Friday, September 03, 2010

Did the Yankees engineer themselves into unprofitability?

My last post talked about how the New York Yankees, baseball's richest team, is actually losing money in part because it makes large revenue sharing payments to help out the other teams.

In the comments, "Johnmeister" responded by arguing that the Yankees' reported earnings are understated, because they don't include local TV revenue. That's a fair point. In fact, I had forgotten that I had posted about that a few years ago. Back then, I had made the same argument -- that if you include the TV money, now the loss turns into a profit.

However, that may not be right. The New York article on which I based my previous post counts the $60 as part of Yankees revenues, which implies that the $60 million is already taken into account in computing the team's bottom line. So their $28 million loss in 2006 really *was* a loss.

But, after thinking about the TV situation a bit, I realized: the Yankees really *are* highly profitable, at least in the sense that really matters.

In 2001, the Yankees created YES, and sold it the rights to broadcast games for 15 years. At the same time, they sold 63 percent of the newly-formed network to Goldman Sachs for (as near as I can tell) about $535 million. (The Yankees kept the remaining 37 percent.)

So, basically, they sold about 2/3 of the TV rights to Yankee games. Those broadcast rights are a huge revenue generator, bringing in even more cash than the revenues from ticket sales. Effectively, the Yankees sold off a large chunk of the business.

Now, that sale wouldn't necessarily have to change the profitability of the team. The Yankees could just take the $535 million, invest it in some other business of roughly equal risk, and earn profits that might be about the same as the profits from YES. It's like when you sell one stock in your investment portfolio, and buy a different one. Your overall return should be about the same.

But: what if, instead, owner George Steinbrenner just took the $535 million and, instead of reinvesting it in the team, he just paid it to himself as a dividend? That's perfectly legitimate -- it was his team, after all, and he could do what he wanted.

But: by taking assets out of the Yankees, the team becomes less profitable. If the Yankees' 37 percent share of broadcast revenues was worth $60 million, that means the other 63 percent, the portion belonging to Goldman Sachs, was about $100 million. With a profit margin of 60 percent of revenues (according to the New York Times), that's a perennial $60 million in profits (as of 2006 -- it's probably more now) that the Yankees sold off.

If you add Goldman Sachs' $60 million back in, you get that the Yankees' baseball operation didn't really lose $28 million: it made a *profit* of $32 million!

Indeed, if Steinbrenner had wanted to, he could have make the loss even larger. For instance, he could have sold the remaining 37 percent of YES. He could have sold his concession profits by telling Goldman Sachs (or any other group of investors), "look, I made $5 million in concession profits last year -- make me a one-time payment of $50 million, and you can have those profits yourself, forever." He could even get rid of his entire gate receipts, by telling the world, "if you give me $1.5 billion in cash, you can take over ticket sales and keep every penny." And so on -- securitizing every stream of revenues he could think of -- luxury boxes, merchandise profits, and so on and so on.

Then, Steinbrenner would have paid himself a huge dividend of all the money raised.

If he did that, then the Yankees would have a massive loss every year. The team's expenses would have stayed the same, but all its revenues would be gone, sold off to others. The Yankees would still have had to pay all those salaries, and all those stadium expenses, and so on -- but they'd have no baseball revenues to pay them with. The result, year after year, would be a massive loss, maybe $300 million or more.

Steinbrenner would then have had to pay off the Yankee losses out of his own pocket. That wouldn't have been a problem, because he'd have pocketed at least a couple of billion dollars out of the sale of all those revenue streams, which he'd have invested elsewhere.

But the fact is that the Yankees would still be losing big money -- because almost all the assets of the team had been sold off. The *business* of Yankees baseball would still be profitable. But most of that business would no longer belong to the Yankees themselves.

What Steinbrenner did was just a small part of that. He didn't sell his ticket revenues, or his merchandise revenues, or his concession revenues. He just sold 63 percent of his local TV revenues. But that was enough to turn the profit into a loss.

To summarize: when you ask if the Yankees are making money, those can be two different questions:

1. If you take all the Yankees' baseball revenues, and subtract all the Yankees' baseball expenses, is there money left over?

