MLB Financial Statements Revealed

The leaking of multiple MLB team financial documents to Deadspin this week has been a big story in the industry. In case you haven’t seen it yet, here are some quick links to catch up to speed:

I wish I had time right now to dig into the details of the statements (brush off those MBA accounting and finance brain cells), but Maury Brown is doing an excellent job of that over on I highly suggest reading up on the multiple posts he’s written (and is continuing to write) over there.

My quick focus in this post is on the choice to run a successful business vs. running a successful team. One of the biggest takeaways from these leaks is demonstrating how a small market team that is not very competitive (yes, I’m talking about the Pirates) can be very successful financially without creating a quality product because of the revenue sharing money provided by teams that are spending money and resources to provide a top-tier baseball team. From a purely business perspective, there isn’t anything actually wrong with this. The team owners have a business to run and are entitled to generate a profit for their work. They have identified a system that works for them and does not violate any agreements that the team has with Major League Baseball. Any customers/fans that have a problem with this approach can demonstrate their displeasure by simply ending their relationship with the team (stop buying tickets or merchandise, stop watching games on TV, etc.). However, if this doesn’t significantly alter the team’s current revenue streams (the majority of which are league-generated), it might not change anything.

The biggest problem with this approach is that there are making their business overdependent on a source of revenue that could change. One of the red flags I was taught to look for when analyzing a company’s financial well-being was generating revenue from a single item or service. If anything in the business environment changes that impacts the company’s ability to show a profit via that single item or service, their entire business model can collapse.  While the Pirates do generate revenue via multiple channels, you can argue that their profitability is very dependent on the current revenue sharing model. In light of these leaks, if MLB changes the “business environment” surrounding revenue sharing in a future CBA, the Pirates and other small-market teams that aren’t successful “on-the-field” could easily be in trouble.

The question now is, will anything change because of these leaks? Will MLB want to add a salary floor (a minimum amount of money a team has to spend on player salaries)? Will higher-revenue teams make a push to adjust the revenue sharing system, knowing that their funds could be going into other owners’ pockets instead of supporting the best interests of the game itself? Will fans stop supporting a team that they know isn’t spending money to create a successful on-field product? These documents definitely open up a lot of possibilities.

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