Money To Burn? (More On the Yankees’ Budget)

Sure, the Yankees are one of the most valuable franchises in sports – Forbes values the team at $1.6 billion, just behind Manchester United and the Dallas Cowboys, and well ahead of any other baseball team.  According to Forbes, the Yankees brand is the most valuable in sports.  The Yankees play in the third most expensive stadium in the world, and by some measures they have the most expensive player payroll of any sports team.  Yes, by most measures, the team is very, very rich.

But first and foremost, the Yankees are a business, a successful business.  They are governed by the same rules that apply to all businesses, and they have achieved success by doing the things that successful businesses do.  Successful businesses spend within their means. Joe Posnanski noted for Sports Illustrated that in 2009, the Yankees’ spent  94.4% of their revenues on their baseball operations.  This is a high percentage for a baseball team, but not an unusually high percentage: in 2009, the Kansas City Royals spent 94.3% of their revenues on their baseball operations.

Posnanski concludes from this that the Yankees’ 2009 spending was “almost exactly in line with their revenue”, and this is a key point: even for the Yankees, the amount of cash flowing out is limited by the amount of cash flowing in.  In other words, if we’re going to understand the Yankees’ budget, we have to do more than we did in Part 1 of this series, where we looked at the Yankees’ historic spending.  Here in our Part 2, we’ll take a close look at the Yankees’ revenues.  Do the Yankees make enough money to justify an increase in their budget, and if so, how high might this budget legitimately go?

More precisely, we’re going to take two looks at Yankees revenues.  The first look, a simple look, suggests that the Yankees are already spending close to their limit on player payroll.  The second look, a more complex (and confusing) look, suggests that the Yankees might be able to spend a heck of a lot more.

First Look (The Simplified Look)

To get a simple picture of the Yankees’ finances, let’s put together a simple income statement for the Yankees for 2009.  Of course, the Yankees do not publish their financial statements — baseball teams are privately owned businesses and are not required to publish their financial results.  So we’re doing what everyone (even Forbes) does when they write about the business of baseball — we’re making an educated guess.

Please keep in mind, this is only a guess … but also note that my guess ($26 million in profits) is not far off from Forbes’ guess ($25 million in operating income).  So maybe my guess is pretty good.

Let’s quickly walk through these numbers.  The $600 million revenue figure was widely reported earlier this year — this is what caused Craig Calcaterra to comment on the Yanks’ ability to print money. I think the figure may be high — it is based on a statement by CNBC reporter Darren Rovell that the Yankees’ business “now approaches $600 million in annual revenues”. But let’s go with the $600 million figure for the moment. Roughly 2/3 of these revenues — $397 million — come from ticket sales and Stadium luxury suite revenue. (This revenue has increased dramatically in recent years — the Yankees were “only” earning $157 million in ticket sales in 2005, and $52 million in 1997.) Other amounts come from local TV payments (around $65 million – more on that later), MLB TV and licensing (estimated at $30 million in 2007), concessions, sponsorship and advertising (estimated at $30 million in 2007), local radio and “other”.

Next, let’s look at the expense side of our financial statements. The $213 in payroll is from Cot’s Baseball Contracts. The $140 million in revenue sharing is the number mentioned by MLB Executive Vice President Rob Manfred in a speech he made in March at the Harvard Law School. $57 million in Stadium rent is taken from the prospectus issued for the bonds used to finance stadium construction (I’ve seen this number reported as high as $64 million, but I think the $57 million number is correct), and I found the $35 million cost for Stadium maintenance here.

I only have two more numbers to explain.

The Yankees’ $600 million in 2009 revenues includes approximately $72 million in post-season revenues.  Apparently, the Yankees can make a lot of extra money when they play in the World Series!  But there are extra expenses associated with making the post-season.  Using the financial statements for the Rays and Angels disclosed by, we can guess that post-season expenses run anywhere from 22% to 33% of post-season revenues. The $20 million of post-season expenses estimated above about splits the difference between these two percentages.

Finally, there are all of the other expenses that go into running a major-league baseball team: minor league operations, scouting, sales, advertising, travel, general and administrative, and so on. How much do the Yankees spend on these miscellaneous expenses? I haven’t a clue. But from, we  learn that the total expenses in 2009 for the Angels were around $229 million. If we deduct from this figure expenses that we’ve already estimated for the Yankees (payroll, stadium operations, revenue sharing and the like), we’re left with around $72 million of expenses that would fall under the miscellaneous category. Of course, it should be more expensive than this to run the Yankees — the Yankees’ revenues are more than twice that of the Angels, plus the cost of living is higher in New York. But again, let’s be conservative and assume that it only costs 15% more to run the Yankees. The Angels’ miscellaneous expenses plus 15% equal the $83 million of miscellaneous expenses we’ve shown for the Yankees.

