The Blue Jays Off the Field

(www.bluejayway.ca)

A recent article on THT (1) tackled the issue of how to increase the value of a baseball franchise. While we are all familiar with how the Jays are on the field, I thought it would be interesting to see how the Jays stand as a profitable franchise, and how that relates to fan experience.

The third variable the THT article tackles is “building success and payroll.” I will spend the least amount of time on this subject, because you can look no further than the forums to see ample discussion on how to make the Blue Jays a winning team. But the payroll is a nice transition into the first variable THT mentions, which is:

“Where is the revenue ceiling?”

In other words, is money being maximized? The payroll, which stands in the mid-90 million’s this year, is about 12th in MLB, whereas the recent Forbes team valuations (which are in a sense somewhat crude, but useable numbers) put the Jays 22nd overall in value, at $352 million. Revenues come in at $160 million, with $42 million of that coming from gate receipts. (2) So on the one hand, it would seem that Blue Jays ownership really cares about making a winning team.

Two other columns are of interest in the Forbes report. One is operating income, which is “earnings before tax, depreciation and amortization.” The Blue Jays lost $1.8 million last year in terms of cash flow. As THT says,

“Five years ago, 16 teams lost money. In 2007 only three teams--Blue Jays ($1.8 million), Red Sox ($19.1 million), Yankees ($47.3 million)--posted an operating loss. But even those losses are misleading. For the owners of the Yankees and Red Sox, the huge dividends they get from their unconsolidated cable networks more than make up for the teams' losses. Meanwhile Rogers Communications, which owns the Blue Jays, their stadium and the cable channel that televises its games, derives huge benefits from owning the Blue Jays not reflected on its team's P&L statement.”

In other words, the Jays are a huge promotional vehicle for the Rogers brand, saving tons of money in national advertising. The Jays have historically had a strong audience on TV, especially since Toronto is the 5th biggest city in North America, and has a national audience. (3) But this doesn’t have to affect the way the Jays market and over-advertise at the game. (“It’s time for the Rogers home phone to the bullpen.”) Rogers mere ownership of the team and station is giving it tons of free advertising on TV. I also found it interesting that in 2006, the Jays had one of the highest operating incomes, in the $30 million territory. I haven’t looked at that year’s valuations, but the 2006 valuations probably refer to the 2005 year, when the payroll was in the $50 million range still. Rogers decided to put that money in the green into player payroll.

Nonetheless, when you go to a game, it is apparent the Jays are throwing as many ads at you as possible. The Jays seem to be marketing to families and children, because the hard core fans will spend money either way, they believe, whereas if you hook a kid at a young age, you will hook them for life. Seems like a weird business model, considering business usually doesn't look down the road 20 or 30 years, but for maximization of profits right now.

The other column in the Forbes table is debt to value. (4) Debt to value basically “indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.” (5) The Jays are one of 3 teams to have a zero debt to value ratio, along with the Cubs and the Braves, who are both (surprise!) owned by publicly funded corporations. But if you look at these teams, one has been ultra competitive for years, and one has a fantastic atmosphere at the games, so the publicly-funded ownership angle really shouldn’t come into play as an excuse (though I can see it being the main argument for why the team shouldn’t sign Barry Bonds). As a result, it seems the Jays are being financed with a very anti-aggressive approach, a typically Canadian mark on an American game.

The second factor of increasing the value of a team is building a new stadium. New stadiums tend to bring in fans for the novelty, and estimates are that actual profit (which is over and above revenue) increases by at least $5 million per year in the first 3 years once the new stadium is built. (1) They are also often paid for in part by the government. I’d argue that now is the time to strike for a new stadium. In just a few years, the Rogers Centre will be one of the oldest stadiums in baseball, in which you can count on one hand. With the new developments on the Toronto waterfront, and the Toronto Bills playing 8 games over the next 5 or so years, now is the perfect time. Engineers could design a stadium with a lakeshore or city view, a dome for the weather, and natural grass. The horrible artificial turf is going extinct, only being used by a handful of stadiums now. However, the recent upgrades in the Rogers Centre tell me that the stadium may be around for a few more years. Especially because “the Jays have been one of baseball’s biggest revenue-sharing receivers in recent years because they are permitted to deduct their hefty stadium expenses from revenues in the league's revenue-sharing formula.” (2)

Toronto is I believe the 5th biggest city in North America, and has the only baseball team in Canada. Even if this is a hockey town, it has a good sports market. The city itself is great, for example being ranked 4th in terms of neighbourhood on the SI.com stadium rankings. (6) That's right no stickups when you go to see a Blue Jays game. La-dee-da. (But this is why I don't understand why JP Ricciardi says free agents are hard to get to come here. Now that the dollar is back up, the only thing is the weather, but that's the case in a lot of cities. Also, I don't really buy the argument that free agents come here for any special reason other than they were all paid top dollar to, or that they hate Tony LaRussa.) Atmosphere is 26th, and on a side note, food is 27th (seriously, did they get their menus from a convenience store?). There’s no reason why the Jays can't be the Yankees of the next decade. If it were me, I’d turn things on its head from a business standpoint. Build a new stadium, and start improving fan experience. Stop the barrage of ads and gimmicky promotions to bring in and breed fair-weather fans in the stadium. If they are having fun at the game, then that will really hook the youngsters.

Things can be improved on the field as well. In part, the bigger following of the Jays in recent years is from signing bigger names. But these are expensive free agents that give marginal wins, which are not enough to put this team over the top. So, I’d knock down the major league payroll by $10 million, and pour that into drafting and development. In other words, I’d splurge on the Rick Porcello’s of the world, as the Detroit Tigers just did, who are in a smaller city, with no better attendances than the Jays before they got their new park and GM.

As well, only a small portion of revenue sharing is part of the commissioner’s discretionary fund, which he sees fit to distribute. For example, years ago the Jays received a couple of extra million in equalization payments for the weak Canadian dollar. I doubt that they currently still receive it. Otherwise, the Jays aren’t in Bud’s pocket any more than any other team, and if anything, they are being good owners by spending their revenue sharing money on team payroll, instead of pocketing it like the Marlins. When all is said and done, baseball is a sport about winning, so toeing the company line when great opportunities present themselves to win (ie: drafting over slot) should be taken, especially when your very own rivals are doing it (Yankees and Tigers).

There is relatively good parity in baseball, but the Jays are unfortunate enough to be in the one division that is uber-rich and uber-smart. Baseball is not going to change and make an expanded playoff system just for them. So it’s up to the Jays to bring success to themselves, and make their business strategy a bit more aggressive.

References
(1) http://www.hardballtimes.com/main/article/how-can-gms-increase-the-value-of-their-franchise/
(2) http://www.forbes.com/lists/2008/33/biz_baseball08_The-Business-Of-Baseball_Rank.html?boxes=custom
(3) The stats are pending, as the THT writer forgot to put in one team in this section of the article, being the Blue Jays. I may update this if the information gets emailed to me.
(4) I also want to bring up an interlude here. I don’t have a business background, generally being an artsy person in school (but I was good at math!). I may be wrong here and there, but the general purpose of these articles is to spur on discussion on the Jays. So feel free to discuss on the forums what you will, and point out any business details I may have messed up.
(5) http://www.investopedia.com/terms/d/debtequityratio.asp
(6) http://sportsillustrated.cnn.com/baseball/mlb/specials/fansurvey/2008/index.html?eref=T1