2. If you take all the Yankees' baseball revenues *except for 63% of the TV money, which you've voluntarily sold to someone else*, and subtract all the Yankees' baseball expenses, is there money left over?

Question #1 is the one that makes the most sense, and shows the Yankees are profitable. Question #2 is not particularly relevant, but it seems to be the one the media cares most about, and the answer gives the impression that Yankees Baseball is an unprofitable business.

I'm not sure if George Steinbrenner arranged this just to make it look like the Yankees were money-losers. My guess is that was a side effect, and that the real benefit was that, by selling $100 million in annual revenues for a lump sum, it was sheltered from MLB's 31 percent revenue sharing "tax".

Still, all things considered, I'm sure MLB is not unhappy that the world thinks the Yankees are significantly less profitable than they actually are.


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19 Comments:

At Friday, September 03, 2010 5:27:00 PM, Blogger Johnmeister said...

Thanks for acknowledging my comment.

I would like to just make sure that the distinction between the Yankees as a team and its ownership is clear. The Yankees as a team may or may not be losing money. But its owners are making TONS of money.

According to this NY Times article, the YES Network was valued at around $3Billion in 2007.
http://www.nytimes.com/2007/08/03/sports/baseball/03yes.html

"If YES is worth $3 billion, it would be two and a half times the $1.2 billion valuation that Forbes places on the Yankees. Whatever price all or part of YES fetches, the network has clearly become the most powerful regional sports network by maintaining a nearly single-minded focus on everything about the Yankees in a market that follows the team rabidly.

It has sold advertising aggressively on Yankees games and other Yankees-oriented programming. Its revenues exceed $300 million, and its cash flow, a crucial measure of the network’s health, was about $186 million in 2006. If YES sells at 15 to 19 times cash flow, it would be valued at between $2.8 billion and $3.5 billion. When the network was formed in 2001, its value was placed at around $850 million."

So while the Yankees are only making $60 million from broadcast rights, the YES network has revenues over $300. So the Steinbrenners are laughing all the way to the bank since the YES network makes them a lot of money that doesn't go to baseball revenue sharing.

Which is why the Steinbrenners teamed up with Cowboys owner Jerry Jones to create Legends Hospitality Management LLC. The new company handles concessions and merchandising sales. It is another way of diverting a revenue stream that would normally go to the Yankees.

Understandably, many people conflate the Yankees financial well being with the Steinbrenners. But it is very clear that while Yankees may or many not lose money but the Steinbrenners most assuredly will not.

 
At Wednesday, September 08, 2010 1:08:00 PM, Blogger Phaedrus said...

There's some seriously flawed logic in this post.

YES is a separate company from the Yankees. The Yankees have not sold anything permanent to YES.

They've signed a contract to allow YES to broadcast their games on TV and CBS radio to broadcast their games on radio. YES has a 15 year contract.

Combined, TV and radio brings the company of the Yankees $60 million per year (I think this is wrong, actually. Pretty sure YES itself pays almost $70 million, but whatever). The Yankees get 100% of this revenue (minus MLB mandated revenue sharing). They do not get 66% as you said.

YES, OTOH, has revenues approaching $400 millon annually, and the Yankees own 37 percent of this company.

I highly doubt that any baseball team is allowed to sign away ticket sales. I would assume anything that is tied into MLB's revenue share formula must be kept within the team in some way.

That is why YES paid the Yankees even when the Yankees owned the entire company. The Yankees would have been much better off charging YES $1 for broadcast rights in perpetuity, but they didn't. The reason must be that MLB does not allow it. In fact I recall something fishy like this going on with the Cubs a while back.

So to summarize, Steinbrenner did not sell 66% of his TV revenues. He sold 100% of his broadcast rights for 15 years to YES for an annual payment of somewhere between 60 and 70 million, which probably rises every year.

He just happened to own a 100% share of YES, of which he sold 63 percent. YES broadcasts Yankees games, but it also broadcasts Nets games and has tons of original programming. These companies have to be viewed separately.

A baseball team is a not a TV station. The Yankees were smart to realize they had something valuable enough to create a TV station from, and if they wish to plow those profits back into the Yankees, they are free to. But MLB does not view the profits generated from Nets games or Yankeeography broadcasts as Yankee revenue.

