The National Pastime is flourishing thanks to cable companies' desire for live baseball programming.
The average Major League Baseball team rose 16 percent in value during the past year, to an all-time high of $605 million. In 2011, revenue (net of payments to cover stadium debt) for the league's 30 teams climbed to an average of $212 million, a 3.4 percent gain over the previous season. But operating income (in the sense of earnings before non-cash charges and interest expenses) fell 13 percent, to an average of $14 million in part due to a 5.1 percent increase in player costs (including benefits and signing bonuses for amateurs), to $3.5 billion in 2011.
Rights fees paid by cable television channels are behind the growth in team values. Aggregate cable television revenue for baseball's 30 teams has increased to $923 million from $328 million over the past 10 years. And thanks to new television deals inked by teams like the Houston Astros, Los Angeles Angels of Anaheim and the Texas Rangers that have yet to kick in, as well as the pending deal for the San Diego Padres and a likely rich deal that will begin in 2014 for whom ever buys the Los Angeles Dodgers, local television revenue could exceed $1.5 billion in 2015.
The richer television deals are evident in the prices that are being paid for teams. Jim Crane, for example, paid $610 million for the Houston Astros in November. Crane's purchase included a 45 percent stake in Comcast SportsNet Houston, a new regional sports network owned by the baseball team, Houston Rockets of the National Basketball Association, and cable operator Comcast. The RSN will begin televising the Astros in 2013 and pay the team an average of $80 million in rights fees over twenty years, more than three times what the Astros received from Fox Sports Houston last season.
The debt-laden Los Angeles Dodgers, whom we say are worth $1.4 billion (including the team, Dodger Stadium and the lease to the parking lots), filed for bankruptcy last July. Yet Frank McCourt has offers ranging from $1.3 billion to $1.6 billion for his team. Why? The Dodgers current local television deals with Fox's Prime Ticket and local station CBS affiliate KCAL Channel 9 expire after the 2013 season and the next deal could pay the team a rights fee that averages around $100 million a year, $55 million more than the team took in last season from Fox and KCAL.
The ultimate cable model for a team is to own an equity stake in a regional sports network because it means you get two revenue streams (cable fees and advertising revenue) and have greater financial flexibility (for example, debt can be parked at the RSN rather than the team). The Rolls-Royce of the RSN model is the New York Yankees, who own 34 percent of the YES Network (full disclosure: I am co-host of Forbes SportsMoney on YES). The Bronx Bombers are the most valuable team in baseball, worth $1.85 billion, tying them with the National Football League's Dallas Cowboys for the top spot among American sports teams and placing them second in the world to Manchester United, the English soccer team worth $1.9 billion. YES generated a staggering $224 million in operating income and paid the Yankees a $90 million rights fee in 2011.
The Boston Red Sox, whose parent, Fenway Sports Group, owns 80 percent of the New England Sports Network, pioneered the duel revenue cable model in baseball in the mid-1980s. We value the Red Sox, who generated $60 million from NESN in 2011, at $1 billion this year, third-most in baseball. The Red Sox averaged a 7.9 rating on NESN last season, tied with the Milwaukee Brewers for third in baseball.
Although both the Kansas City Royals and Minnesota Twins were unsuccessful with attempts to launch RSNs in 2003 because they could not strike sufficient deals with carriers, the Cleveland Indians have shown that it is possible for a small market team to have its own network. The Indians started SportsTime Ohio in 2006, spurning a rights fee offer from Fox Sports Net Ohio in excess of $30 million per season. Although the Indians raked in less than $30 million in rights fees from SportsTime last year, team owner Larry Dolan and his family made a huge profit from their ownership of the RSN. Besides Indians games, STO programming includes coverage of the Browns, Ohio State, high school sports, the Mid-American Conference and golf.
Both the Chicago Cubs, who rose 14 percent in value, to $879 million and the Philadelphia Phillies, who increased 19 percent in value, to $723 million, are expected to enjoy huge increases in local television revenue when their current deals expire. The Cubs contract with WGN, which televises about half the team's games, ends following the 2014 season and its deal with Comcast SportsNet Chicago expires after 2019. The Phillies' TV deal with Comcast SportsNet Philadelphia expires after the 2015 season. The Phillies led baseball with an average rating of 9.7 last season.
Only two teams went down in value: The New York Mets and Tampa Bay Rays. The Mets fell 4 percent in value, to 719 million, due to falling attendance and $41 million in operating losses. The Rays, one of the league's biggest receivers of revenue-sharing, slipped 2 percent in value, to $323 million, as attendance and television ratings crashed last season.
The top 10:
1. New York Yankees ($1.85 billion)
2. Los Angeles Dodgers ($1.4 billion)
3. Boston Red Sox ($1 billion)
3. Chicago Cubs ($1 billion)
5. Philadelphia Phillies ($723 million)
6. New York Mets ($719 million)
7. Texas Rangers ($674 million)
8. Los Angeles Angels of Anaheim ($656 million)
9. San Francisco Giants ($643 million)
10. Chicago White Sox ($600 million)
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