It’s still early, but the Reds have a little positive momentum toward 2019. Dick Williams and new manager David Bell have crafted a forward-looking common message. Other than a broadcaster or two, the Reds no longer seem like Shakespeare’s graying Lear howling at cliff’s edge at the shifting currents of baseball.

Bell has made clear he won’t settle for players that aren’t fully prepared. That means an analytics department with effective lines communicating state-of-the-art data to players and coaches. Ownership has paid for a first-rate, up-to-date coaching staff with high expectations. Williams has endorsed the importance of new blood, new energy, and new perspectives in the clubhouse.

But while a heretofore-missing organizational message is necessary, it isn’t sufficient for winning. Success in the W-column depends on putting more talent on the field. Over the next few weeks, the Reds face thorny decisions about how much they are willing to spend to assemble that kind of team.

That spending can be in cash money or hard-earned prospects or both. Giving up the likes of Nick Senzel, Hunter Greene, Taylor Trammell and Jonathan India to acquire major league ready talent is a bitter cost to bear.



However, there is someone who can help the Reds avoid that brutal sacrifice: Bob Castellini, leader of the Reds ownership group.



* * * * *

Owners of Major League Baseball teams are getting rich. Well, richer. A lot richer.

No, don’t believe the baseball doomsayers or poverty pleaders. The woe-is-baseball narrative pointing at a decrease in attendance isn’t convincing. Not in the least, as the sports revenue soared to nearly to $11 billion in 2018.

Commissioner Rob Manfred has taken aggressive steps to assure the flood of cash will continue to surge into baseball coffers.

Need recent evidence for that? It’s everywhere. Try the new multi-year, multi-platform deal the league inked last month with Fox Sports. You’ll have dates with Joe Buck through 2028. A $5.1 billion payment to MLB in tow. That’s a jump of 36 percent over the previous year.

The 2018 All-Star Game generated nearly $45 million in ad revenue.

Manfred has worked particularly hard to attract young fans. Within the past year or so, he reached a deal with Facebook to stream 25 afternoon games at a price of $30-35 million. A couple weeks ago, Manfred struck a deal with DAZN, a subscription video service, to produce a show similar to the uber-popular NFL Red-Zone that will stream live look-ins. It will run on weeknights and use young-leaning “on-air” talent. The deal pays $300 million over 3 years and gives MLB another way to reach fans without a traditional CATV subscription.

Dwarfing all that is potential revenue from newly legalized betting. In May, the Supreme Court approved sports gambling throughout the United States. The American Gaming Association says that MLB could rake in $1.1 billion from the betting, associated platforms, programming, merchandise and sponsorships.

MLB has rushed to embrace with open arms the new pots they expect to win. Last week, Manfred announced an agreement with MGM Resorts International for the gaming company to become — you know it! — an official gambling partner of baseball. That’s just the start. Beyond partnerships with MLB as a whole, individual teams can set up arrangements with local casinos. Soon you’ll see betting windows at major league parks and an official MLB app that lets you place bets in real time as you watch games. You wonder if there will be a betting line on when Pete gets reinstated.

Those cord-cutters who supposedly threaten the financial future of the nation’s pastime, they use Facebook, stream games online and have been known to gamble a bit.

To mis-paraphrase Tom Hanks, there’s no dying in baseball. Not among team owners anyhow. Not unless one meets his maker counting cash.

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After all, Major League Baseball is nothing more than an association of the thirty privately held individual teams. The growing pile of MLB revenues is divided and distributed back to the owners. The industry’s green gusher means more income and, more importantly, massive wealth for those lucky few.

The value of individual teams has skyrocketed over the past decade. According to analysts at Forbes, who have been studying this for more than two decades, the average major league franchise is now worth $1.645 billion. That’s an increase of 7 percent over last year. That doesn’t include the dollar value of ownership shares of regional sports networks. You’ll be relieved to find out the value of your 67-95 Reds increased by 11 percent last year (more on that in a minute).

Here’s an important point: The value of each team depends little on small swings of annual operating profits. Blips in attendance don’t matter much because ticket and hot dog sales represent an ever-shrinking slice of team revenues. Not when big stacks at the national networks, Facebook, DAZN, MGM pony up.

Here’s an example. The Miami Marlins are dead last at earning baseball revenue. Their annual loss column is as wide as the Gulf of Mexico. They have trouble drawing fans to their regrettable, inconvenient stadium.

Yet, a group of investors paid $1.2 billion for the Marlins a little more than a year ago. Billion with a B.

The Atlanta Braves provide another example. Major league teams are privately owned. So the oh-so-convenient standard operating practice is not to disclose annual revenues, expenses, profits or losses. But Liberty Media, who purchased the Atlanta Braves for $400 million in 2007, began to offer stock in the baseball club. With public trading comes transparency.

We learned the Braves lost $45 million in operating revenue from 2014 to 2016. They were going through a rebuild and moving to a new stadium. But over that same time, the club gained $770 million in value, doubling its worth to $1.5 billion heading into 2017.

Again, here’s the central point: A major league team’s value isn’t about in-person sales and annual operating profit or loss. Baseball’s revenue firehose matters much more. It’s built for the long-term and reaches league-wide.



MLB teams retain 100 percent ownership in MLBAM (tech for streaming games) and 67 percent of the MLB Network. Those assets plus the league investment portfolio add up to about $425 million in value for each team. For each team.

Enjoy cherries on top of your sundae? In 2018, every ownership group received a one-time $50-68 million payout when MLB sold BAM Tech to Disney. That covered about half or more of the Reds 2018 major league payroll. MLB still owns 15 percent ownership of BAM Tech, shared by the 30 teams of course.

To repeat, in 2018, the average value of a major league franchise is $1.65 billion, a 7 percent increase from the year before. Let me do the math. 7 percent of $1.65 billion is $115 million.

