2017 Outlook
Posted: Sat Oct 29, 2016 5:06 pm
6347535B5E320 wrote: I read somewhere, do not remember where, that the new CBA may have a salary floor in the agreement if agreed to. If so hopefully it will be high enough to cause some payroll changes and force the team to spend more!
What frustrates me the most about the Pirate ownership is that spenders like them need a rule like what you heard about. It might be something that players may go for but the owners, well I doubt it.
Unless perhaps there is some kind of revenue sharing where at least TV revenues are shared pretty equally. Unfortunately that is a dream that has about as much chance of flying with ownership as does Pirate ownership paying top $$ for a great starting pitcher. For baseball to succeed and to become more competitive where teams don't have to wait 71 years to make a WS appearance it needs to level the playing field and to me revenue sharing and a salary cap would seem to be a way to consider.
I agree that the whole system would have to change in the way that you say for something like a salary floor to happen. Until or unless it does the Pirate financial model and way of trying to sustain winning for multiple seasons has to continue.
Being a small business owner for the last thirty years I can tell everyone that managing money and cash flow in ANY business is similar to doing it in your own household, except that fluctuations in revenue make it even scarier. And when ownership's financial personal guarantees are probably sprinkled throughout it's easy understand why financial conservatism rules the day. In the Pirates' case, the financial model they must follow for sustained success is going to backfire from time to time from the standpoint of positive results for any single season. That being the case I'd really think they'll look at this season's failures from the standpoint that they'll probably have to risk a negative fluctuation in cash flow in the form of increased payroll (starting pitcher?) in order to maximize their chances of winning next year, which in theory will generate more revenue. If that fails there will be a sell-off. Just look at Kansas City as an example of what a small-market team must do if they fail to win with a higher payroll than what they can afford.
Related to all of that a business's bottom line is not some pot of gold or lump of coal that is realized at the end of the fiscal year or rainbow (if successful fiscally). It is spent, saved, or absorbed little by little as the year unfolds. For this reason, trust me in that this money is not going lump-sum into Nutting's pocket. And also related to that, every successful business is forced to retire long-term debt by virtue of payment schedules, for which ownership is usually personally at risk (the aforementioned personal guarantees). And what's misleading to the bottom line is that reduction of the principal IS NOT booked as an expense. It is only the interest portion that is an expense (what most would call a "write-off"). So a company could technically be profit-rich and cash-poor. And even being profit rich would probably constitute no more than a 3% to 5% bottom-line profit. I would turn hand-springs if my company had been able to do that from one year to the next on a consistent basis.
Finally, a traditional-style business (and certainly no sports team) is going to be a cash cow for ownership. You just hope to maximize opportunity and minimize risk as you operate from year to year. If your business is successful and there is a market for the product, the real money is made when you sell. In the traditional capitalist society this is the potential reward for having taken the risks and employed many people over the years and contributed to their well-being as well as to your own family's.
So all of this is what the Nuttings are doing and as fans it will be very interesting for all of us to see what Bob Nutting does going forward. After all, the market value of a business can fluctuate wildly from what the so-called book value is.
Although I appreciate your insights into small business ownership and the difficulties presented in such an endeavor I would like to point out some significant differences between small business and the business of Major League Baseball ownership.
First, of course a MLB franchise is not a small business. Nor is it fraught with much of the uncertainty (which you've mentioned) that small businesses face. It is in fact a closed shop monopoly permitted by a federal antitrust exemption-about as close to a definition of "cash cow" as exists. The Pirates have virtually no uncertainty regarding revenue. They are guaranteed $25M yearly in TV revenue until 2020 when that figure will likely double to the MLB average of small market teams. They are guaranteed recipients of revenue sharing from the 'luxury tax' in MLB. They have no serious doubts regarding attendance stability as they have been gifted by taxpayers with one of the showcase venues in all of MLB, PNC Park, as their home and drew well even in a year when they didn't have a winning season. Other sources of revenue have been consistently on the increase for all teams in MLB for the past decade. The Pirates ranked 18th out of all MLB teams in revenue with $244M. Their payroll ranked 25th at $104M.
