Forbes has produced top-quality business journalism for more than a hundred years. Yesterday, the company released its annual report on the value and profitability of Major League Baseball franchises, including the Reds. It’s a project Forbes has worked on and perfected for more than two decades.
The report’s conclusion: No surprise. Ownership of a major league baseball team continues to be lucrative. According to Forbes, the average MLB franchise is now worth $1.78 billion, an 8% increase over last year.
In December, I outlined how baseball was awash in new money streams from gigantic multi-platform national media deals, Facebook and a subscription video service called DAZN. That doesn’t include revenue from newly legalized gambling on baseball, a gusher of money that has only begun to trickle in. These core assets are owned in equal share by each of the 30 teams.
Forbes: “The league’s ownership in Major League Baseball Advanced Media (100%), BamTech (15%), the MLB Network (67%) and league’s investment portfolio are included in our values, equally divided among the 30 teams. These three assets constitute over $400 million in value per team.”
The 2019 Forbes calculations of average team worth do not include the value of equity shares in regional sports network. Media ownership has become a big asset for more than half of all MLB teams, including the Reds. “Media revenue” is extra-valuable to teams because it does not have to be included with the “baseball revenue” turned over to the league for revenue sharing.
The Forbes report reveals an industry on a steady, upward trajectory.
The outlook for our hometown team is no less rosy.
Forbes estimates the Reds are worth $1.1 billion as of April 2019. That’s roughly a 10% increase over 2018. It’s the second year in a row the team has increased in value by $100 million.
The report is welcome, expected fiscal news if you have an ownership stake in the Cincinnati Reds. On the other hand, it does throw a bright spotlight on the awkward truth that Reds owners have continued to do quite well financially even as the team strings together 90-loss seasons.
From 2015-2018, the Reds averaged 95 losses a year. Yet over that same time period, the value of the franchise has nearly doubled, from $600 million to $1.1 billion. Again, that doesn’t count the club’s new FSO ownership share.
Process that last paragraph before reading on.
Beyond that, Reds fans will find a second, more explosive piece of news in the Forbes report. In addition to the club’s skyrocketing value, the local team enjoyed an “operating income” $37 million to the plus-side in 2018. Operating income = revenues – expenses.
If that’s accurate, it amounts to the largest annual profit for the Cincinnati Reds in team history, by far. A neat trick during a year when the Reds went 67-95 on the old ball field.
And that jaw-dropping number underestimates by more than half last year’s payout to ownership.
(Hope you’re back sitting down, at least for a second.)
Not included in the $37 million is the one-time $50-68 million cash payment every major league team received in the first quarter of 2018 for the league’s sale of BamTech shares to Disney. Wooo!
Also not counted by Forbes in operating income is the profit stream from the Reds’ (yet-undisclosed) equity share of Fox Sports Ohio won during negotiation of the rights contract a couple years ago.
So, let’s see. In one year (2018): $100 million in added wealth, plus $100 million in annual operating profits? Pretty soon we’ll be talking real money. Since it’s the start of racing season, we can lament how close the Reds were to the century-mark trifecta of a 100-loss team.
That situation demonstrates the startling disconnect between the win-loss and revenue-expense columns for MLB franchises. It’s an anomaly in the business world. The value of each baseball team depends hardly at all on its ticket and hot dog sales. Those quaint, local, analog receipts represent a limited and ever-shrinking fraction of a team’s gross revenue.
In the Reds case, despite another losing season and declining attendance, gross revenue grew to $257 million last year, an increase of $14 million over the previous year. Maybe that’s why those empty seats at GABP this month won’t necessarily set off alarm bells in the owner’s box.
Yes, Reds ownership did commit more money to major league player payroll in 2019.
That number is $126.7 million, net of the $7 million in Dodger cash. That’s about $25 million more than 2018 and $11 million better than the previous high in 2015. It’s a nice one-year increase and we don’t know if they reached their budget limit. Maybe there are plans to boost it even more in 2020.
But when you step back and take a careful look, $127 million is in line with the gradual payroll increases of 2009-2015. Nothing bold.
And yet, boldness was appropriate.
Let’s review. Since 2014, the value of the organization has increased from $600 million to at least $1.1 billion. Why is the Reds major league payroll on the same glidepath it was in 2014?
The $25 million bump is modest in the context of $100 million in 2018 profits.
The new Forbes report reinforces my December conclusion: Pleading small-market poverty for the Reds is a charade. Billion-dollar baseball teams that act small do so by choice, not fate. Reds ownership possesses the resources to scale bigger. If they don’t, it’s because of small thinking, not a small market.