Prospectus Feature: The Numbers (Part Eight): MLB vs. Forbes

Part One
Part Two
Part Three
Part Four
Part Five
Part Six
Part Seven

Add Forbes to the ever-growing list of those who don't believe MLB's cries of poverty.

The April 15 issue of Forbes contains the magazine's annual survey of MLB's finances. Michael Ozanian has been compiling these surveys since 1991, first for the now-defunct Financial World and since 1998 for Forbes. Forbes, based on 2001 performance the average Major League Baseball franchise is now worth $286 million, an increase of 10% since 2000. Moreover, the present owners of MLB clubs have seen the value of their investments appreciate an average of 12% a year. These are hardly the hallmarks of an industry in dire financial straits.

While MLB claims operating losses of $232 million in 2001, Forbes estimates that the 30 teams turned a collective profit of $76.7 million. That's a difference of more than $10 million per team.

Here's how the Forbes numbers compare to MLB's (all figures net of revenue sharing payments):

                   2001 Operating     2001 Operating                 2001 Debt/
Team                Profits (MLB)   Profits (Forbes)    Difference  Value Ratio

New York Yankees      $14,319,000        $18,700,000    $4,381,000           7%
New York Mets        ($ 7,377,000)       $14,300,000   $21,677,000          10%
Los Angeles Dodgers  ($54,450,000)      ($29,600,000)  $24,850,000          23%
Boston Red Sox       ($13,726,000)      ($11,400,000)   $2,326,000          56%
Atlanta Braves       ($25,007,000)        $9,500,000   $34,507,000           7%

Seattle Mariners      $15,475,000        $14,100,000   ($1,375,000)         34%
Cleveland Indians    ($11,373,000)       ($3,600,000)   $7,773,000          31%
Texas Rangers        ($24,433,000)       ($6,500,000)  $17,933,000          40%
San Francisco Giants  $12,692,000        $16,800,000    $3,308,000          49%
Colorado Rockies      ($9,444,000)        $6,700,000   $16,144,000          12%

Houston Astros        ($6,399,000)        $4,100,000   $10,499,000          30%
Baltimore Orioles     ($5,347,000)        $3,200,000    $8,547,000          47%
Chicago Cubs          ($1,771,000)        $7,900,000    $8,671,000          14%
Arizona Diamondbacks ($36,584,000)       ($3,900,000)  $32,684,000          81%
St. Louis Cardinals   ($6,360,000)       ($5,100,000)   $1,260,000          15%

Detroit Tigers         $5,660,000        $12,300,000    $6,640,000          70%
Pittsburgh Pirates    ($1,202,000)        $9,500,000   $10,702,000          37%
Milwaukee Brewers     $16,129,000        $18,800,000    $2,671,000          59%
Philadelphia Phillies ($9,113,000)        $2,600,000   $11,713,000          54%
Chicago White Sox     ($9,888,000)       ($3,800,000)   $6,088,000          13%

San Diego Padres      ($7,483,000)        $5,700,000   $13,183,000          47%
Cincinnati Reds        $2,348,000         $4,300,000    $1,952,000          32%
Anaheim Angels            $25,000         $5,700,000    $5,675,000          21%
Toronto Blue Jays    ($43,097,000)      ($20,600,000)  $22,497,000           0%
Oakland Athletics      $3,407,000         $6,800,000    $3,393,000          38%

Kansas City Royals      ($137,000)        $2,200,000    $2,063,000          13%
Tampa Bay Devil Rays ($10,459,000)       ($6,100,000)   $3,359,000          77%
Florida Marlins       ($9,180,000)        $1,400,000   $10,580,000          51%
Minnesota Twins          $536,000         $3,600,000    $3,064,000          65%
Montreal Expos       ($10,002,000        ($3,400,000)   $6,602,000         112%

LEAGUE AVERAGE ($7,741,000) $2,473,000 $10,214,000 38%

For most clubs, the biggest difference comes from Forbes's refusal to accept teams' reported expenses at face value. These adjustments, which presumably reflect non-baseball costs, related-party transactions, or money taken out of the team by its owner as salary or bonus, come to almost $20 million for the Mets and Blue Jays, and $25 million for the Diamondbacks. Forbes also imputes considerable additional income to the superstation teams: $23.8 million for the Braves, $7.2 million for the Cubs.

The last column, "2001 Debt/Value Ratio," is included because Commissioner Selig recently announced that as of June, clubs will not be allowed to carry debt of more than 40% of the club's value. Using the Forbes estimates, 12 clubs (including Selig's own Brewers) currently exceed this ratio. However, the number as computed by MLB may be higher, since Selig arbitrarily defined a club's "value" as presumptively equal to twice its 2001 revenues minus any revenue sharing payments.

Here's how Selig's valuations compare to Forbes's estimated franchise values.

