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.

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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.