 
At Wednesday, September 08, 2010 4:34:00 PM, Blogger Phil Birnbaum said...

Hi, Phaedrus,

YES's cash flow was $186 million in 2006, according to the NYT article. Suppose, for the sake of argument, that profits are $150 million (although the exact number doesn't matter much).

If TV rights are worth only $60 million, and that's what YES is paying the Yankees ... then where is the $150 million coming from?

That is: if the $60 million the Yankees are charging YES is not a sweetheart deal, then YES would be making only minimal profit on the deal. Say, $10 million, for the sake of argument.

So, where is the other $140 million coming from? It can't be the Nets games, because YES is paying market value for the rights. Assume another $10 million for those. That leaves $130 million in profit. Where is that coming from? Yankeeography?

Seriously ... the Yankees own the rights to their games. If you're right that those rights are only worth $60 million (or whatever), then how can YES make so much money -- $150 million profit -- on their $60 million investment? That just doesn't make sense.1

 
At Wednesday, September 08, 2010 7:57:00 PM, Blogger Phaedrus said...

"Seriously ... the Yankees own the rights to their games. If you're right that those rights are only worth $60 million (or whatever), then how can YES make so much money -- $150 million profit -- on their $60 million investment? That just doesn't make sense."

Long winded, but not to be rude. Just that I think that there is a ton going on in this issue...

YES owns the right to broadcast. Someone still needs to build the TV station, market it to cable and satellite companies, hire producers, broadcasters, and so forth, pay for cameras, etc. etc. etc. A TV station purchases the right to broadcast a sporting event because it believes it will be profitable to do so.

You seem to be conflating YES's total revenue with the Yankees TV revenue, but no baseball team works that way. Every team sells its local TV rights to a TV network, that hopes to use those rights to make a profit. In those situations where the team does not own a significant percentage of the TV station they are broadcast on, you wouldn't add that TV company's revenues to the total team revenue would you? No, you would only add the amount they got for selling their broadcast rights.

Just because the Yankees happen to own a big piece of YES doesn't mean you should throw that revenue into the team's total revenue. It's an investment that paid off. It's not baseball operations.

And if you think the deal is woefully under market, why are the Dodgers only getting paid $10 million a year for 50 regular season games?

Sure, New York is a bigger market, but 3 times bigger than LA must be somewhere in the general ballpark no?

You simply cannot equate a channel's total revenue, even if that revenue was 100% linked back to Yankee games and only Yankee games, with the value that should be applied to the baseball team. That completely negates the value that the television station itself has added to the equation and the profit it should expect to attain by paying for the broadcast rights.

You're almost saying the Yankees have sold games completely packaged with advertising already negotiated, games already played, filmed, etc. All YES has to do is toss in the DVD of the pre-packaged games and voila. They have not. They've done nothing other than sell permission for YES to create a product, aka a TV broadcast of a baseball game.

It's the same as a company licensing technology to a manufacturer. Sure, the manufacturer will pay for licensing, but they're the one doing the work. They aren't going to pass revenue through just for an idea. They'll pay for rights and expect to use those rights to make money for themselves.

According to this article, the Nets get paid $9.6 million a year by YES for the broadcast rights, which the Nets believe to be about 40% of current market value. So the Nets believe their broadcast rights are worth about $20 million.

If the Nets' rights are worth $20 million, then there's no way the Yankees are worth $186 million, as I think you're saying.

 
At Wednesday, September 08, 2010 10:24:00 PM, Blogger Phil Birnbaum said...

I got an e-mail with the same follow-up comment three times, but it didn't show up here. If that's because you deleted it after, never mind. But if you meant to post it, e-mail me and I'll try to figure out what happened.

 
At Thursday, September 09, 2010 9:35:00 AM, Blogger Phaedrus said...

I don't know what your email is. Don't see it on the site. Yes, I'd love to post it. It kept failing. I don't have it, so feel free to copy and paste and just say it was meant to be me.

I think it may have been too long, so maybe split it in two.

 
At Thursday, September 09, 2010 9:37:00 AM, Blogger Phil Birnbaum said...

This is from Phaedrus: he had trouble getting it to show up. Phaedrus, if you can copy and paste and post to your own name, I'll delete this comment.

