The Disconnect Between Franchise Values and Player Salaries
Yesterday, the Miami Herald reported that Jeffrey Loria has an agreement in place to sell the Marlins for $1.6 billion, a more than 10 fold increase in franchise value from the $158 million he paid to buy the team in 2002. If the team actually sells for that $1.6 billion total — and, according to follow-up reports, the final sales price hasn’t been agreed to, and there’s a long way to go between handshake agreement and the actual transfer of the franchise — Loria will have made an 18% compounded annual return on his initial investment.
That’s the kind of annual return promoted by scam artists and ponzi schemers, luring in investors with promises of huge returns that never materialize. An 18% annual return over 15 years that actually materializes is a huge business success, and Loria’s cash-out will serve to make him even more extraordinarily wealthy.
And as Ken Rosenthal wrote last night, these franchise valuations are not going to go unnoticed by the player’s association.
Oh, it’s good to be an owner.
Granted, it’s also good to be a player, but the most recent collective-bargaining agreement, with its modest increases in luxury-tax thresholds, already seems to be stifling salary growth.
The sale of the Marlins for $1.6 billion, or even a lesser but significant sum, would only reinforce to the players that they should be getting more, setting the stage for labor friction in the future.
If you’re one of the free agents that got roundly rejected by the market this winter, and then you see Loria walking away with a $1.5 billion profit on the sale of the team, it’s certainly easy to connect the dots and say that there’s something wrong here. But as easy as it is to hate Jeffrey Loria for the way he’s run the Marlins since buying the team, it’s also important to remember that people buying into MLB franchises right now are purchasing more than just a collection of baseball players.
This issue was a significant section of the article I wrote for the 2015 Hardball Times Annual, specifically relating to the challenges of determining how much claim players have on the value of the non-baseball side of MLB’s properties. Specifically, MLBAM and their BAMTech spin-off unit have created an enormous technological powerhouse by moving early into streaming technology, and BAMTech is now one of the world’s dominant players for hosting and providing over-the-top content.
Last year, Disney bought a 33% stake in BAMTech for $1 billion, putting a $3 billion valuation on just that subsidiary. It’s expected that, at some point in the next five years, Disney will buy the controlling interest in BAMTech, and because BAMTech keeps growing — they just paid $300 million for the rights to stream League of Legends eSports competitions in December — the price tag for the remaining 58% that MLB owns (9% went to the NHL in that partnership) will be even higher, pushing several billion more into the pockets of those who own the 30 MLB franchises.
Say the controlling interest in BAMTech is eventually valued at $5 billion when Disney buys out MLB. We don’t know what the contract stipulates, but controlling interest usually costs more than a minority stake, so I’d be surprised if Disney had to buy out the rest of the company at a number much lower than that. With a 58% stake of a company worth $5 billion, Disney would have to pay an additional $2.9 billion to MLB in order to buy them out completely, which would result in every team owner getting a check for almost $100 million when that went through. Or, perhaps MLB will want to keep a piece of their best investment ever, so every owner gets a little less money up front, but they also get to reap the rewards of BAMTech’s continued growth, which is the backbone of ESPN’s over-the-top strategy.
While nothing in life is guaranteed, that money is pretty likely to be distributed at some point in the not-too-distant future, so anyone buying the Marlins (or any other MLB team) is likely to get a pretty significant rebate on the purchase price if or when Disney buys out the league’s interest in BAMTech. And the sale of BAMTech does nothing to affect the league’s ownership of MLBAM, which remains a significantly valuable operation itself, and is still entirely owned by the 30 teams.
In other words, if you buy the Marlins, you’re buying a baseball team, but you’re also buying a 3% stake in a very valuable tech company, and you’re buying about a 2% stake in an even more valuable tech company that already has a purchase agreement in place. And it’s not really clear that the players have much in the way of a legitimate claim to any of the money that baseball owners are generating from the investments in these tech companies.
From the 2015 THT Annual piece on the subject.
In many ways, BAM Tech isn’t so different from a company like Uber or Snapchat, and if MLB owners had individually gotten together to form a venture capital firm that funded the growth of one of those companies, no one would be clamoring for those owners to then plow the returns from a smart investment into the sports team they also happen to own.