Yes I know, I’ve made a bunch of wild guesses here … but my bottom line estimate is close to that of Forbes, so I don’t think I’m too far off.  What can we conclude from this?  We can conclude that with a $213 million budget for player payroll, the Yankees are already operating at the edge of profitability. The only reason the Yankees made a profit in 2009 is because they made it to the World Series and earned $72 million in extra revenue.  What if we cut that post-season revenue figure in half?  Then we’d be discussing a season like 2010, where the Yankees played 9 post-season games, 4 at home (compared to 15 in 2009, 8 at home).  Let’s try putting together a 2010 income statement for the Yankees, where we’ll assume that all costs and revenues are identical to 2009, except that we’ll cut in half both post-season revenues and post-season expenses:

This is my guess and I’m sticking with it until Randy Levine tells me I’m wrong.  By my estimate, the Yankees broke even this year.  The 2010 Yankees … with roughly $600 million in revenues and a post-season run falling two wins short of the post-season … may not have turned a profit.

Is this possible?  Of course it is possible. According to Forbes, the Yankees consistently lost money prior to 2009: $4 million of losses in 2008, $47 million lost in 2007, $25 million of losses in 2006, $50 million of losses in 2005, $37 million of losses in 2004, and $26 million lost in 2003.   Excluding 2009, Forbes last showed the Yankees turning a profit in 2002.  Between 2003 and 2008, the Forbes numbers show the Yankees losing a total of about $200 million.  We need to keep in mind that the Forbes numbers are only estimates. Still, Forbes is not the only publication that thinks the team loses money – see here, for example.  The Yankees themselves claimed for years that they’ve been losing money.  Brian Cashman said so here in 2005; Randy Levine said so here in 2008. According to one report in 2007, the Yankees at that time had not distributed profits to its ownership in 10 years.

So … this is our simplified view of the Yankees’ revenues, and the Yankees finances.  By this simplified view, the Yankees have a real need for a payroll budget in the range of $213 million.  If the team enforces this budget, it can about break even, assuming that it makes a decent run through the post-season.  By this simplified view, there is no money to burn, no ability to spend whatever it takes to make the playoffs.  By this simplified view, there is no extra money at all.

But that’s our simplified view.

Second Look (More Sophisticated, More Confusing)

Let’s forget everything I wrote above, and start over.

We’re primarily interested in a baseball team called the New York Yankees.  That team is probably breaking even financially, just like I said above.  But there’s more to the picture.  The team is owned and operated by the New York Yankees Partnership.  The partnership is 99% owned by YGE Holdings, LLC, which in turn is owned by Yankee Global Enterprises LLC, which in turn is owned by the Steinbrenner family.

This is more than a simple chain of command, since many of these companies own interests in businesses other than the Yankees.  For example, YGE Holdings, LLC owns Yankee Stadium LLC, the company that leases the new Yankee Stadium from the New York State industrial development agency that issued the bonds to finance the stadium’s construction.  Yankee Global Enterprises owns a stake in the Yankees Entertainment and Sports Network, more commonly known as the YES Network.  Yankee Global Enterprises also owns a piece of Legends Hospitality Management, the company that manages concessions, suite catering and team stores at Yankee Stadium (as well as at the new Dallas Cowboys stadium).  Reportedly, Yankee Global Enterprises owns a stake in dozens of smaller businesses, including Yankee Steiner Collectibles, the company that (in)famously sold dirt from the old Yankee Stadium to souvenir collectors at roughly $80 a tablespoonful.

In short: the Yankees are a business conglomerate.  More precisely, the Yankees are a part of a larger group of businesses, some of which (like the YES Network) are not fully owned by the Steinbrenners.  Is this conglomerate profitable?  We don’t know for certain (again, these are all private businesses), but it is almost certain that these businesses together are earning healthy profits.

