Matthew Yglesias – in The Trouble With “Redskins” – reveals how he came to follow Washington’s NFL team.
When I realized I was most likely going to stay in Washington, DC and write about politics forever and ever and ever, I decided to abandon my New York sports heritage and adopt DC’s teams. I know it’s a minority view, but I don’t think it makes sense to let the dead hand of where you happened to spend the first 18 years of your life dictate behavior for decades and decades going forward.
Yglesias then goes on to note that the name “Redskins” is “ridiculous”. And I would add “offensive” (note: Martin Schmidt is a lifetime fan of the Redskins, but also dislikes the name). Although this is an important point, I wish to return to what Yglesias had to say about changing his NFL loyalties.
Loyal to the Lions
As I have noted in the past, I was born in Detroit. My family left the Motor City in 1981, and since this time I have lived in Nebraska, Colorado, Iowa, California, and now Utah. Like Yglesias, I have decided that my current home is going to remain my permanent place of residence. Unlike Yglesias, though, I maintain my allegiance to teams from my original home town. And this means I remain – even after 19 consecutive losses – a fan of the Detroit Lions.
The Lions had their home opener today and it appears I am not alone. Despite all the losses – and a recession that has devastated Detroit — the Lions still managed to fill the stadium.
In sports, such loyalty is often considered a virtue. But most everywhere else, such loyalty to an inferior product could be thought of as “irrational.” The Lions are bad. They have essentially been bad since the Ford family took over the Lions fifty years in an apparent effort to conclusively demonstrate that managerial ability is not something a person inherits. Despite this history of “badness”, I remain a fan of this team and spend part of my Sundays in the fall watching this team lose.
There is some comfort in knowing I am not alone. Not only are there other fans of the Lions, other sports teams have also inspired such behavior. Perhaps the most famous of these teams is the Chicago Cubs. And hence we turn to the actual point of this post.
A Lesson in Sports Economics
Josh Peter of Yahoo! Sports has penned a wonderful story detailing the effort Tom Ricketts has made to purchase the “lovable losers” in Chicago. I did offer a comment for Peter’s story. Once you get past what I had to say, though, you get to the true value in Peter’s work. In a fantastic lesson for students of sports economics, Peter’s work provides substantial details behind the sale of the Cubs. These details review all the revenue streams Ricketts is purchasing, and furthermore, provides evidence that buying a “loser” can be a good buy in professional sports. And that’s because you can often sell that “loser” to sports fans that simply can’t bear to look away.
- DJ
Here is the complete story from Josh Peter:
Buying Cubs could be a steal for Ricketts
A businessman has agreed to pay $845 million for the Chicago Cubs, and details of the team’s finances and profit potential might have prompted the late Harry Caray to exclaim, “Holy Cash Cow!”
Bleacher Bums swilling Old Style and crowds of 40,000 vowing to “root, root, root for the Cubbies” are among the most time-honored and lucrative rituals in baseball. The Cubs pocket more than $2 million for each of their 81 regular-season home games, based on financial information Yahoo! Sports obtained from three people familiar with the pending deal between Chicago businessman Tom Ricketts and the Tribune Co., current owner of the team. The sources spoke on the condition they remain unidentified because they are not authorized to share the figures.
And game-day profits are only one reason Ricketts is prepared to pay more than anyone has for an American sports franchise – provided the deal is approved by a bankruptcy judge who must decide if creditors owed by Tribune Co. are getting their money’s worth. Tax breaks will enable both Ricketts and Tribune to save hundreds of millions of dollars.
Despite failing to win a World Series for 101 years and counting, the Cubs remain one of the most profitable teams in sports. The following is a look at how the Cubs make money, and why the deal makes sense for Ricketts.
GATE RECEIPTS
Estimated annual revenue: $140 million
Maybe there’s a reason Ricketts rhymes with tickets.
Cubs fans might consider the team’s playoff appearances in 2003 and 2007 as the most memorable recent seasons. But for Ricketts, the most reassuring years would be 2005 and 2006.
In 2005, the Cubs went 79-83 but still drew more than three million fans, the sixth highest MLB attendance that year. The next year the Cubs imploded, finishing 66-96, and yet drew more than 3.1 million fans, again the sixth highest in MLB.
The Lovable Losers, indeed, especially for an owner who can count on steady ticket sales.
“It is pure genius from a marketing perspective, that we support a team that is bad,” said David Berri, a professor at Southern Utah University who specializes in sports economics. “It’s the only entertainment where, ‘We have failed, but we would still like you to pay us.’
“Imagine if you had a restaurant like that. We serve crappy food! That’s what’s so great about us!”
