The Economics of Baseball
We all know professional sports is big money. This is definitely true for Major League Baseball.
This offseason, teams spent more then $2 billion in free agent contracts and there is still 3 months until Opening Day. That said, the expectation is that most of the big names are off the board equating to "peanits" going to the rest who are left out there.
When there is a labor conflict, the old adage is millionaires are battling billionaires.
This is obviously a realm most of us are not familiar with. Nevertheless, like all sports, this is big business. For MLB, each team is getting in excess of $100 million yearly for the national television contracts.
All of this is leading fans to talk about the teams that do not spend. The natural inclination is to call them greedy owners and this certainly could be the case. Nevertheless, there is another point to consider and, with the fact that most do not truly understand finance, it is worth delving into.
Cash Flow
In business, as in our personal lives, everything comes down to cash flow. When we assess any activity, we have to consider whether we can afford it. This comes down to cash flow.
With our personal finances, this usually pertains to our paycheck. Our spending is determined by the income. It is really that simple. Can we afford it?
The same is true in business. Companies have an issue if they spend more than they take in. Of course, debt can be factored into this yet then we have to consider the cost of servicing it.
Again, it is not much different than an individual. Can we make the paymnet on the new car?
We can see how smart companes are sensible with what they are doing here. They are constantly monitoring what is taking place. It is one of the reasons why free cash flow on public company's earnings calls is vital. If the free cash flow is growing, we are dealing iwth a company that is healthy since all additional expenses are more than compensated by the growth.
Net Worth
Here is where people get thrown for a loop.
When it comes to wealthy, the uppoer classes are always described in terms of their net worth. Isn't it interesting how the middle and lower class focus upon income? At this level, the question is how much do you make?
In professional sports, we see billionaires owning these teams. There is no doubt their net worth is off the charts.
The problem is cash flow. For example, Elon Musk doesn't have a tremendous income. This is why he doesn't pay much in income taxes. Warren Buffett was always the same way. For decades, his salary at Nershiire Hathaway was $100K.
Both of these guys, from a cash flow perspective are not in great shape. The difference enters when it comes to the value of their assets. As Musk revealed, his net worth was rather liquic, with most of it in Tesla stock. He financed the Twitter deal with this asset.
Nevertheless, to get cash, they have to sell something. As long as something can be sold, it is no problem. If Musk has his wealth in commercial real estate, it gets a lot tougher to liquidate. The same is true if it was a private company.
Here is where the sport situation enters.
Teams Still Have To Make Money
When looking at different sports, there are variables that separate them. One is the contracts from broadvasters. The NFL has no local television contracts since all games are televised by the national networks. This means there is parity there.
With MLB, things are different. A team like the Los Angeles Dodgers gets a reported $300 million per year for their loval television deal. This puts them in a different position than say the team in Tampa, which has a rather insignficant contract.
This all plays into cash flow. Is one in Pittsburgh or Cincinnati able to spend on the same level as those in NY or LA? Logic would tell us no. Naturally, we cannot state for certain since we do not see the books but it does appear the smaller markets have a lot of challenges.
We also see this coupled with ticket pricing along with the renting of suites. In New York, ticket prices tend to run 3x that of Miami. Is this due to the quality of the team or does market come into play? This is a hard question to answer yet it is easy to see how the NY teams will pull in more revenue.
Teams are corporate entities. This means they have to make money on their own. Nobody is going to spend a billion or more on acquiring a sports team only to have to keep funding it to the tune of tens of millions per year. In the short term, this might be acceptable but at some point, the business has to stand on its own.
It is no different than a division within a company. If it is not making money, after a period of time, it gets axed.
Baseball, as all sports, is a high priced business. The participants, owners and players, are wealthy individuals. Nevertheless, money has to be made.
If it is not, cuts are made. This is the simple reality of any business. Look at what is taking place in Silicon Valley right now. Comapnyes are laying off thousands of employees as things are tanking.
The economics always work out the same, it is only the numbers that change.
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