The $ecret to Our $uccess

Here are the numbers, straight from Forbes:


 

These numbers are enough to drive a small-market team to drink. Consider, for example, the Pittsburgh Pirates. The Forbes numbers show that the Pirates earned gross revenues of $144 million in 2009, while the Yankees earned about three times as much. That’s a significant gap. But when you look at the two team’s gate receipts, the gap is wider still. The Pirates had $24 million of gate receipts in 2009. According to Forbes, the Yankees’ gate receipts were more than thirteen times higher.

Thirteen times higher! Let’s put this in perspective. On average, the Yankees’ 2009 gate receipts for a seven game home series were greater than the Pirates’ gate receipts for the entire year.

Strange, but true: at this moment, the Yankees may have already earned gate receipts in excess of what the Pirates will see for all of 2010 It is mid-April, yet in the race for baseball gate receipts, the Pirates have already been eliminated.

(The Pirates would have been eliminated earlier if the Yankees had opened the season at home.)

You say you don’t believe the Forbes’ numbers? Last year, the Pirates had total attendance of 1,577,853, and an average ticket price of $15.39. Do the math and round off: you get $24 million, on the nose. The Yankees? Attendance of 3,674,495 in 2009, with a $67 average ticket price. Multiply these two figures and … you get a number less than that reported by Forbes. Whoops. But the Forbes numbers include sale of club seats, which presumably makes up the difference.

There’s a lesson in these numbers, apart from understanding the chasm between the Yankees and the Pirates. A baseball team’s financial success depends on the team’s ability to attract fans to the ballpark. The most successful teams earn the biggest gate receipts, not just in terms of overall dollars, but also in terms of the percentage of their revenues earned from gate receipts.

To get a better picture of the importance of gate receipts, we need to go beyond the Forbes numbers. Forbes estimates each team’s annual gross receipts after the distribution of revenue sharing money from rich teams to poor teams. So while Forbes reports Yankees’ revenues for 2009 at about $440 million, the Yankees pulled in close to $600 million in 2009 before they paid their revenue sharing. Similarly, while Forbes reports the Pirates’ 2009 gross revenues at about $145 million, this amount is calculated after the Pirates’ receipt of more than $35 million in revenue sharing. The Pirates’ gross revenues before revenue sharing are closer to $110 million.

If we want to get a picture of each team’s true annual gross revenues, we have to factor in the amount paid or received by each team in revenue sharing. Unfortunately, we don’t know these amounts – the lords of baseball do not reveal this information. All we know is that total revenue sharing in 2009 was $433 million, and that revenue sharing payments and receipts are calculated (more or less) relative to each team’s gross revenues. So when it comes to figuring what each team pays (or receives) in revenue sharing, we’re reduced to guessing.

Here’s my best guess of (1) the amount of revenue sharing paid or received by each team, (2) the true gross revenues of each team, before these amounts are paid or received, and (3) the percentage of each team’s estimated true gross revenues that are generated from gate receipts:

OK, I admit it: these numbers are guesses. Yes, we’re showing revenue sharing payments of over $40 million to some of the poorer teams in baseball, which is more than others have estimated. My numbers are not perfect, they are rough estimates. If you don’t like my guess, propose a guess of your own. But for the moment: assume that these guesses are accurate. Can we learn something from these numbers? Look closely, and a pattern emerges:

1. If your team earns more than 50% of its gross revenues from gate receipts, then you’re a member of baseball’s elite. You’re the Yankees, or the Red Sox. Any team aspiring to Yankee – Red Sox territory should be shooting to exceed this 50% threshold.

2. If your team earns more than 40% of its gross receipts from gate receipts, then you’re in the upper class of baseball. You’re the Dodgers, or the Phillies, or the Cubs, or the Cardinals. You can expect to compete for the post season nearly every year (or for the Dodgers, every year that your principal owners don’t divorce).

3. If your team earns more than 35% of its revenues from gate receipts, then you’ve achieved a sort of baseball respectability. You’re in a league with the Rockies, the Astros and the Tigers. Most years, you can hope for a good season. At least occasionally, you’ll have an opportunity to go deep into the post-season.