Cubs fans appear to be undeterred by bad baseball and expensive tickets. In the past decade, the average ticket price for a Cubs game has increased by more than 300 percent, and that includes sharp hikes during the past two years.
The team bumped prices by 18 percent before the 2008 season and another 10 percent before this season. Yet even in the face of a recession, season-ticket holders renewed at a rate of about 98 percent.
This year the Cubs are on pace to draw more than 3.2 million fans even though their average ticket price of $47.75 is the third highest in baseball behind only the New York Yankees and Boston Red Sox.
Game-day profits
The Cubs make, on average, more than $2 million for each of their 81 regular-season home games. Here’s a breakdown of the estimated income per game:
| Tickets |
$1.8 million |
| Broadcast rights |
$275,000 |
| Luxury boxes |
$120,000 |
| Concessions |
$185,000 |
| Merchandise |
$50,000 |
BROADCAST RIGHTS
Estimated annual revenue: $70 million
Chicagoans aren’t the only gluttons for punishment. Legions of Cubs fans outside the Windy City who watch the team on TV spike ratings and, in turn, the broadcast fees the team can charge.
Comcast SportsNet Chicago is televising 80 games this season and pays the Cubs about $350,000 a game. WGN is televising 70 games this season and pays the Cubs about $200,000 a game.
The Cubs also collect $28 million from MLB’s national package, with equal shares distributed to each of the 30 teams. Throw in another $5 million for the Cubs radio deal with WGN, and they’ve topped $70 million for broadcast rights.
CONCESSIONS
Estimated annual revenue: $15 million
When a Cubs fan threw a beer on Philadelphia Phillies outfielder Shane Victorino(notes) this season, it led to misdemeanor charges of battery and illegal conduct in a sports facility. But Ricketts or anybody else watching the team’s bottom line might have viewed the airborne beer this way: another $6.
Even when this franchise can’t hit, pitch or play defense, it sure can sell beer. At $6 a cup, the Cubs sell more than any team in the major leagues. It’s one of the reasons they make a bundle in concessions.
COMCAST SPORTSNET CHICAGO
Estimated annual income: $15 million
In addition to acquiring the Cubs, Ricketts stands to gain 25 percent ownership of Comcast SportsNet Chicago. The cable station also broadcasts White Sox, Bulls and Blackhawks games.
The Cubs make an estimated $15 million a year from Comcast – a quarter of the regional network’s profits – and the ownership stake is worth far more. Three people involved in the pending sale valued the 25 percent stake at no less than $180 million. The big payoff could begin a decade from now.
When the rights agreement between the Cubs, Comcast and WGN expires in 2019, the Cubs could start their own regional sports network similar to YES, the cable network that generates more than $200 million a year for the Yankees.
“Generally speaking, these networks generate a lot more profits than the teams do,” said Neil Begley, an analyst for Moody’s Investors Service. “If you’re buying a team, in my opinion, financially it’s a better transaction if you own part or all of a regional sports network.”
Ticket price hike
Over the past decade, the average ticket price for Cubs games has increased by almost 300 percent. Cubs tickets are the third most expensive in baseball behind only those sold by the New York Yankees and Boston Red Sox. In 1999, the average Cubs ticket price of $17.46 was the ninth most expensive in MLB.
| Cubs average ticket price |
| 1999 |
$17.46 |
| 2009 |
$47.75 |
Based on rate increase over the past decade.
WRIGLEY FIELD
Chunks of concrete fell from the upper deck in 2004, serving as a reminder that the 95-year-old stadium needs renovation. Who pays for the inevitable sprucing will determine exactly how much more money can be squeezed out of the ballpark.
Taxpayers kicked in $400 million for the Chicago Bears’ revamped stadium that re-opened in 2003, and the new Cubs owner could seek public help for a vast renovation that those involved in the deal say would cost between $200 million and $400 million.
In a renovated ballpark, the Cubs could increase annual revenue by about $100 million, according to the calculations of Premier Partnerships, a sports marketing firm that worked with an investor group that had expressed interest in buying the team. The increased revenue would come from a variety of sources, such as naming rights, added sponsorship and high-end retail and hospitality, according to a presentation Premier made to the investor group.
“There is an opportunity when this market turns to unlock a lot of hidden value,” Jeff Marks, COO of Premier Partnerships, wrote in an email.
ADDITIONAL REVENUE STREAMS
Estimated: $45 million-plus
Don’t forget the snowbirds who attend games at the Cubs’ spring training complex in Arizona. Or the fat cats who prefer to sit in luxury boxes. Or the fans who fork over $20 for a Cubs cap and god knows how much – well, Ricketts and Tribune Co. do – for other merchandise. Or the fans who click-click-click on MLB.com. Those revenue streams and others generate more than $45 million.