Let’s look more closely at the most valuable business in this conglomeration of businesses, the YES regional sports network. Various estimates show the YES Network with annual revenues of over $300 million, or over $400 million, and with annual net profits of $150 million, or $200 million, or 60% of revenues.  These are huge numbers in relation to the normal business of baseball.  Consider that the YES Network revenues are higher than those of any single baseball team, other than the Yankees.  Consider that the YES Network profits are higher than those of any baseball team, including the Yankees.  In fact, if we take the highest estimate of YES profits, they exceed the combined 2009 operating income of all14 teams in the American League (as reported by Forbes).

We mentioned above that the Yankees are one of the most valuable franchises in sports, with a Forbes-estimated worth of $1.6 billion. Well … the estimated value of the YES network is higher than this — roughly twice this high. Hard to believe, but the regional network that covers the Yankees is probably worth twice as much as the team itself.

When we consider the YES Network and the other businesses that make up the Yankee conglomerate, it becomes nearly impossible to figure out an appropriate budget for the Yankee payroll. I mentioned above that reader-commenter Brian wrote that the Yankee budget is whatever it takes to make the playoffs. It might be more accurate to say that the Yankee budget is whatever it takes to maintain the value of the Yankee business enterprises.  But I have no idea how much (or little) such a budget might be.

(We’ve been posting quite a bit about the negotiations between Derek Jeter and the Yankees, and reportedly the two sides are about $8 million apart with respect to Jeter’s upcoming annual salary. But $8 million is a small number compared to the numbers we’ve been discussing here. If another $8 million in payroll is required to maintain the Yankees’ brand (and that, of course, is the big question), then the Yankees will gladly pay it.  That $8 million is chicken feed compared to the numbers being generated over at the YES Network.  It would take about a week for the YES Network to earn that kind of money.  Not quite “all in a day’s work”, but close.)

Let’s try another tack.  By my best estimates, the Yankees are struggling to break even and the YES Network is making hundreds of millions annually.  Should some of the YES Network revenues be transferred over to the Yankees?  Of course, some of these revenues are transferred to the Yankees — the YES Network pays the Yankees somewhere between $60 million and $67 million annually for the right to broadcast the Yankees’ games.  However, by any way of thinking, this is a bargain rate.  Consider the amounts received by other teams for their broadcast rights — Fox pays the LA Dodgers $45 million a year; and has agreed at some future point to pay the Texas Rangers a reported $80 million a year.  Approximately 68,000 households watch an average Rangers game; roughly 92,000 households watch an average Dodgers game.  But a lot more people — approximately 328,000 households — watch an average YES Network broadcast of a Yankees game.  By those numbers, the Yankees ought to receive somewhere between $160 million and $385 million annually for their broadcast rights (based on the price per household paid by Fox for Dodgers and Rangers broadcast rights).  That’s a lot more than the Yankees are currently receiving from the YES Network.

So… if the Yankees were to sell their TV rights on the open market, they’d probably receive at least another $100 million in annual revenue on top of the $600 million they’re already taking in.  The $100 million+ saved annually by the YES Network is value that the Steinbrenners transferred to the YES Network, to help the network get started and attract investors.  If the Yankees were receiving that extra $100 million, that money would be included in the calculations that determine the Yankees’ revenue sharing payments, so some portion of that money would flow to teams like the Marlins and the Pirates (this is one reason why the Steinbrenners might prefer to leave this money over at the YES Network).  But the remainder of this money would be available to increase payroll.

Of course, the Yankees cannot presently sell their broadcast rights on the open market — they’ve already sold these rights to the YES Network.  If as a result there’s more money at the YES Network and less money over at Yankees headquarters, this is not a situation that can be changed.  Even if there was a legal way to move the money from the YES Network account to the Yankees account, there’s no reason why the YES Network would agree to such a plan.  The YES Network is not owned by the Yankees, and it is not 100% owned by the Steinbrenners. The YES Network’s ownership includes people and institutions (such as Goldman Sachs) who have no direct interest in the Yankees.  Also, reportedly, all of the YES Network’s cash flow is spent to pay down the network’s more than $1 billion in debt. In other words, the YES Network’s money is not available to pay salaries for players like Cliff Lee and Derek Jeter, because this money is already being used, for the network’s own business purposes.

Still, the YES Network has an interest in how the Yankees perform on the field.  What if the Yankees were playing .500 ball, and YES Network viewership declined, and YES Network ad revenue declined, and YES Network cash flow and earnings declined?  The $3 billion+ value of the YES Network depends on the network having a premium product for broadcast.  To maintain that value, the network MIGHT find a way to invest funds in the Yankees.  Or … in order to maintain the value of their investment in the YES Network, the Steinbrenners might allow the Yankees to operate at a loss, and the Steinbrenners might agree to make good those losses.  In essence, this is what George Steinbrenner did during the prior decade — the team lost hundreds of millions of dollars, but the value of the Yankee financial empire increased by many times that amount.

