitalistic business. He sees it as it is – an entertainment business which needs to financial invest in its cast (the players) and its backstage crew (managers, coaches, etc) from its producer/producers to provide a quality, successful production to attract and entertain a large fan following.

    • Steve Mancuso

      I’d like to add this. I’m not saying that principles taught in B Schools are wrong or that in general businesses should be run by spending from yet unrealized appreciation (although it’s a pretty common practice). I’m saying the past few years in the baseball industry have been extraordinary in terms of revenue inflows. I said explicitly in the post that it would have been hard to make this argument, particularly with the Reds, even five years ago.

      My point is that given the *unique* nature of the rapid valuation of the Reds – $400 million in 4 years – that it is reasonable for Reds ownership (and other baseball organizations) to adjust their standard “break-even” policy and put more money in payroll. If your asset is appreciating $100 million (or more) every year, investing $20 million back into the club isn’t a radical concept, at least to me. The new money might even be returned in the form of higher revenues that come from winning.


    So, are you proposing another couple bobble head promotions? Or perhaps add a second fireworks night, or a couple more bark in the park games? I think we might be getting to the saturation point as far as promotions/marketing is concerned.

    I appreciate all the efforts on each side of the argument. Great points by each side. Reminds me of the old adage, liars figure and figures lie. Bottom line, it seems pretty evident that Bob and his fellow MLB owners are getting richer by the minute. I concur with the above commentor that he was becoming disenchanted with professional sports. Me too. It is clearly all about the money! In my experience, it seems verrrry few are the owners that are really trying to field competitive teams. Too busy counting their profits.

    On a more positive note, it appears that someone in this organization is truly trying to turn around the culture of losing that has engulfed this team over the last few seasons. Whether or not Bob is willing to spend more on salaries is not something we can control. About all we can do is hope this is not an abberation and something else positive happens during the winter meetings, or soon. The other option is to choose another team to root for, or boycott…probably not the most realistic choice. Boycotting the NFL was one thing…but baseball? Personally, I’m not ready for that.

  34. Ronald Couch

    If all this info is accurate, and then its safe to assume the union also has this info, and we can bet our a$$e$ on a strike. i cant help but see this info as being somewhat misconstrued, in that i dont think we would see playoff and close to playoff teams having fire sales this winter. The Indians are looking to sell off from the payroll Castillini has approved for us this year. Seattle and Arizona are selling off too.This is a great story, I just think there is even more to it than this.

  35. big5ed

    I don’t know, Steve.

    The value of any business is generally the present value of anticipated future income streams. The Forbes article, which we both assume is accurate, indicates that the Reds are worth $1.01 billion, but that $425 million of value comes from its share of MLB’s holdings, which generally are its 100% interest in MLBAM, its 67% interest in the MLB Network, and other investments, but primarily the proceeds of MLB’s sale of the Expos/Nats to the Lerner family X-years ago. (The article doesn’t delve into the implication of a team’s tax recognition of the future receipt of that $425 million.)

    The equity value of the Reds’ business operations, then, is not $1.01 billion, but instead that amount LESS whatever the after-tax value of the MLB investments are, which we will call $351 million, LESS the Reds’ debt. The article’s listing as a debt/value ratio at 10%, which I assume means Forbes’ estimate of $100 million. That leaves the equity value of the business operations at maybe $550 million. (I have heard that the Reds generally used the BAM Tech payout to reduce debt, but that is unclear.)

    Not too shabby, of course. But much of the increase in the value of the Reds is from the increase in the value of the aforementioned MLB investments and enterprises, not from national or local baseball operations. Because the $425 million is not available to the Reds for use (and there are restrictions on how much debt the team can take on), the Reds have to premise their budgeting and planning on their baseball operations.

    You do have to give credit to the Castellini group for some sharp business practices. The new local television contract is much better, and with very good ratings for a bad team, the deal to give the Reds equity in that enterprise was a strong one. The group has also put a lot money through the years in GABP upgrades. When the team gets better and attendance grows, GABP will produce a lot more revenue than it does now.

    I would suggest we use the Mets as a cautionary example of team’s realistically being constrained by its operating income. Fred Wilpon was a long-term client of Bernie Madoff, and (it’s complicated) was deemed to be a net winner from the scheme, and ultimately had to pay back $45 million in clawback to the bankruptcy estate. Plus, Wilpon “lost” all the phantom investment earnings that he thought that he had earned, but hadn’t. In short, Wilpon got crushed, and the Mets for the last 10 years have had little ability to borrow to address cash flow issues, although that is about to change. The Castellini group is not in this position, or close to it, but they are still constrained in general by actual profit-and-loss operational issues. In that regard, I think attendance is a much bigger issue than you suggest. An additional 400,000 tickets sold at $25 per fan in revenue would generate an extra $10 million, almost all going to the bottom line.

    Can the Reds reasonably spend more money than they have been spending, even under my more conservative view of the team’s position? Certainly, and they have in fact indicated that they could spend about $30 million more this year. But I don’t think we as fans or consumers really want the ownership group to get too far out over their skis, especially as the window begins to open.

