I woke up this morning to a discussion on Twitter about a hypothetical billionaire owner who could buy the Pirates, invest his life savings into building a winner, all while ignoring the financial losses year after year. The conversation stemmed from last night’s article in the Trib about how Bob Nutting is “too rational”. The article, written by Jeff Oliver, interviewed a former minority owner of the Pirates, Jay Lustig, who talked about some of the financial details with the Pirates. A few of the highlights:
**Lustig noted that Nutting was allocating the money properly, and running the business rationally, but mentioned that baseball is an irrational business.
**Lustig approached Nutting about selling to a multi-billionaire who was willing to come in and spend more money to see if the Pirates could win. Nutting refused, and that’s ultimately why Lustig sold his shares.
**He also noted that any profits were put back in the team.
The topic of adding a billionaire owner who will come in and spend the Pirates to victory is brought up far too often. It’s brought up so often that it makes this hypothetical owner seem all too common. In reality, that type of owner is more of a fantasy. There are several valid reasons why this owner doesn’t exist.
Using Your Resources
I’m not a millionaire or a billionaire. There is a Holliday Inn Express right around the corner from my apartment complex. So we’ll say that qualifies me to speak on the subject of how millionaires and billionaires act. That’s how it works, right? Or do I have to actually stay at the hotel, rather than walking in the lobby one morning, acting like I’m staying there, and grabbing one of their cinnamon rolls? Not that this has happened or anything (yet).
So I’m not speaking from experience here, but I’m pretty sure that millionaires and billionaires don’t become rich by going into their investments planning to lose money year after year. That doesn’t seem like the recipe for success. Granted, investments in sports teams is different than other forms of investments. The big payout with a sports team comes when you eventually sell.
Take the Pirates, for example. When the team was bought by Kevin McClatchy in 1997, the purchase price was $90 M. Right now the current estimates have the Pirates valued at close to $480 M. Keep in mind that Bob Nutting, who owns 80% of the team according to the article in the Trib, didn’t buy the team for $90 M. He’s been buying shares of the team over the last 10 years, and has probably spent more than $90 M to get to where he is. That said, he definitely hasn’t spent $480 M, so we can assume if he sold today, he’d make a pretty nice profit, and more than anything he’d get on a yearly basis.
The general argument you see here is that MLB owners get their payout in the long run, so they don’t have to worry about making money year after year. That’s true, but it doesn’t mean they should be losing money each year. It seems that there’s only two options. You’re either making money, or you’re losing money. There is a third option, and that’s aiming to break even. That’s what most teams aim to do. They’re not looking to profit each year, but they’re also not planning on taking losses. The focus is spending their resources. It’s what any business would do. The key difference is that if you’re a publicly traded company, your goal is showing a profit each year. You don’t have to worry about showing a yearly profit in sports ownership.
That doesn’t mean you can constantly take on debt. If you’re losing money each year, that money has to come from somewhere. Either you’re using credit that is available to the team, or you’re investing your own personal money (more on this later). The more you do this, the more you chip away at your profits when you sell. The Pirates have gone up in value about $390 M from 1997 to today. Baseball has seen a big financial boom in this period, so I wouldn’t say that it’s common for teams to increase in value at this rate in the future. But if an owner bought the team at $90 M in 1997 and sold at $480 M today, they’d basically be making $25 M a year over that 16 year period. But if they’re taking big losses each year to try and win, that profit gets chipped away to nothing. Sure, the value of the franchise might increase if they do win, but winning isn’t guaranteed and the alternative is losing money and ending up in a bad financial situation — much like the Pirates were in about ten years ago when Nutting started buying the team.
You might say “Yeah, but what if they only spent a few million each year, thus leaving a long-term profit?” Let’s be honest here. We’re not talking about a hypothetical billionaire owner just so we can see the team add an extra bench player and a reliever for a few million more. The dream is someone coming in to spend $30 M or more to take the Pirates from one of the lowest spenders to closer to the middle of the pack in the league. To do that, you’re going to have to spend more than the Pirates make, you’re going to have to take big yearly losses, and you’ll lose your long-term profits a year at a time. As for that owner…
Bill Gates Will Give You $5,000 If You “Like” This Photo
You’ve probably seen the photos on Facebook involving Bill Gates sharing his wealth. In the photo he’s holding a sign saying he’ll give everyone $5,000. All you have to do is click “like” and share the photo, and you’ll get a piece of that sweet, sweet action. But any reasonable person knows that Bill Gates isn’t really giving away his wealth based on a Facebook status, just like Justin Bieber won’t stop making music if you like his photo one million times. And both of those things are disappointing.
The reality is that Bill Gates isn’t going to just give you his fortune. If you’ve followed what he’s doing now, he’s more about giving his wealth to philanthropy. The definition of philanthropy isn’t “give everyone $5,000 so they can buy a new big screen TV and a bunch of other cool stuff with their bonus money”. If you think Bill Gates is actually going to give you his money, you’re dreaming. And if you think Justin Bieber will stop making music that you hear every time you turn on the radio, you’re also dreaming. Sadly.
