SB Nation Pittsburgh Editor's Pick
Can the Pirates Afford to Win?
by DG Lewis on Aug 24, 2010 12:54 PM EDT
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PrintLost in the noise about how much money the Pirates, their owners in general, and the Nuttings in particular "made" in the wake of the leak of the Pirates' 2007-2008 financial documents is a larger question: Can the Pirates afford to win? More precisely, do the Pirates' financials support the ability to add sufficient payroll for them to sustain a competitive team over the long term?
In 2007 and 2008, the Pirates earned $15M and $14.4M on revenues of $138.6M and $146M, respectively. Their expenses for player salaries were about $51M each of those two years. According to the always-excellent PiratesProspects, the estimated 2010 player payroll is $42.4M. All other things being equal, that means the Pirates could reasonably expect to support adding $23.6M of payroll: $51M of 2007/2008 payroll plus $15M of net income allotted to payroll gives $66M; less the current $42.4M leaves room to add $23.6M.
All other things aren't equal, however. Presumably, a competitive team would have higher attendance, generating higher gate receipts and concessions. On the other hand, as the Pirates generate more revenues themselves, their revenue sharing will go down. Taking these factors into consideration, what kind of payroll can the Pirates sustain?
In their first year at PNC Park, the Pirates drew 2.46M customers to watch a team that went 62-100. Obviously, the park was the draw, not the team; but that gives us a benchmark for the number of people in Pittsburgh that are willing to pay to go to a baseball game. So let's assume an annual attendance of 2.5M.
Based on the financial documents and the attendance linked above, the average net home game receipts for 2007-2008 was around $20. The Pirates have kept ticket prices flat from 2008 through 2010, and given the team's performance this year, it's reasonable to expect them to do the same into 2011, and maybe even into 2012. Even with improved performance in 2011 and 2012, it's hard to see ticket prices increasing by more than about 10% in 2013-2014, so let's assume an average net home game receipts of $22. That would increase net gate receipts to $55M, from $32.1M in 2008.
Average concession commissions per attendee were $5.15 in 2008 and $4.08 in 2007. That's a 20% annual increase, but it's hard to discern a long-term average from only two data points. Let's assume that this figure increases another 25% from 2008 to 2013-2014, to about $6.50. That (along with the increased attendance) would increase concessions to $16.25M, from $8.3M in 2008.
Local broadcast revenue grew from $16.5M in 2007 to $18.7M in 2008, a 13.6% increase. Projecting that growth to continue is perhaps optimistic, but projecting half that growth rate, or 6.8%, over five years sounds reasonable. That would kick the local broadcast revenue to $26M.
National broadcast revenues averaged $22.1M in 2007-2008. Given the national broadcast contracts run through 2013, let's assume that number stays flat. It's likely to go up, at least when the next contract is signed, but we'll be conservative.
The formulas for revenue sharing are deep, dark secrets. From 2007 to 2008, the Pirates' piece of revenue sharing went from $30M to $39M, as their local revenues (gate receipts, concessions, local broadcast revenues) actually went up by $1M. Let's be pessimistic and say that revenue sharing drops to $20M.
While we could do puts and takes on all the other revenue components (e.g., ballpark advertising signs, MLB Advanced Media, MLB Licensing, luxury suites, etc.) and expense items (e.g., player development, team operations, game operations, marketing, PR, G&A), they honestly don't move the needle significantly. So if we assume that they net out basically flat from 2008, we end up with about $87M available for the Pirates to spend on player salaries, assuming the team has a net income of $0. Could be as low as $80M, could be as high as $100M.
So by this analysis, a successful Pirates team could add $40M-$50M in annual payroll. That certainly leaves room to lock in two or three arbitration-eligible players to reasonable (not Ryan Howard-esque, but $10-$15M/year) long-term deals and sign one or two second-tier FAs - but the Pirates will have to continue to have eight to ten of their 14 key players (8 starting field players, 5 starting pitchers, and a closer) coming out of the ranks of players in their first six years of ML experience. The team's key success factors will be (1) deciding which two or three players to extend in years 4-5 of team control; (2) getting the most value from the one or two FA signings that they can afford, and (3) continuing to develop young talent to slot in to the other eight to ten starting slots.
This is a FanPost and does not necessarily reflect the views of the managing editor (Charlie) or SB Nation. FanPosts are written by Bucs Dugout readers.