Perhaps a comparable example would be Mark Cuban, owner of the NBA’s Dallas Mavericks, who also operates as a venture capitalist, including appearing on ABC’s hit TV show “Shark Tank,” where he finances startups that often have nothing to do with basketball. When one of Cuban’s investments turns into a big success, he’s not expected to split that money with Dirk Nowitzki, because his ownership of the Mavericks is tangential to his technology investments.
We can say whatever we want about how Loria ran the Marlins, but like the other 29 owners, he helped fund the development of MLBAM’s streaming unit, which turned out to be one of the most successful tech companies of the last decade. And the success of BAMTech is one of the primary reasons that franchise valuations have increased so quickly.
But BAMTech has basically nothing to do with baseball, and the players didn’t share in the risk associated with funding it’s growth. As such, it’s fairly shaky ground to argue that the profits an owner made on a side-investment then need to be funneled into MLB player salaries.
That isn’t to say that there isn’t room for pushback here, as the extreme growth of franchise values means that owners don’t need to be making an annual profit in order for their investments to still pay off handsomely. When a team sets a payroll limit at an amount that all-but-guarantees that the franchise will make more money than it spends, that’s an artificial limit, and every owner in baseball could easily fund higher payroll thresholds, knowing that they’ll make back far more when they sell the team than they might have lost in any year where they spent a little more to try and win.
But when we see big franchise valuations like this one for the Marlins, it’s important to keep in mind that Loria isn’t really just selling the baseball team. The price he’s going to get reflects the other valuable assets that are included in the sale, and as much as it would be nice to see Loria make a smaller profit for running the Marlins the way he did, he’s the one who put up a chunk of his own money when it wasn’t clear that MLBAM was going to become the behemoth it is today. For better or worse, our economic system provides massive returns for early investors of companies that become hugely valuable, and the sale of the Marlins reflects that investment as much as it does the value of getting to pay the rest of Giancarlo Stanton’s contract.
Dave is the Managing Editor of FanGraphs.
The overall environment for asset prices is also an important context to consider, as financial assets are now again in a 3rd mania in 20 years, in which asset values are now priced to arithmetically assure returns for 10+ years that will likely lag inflation. The discount/cap rates for assets have been perverted by negative real interest rates for so long now that many view this as “different this time.” Baseball franchises, while having unique characteristics, are also impacted by this macro environment. Finally, there are a ton of small cap stocks that have gone up 18% avg annual since 2002, which included a massive low in tech stocks off the 1999-2000 bubble peak.
Good piece but I’m a bit confused. Loria’s investment in these companies was made how? Just derivatively as a result of being an owner, with the funding coming out of MLB central, from the revenues generated by the Marlins, or out of Loria’s pocket as a direct investment that was a choice to invest or not? Not to make an obvious point, but Loria has been living on other team’s money since he bought the team. It might be refreshing to know he actually had any of his own skin in this particular game.
Each MLB owner was asked to put in $4 million of their own money, though their actual out-of-pocket investment was a bit less than that, because BAM became profitable very quickly.
http://www.forbes.com/sites/maurybrown/2014/07/07/the-biggest-media-company-youve-never-heard-of/#7cedd451dd4e
Thanks for the response. Dave–since most assets are valued at a combination of their “hard asset value” and their revenue streams, how do you capitalize revenues that come from externals–like cash flow from the media enterprises, and, for the smaller market teams, their revenue sharing dollars? And, how much sensitivity do you think there is in valuation from the CBA–on labor costs, caps on labor costs, luxury taxes, the current absence of a floor?
“But BAMTech has basically nothing to do with baseball, and the players didn’t share in the risk associated with funding it’s growth”
Are you sure about that? If creating MLBAM and BAMTech had been a mistake, costing teams significant $, would that not have impacted player salaries?
A multi-billionaire owner losing on a high-risk $4m investment would likely be too insignificant a loss to cause him to attempt to make up for it by cutting payroll. Even if he did, the maximum amount by which it would make sense to cut payroll is only $4m.