4. If your team earns less than 30% of its income from gate receipts, you have a problem. You’re either a chronically weak franchise, like Pittsburgh and Florida, or a team heading in the wrong financial direction, like Cleveland and Baltimore. You might get lucky (like the Rays) and assemble a hot team too young to be eligible for free agency. But for the most part, your highest aspiration is mediocrity.

Take a look through the list above – you’ll see that these rules apply more often than not. The top three teams for gross revenues are also the top three teams in percentage of revenues derived from gate receipts. Five of the top six teams for gross revenues are in the top six for gate receipt percentage. What holds true at the top of the list also holds true at the bottom: of the 11 lowest revenue earning teams on our list, only three have gate receipt percentages above 30% (and one of those three, the Royals, barely tops the 30% barrier).

True, there are teams here that don’t fit the pattern.  The Angels, Mariners, Rangers and Braves all seem stronger than their percentages would indicate. These four teams defy our rules of thumb, probably for reasons unique to each team.

It’s interesting that some of the percentages that seem “off” at first glance may actually have a hidden meaning. If you asked me to pick two small market teams on their way up, I’d pick the Twins first and the Brewers second. Check out each of these team’s gate revenue percentages. Twins, 37% — better than the White Sox! Brewers, 41% — better than the Dodgers! Do these percentages indicate that these teams have better times ahead (financially, at least)? Maybe so.

But I digress. Our point is that a baseball team’s financial health depends on goodly amounts of ticket sales. There’s no helping a team that cannot attract fans to its ballpark. Again, let’s look at the Pittsburgh Pirates. It is true, Pittsburgh plays in a small media market, compared to the tens of millions who live in the New York tri-State area. But it does not take tens of millions to fill Pittsburgh’s PNC Park. It takes tens of thousands, and the Pittsburgh population is well in excess of tens of thousands. In order to succeed, the Pirates have to get these folks to buy Pirates tickets. 

Remember what the numbers tell us: the secret to financial success in baseball is getting the turnstiles to turn.

64 thoughts on “The $ecret to Our $uccess

  1. Larry@IIATMS

    Mike from Sarasota, I'm playing with some cap/floor numbers in preparation for my next post.  My best guess is that a $125 million cap would require something like a $72 million floor.  Yeah, I doubt the Yanks would be all that concerned about a $125 million cap, so long as it was a soft NBA-style cap, because they'll just exceed the cap, like a number of NBA teams routinely exceed the cap.  But I don't see how teams at the bottom of the ladder could currently afford a $72 million floor.  In short, a cap/floor might destroy the small market teams, instead of helping them.

     

    I'm playing with a proposal that would gradually introduce a salary cap/floor with a target of $120 million at the top end and $72 million at the bottom end, which would need to be introduced gradually in conjunction with improvements in revenue sharing (so that the teams in small markets could afford the floor).  We'd need to have exceptions for the cap that are similar to the exceptions used by the NBA (such as a "Larry Bird" rule to allow teams to retain their existing players).  It's a fair proposal to the player's union, since the impact of the floor would more than offset the impact of the cap.  The difficult part is coming up with the best mechanism to get the small market teams to do their share to raise their own local revenues.

     

    My recollection is that 2/3 of the NFL revenue comes from their national TV deal, and that they split gate receipts 60/40 between home and visiting teams.  The NFL has a hard cap and a hard floor, which is something you can have in a league where revenues are shared so equally and there are no guaranteed player contracts.  We can't look to the NFL for solutions — you're quite right, the two leagues are too different.  The NBA is a better place to look for new ideas.

  2. lonnie 49

    something is fishy here….if these numbers are to believed, then they Yanks gross revenues are $296M more than the Bucs and their ticket revenue is $297M more than Buccos….which means the Buc non-ticket revenue is higher than the Yankees. I would highly doubt that is auccurate.

  3. Lonnie, sorry for any confusion.  I think you are looking at  gross revenues reported by Forbes, which are computed after the making (and receipt) of revenue sharing payments.  I'm estimating that there's a roughly $500 million gap in the revenues of the two teams before revenue sharing payments are made.  Take a look at the "Total Revenues" column in the second chart in the article.

