18 October 2007

Your Athletics Crystal Ball

We've discussed at great length the where and how of the ballpark project. I've also covered "why" from the perspective of deficiencies at the Coliseum. The main point, which I haven't covered in significant depth, is money. Ownership stands to make a boatloads of cash from this deal while taking on a good deal of risk in the process. The purpose of this post is to provide a basic understanding how much more money they could make over the current situation. Take a look at the tables and when you're ready drop a comment.
Disclaimer: Most of the numbers discussed here are based on various media-reported estimates of revenues and costs. They should not be considered anything resembling a thorough accounting of the A's operations. Estimates take into account rules described in the current CBA.
In an effort to further this discussion, I've taken the time to dissect the revenue sharing model, A's-style. But first some explanations:
  • Concessions numbers don't match ticket sales because concessions sales are based on turnstile count, which runs at about 80% of ticket sales (you can't sell concessions to no-shows).
  • Parking sales numbers are based on 8,000 spaces sold per game over 82 games. This may be generous given actual parking lot usage at the Coliseum.
  • Non-game events include tours and other activities outside of game days.
  • In-stadium advertising, sponsorships, and broadcast revenues are placeholders for the purpose of fleshing out the model. So are the items listed in "Actual Stadium Expenses."
  • It is not assumed that the new stadium will immediately benefit the A's in terms of more lucrative local broadcasting deals.
  • Revenue sharing contribution is defined as 31% of Net Local Revenue. All teams pay in this percentage, plus luxury tax if applicable.
  • "Recovered debt service from dev rights sales" is the "refund" the A's will get from selling development rights to ~310 housing units per year. It's this amount that is intended to finance the ballpark debt. That boils down to a $300 million loan, financed at $31 million per year over 15 years. The final loan structure is likely to vary greatly from this.
  • "Revenue Sharing Receipt" is the share of the revenue sharing pool the A's get.
  • "Central Revenue" is national and international revenue taken in by MLB. This includes national broadcast contracts from FOX, ESPN, and TBS, plus merchandising sources.
And now for the details. Below is the A's current revenue/expense model:

A combination of low operations costs and revenue sharing make the A's a reasonably profitable franchise. That $140 million figure looks tantalizingly large, but don't be mislead. Lew Wolff has held close to a "guideline" that dictates teams should spend no more than 55% of revenue on payroll, as is done throughout pro sports. Using the 55% rule the A's payroll should be around $83 million, which is pretty close to this season's actual payroll. Before we move on, remember the amount of the "Revenue sharing contribution."

(estimates not adjusted for inflation)
In this model, A's revenue has risen $25 million. Yet the "Revenue sharing contribution" is almost the same as in the current model. How can this be? The "Actual Stadium Expenses" table totals a whopping $52 million, thanks to stadium debt service and operating costs, which are all deductible from the amount used to determine the contribution. Consider it similar to your annual 1040 form's "Adjusted Gross Income." The A's would service the stadium debt with sales of housing development rights, not stadium income. That would allow the A's to reclaim all of that debt service and put it towards the team - or ownership partners. Notice that even in this instance the A's would be receiving some form of revenue sharing receipt. This is because the A's new revenue streams from the stadium would still place them slightly below the league-wide revenue average, squarely in mid-market territory. This number is smaller because it's expected that most if not all teams that still are developing ballparks will have theirs open around the same time Cisco Field opens. New stadia for the Yanks, Mets, and ongoing improvements to Dodger Stadium and Fenway Park allow the big market teams to take the same deductions, limiting the amounts they pay into revenue sharing.

Apply the 55% rule to the future revenue model and the payroll grows to $97 million. Is that enough to remain competitive? In spurts. A fantastic diary posted by Taj Adib at Athletics Nation goes in depth on future iterations of the A's. $97 million isn't enough for anyone to turn into Brian Cashman. It is enough to invest in more than one franchise-type player while maintaining a young, cheap core of players. The franchise-player investments have inherently high risk, and if those players come through with career years while your young core stays healthy and produces, you might end up like this year's Rockies or Indians. Gamble and lose, and you get this year's Orioles or Rangers. 6 or 7-year deals are not easy to trade if a player seriously underperforms, so GM's won't have frequent chances to roll the dice. What we could see in the future might be shorter and more frequent rebuilding cycles for the mid-market teams. What we don't want to see is a situation like the NBA, where GM's are forced to trade bad contracts instead of trading players based on exchanges of talent. (It's an ugly system, though for a number-cruncher like me it's strangely fascinating.) Thanks to the number of roster spots per team, MLB's salary/trade model is somewhere between the dog-eat-dog tendencies of the NFL and the egregious excesses of the NBA. And that's a good thing.