Thursday, August 24, 2006

Glory Days – the Yankees Are Losing Bucks

Wonders never cease – according to a Bloomberg News report, the New York Yankees expect to lose money this year. The Yankees with a payroll in excess of $200 million will draw more then 4 million fans for the second straight season. Fear not supporters of the Evil Empire, Boss Steinbrenner will keep on spending the big bucks in hopes of delivering the Evil Empire another trip to the Promised Land.

Yankees general manager Brian Cashman told Bloomberg Radio he didn’t know how much money the Yankees were going to lose this year, but did give this gem -- ``We're making a lot, but we're spending more than we're making,’’ Cashman told Bloomberg Radio.

The news that the Yankees are losing money was a surprise to many. The most recent financial valuation offered by Forbes Magazine (a subjective list) listed the Yankees worth for 2006 at $1,026 billion dollars, the first Major League Baseball franchise to top more then a billion in value.

The New York Daily News reported the Yankees lost between$50 and $85 million during the 2005 base all season. In 2005 the Yankees paid $223 million to players and $111 million to Major League Baseball in the form of revenue sharing and luxury tax payments. It’s easy to understand why the Yankees lost as much money they did when you realize two expense totals reached $334 million.

What’s critical in understanding the Yankees losing tens of millions of dollars are the significant dollars the Yankees generate for their 38 percent stake in the YES Network, which are not included in the financial picture Cashman offered Bloomberg.

YES generates more then $200 million a year and is worth more then the Yankees. While it indeed may be true the Yankees ‘baseball operations’ are losing tens of millions of dollars annually, Steinbrenner isn’t heading to the poorhouse anytime soon. YES (again 38 percent is owned by the Yankees), pays the team for its television rights. It’s a classic example of taking the money out of one pocket only to put in the other pocket.

The Yankees broke ground last week on their new Yankee Stadium. Scheduled to open in time for the 2009 season, the stadium will be a money making machine for the business of the Yankees. Even while it’s being built, the stadium will better serve the Yankees bottom line.

The current MLB collective bargaining agreement allows teams to deduct stadium operations expenses including construction costs from the revenues eligible to be shared with low revenue teams. In simpler terms, the Yankees will be able to take the tens of millions of dollars they where giving to other MLB franchises through revenue sharing and use that money to help offset the estimated $1 billion it will cost to build the new Yankee Stadium.

Since the 2000 season, the last time the Yankees won the World Series, the team has doubled its payroll. Consider that in addition to a 2004 payroll of $187.9 million, Steinbrenner, the Yankees' principal owner, was saddled that year with two other large expenses: $63 million to be paid into Major League Baseball's revenue-sharing fund and $25 million in luxury-tax payments, a penalty that only the Yankees will have paid in each of the past four years. That meant for the 2004 baseball season $276 million went to players and less-wealthy teams, from total revenue estimated at $315 million to $350 million, before Manager Joe Torre, the coaches, the front office, the minor league system and the rent were paid.

In 2003, the payroll was a little smaller at $170 million, the revenue-sharing payment was the same $63 million and the luxury-tax payment was a lot less, at $11.2 million. And the Yankees, according to Michael Ozanian, a senior editor of Forbes magazine, posted an operating loss of $23 million that year, on revenue that Forbes estimated at $238 million, including $119 million in income from ticket sales, luxury suites and club seats.

Steinbrenner’s focus isn’t on winning the World Series, it’s the bigger picture and in this case building the Yankees brand. Steinbrenner knows if the YES network increases in value he’ll make more money. And if the Yankees win the 2006 World Series it will improve the YES Network’s ratings numbers – a key to increasing the value of the regional sports cable network.

Steinbrenner’s business acumen allowed him to approve the deadline trade with the Phillies for Bobby Abreu and Cory Lidle. Financially the Yankees did more then add 7.1 million to their 2006 team payroll. Because the Yankees surpassed the MLB team salary payroll threshold of $136.7 million, and because the Yankees surpassed the team payroll threshold level for the fourth consecutive season, Abreu and Lidle cost the Yankees an additional 40 percent ($2.82 million), above and beyond their salaries.

The Yankees opening day payroll was projected at $198,662,180. While the bill has yet to be sent by Major League Baseball to Steinbrenner and the Yankees, the Yankees can expect a luxury tax bill for the 2006 season in excess of $28 million.

Say whatever you want, but the Yankees went to Boston over the weekend, and blew the Red Sox into the Charles River, sinking any hope the Red Sox had of ending the Yankees eight consecutive American League East Division titles. Abreu and former Red Sox, Johnny Damon now a member of the Yankees keyed the Boston Massacre.