  4. MarkH

    D Roc, I gotta take issue with your statement about Pittsburgh not supporting the Pirates.  This town is itching to follow a winner and would do so in a heartbeat, but the only way we can do that now is to go see the opposing team.  The Expos' fans took this same crap, as the Marlins do today; no one goes because the product is bad, then the fans take heat from the big market fans for not supporting the team.   Eighteen years since, not a playoff team, but since an over .500 team.    How many of you go back to a restaurant after you've spent $100 for mediocre food and poor service?  Hell, Pirate fans would be thrilled to have even mediocre ball.

    As far as the salary floor, any number that drives this ownership out is fine with me.  Make it $90 MM; how about $100 MM

    As far as tradition, name four MLB franchises that have been in the same city longer than the Pirates.  Baseball is built on the foundation of its tradition; look around Yankee Stadium.  Lots of history there, no?  Yet folks are ready to jettison one of the oldest franchises in baseball history because the ownership can't or won't compete in the ridiculous system it has generated.   There is indeed a disincentive to put a quality team on the field (or even to increase gate receipts)–the lowering of revenue sharing dollars.  But again, the fans take the heat for not paying out good money for bad baseball.

    Yes, the Pirates sell out the intraleague games when the Yanks or Sox come to town.  Bet all the other teams do too, large and small market alike.  It's a good thing for these teams.  But did you know that 2009 was the FIRST time the Yanks played in Pittsburgh since October 13, 1960?   But then, I don't look to the Yanks, Sox, or Dodgers as the saviours of the franchise; only ownership has that power, or Mario Lemieux.

  5. MarkH, great comment!  Hear, hear.

    Thinking over my post here, I regret any implication that the downfall of the Pirates is the fault of individual Pirates fans (and potential Pirates fans).  I was criticized above (a good criticism) for not being clearer on cause and effect, so let's be more clear: the Pirates' current attendance numbers are an effect of actions taken by Pirates ownership.

    But so long as we're on the subject of cause and effect … while I acknowledge that low Pirates attendance was caused by other factors, the low level of Pirates' gate receipts is now a "cause" for other "effects" — mostly, the effects of having low team revenues.  The financial revival of the Pirates should be focused first and foremost on causing a rise in attendance and gate receipts. 

    I think MarkH is right.  Give the Pirates fans a cause to show up at the ballpark, and we'll see the desired effects.

  6. Davey50

    What an excellent piece.  I wish the chart were a bit clearer, perhaps with a column that showed revenues before the impact of revenue sharing which would have helped Lonnie.  The significant analysis is the last few paragraphs which offer the appropriate challenge, TEAMS SPEND YOUR GATE PROCEEDS AND MAKE YOUR PRODUCT WORTH PAYING FOR!

    Also, maybe it is time for MLB to look at the fact that there are 6 teams within 9 hours of each other.  2 Chicago teams, Pittsburgh, Cincinnati, Cleveland and Detroit, and 4 of them are smaller market teams.   Maybe one or more should be moved.

  7. Davey50

    Check that  7 teams, I neglected Toronto to the list of 9 hour locations.

  8. Scott B

    I like the sober, realistic look at the revenues, the size of the markets.  And in keeping with that thought, I am proposing something that seems outlandish on the face of it.  It is like a lot of ideas.. like the ideas of Oliver Evans: he petitioned the legislatures of Maryland and Pennsylvania in 1786 for exclusive license for the idea of "steam carriages" for his improved steam engine.  Ridiculed and ignored, the world waited forty-plus years later to implement "railroads" in the USA.

    My idea:

    Since players change teams so often, and free agency and agents have redefined player "team loyalty" to the point of a footnote, why not simply put all players into a large pool, and teams pick by a lottery system, every year, the "starting position players" ( a lottery bucket for each position) and pitching staffs (by specialty…starters in one bucket, relievers in another).

    Salaries for players?  However the player association wants to "allot the pot" among the players.  Performance? Potential? Years of service?  Whatever formulation they choose.  MVP bonus? Heck, all the compensation fine print would make your head swim, but….that's why you hire an agent!  They do all the financial "heavy lifting".  Plus, part of the revenues (I'm certain the players would see the wisdom) could benefit players in their old age…forty-seven and not broke!  Maybe $50k/yr till they die…. Nails, Dykstra, I'm talking about you!