                        Franchise value      Franchise value
                        (Selig formula)     (Forbes estimate)      Difference

New York Yankees $457,876,000 $730,000,000 $272,124,000 New York Mets $349,593,000 $482,000,000 $132,407,000 Los Angeles Dodgers $278,107,000 $435,000,000 $156,893,000 Boston Red Sox $337,526,000 $426,000,000 $88,474,000 Atlanta Braves $283,055,000 $424,000,000 $140,945,000

Seattle Mariners $386,077,000 $373,000,000 ($13,077,000) Cleveland Indians $311,230,000 $360,000,000 $48,770,000 Texas Rangers $261,076,000 $356,000,000 $94,924,000 San Francisco Giants $334,282,000 $355,000,000 $20,718,000 Colorado Rockies $257,597,000 $347,000,000 $89,403,000

Houston Astros $244,073,000 $337,000,000 $92,927,000 Baltimore Orioles $251,257,000 $319,000,000 $67,743,000 Chicago Cubs $252,980,000 $287,000,000 $34,020,000 Arizona Diamondbacks $243,832,000 $280,000,000 $36,168,000 St. Louis Cardinals $256,689,000 $271,000,000 $14,311,000

Detroit Tigers $218,709,000 $262,000,000 $43,291,000 Pittsburgh Pirates $219,194,000 $242,000,000 $22,806,000 Milwaukee Brewers $228,444,000 $238,000,000 $9,556,000 Philadelphia Phillies $174,782,000 $231,000,000 $56,218,000 Chicago White Sox $219,163,000 $223,000,000 $3,837,000

San Diego Padres $168,112,000 $207,000,000 $38,888,000 Cincinnati Reds $155,178,000 $204,000,000 $48,822,000 Anaheim Angels $193,056,000 $195,000,000 $1,944,000 Toronto Blue Jays $166,788,000 $182,000,000 $15,212,000 Oakland Athletics $161,458,000 $157,000,000 ($4,458,000)

Kansas City Royals $143,389,000 $152,000,000 $8,611,000 Tampa Bay Devil Rays $173,574,000 $142,000,000 ($31,574,000) Florida Marlins $139,655,000 $137,000,000 ($2,655,000) Minnesota Twins $131,621,000 $127,000,000 ($4,621,000) Montreal Expos             $96,859,000 $108,000,000 $12,141,000

TOTAL: $1,497,468,000

All told, the difference between Selig's valuations and Forbes's is about $1.5 billion–$50 million per team, or an additional $600 million of debt which would be allowed if MLB used the Forbes numbers instead of its own arbitrary "values."

Selig's formula and the Forbes estimates are fairly close with respect to most low-revenue clubs, but the Selig formula grossly undervalues high-revenue clubs. This isn't surprising. Because an owner must realistically spend at least $70 million/year to field a major-league team (even the 2001 Expos spent $72.7 million), his opportunity for profit comes only from revenues in excess of this sum. Thus if the owner of Club A grosses $100 million, he has only $30 million of discretionary money to reinvest in the club or take as profit, while if Club B takes in $200 million, its owner has $130 million to play with. In this example, the Selig formula values Club B at twice the price of Club A, when in fact it has the potential to be more than four times as profitable.

In addition, by looking only at a single year's revenues, the Selig formula ignores the fluctuations resulting from a new stadium, either one that has already opened or one still under construction. In valuing the Phillies, Padres, and Reds, who will all move into new parks over the next few years, Forbes takes into account their imminent revenue growth. Conversely, Forbes recognizes that the Mariners and Giants can expect to see revenues decline as the novelty of their parks wears off. (The "new park effect" is apparently expected to continue for several years in Pittsburgh and Milwaukee, since both are valued about in line with similar clubs that don't have new parks.)

This bears repeating: an independent expert analyst, with no stake in the results of its analysis, concluded that MLB's 2001 operating profits were $300 million higher than reported by Commissioner Selig, and that MLB's franchises are worth a collective $1.5 billion more than suggested by the Commissioner's valuation formula. And that independent analyst wasn't writing in The Nation or The Village Voice–he was writing in Forbes, hardly a hotbed of pro-labor bias.

Not that this stopped MLB. Hours after the Forbes article was released, Rich Levin, MLB's head of public relations, called it "dishonest" and "complete speculation." On Tuesday, Commissioner Selig himself chimed in. After terming Forbes's numbers "pure fiction," the Commissioner lamented, "I think it's a very sad day for journalism in America when somebody knowingly writes something that is not only not true but has been told it is not true."

Apparently in the hermetically sealed world inhabited by the Commissioner and his minions, "good journalism" means printing what you're told. "Good journalism" means uncritically accepting MLB's insistence that it has publicly disclosed all relevant information concerning its finances, even though MLB doesn't act like an industry on the brink of financial ruin and even though it wouldn't let the MLBPA tell Congress what it found among MLB's non-public financial documents.

In the real world, where Selig wields his precious Blue Ribbon Panel report as a club to demand givebacks from the players and new stadia from the taxpayers of Minnesota, Kansas City, Miami, and Oakland (to list just the clubs threatened during Bud's 2002 Extortion Across America tour), any writer meeting the Commissioner's standards of "good journalism" should be fired. Unless and until MLB allows an independent outside auditor to review all its financial records, and to disclose the results publicly in a report whose contents are not subject to MLB's prior review and control, its self-serving statements should be afforded no more deference than those of any other special-interest pleader.

The Commissioner's insistence that his critics were "just plain wrong" struck a familiar chord with me. Two days after my last column appeared, Bud Selig spent 40 minutes on the phone with me, vigorously correcting the "lot of statements here that are just wrong." I'll write about that experience next time.