The billionaire owner who comes in and spends his own personal wealth to try and get a sports team to win is the same dream as Bill Gates giving money away on Facebook. It involves someone with a ridiculous amount of money giving that money away for the sole reason that they have plenty, and can afford to lose huge chunks of cash without going broke. And who benefits? You do. The whole purpose behind the billionaire owner isn’t personal wealth or achievement. The people who benefit are the fans. The billionaire owner is just spending his wealth to give the fans a winner.
So let’s recap. A guy with a huge bank account is willing to come in and spend his own personal wealth for the benefit of a large group of complete strangers. Where have I heard that before? Oh yeah, Bill Gates giving money away on Facebook.
Mark Cuban Isn’t That Guy
Normally when you talk about this fictional billionaire owner who will come in and spend whatever it takes to win, you don’t have a name. It’s usually just “there’s probably a rich guy out there who is 80 years old with no family and close to his death bed who is willing to donate his personal wealth to see the Pirates win”. That kind of sounds like the Nigerian Prince e-mail scam, but what do I know?
In Pittsburgh, there’s actually a name and a face for this fictional billionaire owner: Mark Cuban. It’s a simple solution. Sell to Mark Cuban. He will come in and make the Pirates one of the top spenders in the league because he has a ton of money, and would only care about winning. The problem is that Cuban wouldn’t do this. He’d operate within the team’s resources, just like any other owner. How do I know this? Cuban said it himself in his personal blog a few years ago. The link is here, and some quotes below.
My plans were to spend to win, not to spend for spending’s sake. IMHO, the money I could save being in the 2nd tier of payroll could be invested in scouting and development.
In particular, a lot of the “intelligence” that I would be a big time spender seemed to come out of Chicago.
More important to me was the cash flow. If the economy had a significant impact on future revenues, it would also impact how much I could invest in players. The absolute last position i wanted to be in was paying so much for the team, that if revenues fell off, I couldnt [SIC] play to win.
If you read through the whole post, you’ll see that Cuban says he doesn’t have to out-spend the Yankees and Red Sox. In this case he was talking about the Cubs, and said he only has to compete with the teams in the NL Central. It also becomes apparent that Cuban isn’t a guy who just throws away money. He spends a few paragraphs talking about margin calls, the credit market at the time, the value of cash, and so on. That doesn’t sound like a guy who will spend with no regard for profits. It sounds more like what I described earlier: a billionaire who got to where he is by making smart business decisions, and who will probably continue to operate that way.
Cuban also notes that he was a big spender in his early days with Dallas. According to HoopsHype, the Mavericks have the 13th biggest payroll in the NBA this year, and the difference between them and the top team is about $31 M. The NBA has a soft salary cap, meaning teams can go over the cap, but have to pay a luxury tax if they go over a certain threshold. Last season the Mavericks were one of six teams in the league to pay a luxury tax, so they do spend more than most teams. Of course, the NBA isn’t exactly a balanced league, so some teams can easily spend more than others. The point is that Cuban could be the top spender in the league, and the amount is the same amount we’re talking about him spending for the Pirates each year. But looking at the quotes above, Cuban isn’t a guy who is just going to throw money at the problem. He said he wouldn’t plan to spend just to spend. It sounds like he would be focused on smart spending, which doesn’t always mean increasing payroll. And that brings me to the next point.
What Does Money Buy?
The misconception about spending is that it buys success. Money doesn’t buy success in baseball. Money buys forgiveness. This year the Pirates are spending about $8 M of their own money on A.J. Burnett. If Burnett goes down for the year in his next start, the Pirates are stuck with their own internal options. They can’t afford to go out and add another high-priced arm. Meanwhile the Yankees lose Alex Rodriguez for half a season, and the answer is signing Kevin Youkilis for $12 M. That’s what money buys. Sure, it allows you to keep your own free agents, and maybe add a few high-priced guys. But the key benefit is that if you have a player go down, or if a free agent doesn’t live up to expectations, you can eat that cost and replace the player with a new player.
If you look around baseball, you’ll see big spenders who lose and small spenders who win. Money isn’t the most important thing to winning. Making smart decisions is the most important thing. You probably wouldn’t have to follow me for years to know that the Rays are my model franchise. They don’t spend a ton on an average annual basis. For all the talk about the Pirates having a low TV deal, the Rays have a lower deal. They don’t get much attendance. Yet they make smart decisions, probably to the point where they’re the smartest team in the league.
Then there’s the Yankees. They’re not a team that spends wisely. They just spend freely. They have little regard for prospects, and really, why should they? Baseball is set up so that big market teams build through free agency and established players, while small market teams have to build through prospects who aren’t guaranteed. If you give them both the same amount of money, I guarantee the Rays are going to beat the Yankees every season because they’re a much smarter organization. But you give the Yankees the advantage of money, and the playing field shifts. The Yankees can add Kevin Youkilis to replace their third baseman for half a season. The Rays lose Evan Longoria for half a season in 2012 and they have to rely on Jeff Keppinger and Sean Rodriguez. The end result is that the Rays are a much better run organization, but the Yankees are a better bet to make the playoffs each year.
