Estimating how much money the Royals make

Several weeks ago, Max Rieper and I wrote a piece saying that you should be skeptical of the Royals front office claims of losing $30-35M a year. In that we focused primarily on the bottom line or net income. That piece generated a lot of discussion, but I don’t think we focused enough necessarily on how much money the Royals made, instead looking at how much they retained at the bottom line.

So here, in this piece, I’ll try to come up with a rough estimate of just how much money the Royals make and then bring it back around with a re-evaluation of what they keep after everything is paid for.

First, let’s start with somewhere that has already done the work, Forbes. Their estimates of the Royals revenue were $246M for 2016. They have $70M in gate receipts, meaning the Royals received $176M in non-attendance based items. This would include TV contract, portions kept of merchandising/local revenue, national TV contract, and other revenue sharing.

That actually seems like a reasonable enough number, which I’ll try to dive in deeper later. The issue though is the net income on Forbes, saying the Royals spent $246.9M before taxes, interest on debt, and depreciation/amortization (an acronym know as EBITDA). This seems like a very high number to me. I’ll admit I don’t know the minute details of the expenses to run a baseball club, but $116M operating expense ($246.9M less the $130M payroll) is quite a burden. That’s an operating margin of -0.03%, or breakeven essentially. There are very few larger sized domestic public companies (yes, MLB teams are private) that run negative operating margins and you can think of the expenses that large, public companies have (this is a very blanket statement - I agree).

Maybe we can use some past data to help. It would be nice if someone would leak an MLB team’s financials from the past few years (preferably the Royals), but for now we’ll have to settle for those leaked back in 2010 that cover primarily the late-2000’s. One in particular is relevant, the leaked financials of the Pittsburgh Pirates, who I wrote a few weeks ago shared similarities with the Royals operations.

The Pirates non-payroll expenses added up to $73.2M, or roughly 50% of their revenues. That would put the Royals nearly in line with basically breaking even as Forbes suggests.

I pulled the data from all the other leaked financials and made some operating metrics to find an average, and then applied that average to the Royals.

Using the averages, the Royals non-payroll expenses as a portion of revenue would mean they spent ~$120M and should have had a payroll of $102M if they spent in line with revenue. We know they specifically didn’t do that, and instead spent $141M in 2017, which would be 11% above the average that the selected teams spent. If the Royals kept the same operating margins as the average of the other teams, they would have made ~$22M in 2016. Instead, according to Forbes, they lost ~$900K.

From the above averages, the Royals might have expected to have non-payroll expenses of $121M, with combined with their $130M payroll lead to a loss. However, a $900K loss isn’t anywhere close to the ~$30M that the Royals are claiming they lost during that year.

I have an issue though with Forbes estimates of revenue. According to Forbes own article released a month before their valuation, they found that the average ticket price for a Royals game going into 2017 was around $43. This was of course on the secondary market, but secondary premiums aren’t typically outrageous (excluding fees). We can expect some inflation from 2016 to 2017, and Ticket City backs that up with saying the Royals average ticket price in 2016 was around $40.

We know that in 2016 the Royals drew an attendance of 2,557,712, so taking an average ticket price of $40 yields ticket revenues of $102,308,480. MLB teams put 31% of their gate into the MLB pool and then that gets dispersed back out to team evenly. Using average ticket price and 2016 attendance:

That would imply that each team received $50M in gate attendance sharing on top of the 69% they kept, meaning the Royals brought in ~$120M, for a near 20% gain after payout.

You also include parking costs at the stadium, which almost everyone who attends a game shares the burden of in some capacity. Assuming the 2,557,712 in attendance for the Royals in 2016 shared a car amongst two other fans (and $15 a car), that is $12,788,590 in additional revenue (with 69% kept but then being returned 3% of the total pool).

Of course this is just getting to and into the, and part of the local revenue too is spending once inside the gate too. I couldn’t find any good information on average stadium revenue per team unfortunately so we’re going to have to make a guess here. Certainly they make a millions off food and merchandise sales, and even if they didn’t, we know that the Yankees, Red Sox, Dodgers, and Cubs make considerable revenue from merchandise. Then you include every teams TV revenue, licensing, sponsorship, etc... all gets deposited centrally and trickled down to the smaller market clubs.

And remember, this is just revenue sharing from local revenues we are talking about here. This ignores the considerably bigger slice of pie each team receives from major league baseball for national television rights.

In 2011, after being outraged by the Marlins crying out of being poor, local Miami CPA Jorge Costales tried to figure out how much the Marlins made based on the leaked Deadspin financial and Forbes figures:

And here is the broader point I want to make. In 2008-2009, Costales estimated the Marlins received $87-91M in revenue sharing from the other teams and the league itself. This was several years before Major League Baseball signed deals with ESPN, Turner, and Fox Sports for a combined $12.4B from 2012-2020, or ~$1.55B per year. This was double the previous contracts, meaning teams should receive twice as much as they once were. If all things stayed the same, the Marlins would be receiving ~$80M per year from MLB television contracts alone.

We know that the Marlins are a revenue sharing receiving team, just like the Royals, so it’s likely that the numbers Costales came up with should carry true for the Royals on both MLB money and team shared money, if accurate.

When you tally it all up:

~$80M in national television/MLBAM

~$60M in revenue sharing from other teams (gate, advertising, merchandise concession)

~$120M net in attendance kept after sharing to the pool and receiving back

~$10M in parking

That equates to $270M in revenue for the Royals at the end of the year. There is no reason to believe really as revenues rise, expenses should rise too necessarily. There is no cost of goods sold, fixed costs should be typically the same year-to-year (they always play 81 games), and though variable expenses might move, there isn’t any reason to believe they’ve gone up. Small market teams are receiving free money/subsidies before even selling a ticket.

At $270M (a number that may be high or low), the Royals should have an operating profit of ~$25M after payroll and non-payroll expenses (according to the Forbes implied estimates).

I certainly agree there are a lot of assumptions being made here, and even if you buy the Forbes estimates as being closer to the Royals real net income, it’s a far cry from the $30M loss the front office speaks of.

Non-payroll expenses for every leaked financial was under $100M except for the Mariners (who may have been spending excessive marketing money on the return of Griffey Jr that year and Ichiro’s consecutive 200-hit season record). The average non-payroll expense for those teams was ~$83M. Even with inflation, you’re talking ~$90-95M. That doesn’t consider though that the Royals run more like the Pirates than the Angels, given their respective markets. The Pirates, Ray, and Marlins were at the lower boundary of $70M more than $83M+ most years. It seems really hard to see a small market team spending $120M+ on non-payroll expenses. This is where I cry foul the most. Either the Royals are being mismanaged like your nephews lemonade stand or they are lying about their losses.