    Sure, you could end up with a team with Sabathia, Jeter, and ARod on the same team…in Pittsburg!  But some years would just be lucky for the fans of one city, others would not.  I think it would generate a lot…A LOT more excitement for MLB than the current set-up.

    Look, you cannot make players play somewhere they don't want to play, under the current set-up.If KC, Oakland, Pittsburgh, Texas, suddenly got flush, got billionaire owners who said, "Screw the gate, the attendance, bring me ARod and let's win!!! " …you know what would happen…the Yankees would simply raise the ante.  The MLB "owner" system is officially broken. If your automobile was exhibiting the same signs, you'd simply drive it or tow it, write it off, and begin life with a new (to you) vehicle.  MLB should do the same. The time is right, can be done easily (more easily than the paperwork for a CDS-squared, or CDO-squared) and so….let's get on with it.

    What is the purpose of Major League Baseball?  The "toy" of billionaires? Or something the fans live for, day by day?  Get rid of the super-rich owners…let them buy yachts on each ocean, but let the attendees own the teams.

  9. Davey50, thank you.  The column you're referring to is, I think, in the second chart in the post.  I'll try to create clearer charts in the future.  BTW, I hate relocation.  Moreover, if you scout the list of the largest media markets in the U.S., you'll see that there are no outstanding candidates to receive a new team.   Sacramento is available at no. 19, but there are already two baseball teams in the SF bay area not far away.  Orlando is available at no. 20, but it's not like the two existing Florida teams are doing all that well.  I'd love to see a team in Portland at no. 23, but at 23 you're talking about a small market.

    Scott B, you win the prize for the most outlandish proposal in anyone's comments.  Sort of like Rotisserie with real players.  I'm not sure what problem you've solved, and I'm not sure it matters!  Thanks for posting.

  10. Scott B

    The problem I am solving:

    The impossibility of teams that do not have the relative overall financial/population advantages of New York, to actually field a competitive team.

    Once MLB had expanded for the final time in the 1990s, it sealed the fate of the Pittsburghs, the Kansas City, the Milwaukees of MLB.  Sure, Florida, Tampa Bay snuck in for World Series appearances, but free agency has evolved, stats have become more creative and informational, and cashflow-bereft teams are doomed to settle for mediocre results (e.g. 78-84, then 84-78, then 77-85, year after year… ).  Look at Cleveland: powerhouse in the 1990s, but quickly fading, as their best players (Manny, etc) went to NYC/Boston.

    It won't be a "fantasy league", because real players together on a team always create a more compelling story than lists of numbers.  And, they ought to bring back more clubs in New York in my opinion (e.g. Brooklyn Superbas, New York Highlanders).

    $67 per ticket may be fine for a metro swath with plenty of seven-figure bonuses from Wall Street, but it won't fly (and thus, revenues won't be generated) in the rest of the country.

  11. Hank

    Instead of a team cap, how about a player cap at say 10-15mil… this way large market teams could not  'blow away' an offer of a smaller market team.  With revenue sharing, every market could in theory retain 1-2 elite players (then it becomes a matter of creating a desirable environment – winning, good organization, strong fanbase, etc)

    It also allows larger market teams to spend more if they wish by signing more players to max contracts (but they can no longer rely on outbidding on the superstars).

    This obviously will never fly but I don't see why capping a player's max is much different than a salary cap. A team  salary cap is more likely to create a wide rift in salaries as teams will be filling out rosters with min contracts to get under the cap and also may hammer veteran's value even more so then the recent free agencies have.

  12. Sean

    I have to say that as a Royals fan this is the most depressing thing I have ever read.  You might as well put up signs at all of the Kauffman stadium gates saying "Abandon All Hope Ye Who Enter Here"  I mean is there any reason to believe that the "chronically weak" franchises will ever recover?  If you read Joe Posnanski's blog then the answer is no. http://joeposnanski.com/JoeBlog/2010/04/19/forbes… The Royals try just as hard as the Yankees do according to Joe but it doesn't matter because the Yankees and Red Sox will always have a 35" bat while the Royals and others only get a 15" one. I mean we can't even win with a Cy Young award winning pitcher on the mound. :(

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