My question explicitly said significant money, it was a hypothetical. Imagine instead that an owner decides to build himself a new stadium for $500M, but for reasons unimportant to the discussion the new stadium is a disaster, costing the team a lot of money. In that case we might expect salary to decrease to preserve profitability. But if it was a success, bringing in lots of fans, salary could be expected to increase. I don’t see how investing in MLBAM is any different, just on a smaller scale.
recoup those losses by increasing the hot dog and beer price 1%
BAM Tech was spun off from MLBAM using technology MLBAM acquired as part of mlb.tv. The 4 million put in to fund the split and to establish an initial valuation with the understanding they recover that money and much more when they sell part of their shares
Great write-up, Jeff.
Understanding that the players don’t have a stake in either MLBAM or BAMTech, who thinks that either would exist without MLB and the players? But that and a nickel…
The only way players will maximize their earnings is via a competing league or overturning the anti-trust exemption. Otherwise, the players are basically showing up at CBA negotiations hat in hand.
So Dave has a nickname now? Or you have inside info Cameron’s filching Sullivan’s articles? Yeah, he always did strike me as a jerk. Just like that Loria.
Thanks!
Can we really say that MLB owners would’ve joined together to create BAMTech/MLBAM without knowing that they had control over MLB’s streaming rights? It seems unlikely that the owners would’ve taken a chance on these tech ventures without the guaranteed gigantic asset that MLB streaming rights represent. This feels like the owners directly benefited from the MLB product to which the players directly contribute, which should entitle players to some of the profits. However, whether or not MLB players should be entitled to any of the fruits of BAMTech’s expansion into other streaming ventures (HBO, eSports, etc.) that dont’ have anything to do with MLB is much murkier. Just seems hard to separate the owner-owned BAMTech from MLB when it’s unclear if this incarnation of BAMTech would even exist if the owners didn’t control the MLB rights.
Yeah, if my boss invests ‘X’ amount of $$$ in part based on my work, gamble or not, I feel somewhat responsible for any profits that are generated therefrom.
Does “responsible for” = “entitled to”?
As mentioned several times here/above, the players do not have the requisite leverage to feel entitled to returns on other peoples’ investments, even if they are technically responsible for some/all of those returns.
The Players Association should’ve gotten themselves an equity stake in BAM/BAMtech… they gotta start thinking like a boss.
” I feel somewhat responsible for any profits that are generated therefrom.”
This is true. Not how this rotten, criminal economic system in the USA works, but this is how it should work.
There used to be organizations that existed specifically to make those arguments. They created leverage in those negotiations by threatening to withhold valuable services. We called that labor.
And groups of labor all getting together to create a powerful force against capital? We called those unions.
The MLBPA got better deals for the players in a much worse business environment all throughout its history.
This most recent CBA was pretty demoralizing. There are no strong unions anymore.
It’ll be interesting to see how long it takes, how much more labor in this country can be squeezed out of pensions in favor of worthless 401k’s and dwindling employer health contributions before we decide that maybe we should look into organizing around our own interests again.
“For better or worse, our economic system provides massive returns for early investors of companies that become hugely valuable”
I’m not sure how this could be viewed as “for worse”.
I’m no communist – heck, would’ve voted for Trump over Bernie – but I can see “for worse”. Just because ‘seed capital’ enables a project, doesn’t really make it a kajillion times more responsible for its success than workers, infrastructure, etc. And then factor in that early investors are often just ‘whales’ getting sweetheart deals from brokerage firms. Heck, I emphatically vote “for worse”.
There is certainly some truth in that. That said, I’m sure the whales would say, nothing happens without the $$, there are only so many whales to go around & that they’re taking a huge risk, I.E.,could lose the entire investment, while workers can be replaced & even if it goes bust, can always find other employment.
Do I agree with all that? Not really, but, there IS some merit to it.
How is putting up a tiny fraction of your wealth with the opportunity
to reap a hundred times the return – or more – “a huge risk”?
How many Venture Capitalists can you name who lost their fortunes and are now working a regular job?
Can you name one?
I think the main issue the players have is they’re so well off, it’s pretty hard to stomach the fight it would take to get payroll to match the increasing revenue stream, which is what is behind the franchise valuations.