And (please be sitting down for this) those team values do not yet account for the impact of legalized gambling.

How much could action add to the value of a professional baseball team? Mark Cuban, owner of the NBA Dallas Mavericks, claims that franchise values for pro sports teams “doubled in a second” with the advent of legal gambling. “It will increase interest. It will add to what happens in our arena and in stadiums. It will increase viewership online and on TV.”

Jackpot.

Still think the Reds have to choose between #GetThePitching and #KeepTheProspects?

* * * * *

Carl Lindner was hailed local savior when he bought majority ownership of the Reds from Marge Schott in 1999 for $67 million. Six years later, he sold the team to the Castellini ownership group for $270 million. A sweet return for civic duty.

But that windfall pales in comparison to the trick the current ownership group has turned. Forbes puts the value of the Reds now at $1.01 billion. This chart shows the growth in the value of the Reds organization in millions of dollars over the dozen seasons it has been owned by the Castellini ownership group.

That steep upward trend line has accelerated in recent years despite hand-wringing over attendance at GABP. The Reds have continued to do well in annual operating revenue. Yes, gate receipts were down in 2018, but thanks to MLB’s money cannon and the Reds new contract from FSO (will get to that in a second), Forbes estimates that Reds revenue overall grew from $229 million in 2017 to $243 million in 2018.

Sure, ownership and their apologists shake a finger at fewer fans cranking the GABP turnstiles. But let’s put someone who knows the numbers under oath and ask if the team made or lost or made money last year. Remind them about the lump sum $50+ million check from Disney. Then let’s see what answer we get.

Forbes breaks down the Reds $1 billion in value this way: 44% from the worth of the sport overall, 30% from the city of Cincinnati and surrounding area market size, 18% from the stadium and just 8% depends on the Reds specific brand.

The Reds also have a new deal with Fox Sports Ohio. The contract will transfer to a new company this spring when FSO is sold along with 21 other Fox regional sports networks. Neither the Reds nor FSO has revealed the terms.

We do know the step-increase payments began in 2018. Forbes and others estimate it’ll reach $65-75 million a year, more than double the previous contract of $30 million. That sounds about right based on comparisons to other clubs. That would be $30-35 million in new revenue annually. Plus the Reds negotiated an equity share in the local network.

* * * * *

To analyze Reds’ major league payroll, let’s start by looking at what they’ve spent the past 13 years under the Castellini ownership group.



From 2007-2011, Reds payroll spending was flat, factoring inflation. The level jumped a bit in 2012, then bigly from 2013-2015, before declining back to previous inflation adjusted levels with modest steps up in 2017 and 2018. The spending bump beginning in 2013 coincided with a $25 million per year increase per team from a new set of national broadcast rights agreements which is still in effect.

For more context, let’s compare Reds payroll spending under the Castellini ownership group to the median MLB payroll. Median payroll is where half the major league teams are above and half are below. In this chart, the Reds are red, league median is blue.

The Reds have been below median payroll every year except 2013-2015. Notice how median spending shot up the past two seasons. The Reds fell far behind.

This is probably the place to point out these payroll figures do not account for spending on the amateur draft, the international market, minor league coaching, sports science and other player development expenses. The Reds have stated it has been their plan the past couple years to shift money from major league payroll to these other areas.

Last chart. Let’s look at payroll spending as a percentage of the estimated value of the Reds.

This chart highlights the fundamental point of this post. After several years of maintaining a steady percentage, the ownership group has not taken into account the sharply growing value of the organization, and its own wealth, when it sets the major league payroll.



* * * * *

Bob Castellini has long maintained a policy that the Reds major league payroll would fluctuate based on annual operating expenses and revenues. If the Reds gain or lose a few million in income, payroll will be adjusted accordingly.

At first glance, that seems quaint, even generous. Hey, everyone, the owners aren’t looking to make any money on the Reds! That’s certainly what’s implied.

But oh, my goodness, have they made money.

If the Reds ownership group had parked its $270 million in the stock market in 2006, they would have enjoyed a strong 6.6 percent rate of return. Instead, they bought a professional baseball team and earned almost double that.

In the past four years, the Reds have gone from spending above middle-class on payroll to tens of million dollars below. Meanwhile, the Castellini ownership group has gained $400 million in wealth from owning the team.



Thesis statement: Focusing on year-to-year operating profits or market size obscures the modern financial reality of owning a baseball team because it doesn’t account for the most profitable aspect: the value of the franchise. When your team is worth over $1 billion and that value is growing by more than $100 million a year, you can afford to spend a lot on your major league payroll.

Plenty of other major league franchises are in a similar situation. The value of their team has exploded in recent years — I’m not sure the argument in this post could have been made even five years ago — but ownership hasn’t taken advantage by boosting payroll.

Could spending on payroll be the new Moneyball?

It has been well documented that the Reds’ rebuilding phase was impaired by ownership’s reluctance to trade players in a timely manner. Less well appreciated is how the roster has been further diminished by ownership sticking to its arbitrary break-even policy, all the while awash in the tremendous accidental wealth generated by owning the franchise.

The Castellini break-even formulation, while objective, is arbitrary. Given the enormous wealth the ownership group has gained through its investment, it’s also absurd. Anyone pleading small market poverty in this context is performing an obscene charade. I’m sorry, but billion-dollar baseball teams that act small do so by choice, not destiny. If owners don’t take advantage of their resources, it’s due to small thinking, not a small market.

Bottom line: Reds ownership can and should leverage a tiny fraction of its newfound wealth and authorize a payroll north of $150 million. Whatever it takes to acquire several impact players without trading away the organization’s prized prospects.

With enough money to spend and a few smart decisions by Williams and Bell, Reds fans might just see real progress.