Bloops: Losing Is Profitable For the Pirates
Posted by Neil Paine on August 23, 2010
Courtesy of ESPN, here's confirmation on something Pittsburgh fans have long suspected -- namely, that the Pirates are making a killing by giving the fans a subpar product:
"The Pirates made nearly $29.4 million in 2007 and 2008, according to team financial documents, years that were part of a streak of futility that has now reached 18 straight losing seasons. The team's ownership also paid its partners $20.4 million in 2008.
The documents offer a rare peek inside a team that made money by getting slightly less than half its income (about $70 million) from MLB sources -- including revenue sharing, network TV, major league merchandise sales and MLB's website. The team also held down costs, keeping player salaries near the bottom of the National League, shedding pricier talent and hoping that untested prospects would blossom."
The question is, could they make that much if they tried to win more ballgames? Sports economists say no... What say you, Baseball-Reference reader?
August 23rd, 2010 at 10:08 am
Baltimore Orioles are in the same basket, although not quite so extremely. When two of your division rivals are within a six-hour drive, and are two of the most popular franchises in baseball, you'll sell out the stadium at least 19 games a year.
August 23rd, 2010 at 10:13 am
Well, the article kind of tells you the real truth, which is that the Pirates wouldn't exactly be teetering on the edge of greatness if they'd held onto their players. As the evidence that the Pirates are shortchanging people by dumping their "talent", this is the list of players they came up with: Jason Bay, Freddy Sanchez, Nate McLouth, Jack Wilson, Tom Gorzelanny, Ian Snell, John Grabow, Xavier Nady, Adam LaRoche, Damaso Marte, Nyjer Morgan, Ronny Paulino and Sean Burnett.
How many of those guys would clear waivers right now? If you guessed "at least half of them", I think you're right. The former all-stars Sanchez (.642 OPS), Bay (.749 with a burdensome contract), McLouth (.727 OPS in AAA Gwinnett) and Wilson ($5 million for a .598 OPS) are all complete locks. Nady's added no value for the Cubs, Morgan's not getting on base. The Morgan/Burnett trade wasn't about cost savings, it got them Lastings Milledge and Joel Hanrahan.
The Pirates may be skimping on payroll for the benefit of their bottom line, but they've never exactly been on the verge. If this were the Indians making millions off revenue sharing while dealing away an entire starting rotation in Sabathia, Lee, Pavano and Westbrook in the last three seasons, then maybe there'd be a real story here.
August 23rd, 2010 at 10:16 am
Hypothetically, if they signed 2 top pitchers for...mmm, say, $10 million each, they'd probably still have a losing record and get a small attendance boost on the days those pitchers start (assuming we're not signing bullpen greats). I think it's pretty safe to assume an attendance boost like that doesn't make up for the $20 million they spent in signing, thereby cutting into the Pirates profit margin by, mmm.. maybe $15-$18 million? If I had exact numbers on how $$'s spent affect attendance, I'd try figuring a calculation to determine something more exact. So anyway... yeah, I think they make only a small profit or no profit if they try to win right now, unless they actually REALLY try to win...like say, 90-100 games, signing a bunch of solid players. Then their attendance would probably soar & merch would sell like crazy as everybody in western PA wants to get in on enjoying the once in a lifetime winning season in Pittsburgh.
August 23rd, 2010 at 10:17 am
Further reports say that these payments were solely for the purpose of covering tax obligations owners had to make, and that most of the owners have made zero profit in the last 3 years.
August 23rd, 2010 at 10:56 am
Speaking as a tax accountant: If the Pirates are set up as a pass-through entity, a partnership or a subchapter S corporation, then all profits are taxed to the partners/shareholders. A LLC is almost always in this situation. It does not matter if distributions are made or not, if there is a profit the members are taxed on it. And if there is no profit then there is no tax liability. So, if the ownership had tax obligations, there must have been profits. We can even estimate the profits. If the $20.4 million paid was the sum of the individual tax obligations, we can divide that by 35%, (the highest marginal tax rate). This gives us a minimum of about $58 million of profits to produce that tax obligation.
August 23rd, 2010 at 10:59 am
Does anyone know the financials (profit/loss) for the Pirates' owners the last time they were good - early 1990's. Were they able to "survive" (be good and not go bankrupt) because player slaries were still somewhat reasonable at the time, or did they draw more people because the teams were good? Or was it just pure luck if having good, young, relatively cheap talent?
I wonder how many times we would have heard the word BALCO, had the Pirates been able to re-sign Bonds.
August 23rd, 2010 at 11:17 am
The I.W.R.B are responsible for this mess overall
The fans are the problem for the Pirates. Stop going to the games and the owner won't have any money at all.
August 23rd, 2010 at 11:27 am
Dave -- that's the rub of it. Based on their 2008 balance sheet, the Pirates could play in front of an empty house for every one of their home games and still make about $70 million dollars from revenue sharing, TV rights, and the like.
They only made $32 million in gate receipts; that may be the difference between a profit and a loss at the moment, but everyone literally stopping going to the games wouldn't leave the owner with no money at all.
August 23rd, 2010 at 11:34 am
This is the argument Larry Dolan always makes in Cleveland; he can't pay for better players if no one goes to the games. Well it's a bit of a catch-22 in that if he put a better product on the field, people would actually show up. It's a risk/reward scenario - it's a big money sink to invest in good players, and you don't know if it will pay off big like with the Twins or fail miserably like with the Mets. Guys like Dolan and the Pirates collective ownership prefer to play the low-risk strategy of throw a bunch of cheap AAAA players on the field and guarantee a profit through revenue sharing. It's the difference between owners who are in it to make money and owners who are in it to make money and win.