Now that’s the Rays. They’re, in my opinion, the smartest team in the game. So what happens when you have a small market team that is making poor decisions, or even a team that is good, but not great? If a team isn’t winning because of poor decisions, then giving them extra money isn’t going to help. I’m not saying the Pirates only make poor decisions. There have been some poor investments, but there have also been some good investments. What I’m saying is that the most important thing isn’t money, but how an organization is run. If you think the Pirates have no shot at $68 M, then they’re not going to have a shot at $98 M. If you think they’re making more good decisions than bad decisions, and could benefit from extra money, then they might have a shot with some extra payroll. It’s all about the decisions and how the team is run, not about how much the team is spending. It’s possible for a team to win at the payroll level the Pirates are currently at. It’s a lot harder for the Pirates than it is for bigger spenders, but it’s possible. So the idea that money is all it takes it too simplistic. First, you need to make sure the organization is spending that money wisely.
Why Can’t Nutting Spend More?
Let’s say you would find an owner who would be willing to take a personal loss to see his team win. Why couldn’t that be Bob Nutting? What if Nutting wasn’t so “rational”, as Lustig put it?
That’s a common question that gets thrown around: why doesn’t Nutting spend more? The simple answer is that he can’t.
Nutting owns 80% of the team, which means the minority owners own 20%. Yeah, that’s basic subtraction. Be impressed. Nutting can’t just put his own cash into the team. If he does that, he increases his ownership of the Pirates. Let me break it down.
Say you and I own a company that we bought for $100,000, and I own 80%. To keep it simple, let’s say the company is still worth $100,000. I mean, times are still a little tough. The economy is turning around. The S&P 500 and the Dow have both touched record levels recently. Plus we both believed in this investment when I made it up a few sentences ago, and it would only make sense to stick with it. The only thing is, I now want to invest $80,000 of my own money in the company. If I do that, then I go from owning 80% of the company to owning 89% of the company. The only way you maintain your 20% is if you invest $20,000 to keep pace with my investment.
It’s the same way with Nutting. If he invested his own money into the team, he’d be increasing his ownership. The only way around this is if every other owner matched the investment based on their ownership percentage. So if Nutting invests $16 M, the other owners need to come up with $4 M.
The Pirates actually had this situation a few years ago. Nutting loaned the team money, and wanted to turn that money into equity. In doing so, he would have increased his ownership of the team. The partners ended up voting that down, with Nutting abstaining from the vote due to a conflict of interest.
So it’s not like Nutting can just spend his own money. The only way that could happen is if he owned 100% of the company, and it seems like that’s his goal based on the article in the Trib.
The Reality For Pirates Fans
Let’s be realistic. The Pirates are a low revenue team in a league of haves and have-nots. That billionaire owner who is going to come in and spend his life’s savings to build a winner? He doesn’t exist. The current owner? By all indications it doesn’t look like he intends to sell. That doesn’t mean the Pirates will never win.
Small market teams can win. They just need to be smart, and be a bit lucky to avoid injuries and down years from their top guys. The Pirates can win as a small market team. In doing so, they can increase their revenue and payroll organically. Win and more people buy tickets. More people buy tickets and you have more to spend. Spend that money wisely and you’ll win more. And the cycle continues. That’s the cycle that every successful small market team has followed. That’s also the only option for the Pirates.
It all starts with smart decisions. Is the current management group the right group for those decisions? Personally I think we’re going to find out one way or another this year. I don’t see this group surviving another losing season, but I also don’t think a losing season is inevitable. There are questionable things about this group. They add players who they seemingly have no interest in playing. They make day-to-day roster decisions while ignoring a long history of stats that suggest those are the wrong moves to make. On the other side, they’ve done some things right. All the talk about how they can’t develop talent ignores guys like Starling Marte, Kyle McPherson, Phil Irwin, Gregory Polanco, Alen Hanson, and so on. These guys didn’t go from low bonus players or mid-round draft picks to legit prospects by themselves. They’ve also made some shrewd moves compared to the current markets. In a time when Kevin Correia is getting $5 M per year on the open market, and good starters are getting ridiculous contracts, the Pirates are paying $8 M each to A.J. Burnett and Wandy Rodriguez.
As we’ve seen with the Rays, even the smartest small market team is at a disadvantage. The Pirates don’t need money to win, but they also can’t afford to make mistakes — even small ones like wasting $2.75 M on John McDonald and Brandon Inge. If this group is the group that will lead the Pirates to becoming a winner, then the extra money will help, but it won’t be necessary. If this group isn’t the group that will lead to winning, then giving them more to spend isn’t going to help anything.
In short: we should spend less time pining for a fictional billionaire owner who is willing to lose all of his money making the Pirates a winner, and instead we should focus more on whether the Pirates are making the decisions necessary to win at their current payroll level.
Links and Notes
**The 2013 Prospect Guide and the 2013 Annual are both available on the products page of the site. If you order them together, you’ll save $5. Get them both to use throughout the 2013 season.