But the Cubs also have to kick back about $35 million to MLB as part of the revenue-sharing plan.
TAX BENEFITS
Estimate: $100 million
Even perennial losers like the Cubs are world-beaters when it comes to avoiding taxes.
“April 15 is the official claim on the value of this interesting special depreciation for team owners,” Rodney Fort, a professor of sports management at the University of Michigan, tartly noted in an email.
As Fort was among the first to discover, the federal government allows sports franchises to be depreciated, which in turn creates an annual deduction and shelters income from taxes. This will come in handy for Ricketts.
In 2008, the Cubs made about $45 million in profits, according to sources familiar with the deal. That $45 million is subject to a 35 percent tax, meaning the government ought to get almost $16 million. But an owner enjoying the special depreciation pays nothing in taxes.
The easiest way to calculate the value is to project depreciation of the asset over 15 years and do some quick math. Divide the $845 million purchase price by 15. That’s $56 million that can be deducted against team income and personal income each year for the next 15 years.
The $56 million exceeds the Cubs’ yearly profit, sheltering it all from taxes. The owner must pay capital gain taxes if he sells the team at a profit. But until then, he keeps it all to do with as he pleases.
The maximum tax savings would be $19.7 million a year. Assuming Ricketts can earn an average of 7 percent yearly interest, his annual return from the accrued tax deduction over the next 15 years could reach $105 million.
Buying a ballclub
A list of the 12 MLB teams sold this decade and their selling prices.
| Year |
Team |
Sold for |
| 2000 |
Kansas City Royals |
$96 million |
| 2000 |
Toronto Blue Jays |
$140 million |
| 2002 |
Boston Red Sox |
$700 million |
| 2002 |
Florida Marlins |
$158 million |
| 2003 |
New York Mets |
$391 million |
| 2003 |
Los Angeles Angels |
$184 million |
| 2004 |
Los Angeles Dodgers |
$371 million |
| 2005 |
Cincinnati Reds |
$270 million |
| 2005 |
Milwaukee Brewers |
$223 million |
| 2005 |
Oakland Athletics |
$180 million |
| 2006 |
Washington Nationals |
$450 million |
| 2007 |
Atlanta Braves |
$450 million |
SETTLING ON A PRICE
In 1981, Tribune Co. bought the Cubs for $21 million. Three decades later, the company is selling the club for more than 40 times that amount. How to put a price on an asset that can appreciate so dramatically? Is Ricketts getting a good deal?
A widely used formula involves using a multiple of a team’s annual revenue. In the case of the Cubs, the $845 million purchase price is 3½ times more than the $241 million in revenue the Cubs reported in 2008. Experts say that’s within the expected range for a large-market team, even though Tribune Co. initially indicated it wanted at least $1 billion for the club.
Because Tribune Co. is in the midst of bankruptcy proceedings, a creditors committee and the bankruptcy judge will have to sign off on the deal. But approval is all but a foregone conclusion considering how negotiations were handled. Essentially, the team has been on the auction block since April 2007, and key creditors have been kept apprised of the negotiations.
But if the Tribune Co. was holding out for $1 billion, its plan backfired. Mark Cuban, the deep-pocketed owner of the Dallas Mavericks NBA franchise, hinted he would have been willing to pay that much.
”I never thought it conceivable that it would be hard to spend a billion dollars on a sports team,” he wrote in January on blogmaverick.com.
Cuban first expressed interest in buying the Cubs in 2007 but the two sides could not agree to terms or the structure of a potential deal. He withdrew from the bidding about the same time the economy tanked, which made raising money for the purchase more difficult for all prospective owners and the prospect of fetching $1 billion unrealistic.
The original pool of about 10 bidders narrowed to two.
A group of investors led by businessman Marc Utay reportedly offered more than $845 million. But Ricketts guaranteed more cash up front and allowed Tribune to keep 5 percent of the team, which gives the company a shrewd tax break. Sources said that by accepting the lower purchase price in exchange for retaining a portion of team ownership, Tribune will save about $400 million in capital gains taxes. This also delays Ricketts’ ability to depreciate part of his $845 million purchase.
Which makes perfect sense, said Tom Brennan, a tax law expert who teaches at Northwestern University.
“Saving capital gains tax dollars today generally is more valuable than having higher depreciation deductions tomorrow,” he said.
The bankruptcy judge, who is expected to issue a final ruling in the next two months, may agree the team is worth $1 billion – then acknowledge the creditors benefit most from Ricketts’ offer. At which point the Chicago businessman will pay $845 million for a team that has failed to win a World Series championship in more than a century – and get that team and related assets for a relative steal.
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