The business of baseball

Forbes released their annual baseball franchise valuations last week, a tradition since 1998. While there is legitimate discussion regarding the accuracy of the numbers, they serve as a reference point and generally reflect reality — for example, they don't show the Athletics to be worth more than the Yankees or anything ridiculous like that — so they provide a basis to gauge the health of individual teams and the overall status of baseball.

Forbes shows a team's value (quite likely the most difficult thing to quantify) and then breaks out revenues, gate receipts, debt load, salaries and operating income. Operating income is defined as earnings before interest, taxes, depreciation and amortization (EBITDA), so it's not the bottom line return teams see each year.

So how is baseball doing? Pretty darn good from a franchise value standpoint--this chart shows cumulative franchise value since 1998:

In case the subtle inflection of this graph is too difficult to discern, the values for all teams increased from around $5 billion in 1998 to around $36 billion in 2015, around 600 percent. I won't speak for anyone else's portfolio of investments, but that sure beats the heck out of the returns I've seen since 1998.

This Tableau data viz shows all the data since Forbes began releasing these reports. Not every year has every data point, but generally speaking, everything except debt load and gate receipts is shown.

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The first tab, Sport, shows the values for each team by year going back to 1998 (or 1999 for the NFL), the growth over the previous year, and the growth since Forbes began presenting this data in 1998. For example, the Yankees are estimated to be worth $3.2 billion, a 28 percent change over last year and a 552 percent increase since 1998, right in line with the growth baseball has seen in that span. Astute eyes will notice the Sport filter — data for the NBA, NHL and NFL is included as well.

The Team tab shows the growth in franchise values in this time span, and shows that not all franchises are equally blessed, even in leagues with salary caps and revenue sharing. The Payroll tab shows payroll both in absolute terms and as a percentage of team revenue. The League tab shows the cumulative value of the franchises, and in baseball's case, is essentially the same as the first chart shown but presented in a different fashion. The amazing thing is that while the valuations are different, the increase in cumulative value for each league is around 500 percent.

The most important thing to understand is that franchise value isn't the same as cold hard cash. Granted, franchise value is monetized through lines of credit, but the oft-heard phrase "Baseball is a $9 billion sport," (technically, $7.864 billion in 2014, using Forbes numbers), is somewhat misleading, since it also has $7.2 billion in expenses. Clicking on the Revenue tab of the data viz shows this quite clearly: Whereas the Yankees have had close to $3 billion in revenue from 2010-2014, they've shown an operating income of $61 million in that time frame, or around a 2.2% profit margin, and that's EBITDA — the true income will be lower than that, often by a significant margin. Where there's revenue, there's always cost as well.

Revenue is broken out in alternate franchise valuations by Bloomberg. For example, this his how it shows the Yankees revenue for 2013:

Gate is very similar to what is shown for Forbes and includes ticket sales and suites. Media rights includes both local broadcast revenue and an equal share of  national deals. I show this data to explain the common misconception of many fans, that their ticket revenue provides the basis of player salaries ("Them bums, they work for me — I pay their salaries!"). In the Yankees' case, and for most other teams as well, it's just over half.

It doesn't take a genius to notice that baseball franchise values spiked dramatically in the past couple of years, more than doubling in value since 2012. While there are plenty of reasons for this, a primary one is the stunning growth in value of MLB Advanced Media (MLBAM), something in which every team has an equity stake. A recent article in the Wall Street Journal explains this, and this growth will probably continue for quite some time as it expands beyond baseball streaming. The Bloomberg valuations have the MLBAM equity stake for each team at $110 million — not a cash flow, but still a substantial asset.

There are numerous factors that go into franchise value such as local broadcast rights, regional sports networks, and stadium ownership stake that go beyond the day-to-day operational functions that generate revenue. In addition, teams only have value when sold, so until a buyer is found willing to spend $3.2 billion to purchase the Yankees, the number is only hypothetical. However, with Steve Ballmer forking over $2 billion to buy the second-most popular NBA team in Los Angeles, the value of just about every major league team, and especially major market ones, went up dramatically. Don't believe me? Filter the data viz in the Team tab to NBA and look at the Clippers to see how their value increased in the past year.

There are troubling trends, however. Every league has teams at the bottom of the revenue chain, although increases in national broadcasting rights and revenue sharing has lessened the revenue disparity between the highest and lowest teams dramatically. There's no denying the Rays will probably never be able to spend like the Yankees, even if they replace their albatross of a stadium. Money isn't everything, as the Yankees haven't won a World Series since 2009 and don't appear they will any time soon, but all things being equal, more revenue is better than less.

Other nagging questions remain. Will regional sports networks be able to deliver revenue like they have for the Dodgers, Mariners and Rangers? Hard to say — the Cubs let their deal with WGN lapse after 2014, and ended up having to scramble to find a place to broadcast 45 of their games, something they certainly didn't anticipate. The stadium boom of the past twenty years is over, and fairly soon teams will be looking to do major renovations or build new stadiums, and the landscape for municipal help has changed dramatically. Attendance is down seven percent since the recession of 2007 (this data viz is very much a work in progress and will be the focus of my next post) and has decreased in each of the past two years. Whether this is a blip or the beginning of a long-term trend is impossible to tell.

There are no guarantees in life, and the best planning is typically obsolete within two to three years maximum, often quite sooner. As baseball enters a new season, things look good overall, and every team seems to be experiencing an increase in not only franchise value but in team revenues as well. How long can this be sustained? Nobody knows with any accuracy, but for now, welcome back, baseball — looks like it will be a good year on the field and in the ledgers.

Data adapted from Forbes data. Every single item was entered by hand, so a larger chance of error exists than usual, but every step was taken to ensure the data is as accurate as possible.

Scott Lindholm lives in Davenport, IA, and as a Cubs fan has been eagerly waiting for this year. Follow him on Twitter @ScottLindholm.