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.
Labels: baseball, economics, Forbes, Yankees