The Captain's Blog

“Wall Street bankers supposedly back the Yankees; Smith College girls approve of them. God, Brooks Brothers, and United States Steel are believed to be solidly in the Yankees’ corner. The efficiently triumphant Yankee machine is a great institution, but, as they say, who can fall in love with U.S. Steel?” – Gay Talese, There Are Fans – And Yankee Fans (1958)

The Yankees used to be backed by Wall Street bankers. Now, they are run by one. With a self-described “finance geek” at the helm, the Bronx Bombers have a new bottom line. Gone are the days of win at any cost. A successful season is now measured by profit margin, not championships, and to this point, the Yankees are having a banner year.

What about next season? According to recent reports, the best free agents in the game are lining up to wear pinstripes, but the Bronx Bombers may not be interested. Clearly, these are Hal Steinbrenner’s Yankees, not his father’s.

Yankees’ Payroll/Luxury Tax as a Percentage of Team Revenue, 2001 to 2018E

Note: Revenue for each team is net of stadium debt and revenue sharing, and includes non-MLB events at the ballpark. Also excluded was the $18 million payout to each team from the sale of BamTech to Disney as well as profit/loss from RSNs in which teams own equity. Payroll is based on final figures for each year released by MLB, and may not necessarily equal the amount upon which the luxury tax is based.  For 2018E, revenue is Forbes 2017 kept flat, and payroll is set at the luxury tax threshold of $197 million (for a proprietary tracking calculation of the Yankees 2018 payroll, see here).

Source: bizofbaseball.com and MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

As evidenced by the chart above, the Yankees have adopted a new set of financially motivated priorities. With revenue and payroll headed in opposite directions over the past few years, the team now sits near the bottom of the league in terms of revenue spent on players. The numbers don’t lie. And, if you’re not a finance geek, forget about the math. The ring on Justin Verlander’s finger and the pinstripes that aren’t on his back tell the same story.

The Yankees have a lot of money. Sure, the league as a whole is more profitable, and teams from all markets are enjoying heightened income and inflated valuations. And yet, the Yankees still stand well ahead of the pack. According to Forbes, the Bronx Bombers easily led the majors with revenue of $619 million (net of stadium debt and revenue sharing). How accurate is that figure? Well, from verifiable public sources, the Yankees earned over $470 million from ticket sales, suite licenses and local/national TV money alone. That still leaves ownership interests in digital properties (such as the approximately $65 million payment made to all teams following the sale of BamTech), licensing, concessions, sponsorships, postseason ticket/suite revenue and derivative activities such as other businesses and events that benefit from association with the Yankees’ brand (i.e., Legends Hospitality, Pinstripe Bowl, NYFC, etc.).

Forbes estimate may not be exact, but it seems like a pretty good ballpark figure. That’s why, when judged against their means, the team’s recent investment in players has been miserly. There really is no debate in this regard. Uncertain, however, is whether the team’s self-imposed budget is temporary or permanent. Conventional wisdom suggests the Yankees are just waiting to get below the luxury tax so they can open their checkbook once again. However, that optimistic sentiment doesn’t mirror the public comments of Hal Steinbrenner, who has often questioned the need to spend $200 million on frivolous things like champagne, pennants and shiny rings. To a finance geek, intrinsic value only exists to the degree it can be monetized.

Let’s give Hal Steinbrenner the benefit of the doubt and assume he is willing to exceed the luxury tax threshold in 2019. The next question becomes, “by how much”?

Clearly, the Yankees are not returning to the days when they spent nearly 90% of revenue on payroll. And, quite frankly, it would be unreasonable to demand they do so. However, there is a lot of room between that peak and this season’s nearly 30% rate. Is the approximately 45% average for all teams a fair expectation? How about the 56% level recorded by the Bronx Bombers in the five years before the team began its belt tightening in 2013? Both seem like credible figures, so let’s take a look at what level of spending would be commensurate with these rates of investment.

Hypothetical Player Costs versus Estimated Revenue for 2019

Note: figures in $ millions; Revenue range is from 5% below Forbes $619 million 2017 estimate to 10% above. Total Player Costs include Payroll + luxury tax (including surcharges). Blue shaded cells represent rates commensurate with 2017 league average. Green shaded cells represent rates commensurate with Yankees’ average spending level from 2009 to 2013).

Source: Forbes (revenue estimate), MLB CBA, proprietary calculations

Based on a range of revenue assumptions, the Yankees could increase their payroll by about $50-$90 million and still end up spending a league average level of revenue on player costs. And, if the team’s five-year, pre-2014 rate is used as a barometer, the Yankees could increase payroll by a whopping $90-$130 million. Granted, the chart above is not stress tested beyond 2019, at which point the team’s tax penalty will start to rise and cost-controlled players will reach arbitration. However, even if the Yankees boosted 2019 payroll to $270 million, their relative rate of player costs would still be about 56% in 2021 (in line with the pre-2014 five-year average), assuming 5% revenue growth and 7.5% annual payroll increases (team payroll increased 2.5% per year from 2003 to 2013).

Hypothetical Payroll Stress Test, 2019-2021

Note: Revenue is based on 5% increases from Forbes 2017 revenue estimate of $619 million. Payroll is increased by 7.5% each season. Total Payroll Cost includes Payroll plus luxury tax (including surcharges).

Source: Forbes (revenue estimate), MLB CBA, proprietary calculations

The models provided above are by no means exact. They rely on revenue growth assumptions that could prove to be too aggressive, and do not contemplate the terms of the next collective bargaining agreement (the current CBA expires in 2021). And yet, they illustrate the degree to which the Yankees have under-invested in players. So, if there is a debate this off season, it shouldn’t be about signing either Manny Machado or Bryce Harper; the question should center on signing both (or some other combination from next year’s star-studded free agent class). For Yankee fans’ sake, hopefully that decision will be made by an owner who values winning baseball games. The investment bankers, however, will be rooting for the finance geek.