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As long as the team can sustain a player payroll proportionate. . .
to $80 million by today’s MLB payroll standards, if your analysis is correct, they should have no problem competing.
Everything that guy just said is bullshit . . .thank you
They can compete...
…but like he mentions, they will have to lock up the right players and spend wisely. We are already seeing trouble with the Brewers, as they are essentially at max payroll and the window with their young players is passing quickly.
Great post, by the way.
Dammit
This went up while I was working on my own, similar post. My entire focus was on the gate receipts, but I don’t really come to any different conclusions from yours.
Gate receipts and other stadium revenue
The telling thing in the 2009 quarterly report (which admittedly doesn’t tell much) is that most of the decrease in revenue and profitability of the Pirates in 2009 was in stadium revenue — gate receipts and concessions, at least compared to 2008 YTD (as of July 31, 2008).
That really shouldn’t be that surprising. The 2008 Pirates didn’t suck all that bad before the July trades. In fact, their offense was quite good and they had a lot of exciting wins. Plus, 2009 was a terrible year for the economy.
Maybe the lesson in all of this is this: Pandering to the fans who follow the team most intensely and make the most noise on a per capita basis — like the posters here, the people who organized the walk-out in 2007, etc. — while ignoring the fans who don’t really speak on these matters, doesn’t make good business sense.
It actually is possible that the Pirates would benefit financially, at least on the revenue side, from being better on the field, isn’t it? Or is that just a fantasy?
Pandering
I don’t see anything that the current management team is doing as “pandering” to the minority of intense fans. They’re not focusing on acquiring high-ceiling talent with long spans of inexpensive team control because they think that’s the best way to develop a competitive team, not because they are playing to the 1% of the fans who can name the starting lineup for the Power.
And if “ignoring the fans who don’t speak on these matters” means ignoring the ones who think the Pirates should be hanging on to players like McLouth, Wilson, and Sanchez, and spending $10M on the likes of “proven veterans” like Joe Randa and Jeremy Burnitz – well, that’s pretty stellar business sense.
The amount to which the Pirates would benefit financially from being better on the field depends on how much better. For kicks, I ran the correlation coefficient between wins and attendance for the seasons the Pirates have played at PNC. Throwing away 2001 (opening season), the correlation coefficient was -0.015 – which basically means there’s been no correlation between wins and performance. On the other hand, the Pirates have never won more than 75 games and never finished better than 4th in that span. So basically, you’re not going to get appreciably more people at the game by improving from a 62-win last place team to a 75-win fourth place team.
On the other hand, the correlation coefficient between wins and attendance for the 1971-2000 Pirates (at Three Rivers Stadium), with 8 first-place finishes and 16 in the upper half of the division, was 0.50 — a clear positive correlation. Which says to me that a team that is better to the point of competing for a Division championship will result in increased attendance. Increased attendance leads to increased gate and concession revenue; competing for a Division championship leads to higher TV ratings which leads to a larger local broadcast contract; overall increased revenue increases the value of the team to the partners.
But it’s not enough to be a little better – you have to be “enough” better to compete for the Division.
Other confounders
The Pirates also hosted an All-Star game post-PNC, which (predictably) creates about a two-year large pre-game attendance boost as fans and businesses gather up ticket packages to get priority on the game.
I’m not sure how long it takes for the shine to wear off a new stadium.
Also, the attendance boost that would be projected would come mostly at the end of the season the first year (maybe two years) of being good, and then would (I think) slowly gather momentum and impact the early part of the season as well.
Moreover, I think that 2008 trades and the McLouth trade in 2009 probably had an impact on stadium revenue that would be comparable — on the negative side — to being in contention on the positive side.
Also, attendance does not necessarily = stadium revenue, as ticket prices can be lowered (not to mention specials) to offset the decline in attendance, though the decline in revenue remains.
If I were a business like the Pirates — who, by the way, in 2008 spent a whopping $17 million in marketing and administration to generate around $50-60 million in non-MLB based revenues, an astonishingly pathetic return on non-production expenses — I’d want to design a better study before I accepted that the road to wealth and the route to sucking were one and the same.