August 23rd, 2010 at 12:46 pm
#2,#3,#9: I think the larger issue is that most teams see LARGE increases in attendance only when they are in serious contention for the post-season, or at least when they appear to be in contention. The problem is that the Pirates are SO far away from contending, and have been for so long (average record from 2000 to 2009: 68-94), that they would need one of these things to happen:
1) spend big on elite free agents who play to/above expectations
2) have their farm system produce several (cheap) excellent players at once
3) {both of the above}
4) have the rest of the division collapse
#1 doesn't seem to be in the owners plans; #2 is what the new management is trying to implement, but it would take take several years to be apparent; and #3: they probably wouldn't spend big bucks on free agents until they had a halfway-decent team. #4 - with five other teams in their division,they'd need the equivalent of a royal flush.
In short, they are so far away from being in serious contention (need to improve by 20/25 wins), merely spending a lot on elite free agents isn't likely to get them into the "serious contender" status... and merely going 83-79 isn't going to help attendance much.
I'm sure a serious sports economist (like Andrew Zimbalist?) could analyze this better, but that's my take.
August 23rd, 2010 at 2:33 pm
It will be interesting to see how this year's playoff run by the Reds will play out in future seasons. We will se if they go out and get a couple of free agents and re-sign their top players in order to capitalize on their good season...and in turn get more people to come out to the games.
August 23rd, 2010 at 2:45 pm
Kds @ #5- I read in another article that only about half of the 20.4 million was to pay off taxes. The rest was repayment of interest on a loan.
August 23rd, 2010 at 4:47 pm
How about they get some richer owners in there more concerned with winning than turning a fairly weak profit? I mean, really.
They need to institute some sort of "If your team has a losing record for 10+ years, you have to sell." What are the Pirates at now? 18 straight losing seasons? Ridiculous.
August 23rd, 2010 at 5:59 pm
Just Lovely. Capitalism run a muck. The Pirates ownership does not give a damn about its fans. Only the money. Being an Orioles fan, I have been saying for years that Peter Angelos is doing the same thing. These are sick rotten people. Quit going to games and buying merchandise because as long as you do they will continue to take advantage of you. Shame on them.
August 23rd, 2010 at 6:29 pm
Except it's not capitalism run amok. That argument can be made for the Yankees and Red Sox, but not here. This is instead the perverse incentives of communism. The Pirates are following the Donald Sterling model and feeding off the wealth and success of the league as a whole.
August 23rd, 2010 at 7:28 pm
I disagree Robert. The Pirates are being run strictly as a corporation where profits trump everything and are all that matter. But MLB loves this because it allows the large market teams to prosper year in and year out guaranteeing teams like the Yankees and Red Sox a disproportionately better chance of being there at the end. So the smaller market teams remain financially viable, which the league needs, even if they really won't be able to compete at the level of the larger market teams. I don't think Major League Baseball would be as successful financially if they allowed many of these smaller market teams to just collapse. You can call it communism if you like but I think it is just smart corporate policy by MLB. In other words I think both sides benefit with the main benefactor being MLB. Those who suffer are fans of teams like the Pirates, Orioles, etc. many of whom cannot see the guile of MLB and think that their team has a legitimate chance to win. Smaller market teams fans are basically being taken advantage of through the manipulations of MLB.
August 23rd, 2010 at 8:09 pm
"The Pirates are the welfare queens of the National League." -Jim Bunning
August 23rd, 2010 at 8:19 pm
Hello,
I think he meant to say "The Pirates are the corporate welfare queens of the National League."
We all know corporations privatize profits and socialize losses. You need to look no further than the recent bailouts of the Wall Street Banksters.
August 23rd, 2010 at 8:32 pm
They need to institute some sort of "If your team has a losing record for 10+ years, you have to sell."
They were sold, a few years ago.
August 23rd, 2010 at 8:40 pm
What is the motivation for the ownership to make a serious run in this type of league? What kind of motivation is there for the fans? As a Milwaukee Brewers fan, I got to see the small-market Brewers make it to the post-season in 2008 for the first time in 26 years thanks to luckily having Prince Fielder, Ryan Braun, Corey Hart, and J.J. Hardy all come up at the same time along with the huge pay-off of trading for CC Sabathia. How could we not hope this a was sign for better things to come? But look at us now, never being relevant at all this season and very easily on the verge of losing our best slugger to a big market team after next season. And in the modest attempts at signing other players to hopefully overachieve to somehow make a run at another wildcard birth, we inturn handcuffed ourselves for future attempts at winning. Eventually Mark Attanasio will tire of spending all of his profits only to be outspent every single year and never getting any returns on his investment in the form of championships.
Being a realist and a fan of the game itself, I prefer to just see a competative team take the field than having unrealistic hopes being crushed year after year. The problem with this is not at all the Pirates ownership. By all accounts I've heard and read, the Pirates offer their fans one of the best experiences at PNC Park for the value in all of MLB. This is something that could not be provided if they wasted their money resigning their players like Bay, Wilson, McClouth, etc. So big deal if the team is at least fiscially a winner, at least they can be in that sense. But realize that in the real world (i.e. not any of the 8-10 large markets) you can't fix a problem just by throwing money or buying it. If when trying your best, you're still at about 1/3 of the spending of the largest markets, would you still have unwavering hope and keep throwing more and more money in every year? Yeah, didn't think so.