Here's Phaedrus:

---

"Seriously ... the Yankees own the rights to their games. If you're right that those rights are only worth $60 million (or whatever), then how can YES make so much money -- $150 million profit -- on their $60 million investment? That just doesn't make sense."

Long winded, but not to be rude. Just that I think that there is a ton going on in this issue...

YES owns the right to broadcast. Someone still needs to build the TV station, market it to cable and satellite companies, hire producers, broadcasters, and so forth, pay for cameras, etc. etc. etc. A TV station purchases the right to broadcast a sporting event because it believes it will be profitable to do so.

You seem to be conflating YES's total revenue with the Yankees TV revenue, but no baseball team works that way. Every team sells its local TV rights to a TV network, that hopes to use those rights to make a profit. In those situations where the team does not own a significant percentage of the TV station they are broadcast on, you wouldn't add that TV company's revenues to the total team revenue would you? No, you would only add the amount they got for selling their broadcast rights.

Just because the Yankees happen to own a big piece of YES doesn't mean you should throw that revenue into the team's total revenue. It's an investment that paid off. It's not baseball operations.

And if you think the deal is woefully under market, why are the Dodgers only getting paid $10 million a year for 50 regular season games?

Sure, New York is a bigger market, but 3 times bigger than LA must be somewhere in the general ballpark no?

You simply cannot equate a channel's total revenue, even if that revenue was 100% linked back to Yankee games and only Yankee games, with the value that should be applied to the baseball team. That completely negates the value that the television station itself has added to the equation and the profit it should expect to attain by paying for the broadcast rights.

You're almost saying the Yankees have sold games completely packaged with advertising already negotiated, games already played, filmed, etc. All YES has to do is toss in the DVD of the pre-packaged games and voila. They have not. They've done nothing other than sell permission for YES to create a product, aka a TV broadcast of a baseball game.

It's the same as a company licensing technology to a manufacturer. Sure, the manufacturer will pay for licensing, but they're the one doing the work. They aren't going to pass revenue through just for an idea. They'll pay for rights and expect to use those rights to make money for themselves.

According to this article, the Nets get paid $9.6 million a year by YES for the broadcast rights, which the Nets believe to be about 40% of current market value. So the Nets believe their broadcast rights are worth about $20 million.

If the Nets' rights are worth $20 million, then there's no way the Yankees are worth $186 million, as I think you're saying.

 
At Thursday, September 09, 2010 9:38:00 AM, Blogger Phil Birnbaum said...

BTW, my e-mail address is my last name [at] sympatico [dot] ca .

 
At Thursday, September 09, 2010 9:46:00 AM, Blogger Phil Birnbaum said...

Hi, Phaedrus (two comments ago, posting under my name):

OK, maybe you're right that $60 million is the total.

However, if that's the case, why would YES be so valuable and profitable? It's not that complicated to start a network, and it's not that hard to negotiate a cable/satellite deal when that new network will have a monopoly on Yankees/Nets games.

The newly-created YES was worth over $800 million immediately on its creation. Unless it held $800 worth of capital -- which I doubt -- why would it be worth so much? Only because it held the rights to Yankee games cheaply, no?

Another way to look at it: the New York article says that YES has more that $250 (MM) in revenues and a 60% profit margin. That means $100 in expenses and $150 profits. According to you, expenses *include* $60 in Yankee rights fees (this is 2006) and $10 in Nets rights fees. So their other broadcast expenses are only $30. Maybe a little more, because revenues are "more than" $250MM.

What I'm saying is: if YES can make $150 MM that easily, anyone could. So the Yankees could easily have gotten more than $60MM for the rights than they actually got.

 
At Thursday, September 09, 2010 10:41:00 AM, Blogger Phaedrus said...

Splitting this one in two as I'm having same problem.

I'll leave my post with you to keep the order right. Thanks for that.

Phil said:
"What I'm saying is: if YES can make $150 MM that easily, anyone could. So the Yankees could easily have gotten more than $60MM for the rights than they actually got."