Where does this leave us?

If we think that the Yankees’ payroll budget is limited to what the team can afford to spend without losing money, then the budget should be set at around $213 million.

If we think that the Yankees’ payroll budget should be at a point designed to maintain the value of the various Yankees properties, then the budget might be set somewhat higher than $213 million.  How much higher we cannot say.  Perhaps the Yankees could sustain losses this decade comparable to the losses they sustained in the preceding decade.  This would allow for a higher budget, perhaps around $240 million.  The budget might be pushed much higher than even $240 million if the Yankees stopped playing championship level baseball, and as a result the team saw a decline in attendance and TV viewership.  Remember that the combined value of the team and the YES Network is something like $5 billion.  It would be worthwhile to increase the Yankees’ payroll by 10%, if that was needed to avoid a 10% decline in the value of the Yankees financial empire.

But at the moment, the Yankees team is not in crisis.  The guys who run the baseball operations seem to think that the team is one quality arm away from a possible 28th World Championship.  Under these circumstances, there is no threat to the continued growth of the Yankees’ brand, and no need for a dramatic increase in the size of the budget for payroll.

Remember, the financial goal is to maintain and grow the value of the Yankees’ brand.  It didn’t hurt the Yankees’ brand when they lost around $30 million a year during the last decade, but if losses got a lot larger than this, at some point the value of the Yankees enterprises would have taken a hit.  No one likes to own a business enterprise that bleeds money.  Not even the Steinbrenners.

We’re not done analyzing the Yankees’ budget!  The next thing we need consider is the upcoming negotiation of a new baseball Collective Bargaining Agreement.  This agreement will have a major impact on what the Yankees can spend … and the Yankees will try to do everything in their power to shape this agreement in their favor.  I believe that the Yankees will be in the best possible position to negotiate a favorable agreement if they keep 2011 payroll at the lowest level possible.

More on this in an upcoming post.

15 thoughts on “Money To Burn? (More On the Yankees’ Budget)

  1. Terrific stuff, Larry. One thing I think you failed to mention (read it quickly) is that new stadium debt payments are deducted from either revenue sharing or luxury tax payments. So the interest on those bonds may add to the Yankee bottom line.

    • Steve, you're right, the Stadium debt payments ARE deducted from MLB's calculation of the Yankees' revenue, so the Stadium deal does serve to reduce the team's revenue sharing burden. This doesn't exactly ADD to the Yankees' bottom line, because the amount of the Yankees' debt service is still greater than the resulting savings in revenue sharing. The amount of this savings is already factored into the $140 million revenue sharing charge I included in my rough-and-dirty financial statements. Still, it's important to note that MLB effectively has given the Yankees an assist in paying for the new ballpark.

  2. It's probably worth trying to sort out the Yankees long term and short term payrolls here as well. In the short term, there's Posada's contract, A-Rod's contract, Burnett's contract, etc. hanging around their necks. In the long term, they'll probably change the way they do business a bit to keep things in the $190-210 million range. If even that.

    I do think, however, that there probably is a certain amount of willingness on the Steinbrenners part to float the franchise some money, as it were, in the right case. You kind of saw it when they increased their stated budget so that Cashman could grab Tex while Boston dilly-dallied, and I think you could see more or less the same thing once or twice more. I don't think they'd hesitate to put some of their own money towards signing someone like Cliff Lee.

    • Brien, you're anticipating Part FOUR of this series (which mercifully will be the last part). Actually, my thinking is that the 2011 Yankees budget should include some amount of this long-term payroll commitment. When the Yankees sign a player to a long-term deal, some of the amount the Yankees have agreed to pay at the end of the deal (in my view) represents deferred salary for the player's performance at the beginning of the contract, and this deferred salary should (in my view) be included in the team's current budget.

      I agree about Cliff Lee.

  3. Excellent post, I've loved these articles thus far. It seems to me that even though they can't and probably wouldn't float YES network money to the Yankees, they continue to spend because of it. Clearly your point was to state that they have to keep the value of that network up, but also, they may not mind losing money or breaking even on the Yankees if they're making money off the network.

  4. So – should the Yankees lose money, does that mean we (I mean, they) will get some of the revenue-sharing money? Only seems fair, especially when viewed in the light of the teams receiving the welfare checks who actually turn a profit. Without producing interesting baseball.

