Trumpeting Major League Baseball’s financial health may not seem wise, or appropriate, in the midst of a pandemic that has shuttered the game and brought the entire country to a halt. However, the business of baseball has been very strong in the recent past, and that’s a very important thing to consider at a time when the game faces such an uncertain future.
MLB Financial Snapshot, 2003-2019
Note: See below for relevant footnotes pertaining to financial metrics.
Source: Forbes.com
According to the latest Forbes survey, MLB teams continued to enjoy stable revenue and enterprise value growth in 2019, with each up mid-single digits over the past three years. However, where MLB really hit a home run was with EBITDA. According to Forbes, nearly 65% of incremental revenue flowed straight to operating profit, boosting the sport’s margin to 14.5%, the highest it has been since Forbes started doing its annual survey. The increase in EBITDA margin extended a recent acceleration that has been fueled in large part by cost control (i.e., a slower rate of growth in player salaries). With the top line maintaining a steady growth trajectory and costs leveling off, team coffers have been filling up. That’s not a bad way to head into a year that promises immense business disruption.
MLB EBITDA Margin, 2001, 2003-2019
Note: See below for relevant footnotes pertaining to financial metrics.
Source: Forbes.com
Although league-wide net revenue was up 5% for the third straight year, some teams benefitted more than others. Six teams enjoyed a double-digit revenue boost, led by the Tampa Rays (thanks to a new cable TV deal), whose top line increased by 16%. At the lower end of the spectrum, five teams either recorded flat revenue or a slight decline, with the Giants seeing the biggest drop at -2%. Also of note, the league’s three highest revenue teams all saw very modest growth gains, perhaps suggesting saturation (as well as the absence of significant post season revenue).
Growth on the bottom line was also broad-based, as all but seven teams recorded a higher EBITDA than the year before. Even the hapless Baltimore Orioles joined the party by parlaying 108 losses into a whopping EBITDA increase of $63 million. Tanking clearly has its advantages. Meanwhile, the New York Mets, who were somewhat aggressive during the off season, suffered the opposite fate. The team’s EBITDA declined by $23 million, leaving it with the second lowest operating profit in the league, ahead of only the Miami Marlins, who recorded the game’s only operating loss.
In terms of enterprise value, the trend remained up, but much more muted than in the recent past. As a whole, league enterprise value increased 4% in 2019, the lowest level in 10 years. Still, nearly every team’s trajectory remained positive, with only the Pirates and Marlins suffering small declines. Topping the list was the Yankees, who recorded the league’s highest enterprise value growth for the second straight year. According to Forbes, the team’s 9% jump to $5 billion makes the Yankees the world’s second most valuable sports franchise, trailing only the Dallas Cowboys.
Top-5 and Bottom-5 Teams by Valuation, Net Revenue, EBITDA – 2019
Note: See below for relevant footnotes pertaining to financial metrics
Source: Forbes.com
As mentioned above, contributing to the league’s healthy operating profit were flat payrolls. For the second year in a row, and only the second time since at least 2001, owners kept more than half of the game’s revenue. Thanks to stagnant compensation (salaries, benefits, and postseason awards), the players’ share of the revenue pie in 2019 dipped to only 46%. This trend had been expected to reverse thanks to increased spending in the winter, but with the status of the season in doubt and the impact on revenue and salaries unknown, the relative share in 2020 remains a big question mark.
MLB Player Compensation vs. League Revenue
Notes: Data Labels represent “year over year comp growth / total comp as percentage of net revenue”. Revenue is net of stadium debt service. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. For pre-2015, benefit costs were determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll), baseball-almanac (postseason revenue) and Forbes (net revenue)
In addition to the player’s overall share contracting, so too has the disparity between teams, at least on the high end. In 2019, the Washington Nationals posted the highest percentage of revenue spent on players, but at only 55%. In past years, the top spending team could be expected to spend anywhere from 70% to 90%, but now, the scale has shifted lower. As a result, one-third of the league now spends less than 40% of revenue on player costs, including mega-market teams like the Yankees and Dodgers, who hovered around only 35% in 2019.
2019 Discretionary Player Cost (Payroll/Luxury Tax) as a Percentage of Team Revenue for all 30 Teams
Note: Red shading indicates NL teams; Green shading represents AL teams.
Note: See below for relevant footnotes pertaining to financial metrics.
Source: MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)
Despite MLB’s strong position, the fallout from the COVID-19 pandemic is likely to take a significant toll on the game’s financial health. The degree of the impact will be based on how much of the season can be played, and what percentage of those games take place in front of paying customers. According to Forbes, gate receipts accounted for about 30% of 2019 revenue, or about $3.2 billion, so if a substantial portion of the season is played in front of empty seats, MLB’s robust margins could be sliced razor thin. Luckily, other sources of revenue, including sponsorships and local/national media rights, appear more resilient, provided, of course, there are games to play. For that reason, it seems likely that MLB will cobble together a season, but either way, the booming baseball business is sure to take a hit, and that’s not an ideal way to head into a new round of collective bargaining.
Footnotes
Forbes Methodology:
“Our team values are enterprise values (equity plus net debt) calculated using a multiple of revenue. The multiples are based on historical transactions and the future economics of the sport and team. Revenue and operating income (earnings before interest, taxes, depreciation and amortization) measure cash in versus cash out (not accrual accounting) for the 2019 season.
“Our figures include the postseason and are net of revenue sharing and stadium debt payments for which the team is responsible. Revenues include the prorated upfront bonuses networks pay teams as well as proceeds from non-MLB events at the ballpark. Ownership stakes in regional sports networks, as well as related profits or losses, were excluded from our valuations and operating results. Sources include sports bankers, public documents like leases and filings related to public bonds and media rights.“
In addition to team-specific net revenue figures, Forbes also estimated total gross revenue at $10.5 billion, broken down as follows: gate receipts: $3.2 billion; central revenue: $3.1 billion; local media: $2.2 billion; sponsorships: $1.1 billion; and other stadium revenue: $925 million.
Forbes uses EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a measurement of operating income. Although usually defined as EBIT, Forbes not only adds back interest and taxes, but depreciation and amortization expenses as well. As a result, Forbes operating profit can appear higher than stated figures.
Payroll is based on final figures (not AAV) for each year released by MLB and does not include benefits.
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