You're looking at it from the perspective of someone on the other side of the Yankees' decision to create YES. For decades, no baseball team ever considered such an idea, and I'm sure if you asked experts in the years leading up to YES's creation, many would have said it was foolhardy. "Stick to what you know, baseball. Blah blah." It was revolutionary when they did it. And yet it was instantly obvious it was a genius move.

But that's how things work sometimes. When Roger Bannister broke the 4 minute mile, no one thought it was even possible. Within 3 years, 16 people did it.

You shouldn't minimize the stones it took to make the move, just because it turned out so well. It was a brilliant business decision that has revolutionized sports.

 
At Thursday, September 09, 2010 10:42:00 AM, Blogger Phaedrus said...

One more point on this: Let's get back to the $60 million. Let's think about 2011. YES has already agreed to pay $60 million. What if the Yankees suck next year? Ratings will collapse. I know they won't suck, but you get the idea.

You're looking at it from the perspective of "last year, YES paid this much and made this much, so clearly the Yanks were underpaid."

But again that's not how this works. Teams make a rational decision to sell the rights to their games because it's a transfer of risk. "We will lock in $60 million right now and cap our revenue in order to eliminate the risk of bad ratings should our team suck."

I don't know if you've noticed, but ever since YES opened it's doors, the Yankees have been doing anything and everything they can to be awesome. One reason is they have the money, but the other reason is how much they lose if ratings drop. They have taken on a huge amount of risk. If they stink, they lose crazy money now. This is also why they sold 67% to Goldman. Risk transfer.

So when YES signed a 15 year contract, they had no idea how good the Yankees would be over the life of that deal. That's a huge amount of risk transfer AWAY from the team. Remember the early 90s? Would you want to pay $70 million to broadcast the 1990 Yankees?

I actually like this consequence of teams owning their own stations. To have a huge chunk of revenue tied so explicitly to team success will really focus the mind.

 
At Thursday, September 09, 2010 10:43:00 AM, Blogger Phaedrus said...

This comment has been removed by the author.

 
At Thursday, September 09, 2010 10:51:00 AM, Blogger Phil Birnbaum said...

Hi, Phaedrus,

I see what you're saying ... but my assessment of the risk the Yankees took is lower than yours.

When YES was created, what would be the business case for valuing it at over $800 million? "We're going to create a new TV station, and we're going to buy the rights to the Yankees at fair market value. That's worth $800 million."

Well, no, it's not. It's not worth anything. If you buy something at market price, you're not adding any value.

If you and I say, "We're going to start a publishing house, and we're going to buy the rights to Stephen King's back catalogue at fair market value," what's our company worth? Zero. Anyone can do it. There's no value added.

The fact that a company can be worth $800 million when its only real asset is the Yankees and Nets rights absolutely means that the rights are worth more than the company paid for them.

(Unless they had $800 million invested in other capital, like buildings and equipment, which doesn't seem likely.)

Also -- and I think we can agree on this -- the fact that it turned out to be a brilliant business move does not change the fact that the Yankees are profitable *if you include the profit they made from YES*. We perhaps disagree on whether that should be considered "baseball" profit. I think it should. It certainly would if YES were part of the Yankees proper and not a separate company.

 
At Thursday, September 09, 2010 11:27:00 AM, Blogger Phaedrus said...

"Also -- and I think we can agree on this -- the fact that it turned out to be a brilliant business move does not change the fact that the Yankees are profitable *if you include the profit they made from YES*. We perhaps disagree on whether that should be considered "baseball" profit. I think it should. It certainly would if YES were part of the Yankees proper and not a separate company."

Phil, this really just makes no sense. Seriously. Why don't the Yankees just buy out every bar on River Avenue then? Why don't they hire every blogger who makes money writing about the Yankees?

There are many many businesses that make substantial revenue because the Yankees exist. TV is no different.

MLB would be wrong to add YES's revenue to its baseball operations formula because it's simply not baseball operations.

Of course when Hank and Hal sit down at the end of the year, they should look at their entire portfolio to see how they did. They can opt to take the gains from YES and funnel them into the team if they wish. But that doesn't mean MLB should be looking at the same portfolio.

Maybe we're saying the same thing, but I'm trying to draw a hard line on what should constitute "team revenue" in the eyes of the league.

Also, you haven't addressed the fact that if it's so easy to setup a TV channel, how come the Dodgers don't have one?