On one hand, they’re getting screwed because revenue, team value, etc. are skyrocketing, while player payroll isn’t. On the other, the average player makes north of $4 million a year, so things are pretty darn good & it would be pretty hard to get upset enough to go on strike, which is probably what it would take to get their fair share, either through payroll or “profit sharing” (like UAW has with the Big 3) or an actual ownership piece of the franchise’s.
A strike is mandatory in order to make the changes needed.
The problem is the players have been brainwashed to grab a pickaxe and chop a huge hole in any boat that catches a wave. Hating A-Rod the man is fine, but extending that to his contract is suicide for the players, but they have been convinced otherwise.
The players seem willing to allow the owners to sign the next Bryce Harper for less than a million dollars. Another three or four CBA’s and that’s where we’ll be. The players have been led to believe that this will shift more money to them when in fact it just shifts more money into the owner’s bank accounts.
Even though amatuer talent has become far more valued and coveted than MLB players and the road is being constructed to increase the value of those amateurs, scouts still can’t afford to buy a house or even an expensive car to drive from park to park. If you see a scout living in a house or driving an expensive car you know his wife has a really good job or trust fund.
THanks for the article.
Not the point of the article but Loria’s returns are really even better than that. He bought a minority stake in the Expos in 1999 for $12M and then pushed all the other owners out with cash calls. He then swapped out the Expos at $120M for the Marlins at $158.5M in 2002 (including an interest-free $38.5M loan from MLB).
I don’t know how much he had to plow into the Expos those 3 years, but the returns on his initial $12M investment in 1999 is more like 35%.
Nique Loria. No one ever said an art dealer was a bad business owner from his point of view…it’s so shrewd it’s admirable. Everything about the Marlins has smelled funny and I’m just going to ignore mes Expos. Let him sell – the faster the better. Adieu. Don’t let the gilded door hit you.
“…every owner in baseball could easily fund higher payroll thresholds, knowing that they’ll make back far more when they sell the team… ”
Where is the money for this incremental payroll spending supposed to come from? The new owner may profit $1B or more when he sells the team in 15 years but he cannot use that money to pay incremental payroll now. I think a potential owner would discount the purchase offer by the amount they would be expected to add each year for incremental payroll.
Missing from this article: The yearly massive profits made by Jeffrey Loria.
You’re describing a real thing but it is not nearly large enough to explain this valuation (or as corollary to say that players have no claim on the valuation). To make your argument work, the market would have to value these tech businesses at $30+ billion, to make a 1/30 share worth this much. They’re not worth that.
First off, baseball has become disassociated with MLB team revenues and not just franchise valuations.
Second, MLB tech company owes its existence to the game in which players are a key component. In fact the players are the main reason why fans paid for mlb.tv and suffered with the early years of a poor product until the tech improved.
That the players did not force a claim on that tech and its future earnings just goes to show how coopted the MLBPA leadership has been over the past 10 years.
MLB owners invested 2% of their revenue in MLB in 2000. There was a risk but not a great risk.Thats long been paid back and then some.
I contend the players should claim some of that, since it was not untelated to baseball. Not in terms of a direct return, but as a calculation of how much MLB should return back to the game and players. Of course, the latest CBA shows that wont happen.
Just to flesh out what Dave alludes to by Loria “running the Marlins the way he did,” I figured total payroll over the last 15 years for all 30 clubs. Miami ranked #29, just ahead of Tampa, spending 53% of the MLB average. Pittsburgh was #28 at 63%.
I believe MLB truly wants to promote competitive balance. Another prong in that plan could be a modest tax on franchise sales that varied inversely to long-term payroll (adjusted for market size).
But we should remember that there’s not a pure straight-line connection between payroll and winning. Miami’s #29 payroll bought the #19 record (.480) — better than payroll #12 Seattle (.474), #16 Baltimore (.469), among others.
Yes, the Yankees are #1 in both W% and payroll over the last 15 years. But the Cards are #2 in W%, #11 in payroll, spending half what the Yanks did. Atlanta is #6 in W%, #14 in payroll. And Oakland is #8 in W%, #26 in payroll. On the flip side, the Tigers and Mets are #4 and #6 in payroll, but #17 and #15 in W%, both a bit under .500. (My favorite teams … sigh.)