    The Reds still just do not have the same ability to paper over a bad contract like the Yankees or Dodgers do.

    • BK

      Well said. The problem with debt is it has to be repaid. The Reds have done this in the past under the auspices of defferred salary to some higher earnings players. I would only expect the Reds to use debt if they thought the debt this year would boost future revenues (e.g., ticket sales). Last Inread, the Reds earn approximately $40 per attendee from the ticket, parking, concessions, etc. So, 400K boost in attendance would generate $16M in operating revenue. This is one way the Cards outdo the Reds. Having a consistently competitive product builds a long-term fanbase and consistently high attendance.

    • Steve Mancuso

      Organizations are worth what people are willing to pay for them. Franchise values are influenced significantly by the value of the most recent franchise in that sport that was sold. That’s at variance with the way most other businesses are valued. I know that.

      I understand the sentiment behind this kind of reply. It’s based on conservative and traditional business practices. The point of my post was that major league baseball franchises aren’t functioning like normal businesses. Media contracts (both local and national), gambling, streaming, and all the other items I mentioned in the article show that. Forbes is on it.

      Conservative and traditional business practices are outmoded in this unique circumstance. In the same sense that our understanding of what it takes to win baseball games on the field has changed radically in the past five years, so has it off the field. Not only are classic “look at annual operating expenses and revenues” models out of date in this industry — see Miami and Atlanta examples — but even within that old framework, annual revenues will continue to improve.

      My view is Reds ownership should get in front of the curve and change the way they figure our how much money they want to spend and base it more on the escalation of the value of their business more than incremental annual balance sheets. I see much of the pushback here (not in your comment per se, but generally) as simply “but that’s not the way it’s been done” which doesn’t deserve any more presumption given the circumstance than using RBI as a way to evaluate hitters.

      • BK

        “Organizations are worth what people are willing to pay for them. Franchise values are influenced significantly by the value of the most recent franchise in that sport that was sold. That’s at variance with the way most other businesses are valued. I know that.”

        This is only partially true. If you can afford a billion dollar business, you can also afford financial analyst that can help you accurately value the team from an investment perspective. The reason the sale of a professional sports franchise resembles the most recent sale is these analysts are coming to similar conclusions on operating revenues (ticket sales, TV rights, etc.), expenses (payroll, travel, facilities, etc.) and underlying assets (stadium, spring training complex, exclusive marketing rights, etc.).

        Financial analyst can then overlay the know (past & present events) onto projections for likely future scenarios and provide the decision maker with risk levels for different price points on the franchise. This is when the decision maker decides how much risk they are willing to assume and therefore the “what they are willing to pay.”

        As franchises values have risen, I would not anticipate you will see sole billionaires making many of the future purchases. It will most likely be a group of investors. The more broad that investment group is, the more they will rely on the analytics and the less any one person’s personal risk tolerance will dominate the decision.

    • Steve Mancuso

      The comparison to the Yankees or Dodgers in your last sentence is a bit of a straw man. No one is saying the Reds can or should spend $200 million + and shrug off bad contracts. But, I thought I made the case that small market decision-making is a choice, not a fate. Not with billion-dollar (or two-billion dollar) teams.

  36. Chris Garber (@cgarber8)

    There’s a lot of work behind this piece, and it’s persuasive, but I ultimately can’t agree with Steve’s conclusion that cash flow doesn’t matter.

    The guy who owned the Diamond as Big as the Ritz was able to chip off little pieces and sell them. But most people who own an illiquid asset — like a baseball team – don’t have that option.

    The players cash their checks in US Dollars, and that money has to come from somewhere. Either (1) cash on the balance sheet, (2) a bank loan, or (3) a cash infusion from the owner(s). I think you have to choose one of those – all of which have consequences.

    Ultimately, we can hand-wave the problem away with “Castellini is a billionaire and he can/should just do it.” If that’s the ultimate premise, we really don’t need any charts, and there is *no* reasonable limit on spending.

    • Steve Mancuso

      Bank loan or cash infusion from owner of $25 million more than he’s planning to spend this year. That’s the limit. No more or less arbitrary than saying $130 million is the right amount.

    • turbobuckeye

      Well said sir, my points exactly.

  37. Steve Mancuso

    For the people still reading this thread and who generally have pushed back on my original post … let me ask this hypothetical question two ways.

    Is there any level of increase in value of the Reds franchise that would change your mind? Suppose tomorrow a baseball team that was similar in structure to the Reds sold not for $1 billion, but $2 billion, on the basis of legalized gambling and in-market streaming futures.

    In that case, Reds ownership’s investment would have doubled in expected value in resale and therefore value. In that case, with a $2 billion asset, would you be OK with expecting the Reds to borrow against that and raise payroll to, say $160 million?

    Another way of putting this. If Castellini sold the Reds tomorrow for $1 billion and passed that money around to the ownership group, would you look back and say – wow, those people got really, really wealthy off the team. Given that, they sure were skimpy how they spent on payroll?

