The Billion-dollar ‘Backs

The financial business of sports is murky, likely only rivaled by Hollywood in terms of creative accountancy. That’s what makes the annual Forbes assessment of team value so interesting: they do the legwork, and offer a glimpse behind the curtain of what has become an extremely profitable business. It’s particularly profitable in the sense of value gained. When Ken Kendrick and his associates bought the Diamondbacks in 2004, they paid $238 million, so only about thirty-five million more than Zack Greinke’s contract. Today, Forbes estimates the franchise’s value at $1,150 million, an increase in just one year of $225 million - almost the cost paid to buy the team.

That works out a 483% return on the original investment over 13 years, or a 12.8% compound interest rate. Now, that number isn’t entirely accurate. For example, the team also required investors to pony up $50 million in a 2009 cash call, which would also need to factor into any such calculations. Still, it’s very nice work if you can get it. Of particular note is the 24% increase in the past year - and despite the terrible season on the field on 2016. The reason is not too hard to see: the arrival of the new broadcasting deal with Fox Sports Arizona, estimated as worth $1.5 billion over the 20-year lifetime of the contract.

The Diamondbacks are not alone in seeing a sharp spike in team value. While up more than most, the average increase across MLB last year was a robust 19%. According to Forbes, “Values were driven higher by new local television deals that are increasing at roughly a two-fold rate, surging profitability, and the escalating value of MLBAM, the Internet and technology arm of MLB.” Though with viewership on FS Arizona slumping by 37%, falling into the chasm between hopes/expectations and the cold, hard reality of a 69-win campaign, the value on the broadcast side may be questionable, even in a market where live sports represents the last bastion against cord-cutting and DVRs.

A few points to note in the more detailed analysis of the team’s finances. The first thing that stands out is the $47.2 million operating profit last season, which is more than the total figure Forbes reached for the 2011-2015 seasons combined. Kendrick has repeatedly said the investors are not taking money out as a result of their participation. So if the Forbes numbers are anything like accurate, you do have to ask: where has that $47.2 million gone? I wonder if it is perhaps being salted away, in preparation for the team taking over ownership of Chase Field, and then needing to fund the repairs and upgrades currently being fought over with the stadium district.

The other number that stands out is really two: revenue of $253 million, of which gate receipts represented only $45 million, less than 18% of the total. Put another way, (and using “dirty math” you likely will not find in any accountancy class!) last year, even if nobody at all had paid for a ticket to see the D-backs at Chase Field, they would still have turned a profit. The team takes in MUCH more from things such as local television rights, or revenue sharing that comes back to the team from MLBAM (worth $12 billion, divided equally among franchises), their slice of national TV deals with FOX, etc. This is why even a team like the Marlins, one of the few to make an operating loss in 2016, can still be worth more than a billion dollars.

One point regarding the valuation of the team: Forbes say they “do not include the value of regional sports networks owned by teams or their profits or losses. But we do include the rights fees (and pro-rated upfront bonuses) the RSNs pay the teams.” That likely means the D-backs are undervalued here, because their deal with FS Arizona reportedly includes an equity stake in the network, thus not factored into the total. However, the same Feb 2015 article includes this quote from team president, Derrick Hall: “Any increase in revenues, as we've said in the past, will go directly toward our (organization). It will help the franchise. It will help the product on the field."

The Forbes numbers since would appear to tell a quite different story.

• 2014 - Revenue $192 million, Player expenses $106 million
• 2015 - Revenue $211 million, Player expenses $125 million
• 2016 - Revenue $223 million, Player expenses $103 million
• 2017 - Revenue $253 million, Player expenses $111 million

The slice of team revenue which went to “the product on the field” has dropped significantly, from 55% in 2014, to 44% this year. Or, put another way, the amount spent on payroll has barely changed since 2014, going up less than five percent (not even allowing for inflation). Meanwhile, inflation-unadjusted revenue has increased by 32% over the same time. Where, exactly, has it gone? Inquiring minds want to know. When’s the next Derrick Hall social media chat?

Nor will reports such as this help the team win the PR battle in their ongoing spat with the Stadium District. Regardless of who is legally in the right, a highly-profitable private enterprise, which has seen sustained revenue growth, is never going to look good when they demand tax-payer funding. We’ve already seen an opinion piece in the Republic pointing this out, concluding “There is no such thing as a billion-dollar beggar.” It’s apparent the team could well fund the repair costs itself: while they may (or may not) be legally entitled not to do so, the optics are thoroughly unimpressive - especially to someone like me, opposed to all public funding for pro sports facilities.