 
At Thursday, September 09, 2010 11:00:00 PM, Blogger Phil Birnbaum said...

"There are many many businesses that make substantial revenue because the Yankees exist. TV is no different."

If you could convince me that YES is not making an above-normal level of profit for running a TV business, I would probably agree with you. But, as I continue to argue, the financials suggest otherwise. You can't just start a TV network and start making $150 million a year for nothing. If you could, then another rival -- call it the "NO" network -- would start up, buy the Yankee rights for $100 million instead of $60 million, and immediately start making a $110 million profit.

The markup just seems way too high -- YES buying the rights for $60 million, selling them for $250 million, and making a $150 million profit.

I'm certainly willing to agree that SOME of the YES profit shouldn't be considered part of baseball revenues. Just not all of it.

And, BTW, suppose YES had never been created, and the Yankees created the TV station NOT as a separate company. Then they wouldn't receive the $60MM a year, but would earn $210MM from broadcasting instead of $150MM.

If that were the case, would you argue that only $60MM of that profit was baseball, and that the other $150MM shouldn't be considered?

That is: if the Yankees earned $250MM in revenues from broadcasting their own games, and had expenses of $40MM for a profit of $210MM, would you really argue that we should ignore all those revenues and profits except for $60MM?

 
At Friday, September 10, 2010 1:09:00 PM, Blogger Phaedrus said...

Maybe this will convince you: at the time of the very first contract with YES, which you believe is a heavy discount, the Yankees were receiving more per year from YES than they ever got from MSG.

Here you can see MSG paid $52 million, reluctantly I might add, to broadcast Yankee games in 2001.

The MSG contract before 2001 was 12 years $486 million signed in 1988. Average annual revenue $40.5 million.

To sum up, the Yankees get more in rights fees today than any other team by a wide margin. They get more in rights fees from YES than they ever got from a completely separate company. YES paid more in 2002 than MSG paid in 2001.

Hmm...

 
At Saturday, September 11, 2010 1:31:00 PM, Blogger Phil Birnbaum said...

That's certainly an argument in your favor ... if MSG paid only $52MM in 2001, then $60MM in 2002 seems reasonable (if it was for 2002 only).

Since then, Yankees' revenues have doubled, and MLB revenues are up substantially in general. Do you know if the YES payment to the Yankees has kept up?

---

In any case, that doesn't bear on the question of the YES profits. I argue that the Yankees have leveraged their TV rights into a network to make huge amounts of money. You say YES should be considered a separate business.

That difference remains. I think that if YES lost the Yankees and Nets, it would disappear. Who would want to subscribe to it?

I agree with what you said, that the Yankees brilliantly figured out how to make more money from local TV than anyone ever has. I just think that part of that money should be considered baseball revenues. That's all.

I can even agree with you that, because of the risk involved, and the fact that other teams haven't done the same thing, maybe revenue sharing shouldn't fully apply to YES money. But still, the main point of my post: YES and the Yankees are so intertwined that the business really IS making a profit. It's just that the Yankees have engineered it so all the profit comes out of YES, and none of the profit comes out of the rest of the team operations.

 
At Monday, September 13, 2010 10:46:00 AM, Blogger Phaedrus said...

thanks for the chat. Nice to have a writer be responsive.

I just can't agree with this: "It's just that the Yankees have engineered it so all the profit comes out of YES, and none of the profit comes out of the rest of the team operations."

If you accept my other arguments, I don't see why you have to say it's been engineered. TV makes more money than a baseball team. That's just the way it is. There's no motive behind it other than actually making more money. That's my point. The Yankees saw this and chose to own their TV station, not in order to avoid revenue sharing, but to make more money!

 
At Monday, September 13, 2010 11:31:00 AM, Blogger Phil Birnbaum said...

">The Yankees saw this and chose to own their TV station, not in order to avoid revenue sharing, but to make more money!"

OK, you've convinced me of this. However, the fact remains that the TV station only makes money because of the Yankee rights. We just disagree about the percentage of TV revenue that's really baseball. You seem to be saying 0%, and I'm saying more than 0% but less than 100%.

">thanks for the chat."

Likewise!

 

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