2 Think Good

Please click on the spreadsheet to enlarge or print

Recently, the Marlins made a claim as to what they spend [$10 million] on marketing and suggested that that has implications as to their perceived profitability, i.e. “hidden costs.”

Based on the Forbes analysis, marketing expenses, and all expenses other than ‘Player [major & minor leagues salaries & benefits] Expenses,’ are captured on our P&L in the the ‘National and Other Expenses’. If you think about it in terms of your own businesses, these are their operating expenses. These expenses are common to all MLB teams [minor league operations, player development, rent etc] and are the expenses which are least subject to fluctuation, as opposed to ‘Player Expenses’ which could vary significantly from one year to another – for example the Marlins in 2005 had $91 million in ‘Player Expenses’ and only $31 million one year later in 2006.

The spreadsheet above shows the ‘operating expenses’ attributable to the Marlins – $48 million in 2007 – are consistent with the other lowest revenue teams and could accommodate the $10 million in marketing and the over $20 million in farm system costs which the Marlins President David Samson stated [about halfway through] on his radio show. That December 2007 radio show, made after the Cabrera & Willis trade, gives us a good example of the smokescreen people in Mr Samson’s position are forced to attempt in denying profitability – let’s examine his various points:

1. Farm system costs Marlins over $20 million, which does not include bonuses, and the Marlins do not own any of their minor league affiliates.
2. People believe Forbes claims re the Marlins operational profitability [$43 million in 2006] because they assume that player expenses are the Marlins only expense.
3. They have depreciation and interest expenses which are not being considered in the $43 million amount.

Here is my response to each point:

#1 – Farm system or player development costs:
Outside of salaries and bonuses, it’s difficult to see where significant costs for minor league operations would arise given how the Player Development Contract [PDC] – the document which governs the relationship between the big league and independent minor league teams – divides costs responsibilities. Again, aside from salaries, the costs entail the players medical treatment, uniforms and part of the transportation costs. Some minor league teams are owned by the major league team, who are then responsible for all the costs and receive the revenues. All 6 of the Marlins minor league affiliates are independently owned. See the minimum salaries according to the new CBA agreement.

To be fair, Mr Samson might have meant to say player development costs, which would include minor league player salaries, in the over $20 million figure. Noted sports economist, Andrew Zimbalist, has written recently that “the average MLB team spends over $20 million in player development costs, which includes $11.5 in minor league player salaries.” Important to note that the $48 million we have been referencing, does not include minor league salaries, which are captured under ‘Other Players & Benefits’ expenses in the Player expenses section of our P&L.

Bottom line, there is plenty of room in the $48 million of non-player expenses to accommodate all the expenditures the Marlins have stated or hinted at to date. Like facts, operational incomes are stubborn things.

#2 – Forbes assumes that player expenses are the Marlins only expense.
Bizarrely untrue. As noted, Forbes allows for $48 million in non-player expenses – National and Other Expenses in 2007.

#3 – Forbes does not consider the Marlins depreciation and interest expenses in determining their operational profitability.
Debt and interest costs are supposed to be excluded from operational income. That’s why it’s operational income as opposed to net income. Operational income is considered a better indicator as to how your core business is performing rather than including certain expenses, such as depreciation, which could create ‘paper’ losses and distort actual performance. This is not a complicated point, certainly one not lost on a former Wall Street professional like Mr. Samson. In fact, he made the very point to ESPN back in 2004.

The reason for the flip-flop? I hope you answered incentives. Mr. Samson acknowledged the distinction between operational and paper losses because at the time – the Marlins had an operational loss [$12 million] in 2003 – that served the Marlins purposes in explaining the need to cut costs. Interesting to note, Forbes loss estimate for 2003 was $12 million and the Marlins self-professed loss in the article was $20 million.

Interests costs – Forbes does estimate each teams interests costs for their valuation analysis, but I do not use that part of their work.

Here is the most constructive way to think about it; How reasonable is it to believe that the Marlins, especially prior to the stadium deal being secured, would have spent a significantly higher percentage of their revenues on how they operate their franchise than the other 4 teams in MLB which had revenues under $150 million? I would say that would be very unlikely and uncharacteristic of how Mr Loria would operate a franchise which could have been looking to relocate. There is a track record for Mr Loria’s behavior in similar circumstances and it did not involve increased marketing expenditures in an effort to lure fans. Forbes again! Hey maybe they just have it in for the guy? OK, try this.

The only “hidden costs” are those hidden from us fans and with good reason. The more that is revealed, the less the wiggle room. This is a good example of why MLB teams avoid discussing the specifics of their finances.

Hey don’t those highlighted amounts on your Florida Marlins P&L Financial Statement mean you are guessing?

Yes.

But do me a favor, please print it out and follow me here – it won’t hurt.

Each of the amounts highlighted ties into the Forbes Total Revenue amount. So, the guess is about the breakdown of the highlighted amounts only. For example, if one of the estimates were changed to be $3 million higher, another one of the estimates would have to be lowered by $3 million. Within the highlighted amounts, it’s a zero-sum game.

Think of this as a puzzle for which Forbes has already provided every key piece [Gate Receipts, Total Revenues, Total Player Expenses and Operating Income or Loss]. To the extent to which additional information can be uncovered, there is less which has to be approximated to fill in the individual revenue items.

For example, there was a State of Wisconsin Legislative Audit Bureau review report released in 2004 [see page 7 of report], which provided the MLB Central Fund revenues for 1998 through 2003. In addition, Rob Manfred, chief labor executive for MLB, disclosed that the Marlins had received $41 million in Revenue Sharing monies across the two years ending in 2003.

For our purposes, the year 2005 was a very good year. Apparently due to the CBA negotiations ongoing in 2006, MLB Central and Revenue Sharing amounts for 2005 were disclosed in various reports – see list of articles below. So the only guesses involved the Marlins Local Revenues. Using the USA Today 2001 forecasts for each revenue line item, allowed me to approximate the Local Revenues which tied into the Forbes Total Revenue amount. While their attendance has obviously been low, the Marlins have had good ratings for their local broadcasts and likely benefited from an aggressive Fox Sports regional sports network [RSN] efforts to acquire MLB broadcast rights and dissuade teams from setting up their own team-owned RSN.

Note re Revenue Sharing – In the world of MLB finances, Revenue Sharing [based on Local Media revenues] and Luxury [based on payroll] taxes are all part of the revenues which are taken from from certain teams. However, only Revenue Sharing is redistributed to the other [low revenue] MLB teams. Luxury taxes are collected and kept at the MLB Commissioner’s office level.

Those differ from MLB Central revenues [National broadcast & cable contracts, MLB Advanced Media, merchandise, etc] which are derived from external sources and distributed equally among all the teams.

In the case of MLB Central revenues, there is a strong basis to assume that each team’s share has been growing consistently. Revenue Sharing amounts are the revenue item subject to the most fluctuation. Therefore, other than in 2005, I treated it as the last component and plugged the amount needed to match Forbes Total Revenues.