As the owner of a Major League Baseball franchise, George Steinbrenner appreciates that you have to spend money (in his case hundreds of millions of dollars) to make money (again hundreds of millions of dollars).

Recently The New York Daily News reported Goldman Sachs & Co. and Providence Equity Partners who own 40 percent of the YES Network are interested in selling their stakes in YES. The YES Network is four and a half years old, born on March 22, 2002. The value of the highest rated regional sports network has been estimated at between $1.3 and $3 billion. Goldman Sachs & Co. and Providence Equity Partners invested an estimated $340 million in initial start-up costs for the YES Network. According to a report in Multichannel News, dividends paid to Goldman and Providence has retuned more then 100 percent of their original investment. Multichannel News estimated Goldman and Providence could sell their 40 percent of YES for between $480 million and $1.2 billion – which would represent an amazing return on their investment given that they’re already been paid back the money they put in YES to get the network going four years ago.

And why this matters to Steinbrenner, he owns 38 percent. His stake in the network could be worth a more then a billion dollars, in addition to his 100 percent ownership of the Yankees he has, again worth more then $1 billion.

The new Yankee Stadium will be a monster money making machine, especially when you take the time to compare it to the Yankees current stadium. The key differences between the current and the new ballparks – 60 luxury suites. The current Yankee Stadium has 17 suites. Those 43 additional suites will represent millions of additional dollars in revenue for the Yankees each year. Then factoring in a majority of the new ballparks seats being located in the lower deck, the Yankees who have already surpassed 4 million tickets sold for the 2006 season (marking the second consecutive season the Yankees have achieved that attendance figure) the slight drop in capacity from 54,000 to 51,800 will drive Yankee season ticket sales and again result in millions of dollars in additional revenues with an increase in premium seating. Two thirds of the seating in the new Yankee Stadium will be lower deck what will be priced as premium seating.

Since 1999 as Cashman reminded Bloomberg Radio, the Yankees have had the highest annual payroll in baseball.

``You can try to build a perfect business plan, but again you're going to have to deviate from it,'' Cashman said. ``That's why some of the decisions that we've made and started to make going forward are to help transition us to help get the payroll back in line.''

According to the Bloomberg News, the Yankees issued about $967 million of municipal bonds through the New York City Industrial Development Agency to raise the working capital needed for their new stadium. The bonds are to be repaid with money from ticket and luxury box sales at the new stadium.

``The team needs to be a viable enterprise,'' said Moody's analyst Thomas Paolicelli. ``There's only so much time where they can run a deficit before it would start impacting their obligations.''

The Yankees have no plans to sell the naming rights for the new Yankee Stadium. Give Steinbrenner credit, it’s another example of how he does business and realizes what the Yankees brand name is worth. The Yankees may have been able to sell the naming rights to their new stadium for close to $10 million a year. That would sully the Yankees brand name, taking away from the big picture philosophy Steinbrenner has always had during his stewardship as Yankees owner.

The new Yankee Stadium has been designed to generate tens of millions of dollars annually in corporate sponsorship naming rights fees. Each gate at the new Yankee Stadium will have its own lead (title) sponsor. The Yankee brand will drive decision makers to buy parts of the stadium for millions of dollars. Assuming the Yankees can meet their goals of what amounts to a series of ‘mini-naming rights deals’, and there is no reason to believe they won’t, the Yankees will easily surpass $10 million in annual corporate naming rights.

When the Yankees broke ground on their new stadium last week, Steinbrenner and Yankee president made it clear – the new stadium would be all about showing everyone how much money the Yankees are about to start making.

Steinbrenner offered, "We developed the new stadium with the needs of the Yankees and the fans in mind. This new 'Home of Champions' will preserve the architectural integrity of the original Yankee Stadium, while incorporating modern amenities."

Yankees President Randy Levine said, "The design of the new stadium allowed us to incorporate restaurants, a special events hall, first-class concourses, and an increased number of luxury suites - while still managing to keep ticket prices affordable."

Levine’s comments say what needed to be said – the Yankees are building a world-class stadium will all of the revenue generating amenities the Yankees need to make more money. Bottom line the Yankees have been losing more then $50 million annually for the last three baseball seasons. Believe whatever you like but if you understand what a true genius George Steinbrenner is, is his stake in the Yankees and in the YES Network are each worth more then $1 billion. For every dollar George Steinbrenner spends on bringing the Yankees to another World Series, its two or three dollars more in the companies he owns that are directly related to the Yankees.

For Sports Business News this is Howard Bloom. Sources cited in this Insider Report: Bloomberg News, The New York Daily News and Mutlichannel News and The New York Times