Forbes magazine has ranked the Pittsburgh franchise as the 18th most valuable of 30 teams at an estimated value of $975M. The Nutting ownership purchased the franchise for $98M. That places the equity in the business at roughly $780M after the 10% franchise debt has been settled. You make the assertion that "managing money and cash flow in ANY business is similar to doing it in your own household." I would agree. As such if I had a house that was worth more than 7 times what I paid for it I would consider a home equity loan to finance anything that I might not have the proper cash flow to deal with at a particular point in time. This equity is leverage for running a business and a safety net for any unexpected expenses or crises. Pirate ownership pleading poverty regarding payroll (which NH has already done after the season ended) is simply absurd. There is enough equity in the franchise to sustain a much higher payroll for more than just a run at a championship. Evidence from other MLB teams suggests that a team with $244M in revenue can sustain a payroll of ~$130M without going deep into the red. With the equity built into their business Pirate ownership should be looking to spend up to their limit when the chance for a championship is a reasonable possibility.
Finally you point to KC as an example of what a small market team has to do if they fail to win with a higher payroll. Somehow I don't consider winning a World Series Championship as KC did any kind of failure. The fact that their ownership decided to go for seconds with a higher payroll the following season was a reasonable risk. Reasonable not only because they had already won one championship but reasonable because any MLB team can mitigate subsequent payroll excesses through trades and youth development in the natural course of the business of MLB. If KC operates in the red for a couple of years before they can balance the books they'll have the increased value in the franchise that a world championship brought them in 2015 that will likely more than make up the deficit.
The Pirates ownership is well beyond a reasonable definition of fiscal conservatism. They are demonstrating a seemingly unethical disregard for the essence (sports competition) of the business they have chosen to participate in.
I appreciate your point about "as close to a cash cow". I think you're right about that. I also think that, even with that, it is not close to a cash cow. Trust me, the month to month operation is a roller coaster. To that end every successful business operates to some degree via a bank line of credit (or for larger business multiple lines of credit). Most are renewable on a yearly basis pending decent enough financial performance, but ALL are at the personal risk of ownership. If any of those is not renewed then the bank demands payment IMMEDIATELY and the legal "fun" begins. So I don't think we should be so quick as to judge Bob Nutting on a moral or ethical basis. He's trying to stay fiscally operational -- not such a bad thing. I do think, however, that in highly visible situations like theirs appearances are important. That's why the Liriano salary dump looked bad with regard to how it was done.
What frustrates me the most about the Pirate ownership is that spenders like them need a rule like what you heard about. It might be something that players may go for but the owners, well I doubt it.
Unless perhaps there is some kind of revenue sharing where at least TV revenues are shared pretty equally. Unfortunately that is a dream that has about as much chance of flying with ownership as does Pirate ownership paying top $$ for a great starting pitcher. For baseball to succeed and to become more competitive where teams don't have to wait 71 years to make a WS appearance it needs to level the playing field and to me revenue sharing and a salary cap would seem to be a way to consider.
I agree that the whole system would have to change in the way that you say for something like a salary floor to happen. Until or unless it does the Pirate financial model and way of trying to sustain winning for multiple seasons has to continue.
Being a small business owner for the last thirty years I can tell everyone that managing money and cash flow in ANY business is similar to doing it in your own household, except that fluctuations in revenue make it even scarier. And when ownership's financial personal guarantees are probably sprinkled throughout it's easy understand why financial conservatism rules the day. In the Pirates' case, the financial model they must follow for sustained success is going to backfire from time to time from the standpoint of positive results for any single season. That being the case I'd really think they'll look at this season's failures from the standpoint that they'll probably have to risk a negative fluctuation in cash flow in the form of increased payroll (starting pitcher?) in order to maximize their chances of winning next year, which in theory will generate more revenue. If that fails there will be a sell-off. Just look at Kansas City as an example of what a small-market team must do if they fail to win with a higher payroll than what they can afford.
Related to all of that a business's bottom line is not some pot of gold or lump of coal that is realized at the end of the fiscal year or rainbow (if successful fiscally). It is spent, saved, or absorbed little by little as the year unfolds. For this reason, trust me in that this money is not going lump-sum into Nutting's pocket. And also related to that, every successful business is forced to retire long-term debt by virtue of payment schedules, for which ownership is usually personally at risk (the aforementioned personal guarantees). And what's misleading to the bottom line is that reduction of the principal IS NOT booked as an expense. It is only the interest portion that is an expense (what most would call a "write-off"). So a company could technically be profit-rich and cash-poor. And even being profit rich would probably constitute no more than a 3% to 5% bottom-line profit. I would turn hand-springs if my company had been able to do that from one year to the next on a consistent basis.