Do you work for them, by the way?
by RafaelBelliup on Aug 24, 2010 3:36 PM EDT up reply actions
Does anyone else think that when the Pirates are in the playoff race, PNC Park’s attendance record from 2001 will be shattered? I think the ballpark will be sold out or nearly sold out a lot down the stretch. Do I have too much faith in Pittsburgh?
no its very reasonable
they can already sellout the stadium with a horrible team and a great give away night. you get this team in a playoff race and all the bandwagon fans will be out there for every game. like an city, when the product is good the fans will show up. look at the turnaround on the penguins attendence between the early 2000s and the late decade.
Furthermore
The Pirates have had a number of games over the years with huge walkups – 5k for Karstens’ start after his near-perfecto, iirc. The pent-up demand for winning baseball is staggering.
Not to mention that the park is already a draw for out of towners – every Saturday in the Strip, I see people wearing the visiting team’s colors. Combine that with a Pirates team that’s actually worth watching on its own, and the numbers really spike. Doesn’t directly help on the weekends, but if every weekend game is sold out, the weeknights become a lot more desirable.
this
The pent-up demand for winning baseball is staggering.
This is spot-on, although I might amend it to say that the demand for relevant baseball is staggering. If we hung around .500 (or just a tick above) and were still 5 or 6 games out for most of the summer (rather than the usual 30 games back) I bet that’d have a big impact on attendance.
I agree that in theory attendance should rise slowly behind the rate of improvement, but in this case, being historically bad may actually be an advantage. When we get good competant tolerable not nausea-inducing, Pittsburghers will want to be there.
If we hung around .500 (or just a tick above) and were still 5 or 6 games out for most of the summer (rather than the usual 30 games back) I bet that’d have a big impact on attendance.
1996: 1,332,150 (14th of 14)
1997: 1,657,022 (12th of 14)
1998: 1,560,059 (15th of 16)
sure, but
those seasons were a mere five-ish years removed from great baseball. People still had the expectation of good teams, so playing .500 ball was a disappointment.
Flash forward 15 years and I think the public’s expectations have sank a bit.
I mean, we’re not going to sell out every night, but imagine a season where we hang around .500, benefit from the Cubs imploding and the Cardinals aging, put together an improbable 8-2 run in July and all of a sudden we’re kind of in the wild card race. I think that would definitely put some bodies in the seats, minor progress though it maybe.
Also
That was at Three Rivers, which although it hosted some of the best teams in franchise history, was an awful place to watch a game, and was beyond dog eared by the end of the 90s. Hell, the night we clinched the division in 1974, there were around 10,000 in the house. Three Rivers never attracted baseball crowds. When they contend again, the park will be near full most nights.
by RichieHebner on Aug 25, 2010 11:55 PM EDT up reply actions
I agree. The first hint of competent baseball will draw crowds. It, in my opinion, will come down to how smart our management group allocates resources to whether we turn out like the Brewers or the Rays.
I hope if the Pirates are just a mediocre team, NH and co recognize that and don’t spend 10 mill a year or so on a Suppan to make a one or two year run. Or trade away 4 prospects for a Sabathia type rental for a first round failure when its obvious we don’t have the talent. I’d rather go another 4 years and have all the key players in place from our system then they try to make a half assed run with the current ’’core’’ just to try and appease the ‘long suffering fans’.
"So you think 25 percent of the country is retarded?! Yea. Atleast 25 percent. Well lets do a sample. There are 4 of us an you're retarded. Thats 25 percent." Southpark; Mystery of the Urinal Deuce
by gorillakilla34 on Aug 25, 2010 12:18 AM EDT up reply actions
I seem to recall a lot of empty seats...
…at Mellon Arena during the lean years in the early 2000s through 2006.
Don’t worry, when the team gets good, the fans will come, and revenues will increase. They likely won’t be able to sustain a payroll over 100 million, but they can be competitive. First though, they need a good team…
I think the city of Pittsburgh is ready for a contender. I remember the early ’90’s the city was baseball crazy. Even with the Pens and their cup drives,Three Rivers seats were filled down the stretch of those great years.
Pirates' attendance ranks 1989-1993
1989: 11th of 12
1990: 6th of 12
1991: 7th of 12
1992: 7th of 12
1993: 12th of 14
I love Pittsburgh, and I love baseball. However, Pittsburgh is not a baseball town.
Love it...
Facts > opinion
I remember traveling from DC to see the bucs vs braves playoff series and there were PLENTY of seats available. We could have saved money buying discount tickets at gametime from scalpers.