    • Sliotar

      “Conservative and traditional business practices are outmoded in this unique circumstance”

      Baseball is a business…unique compared to many industries, but the principles of being successful are still the same….take in more than you spend, know the difference between productive (return on investment) debt and unproductive (speculative) debt, etc.

      Going into debt to buy players for a hoped-for outcome (playoff spot) that no one can guarantee is speculation of the highest order.

      IMO, your reply right above this suggests that you are struggling with the ethics vs. practicality/business case of what you are proposing.

      Wealth is usually grown by shrewd and ruthless decisions, and demanding returns on investment, not by “doing right by the fans” (depressing as that is to write).

      The late Mike Illitch “going for it”, trying to win a World Series with the Tigers at all financial costs before he died, may be the last of his kind we see in our lifetimes in MLB.

      • Sliotar

        Plus, going into debt totally lets Phil Castellini and Dick Williams and everyone reporting to them off the hook.

        If I am a 1% owner of the Reds, and Castellini brings me Steve’s suggestion, I say immediately….

        “Tell your son to get that stadium packed with paying customers, and tell Dick Williams to get the team up into the 80-plus win category.

        Once your people have done this, and exhausted every resource for revenues and wins that they have under their control, if we then need to go into debt to get the Reds over the hump…. I will consider it.”

        It stinks that the Reds are a 67-win club after 4 years of rebuilding h*ll. But, when you put unqualified people in charge of business ops (Phil) and baseball ops (Dick), this is often the outcome.

        Dick may turn out OK, especially if he and Bell become the next generation of Jocketty and Castellini….but why no one calls out Phil for literally doing nothing but adding beer taps and bars is beyond me.

    • BK

      The underlying value of the franchise does not impact my view. Borrow money when you expect the return on your investment (in this case spending on a player) to exceed the cost of the interest you pay and other competing investment opportunities.

      One of the reasons franchise values have increased so handsomely over time is that revenue growth has exceeded expense growth. If baseball (or just the Reds) transitioned to a model where they routinely grew debt or required ownership to pay an annual fee to grow player payroll (the opposite of a company paying a dividend) you would likely see the franchise’s valuations begin to reverse.

      RBI are not an inherently bad stat, they are just not predictive of future performance. Even in the modern analytical era of baseball, we still celebrate RBI after they happen. We simply know there are better stats that should influence which players a team should covet like on base percentage for example. Expecting the Reds to make payroll decisions based on the team’s underlying valuation, particularly in a market that is mostly static, would be just as backwards as chasings last year’s RBI king. In business, cash flow is the equivalent of on base percentage.

      To execute your strategy, we need a sole owner, that is willing to pour money into their hobby without regard to return on investment. Before sports franchises grew into billion dollar entities that occasionally happened.

      What we actually have is an ownership group that is contractually bound to collective decision making with a CEO that has a fiduciary responsibility to make decisions in the best interest of that ownership group. I’m not anticipating they will collectively agree to pump money into the franchise unless they see an appropriate return on investment. Nor would I expect any of them to begin making donations to the franchise.

      That said, thank you for consistently writing thought provoking articles. The fact that I disagree with your premise in this particular case does not in any way diminish my admiration for your work.

    • Chris Garber (@cgarber8)

      I suggest an entirely different paradigm: The problem is that increased payroll spending is no longer rewarded financially. Stated another way, the teams get too much guaranteed money. There is little to no revenue upside to winning.

      No rational actor would operate in the continual deficits you describe. (Borrowing $25M once is no big deal – and the Reds probably do that already. But doing that every year runs you into the toilet.) BUT, if there was a bigger short-term financial difference b/w winning 80 games and winning 100, it’s a different calculus.

      • turbobuckeye

        I agree with this. FA is not efficient.

        Steve, to address your hypothetical which (as I understand it) is: “If the Reds suddenly doubled in value to $2bb, would you expect ownership to borrow against that equity to support a higher payroll?” That may be a coarse way of putting it, but it’s a good question nonetheless.

        To answer your question, no I wouldn’t expect that. If the Reds can quickly double in value, they can just as easily lose value. And business owner understands that. Why take money out of your house to fund a lifestyle you can’t really afford? What if the value of your house doesn’t keep going up? What if it goes down? In 2006, these questions seemed silly. Today, not so much.

        The real answer to all of this is a salary cap and a salary floor. And I think that MLB also needs to rethink how young talent is brought up and the years of control that teams have over said talent. I also think we need greater revenue sharing.

        I might come off as a greedy capitalist defending Bob’s decisions to keep payroll where it is, but MLB is a unique animal. I think that greater payroll equality would be terrific for the sport and solve a lot of these discussions.

  38. turbobuckeye

    Let me add one other, unrelated point.

    There are some really smart people who write in the comments section on this site. Unfortunately, the actual comments section may very be the worst possible way to comment and converse on an article. Could Facebook or something a little more modern be used?

  39. Mark Elliott

    Great article, Steve. Wish someone would do the same thing on the Bengals financial situation. Have a Merry Christmas.