  5. Jay, good question! Revenue sharing looks at a team's gross revenues, with a deduction permitted for Stadium debt. A team's profitability (whether the team is a revenue sharing payor or recipient) is not taken into account. While that seems crazy, it's really not so crazy. It's easy for a private business like a baseball team to figure out ways not to turn a profit. Look at the LA Dodgers, who have reportedly paid huge salaries to members of the McCourt family who do not really work for the team. Hollywood has known for a long time that if you want a piece of the action, you ask for a share of a motion picture's GROSS, and not a share of the picture's profits.

  6. Hey, i understand they're a business, but their business is baseball. 94% of the revenue they get from baseball is going back into baseball? Sounds like a winning strategy.

    It's not like 108% of revenue goes the players; That's a negative. Or 50% goes to baseball and 50% goes to soccer. We're not that heartless….

    ..Oops. (sorry Boston)

  7. Great, great post. Information like this reminds people that despite how much we love it, baseball is a business first before anything else.

    • Daniel, thanks! I find that understanding the business helps me understand the rest of the game.

  8. Glenn, something like 48% of the Yankees' revenues (after deduction for revenue sharing) goes to payroll. Again, this is comparable to the percentage paid by other teams.

    As for the Red Sox … they did not buy a soccer team. John Henry and Tom Werner, owners of the Red Sox, bought themselves the Liverpool Football Club. Did they siphon off cash from the Red Sox to make this purchase? Did George Steinbrenner siphon off future TV revenues from the Yankees in order to form the YES Network? The answer may be "yes", both times.

    Still, it's interesting to consider the situation in Boston along side the situation in New York. Bostoners sometimes complain that Henry is not spending enough on the team up there, but I have not seen (or looked for) any specific Boston reaction to the purchase of Liverpool soccer.

  9. Hantu, thanks. I thought about shelling out the $400 to get the full S&P report, but I figured I'd spend all Thanksgiving kicking myself if the report just repeated stuff I already knew. I DID spend a lot of time reading the bond prospectus, and I think I actually understand how these bonds work. I wanted to figure out whether the bond rating (which is as close as you can get to a junk rating without actually having a junk rating) said anything about the financial condition of the Yankees. My best guess is that the bonds' rating is largely based on the rating of the bond insurers (which went WAY south with the overall financial collapse of 2008). There are other risks having nothing to do with the Yankees, such as the risk that property tax rates will drop dramatically (the explanation of why property tax rates affect the bonds is a bit complicated). The bonds have first claim on Yankees revenues, and the chances of those revenues dipping below the amount owed annually on the bonds ($57 million) are remote. But a bankruptcy involving the Yankees or any entity in the Yankees' chain of ownership would have an uncertain affect on the bonds.

    In any event … I decided that the bond rating was not really a reflection on the Yankees' finances, and that the S&P report would not be worth the $400. As a blogger, I have to carefully balance my blogging income and expenses, just like I said that the Yankees must do. If I bought that report, it would throw my blogging finances out of balance, to the tune of $400.

    But if you ever see the report, I'd love to know what it says.

  10. Great analysis, Larry. You make a complicated subject easily understood, and I think your 2nd analysis is the way to look at it. But to be sure, let me see if I get this straight: if Nick at Night knew that he would garner higher viewership and therefore higher revenue for his cable channel by putting a better lineup on each night, and if that higher revenue from cable at least equaled the higher cost of that better lineup, Nick would have every reason to make the investment. The names at the top of the marquee may shift, and some fans may seek Mary Anne while others pine for Ginger, but as long as Gilligan and the Skipper, too, are keepin' us happy, we'll keep coming back each night for our three hour tour. And the financial sharing stuff is just like the Brady Bunch — one big happy family!

    • Jim, the 338 page prospectus for the Yankees PILOT bonds isn't nearly as complicated as your view of basic cable. Perhaps I should point out that the Yankees games are broadcast live? Our situation is probably more akin to SNL. I'm trying to think of an analogy involving Tina Fey, since I have a major crush on Tina Fey. OK. If I'm an advertiser for a particular SNL broadcast, and the show is falling flat at around midnight, I might pony up the extra money to get Tina Fey to rejoin the cast at 12:30 a.m. and save the last half hour of the show. (That show still runs 90 minutes, right?)

      Now I can't remember the point I was trying to make. Oh, well. I think that makes two of us! ;^)