With that said, I think that PNC park is a component that cannot be ignored. Hopefully more people would want to come to this gem of a ballpark come playoff time (can’t believe I threw that out). On the flip side, I believe the capacity is about 10,000 less than 3Rivers.
“In their first year at PNC Park, the Pirates drew 2.46M customers to watch a team that went 62-100. Obviously, the park was the draw, not the team; but that gives us a benchmark for the number of people in Pittsburgh that are willing to pay to go to a baseball game. So let’s assume an annual attendance of 2.5M.”
I was referring to this quote. I assume that a playoff-contending ballteam will be a bigger draw for fans. Lots of fans came out to see PNC Park for the first time in 2001, but if the Bucs are in the playoff race then even some casual fans could be making several trips per week to the ballpark down the stretch.
they have to pick college players in draft
they can’t keep guys when they come up for contracts. so they need to get guys in the draft who are a little older and ready to make the bigs in a year or 2. this way they can sign them to a few years cheaperand get a few decent years out of them before FA. sign guys quickly that show any promise like McCutchen, Tabata, walker. sign them now for 3-4 years while they may still be cheap. maybe make the end of the contract heavy, and club options and then if you get 2 year into it they can be traded for something instead of lost to FA for nothing
Any task BIG or small, Do it well or not at all
by Rickfansince76 on Aug 25, 2010 10:34 AM EDT reply actions
Pipeline
They need college players who will be ready in 2-3 years.
They need HS players who will be ready in 3-5 years.
They need 16-year-old Latin American prospects who will be ready in 5-7 years.
They need, simply put, to get the prospects with the highest upside available at any and all levels, to keep the minor league pipeline full.
Thanks Dave Littlefield
That’s a very strong plan indeed…
Yeah
That is Dave Littlefield Drafting 101, picking only college players who can be nearly “major league ready.” You don’t draft to fill needs, YOU DRAFT THE BEST AVAILABLE TALENT, EACH TIME, EVERYTIME.
very few players
usually who are ready in a year or 2… and those guys go in the top of the draft… most others need a few years in the minor leagues… of course, there’s also relievers, who could make it quicker, but they shouldn’t be drafted early anyway… really, I don’t see much point in what you are saying…
GREAT ANALYSIS
On a risk/reward basis, why would the owners do anything besides the current draft strategy followed by trading their proven assets for more profits? They can keep their salaries in the bottom 25% of MLB as they control the young talent for several years at very affordable dollars. They will continue to get a large part of their operating income from the MLB pool and revenue sharing. A poorly performing team, with strict spending discipline is a cash cow (at least from the evidence presented by the financial statements). Apparently they’re not hitting critical financial covenants and paying down debt. And, at least according to Forbes, the value of the franchise has appreciated significantly.
The machine has been started, with an influx of amateur and LA talent. The Bucs will continue to spend aggressively in both places. But I’ll be shocked if we get to the middle class as proposed above simply because the rewards do not outweigh the risks (i.e., winning is nearly impossible just ask the twins and turning 8figure profits is easy).
The owners and management are no dummies, I don’t think they honestly believe that they can consistently compete for championships. But they do understand the rules of the road and will continue to exploit them to churn out nice profits every year.
I think the risk will come
when ownership has to decide whether to count on the fans to come back or not. There is going to come a critical time when the team will have improved significantly, but will be nearing the end of club control for it’s “core” players. Either the skeptical fans or the ownership will have to blink first, and I don’t think it will be the fans. In this case the financial obligations can become untenable quickly. If they don’t win right away after re-signing these guys, the attendance won’t support the increase in salary. If they don’t sign the players the fans will walk away, frustrated by another failed re-build, setting your team back another 5+ years minimum. I don’t know how to get there without a work stoppage, but baseball has to find a way to fix it’s financial system, unless it want’s to remain a 5 or 6 team league.
financial system is just fine
Teams can make money win or lose. It’s competitive balance that needs fixing.
I don't think that's completely true.
