If you have followed baseball closely for many years, you probably remember the term “contraction” — and the debate about whether Major League Baseball needed to “contract” or eliminate some of its 30 teams because the sport was in financial trouble.
In 2001, contraction seemed highly likely after the MLB approved a contraction plan to fold two teams by a vote of 28-2. The Montreal Expos and Minnesota Twins voted against the plan, because they feared they would be the teams disbanded. The two teams seemed “doomed” according to the Los Angeles Times.
In the 2003 season, the Twins and Expos were among 15 teams with a negative operating income while the Toronto Blue Jays broke even. A Forbes article reports that the teams with a negative operating income — which basically projects future profits and is statistically earnings prior to amortization, depreciation, interest and taxes — included big-market teams that were among the sport’s most highly-valued, including the New York Yankees, New York Mets, Los Angeles Dodgers, and Atlanta Braves.
The Houston Astros, St. Louis Cardinals, Texas Rangers, Colorado Rockies, Philadelphia Phillies, Arizona Diamondbacks, Anaheim Angels, Pittsburgh Pirates, and Florida Marlins were the other teams that lost money. What was more worrisome to the league, perhaps, was the fact that several of the teams that did make a profit. The Oakland Athletics, Milwaukee Brewers, Kansas City Royals, and Tampa Bay Devil Rays, were among the sport’s least highly-valued, and were uncompetitive on the field for many years.
Basically, the salaries of the league’s players had exploded because of free agency. Some teams like the Yankees decided to pay players their free market value and, thus, lost money while many small-market teams decided they couldn’t afford those players and, thus, essentially chose profits over winning games.
The situation was so dire that sports fans believed by a wide margin that baseball had the “most serious problems” of the USA’s four major professional sports leagues, according to a 2003 Gallup Poll. Thirty-nine percent of the fans said Major League Baseball had the most problems. The NBA was second at 20 percent. Forty percent of the fans said baseball was in a crisis or had “major problems.”
“By far, the biggest problem baseball fans perceive is the financial gap between so-called “large-market” and “small-market” teams, with 44 percent calling the payroll gap the most serious problem the game faces today,” Gallup reported.
Oh, how times have changed…
An Amazing Turnaround
If you were an investor in 2003, you probably did not think about how you could buy part of a Major League Baseball team. It turns out, though, that buying part of a team would have been a tremendous investment — and probably would be today because baseball is booming economically.
If you didn’t have any financial information in front of you, you might think that baseball should be in as much financial trouble today as it was in 2003. The games are still far longer than they were in baseball’s heyday. The trend of inner-city kids throughout the nation being less interested in playing baseball than their fathers continues. The percentage of major leaguers who are American continues to decline. In addition, kids today spend far more time on a wide variety of entertainment options that weren’t available in 2003.
There are also statistics that seemingly show baseball is less popular today than it was in 2003. This chart shows how many people watched the World Series on TV from 1973 to 2016. The 10 years with the most viewers occurred before 1992. The number of viewers per game plunged from about 44 million in 1978 to 12.6 million in 2012. One chart reports that the number of people who watch the All-Star Game on TV hit an all-time low in 2016 — 8.7 million or about one-third to one-fourth the number of viewers each year during the 1970s and 1980s.
The number of people who watch nationally televised baseball games during the season has also declined significantly in recent years as this 2013 article shows. The number of people viewing a game on Fox declined from 3.6 million in 2005 to 2.5 million in 2012 while the number of viewers per game broadcast by ESPN declined from 2.75 million in 2007 to 1.78 million in 2012.
Skyrocketing salaries also seem to be bad for the business of baseball. A player’s average salary rose from $2.48 million in 2005 to $4.47 million in 2017. Here are the payrolls for every year since 2000. In 2017, the Dodgers’ payroll of $242 million was No. 1. The Yankees, Boston, Detroit, and Toronto were second through fifth. Milwaukee’s payroll of $63 million was the lowest. Tampa Bay, San Diego, Oakland, and Arizona were the second through fifth lowest.