Finally, a traditional-style business (and certainly no sports team) is going to be a cash cow for ownership. You just hope to maximize opportunity and minimize risk as you operate from year to year. If your business is successful and there is a market for the product, the real money is made when you sell. In the traditional capitalist society this is the potential reward for having taken the risks and employed many people over the years and contributed to their well-being as well as to your own family's.
So all of this is what the Nuttings are doing and as fans it will be very interesting for all of us to see what Bob Nutting does going forward. After all, the market value of a business can fluctuate wildly from what the so-called book value is.
Although I appreciate your insights into small business ownership and the difficulties presented in such an endeavor I would like to point out some significant differences between small business and the business of Major League Baseball ownership.
First, of course a MLB franchise is not a small business. Nor is it fraught with much of the uncertainty (which you've mentioned) that small businesses face. It is in fact a closed shop monopoly permitted by a federal antitrust exemption-about as close to a definition of "cash cow" as exists. The Pirates have virtually no uncertainty regarding revenue. They are guaranteed $25M yearly in TV revenue until 2020 when that figure will likely double to the MLB average of small market teams. They are guaranteed recipients of revenue sharing from the 'luxury tax' in MLB. They have no serious doubts regarding attendance stability as they have been gifted by taxpayers with one of the showcase venues in all of MLB, PNC Park, as their home and drew well even in a year when they didn't have a winning season. Other sources of revenue have been consistently on the increase for all teams in MLB for the past decade. The Pirates ranked 18th out of all MLB teams in revenue with $244M. Their payroll ranked 25th at $104M.
Forbes magazine has ranked the Pittsburgh franchise as the 18th most valuable of 30 teams at an estimated value of $975M. The Nutting ownership purchased the franchise for $98M. That places the equity in the business at roughly $780M after the 10% franchise debt has been settled. You make the assertion that "managing money and cash flow in ANY business is similar to doing it in your own household." I would agree. As such if I had a house that was worth more than 7 times what I paid for it I would consider a home equity loan to finance anything that I might not have the proper cash flow to deal with at a particular point in time. This equity is leverage for running a business and a safety net for any unexpected expenses or crises. Pirate ownership pleading poverty regarding payroll (which NH has already done after the season ended) is simply absurd. There is enough equity in the franchise to sustain a much higher payroll for more than just a run at a championship. Evidence from other MLB teams suggests that a team with $244M in revenue can sustain a payroll of ~$130M without going deep into the red. With the equity built into their business Pirate ownership should be looking to spend up to their limit when the chance for a championship is a reasonable possibility.
Finally you point to KC as an example of what a small market team has to do if they fail to win with a higher payroll. Somehow I don't consider winning a World Series Championship as KC did any kind of failure. The fact that their ownership decided to go for seconds with a higher payroll the following season was a reasonable risk. Reasonable not only because they had already won one championship but reasonable because any MLB team can mitigate subsequent payroll excesses through trades and youth development in the natural course of the business of MLB. If KC operates in the red for a couple of years before they can balance the books they'll have the increased value in the franchise that a world championship brought them in 2015 that will likely more than make up the deficit.
The Pirates ownership is well beyond a reasonable definition of fiscal conservatism. They are demonstrating a seemingly unethical disregard for the essence (sports competition) of the business they have chosen to participate in.
I appreciate your point about "as close to a cash cow". I think you're right about that. I also think that, even with that, it is not close to a cash cow. Trust me, the month to month operation is a roller coaster. To that end every successful business operates to some degree via a bank line of credit (or for larger business multiple lines of credit). Most are renewable on a yearly basis pending decent enough financial performance, but ALL are at the personal risk of ownership. If any of those is not renewed then the bank demands payment IMMEDIATELY and the legal "fun" begins. So I don't think we should be so quick as to judge Bob Nutting on a moral or ethical basis. He's trying to stay fiscally operational -- not such a bad thing. I do think, however, that in highly visible situations like theirs appearances are important. That's why the Liriano salary dump looked bad with regard to how it was done.