This week Sam Mellinger wrote about how the economic of baseball have changed to allow small-market teams like the Royals afford higher payrolls and compete with large market clubs like the Yankees and Red Sox. Mellinger correctly points out that revenue sharing is greater than ever, allowing the Royals to bump payroll to a franchise record $130 million this season.
In the column, he talks to Royals officials about how they are able to afford such a high payroll.
The answer: "We can’t."
Their internal projections are that the club will lose money in 2016 without a postseason appearance, will make a profit with another deep playoff run, or will break even with something in between.
David Glass has the reputation of being the hard-nosed, frugally-minded CEO of Wal-Mart. Losing money, even at the expense of a championship, does not seem to be how he operates. For years, the team cut corners at every chance, and paid for it in the standings. But now the team seems to be taking in money hand-over-fist due to its popularity. Could the Royals actually lose money? Let's break it down.
The Royals reaped record revenues last year, in part because of their fantastic season on the field. The team set a franchise record with 2.7 million fans passing through turnstiles in 2015. Because of increased demand, the Royals were able to raise ticket prices as well, earning record ticket revenues for the team.
Even with their rotten local TV deal — the Royals expect their annual take to more than double when the current deal expires in 2019 — their ticket revenue has nearly quadrupled in the last 10 years to around $80 million per year.
Ticket revenues should only go up this year with prices likely going up, and sales likely to go up as well. Ticket prices, on average, went up 20% after the Royals won the 2014 American League pennant. If we conservatively predict they go up 10%, with about the same attendance figures, that is $88 million in ticket revenues.
Mellinger touches upon the TV deal, which has been well-noted and lamented. The Royals are tied for the lowest local TV revenue in baseball at just $20 million per year, but this should not be surprising since Fox Sports Kansas City goes to fewer homes than any other regional sports network in baseball.
Major League Baseball recently signed massive national TV deals with ESPN, FOX and TBS that doubles the revenues from their previous contracts. About $25 million more per year is available to teams than under the previous deal, although its quite likely the revenues early in the contract begin lower and escalate each year. From leaked financial documents, we know that smaller market teams like the Pirates, Rays, and Marlins previously received about $75 million from MLB in revenue combined from the national television deal and revenue sharing funds back in 2008-2009. Adding $25 million on top of that brings Kansas City's share to about $100 million. Beginning this year, no revenue sharing funds will go to clubs in the top markets in baseball, meaning there could be even more money left for the smaller-market clubs like the Royals.
Teams also receive local revenues from suite sales, advertising, parking, and concessions. These revenues can vary quite a bit by team, but from the leaked documents we can estimate they will be around $20 million. Clubs also receive money that is grouped to together and split equally among all 30 teams from merchandising, MLB Advanced Media, and international broadcast agreements, which amounts to a few million dollars. All told, this puts the Royals revenues around $238 million, although that could be much more depending on how much the team generates in ticket revenues for 2016. These numbers are consistent with what Forbes estimated before the 2015 season.
The Royals have increased payroll by nearly 17% to $132 million for Opening Day, although they could save up to $6 million on Jason Vargas' salary since it is insured against injury. On top of that, teams have to pay for health care, pension obligations, social security contributions, unemployment, worker's compensation and other various labor expenses that run about $10 million per year. Clubs also have non-player expenses to run a ballclub, such as other employee salaries, stadium expenses, travel expenses, the costs of operating minor league teams, scouting, player development costs, and marketing. Based on the leaked documents, we can see that these expenses generally run about $90-$100 million.
Teams can also have debt obligations. The Royals should not have any debt obligations as the team was purchased in 2000 for $96 million, and only contributed $25 million towards stadium renovations in 2007, but we don't know for certain if they are free from debt payments.
|Revenues (in millions)||Expenses (in millions)|
|Ticket sales||$88||Player payroll||$132|
|Local TV (FSKC)||$20||Other player expenses||$10|
|National TV/Revenue sharing||$100||Non-player expenses||$100|
These are all estimates using the little information that has been made public, but it looks like the Royals will likely be around a break-even point, depending on how ticket revenues go. That could change if the Royals make a mid-season acquisition that takes on more in player payroll, and of course, they could be quite profitable if they go on another deep playoff run. From the leaked documents, we see the Rays generated $17 million in revenues from their pennant in 2008, with $6 million in expenses in October, leaving an $11 million profit. That is consistent with Mellinger's reporting that the Royals reap $1 million in profit for each post-season game they host.
All of this is underscored by the fact the value in the franchise has skyrocketed since David Glass bought the team for $96 million fifteen years ago. Forbes estimates the value of the franchise at $700 million, although Glass will not enjoy that money until he sells the club, which he may never do. We should also remember the team operated with very low payrolls for several seasons while the team was rebuilding, likely generating much greater profits for the Glass family.
Few fans would quibble with David Glass turning a profit on the ballclub, they are a profit-making business, after all. The more profits they can make, the likelier it is that Kansas City is able to retain a Major League franchise. But it is interesting that while baseball itself likes to crow about record revenues, individual clubs are much more modest. No team ever likes to brag it is making money. Instead they cry poor at how much money they will lose in the upcoming season. Don't cry for David Glass, he is doing fine. The Royals are doing fine. And Royals fans are doing fine as long as the team keeps winning.