They can make money if they field a cheap uncompetitive team, with enough revenue sharing money. Competitive balance is obviously linked to the financial system. Yes, teams can spike occasionally when young inexpensive players, play beyond expectations, but that is simply not the norm. The current system puts the disadvantaged teams in a state of constant rebuild, and forces them to over pay for unproven talent. Gambling essentially, just for the chance to be slightly competitive for a short time. Ultimately teams like the Yankees could take even that process away from the smaller teams. They could out over-pay for unproven talent if they wanted, but why should they. They can simply let the small fish do all the gambling, then pay any amount of money they want to the players they want via free agency, and take virtually no risk. They maintain a respectable system out of pride, but to them it isn’t really necessary. Lets face facts. The real Major league only has a handful of teams. Sure every fall a few of the undesirables get an opportunity, through hard work, luck, and gambling to get a seat at the big table. The rest are simply warm up scrimmages for the real Major League teams whose season starts in fall. Wouldn’t it be great for the league as a whole, and widen the fan base, if every team had a realistic shot to compete? The ironic thing is, even the players don’t realize that by and large they could be better off in a new system. I mean, everyone can’t play for the Yankees.
Very Good Work, DG
…and some interesting comments as well, but this is something that has bothered me for a while: the problem isn’t just the Pirates and their long-term (mis?)management. It is baseball’s entire economic system. That gets lost when the Bucs have been the butt of the small-market joke for so long now, so long that it’s bread-and-butter go-to material for most of the radio hacks at ESPN (Cowturd, Gottlieb…I am looking at you….).
Hockey fans gave up a year of the game to get the the economics of their league straightened out. Remember that the Pens were sucking and bankrupt and couldn’t compete because they couldn’t afford to? Well, now, with a payroll minimum and cap in place, being good in hockey comes down to the management’s decisions on draft day, in free agency, etc. All the teams’ general managers are dealing with the same set of rules.
NBA…uh, same thing. NFL, same thing and way ahead of the curve of most leagues, by the way, because Pete Rozelle was shrewd enough in the 60’s to get all the owners to sell their television rights for one lump sum which was then equally divided by owners. People like Jerry Jones despise that arrangement to this day (hence this year’s concession of a no-cap year…no doubt, Jerry’s erstwhile attempt to buy a Super Bowl…they even let him host it!), but the whole success of the NFL has been built on tv money. Think the Packers would still exist without it? Hell no…they would long ago have relocated… And consider, Rozelle got that tv arrangement done in the 60’s, before the owners knew what tv would be worth. They were still focused on putting butts in seats at that point. If the NFL weren’t so draconian and established, and it was up to Jones to “share” revenue with Green Bay, and Buffalo, and hell, Pittsburgh….do you think they would do it? No way.
My point is…I never hear anyone rant about the fact that baseball’s economic system is slanted toward the the 10 or 12 teams that have the most money, the most population. In the Yankees’ case, they own their own damn television network, from which they draw more dollars than the entirety of their annual payroll, which makes all the gate recepits and concessions profit gravy, while the poor Pirates get a paltry 18.7 million… And the Yankees complain about revenue sharing! In that environment, as a businessman, I can understand why the Pirates might be happy to sit at the friction point of profitiability with a team that can only ever win 75 games. That pisses me off as a fan, but I understand it.
I do know this: I would give up a year of my favorite sport if this could somehow be fixed…where every single team’s television money went into a single pot and was redistributed in equal portions to every member of the league. Then the playing field is even. Then it is Huntington vs. Cashman and all the other GM’s for best acquisition, best draft day, best farm system, best major league club….not some bullshit where there are pretty much the same teams competing for the playoffs with a couple of one-hit wonders (Milwaukee, Tamba Bay) whose rosters, three-years down the road, will migrate to New York, LA, Boston, Chicago…etc…because those teams have the ability to sign huge checks.
Now is the time boys to make a big noise.
No matter what the people say,
For there is naught to fear, the gang's all here,
So hail West Virginia, hail.
TV Rights
You don’t even have to be as draconian as having all TV revenues split evenly across the teams. While that works in football, where all games fall under the national TV contract, in baseball the overwhelming majority of games are broadcast under local TV contracts. It doesn’t make a whole lot of sense for the Yankees to get 1/30th of the TV revenues for its local broadcast.
But 1/2 does make sense. After all, there are two teams playing each game; if the Royals didn’t show up, the Yankees wouldn’t have a game.
I haven’t run the numbers yet (maybe in a later fanpost), but I suspect that splitting the local broadcast revenues of each team 50/50, with one half going to MLB to split evenly among all 30 teams, would do quite a bit to balance the revenues.
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