Despite the continuation of negative trends, though, baseball has experienced an amazing turnaround financially since the early 2000s. The positive numbers include:
A Better Competitive Balance
The Yankees dominated baseball from 1996 to 2003, but they have reached only one World Series since 2003. In recent years, several low-payroll teams became winners, including 2015 and 2017 World Series champions Kansas City and Houston and 2016 American League champion Cleveland. These teams had the 15th, 18th, and 17th-highest payrolls in 2017. No teams have folded. While several NFL teams have moved in recent years, Montreal is the only MLB team that has moved. The new Washington, D.C., team is one of the league’s best.
Excellent Attendance
The MLB’s best 15 seasons in attendance have occurred since 2000. While national TV ratings plunged in recent decades, the average crowd at a ballgame soared. That’s partly because most teams built fan-friendly baseball stadiums. Atlanta, the only team with a new park in 2017, had the largest increase in attendance. The Dodgers were No. 1 with almost 3.8 million or about 46,000 per game. St. Louis, San Francisco, the Yankees, Chicago Cubs, and Los Angeles Angels also sold more than 3 million tickets. Tampa Bay was last at about 1.25 million.
Great Local TV Ratings
Baseball teams are No. 1 in all 25 of MLB’s U.S. markets in cable TV ratings. Four markets have two teams. Toronto, Canada, wasn’t part of the report. Baseball also excels on local network TV. “In 11 of the biggest markets in the country, more people are watching baseball than any other programming option,” FanGraphs.com reports. These ratings mean that teams’ most recent TV deals are for about twice as much money as their previous deals, Forbes reports.
Record Revenues
MLB reported in Dec., 2016, that it set a gross revenues record for the 14th consecutive season in 2016. Its revenues of more than $9 billion were more than double its 2003 revenues. The revenues boosted profits. The average team’s operating income increased from a $1.9 million loss in 2003 to a record $34 million gain in 2016. The number of teams that lost money plunged from 15 in 2003 to five in 2016 — Baltimore, Detroit, the Dodgers, Kansas City, and Miami. Detroit and the Dodgers’ losses were due to payrolls that helped them reach the World Series.
Record Values
In 2003, an MLB team’s average value was $295 million. Today, it’s $1.54 billion. The Yankees are No. 1 at $3.7 billion. The Dodgers, Boston, the Cubs, and San Francisco are second through fifth. Tampa Bay is last at $825 million. Oakland, Cincinnati, Cleveland, and Milwaukee are 29th through 26th. Philadelphia, the Cubs, Boston, San Francisco, and Houston were the most profitable in 2016.
Should You Invest? Can You?
The MLB has turned its fortunes around by focusing on local fans.
The conflicting numbers on national and local popularity make it clear that “baseball fans” are more apt to be fans of their local team than fans of the sport. In other words, a San Francisco fan might be uninterested in a Yankees-Dodgers World Series game, but passionate about following the Giants on an everyday basis.
The MLB has adjusted to this reality, and is now thriving while simultaneously getting clobbered by the NFL in national popularity polls. As a prospective investor, the MLB’s national woes shouldn’t worry you as long as the league is flourishing in its local markets — a strength that has also helped teams dramatically increase the revenues they get from sponsors.
Major League Baseball has become a consortium of locally strong businesses. However, investing in a team is easier said than done because most baseball teams are not publicly traded on the stock market.
Despite this setback, you can investigate whether a team’s limited partners are willing to sell you stock. Most teams have a very well known principal owner and many unknown shareholders.
The bottom line is that a $100,000 investment in a MLB team in 2003 would on the average be worth more than $500,000 today, so seeking information on being a part owner might be worthwhile. It’s also very unlikely that any team you invest in will fold.
Regards,
Ethan Warrick
Editor
Wealth Authority
