A Discussion on the Pirates’ Revenue and Payroll

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“Nutting is cheap. The Pirates need to spend more on payroll.”

You’ve probably heard this on talk radio tons of times. You may have overheard someone say it at a Pirate game, at a bar, or at a party. You may have said it yourself.

What follows is a discussion on how the Pirates bring in revenue and how much they should be doling out to the players. As is the case with most economic issues in baseball, there are no dead-on known facts about revenues, due to the “closed shop” nature of Major League Baseball franchises. There are things that we can extrapolate from leaked documents and interpreted public statements from team executives, though.

The basic rule of thumb is that team payroll should be around 50% of a team’s revenue. This falls in line with recent Collective Bargaining Agreements (CBA’s) reached with the other three major sports leagues (NFL, NBA, NHL). The most accepted study of team revenues in MLB is done annually by Forbes magazine. From their March 2014 study, Forbes estimated the team values, revenues, and operating income for each team from the 2013 season. To no one’s surprise, the Yankees had the highest revenue at $461M, while the Pirates clocked in at 20th with $204M. The last column is the most pertinent when discussing the finances of a MLB team — operating income.

Operating income is defined as the earnings before income and taxes. Essentially this is “profit” from revenues minus expenses. For 2013, the Pirates had an operating income of $21.8M. Yes, the Pirates turned a profit. No, this is not Communist China. They are allowed to do so. But here’s something else to keep in mind — the debt-to-value ratio, in which the Pirates have a 16% ratio. Considering that the Pirates were valued at $572M, that means they have a debt of $91.5M to pay down.

So where did the Pirates’ $204M revenue come from in 2013 and how can it be increased so that more money can be rolled into payroll?

Attendance

There’s no point in owning a team if no one is going to show up. Again, using 2013 numbers, the Pirates drew 2.2M fans in 2013 to PNC Park. The average ticket price at PNC Park was approximately $18.13 in 2013, so for math purposes let’s make that an even $20. The Pirates keep 90% of revenue from ticket sales, so:

90% x 2.2M x $20 = $39.6M from attendance in 2013

Every 100,000 extra fans would result in $1.8M of additional revenue. Considering that the Pirates drew 2.4M fans in 2014, that means that there should be an additional $3.6M of revenue from 2014 for the 2015 payroll.

Food/Merchandise

Now let’s assume that each fan spends $25 on food and merchandise at the game. When I first did a variation on this story in 2011 for another site, a high ranking Pirate official told me that the Pirates get 40% of all food/merch revenue, with most of the rest going to Aramark for the distribution service fees.

You may be thinking, “Wait, there’s no way I spend that much per game!” You may be right. Perhaps you get a bottle of water for $1 outside the park on the Clemente Bridge and bring it in. Maybe you eat before the game. Maybe you’ve never bought a T-shirt there at the Clubhouse store.

Now think about that family sitting next to you with two adults and two kids. The one with the beleaguered dad constantly getting up to get hot dogs, popcorn, cotton candy, and a well-earned beer for himself. And maybe a foam finger or two for the kids. How much do you think they spent? Then think about the people downing three to four beers a night at $8/beer.

40% x 2.2M x $25 = $22M from food/merchandise in 2013

Using the same sensitivity analysis, every 100,000 extra fans would bring in $1M of additional revenue. For the 200,000 extra fans in 2014, that would be an additional $2M of revenue from 2014 for 2015.

Parking

When PNC Park was developed, the Sports and Exhibition Authority didn’t want there to be a sea of asphalt between PNC Park and Heinz Field, so there is only limited parking revenue. From their website:

In order to incentivize the teams to develop the Option Area ?s surface parking, unlike what occurred with Three Rivers Stadium, the teams are given only limited parking revenue. Instead, certain parking revenue is placed in a development fund that is accessed only when a parcel is developed. The teams hired Continental Real Estate Companies as developer of this land, which consists of twelve parcels. The Stadium Authority oversees this development according to the terms of the Option Agreement.

Let’s assume that the Pirates get zero dollars from parking for purposes of this discussion. However, they are getting something from the development fees of all the hotels, office buildings, and parking garages on those twelve parcels.

Television

Here’s the big one. The new national TV deals kicked in during the 2014 season. Each team’s national cut went from $23M to $50M, thanks to newly brokered deals with ESPN/FOX/TBS. So from the 2013 Forbes’ analysis, that’s an increase of $27M. However, not all of that is “white meat” for the Pirates. Some of that gets kicked back upstairs to the MLB Central Fund for MLB to keep in reserve or pay down any revolving loans that a team may have taken out with them.

There’s also the local TV deal with ROOT. At one time, I estimated their yearly sum to be $20M, based on metropolitan size and other reported local TV deals. Frank Coonelly refuted that number and said it was higher and that the Pirates were closer to the middle of the pack in local TV deals. Let’s say it’s $30M for purposes of this piece.

If the national plus the local adds up to $80M, let’s assume that the Pirates got $60M of that in 2014. That would be an additional $20M of revenue from 2014 over 2013’s TV money.

Other Revenue Streams

Adding up the 2013 numbers for TV, Attendance, and Food/Merchandise, you get about $102M. Remember, this doesn’t account for the increases due to better attendance and the new national TV deal in 2014. So where did the other half come from? I can’t put a figure on any of these items below, but here are some other streams to pull from:

• MLB Advanced Media — In 2013, the revenues for the digital service arm of MLB were $650M. Every team owns an equal share of MLBAM
• League-wide merchandising/licensing — If a video game has the Pirates, if a Cutch jersey is sold in Idaho, the Pirates will get a cut of that
• MLB’s Investment Portfolio — When the Expos were owned by MLB, then sold to the Lerner family to become the Washington Nationals, the profit from the sale (about $330M profit) was parked into a hedge fund in 2006. Each team is an equal shareholder and, presumably, gets a cut yearly from the Baseball Endowment L.P.
• General Revenue Sharing — The Pirates are one of the “poor” teams in MLB, so they’re getting a cut from MLB to attempt to level the playing field. This comes from teams like the Yankees and Dodgers going over the $189M payroll threshold and having to pay a tax to MLB. All local TV deals get a small cut sent to MLB Central and they re-distribute it to certain teams like the Pirates.
• Radio rights — It’s probably not a lot, but the Pirates aren’t letting 93.7 The Fan broadcast the games for free
• Local sponsorships — All the ads on the walls, the PNC naming rights, any company you see at PNC — they paid some money for that privilege
• Suite rentals, event rentals — Ever go to a suite for a Boys Night Out or to get pitched by a vendor on some product you’ll never buy? They paid for that. Ever go to a wedding or other event at PNC? (I went to a wedding last fall). They paid for that. It all adds up.

 

Since I can’t put an accurate dollar figure on the “other revenue streams”, let’s just look at the increases from the 2013 revenue to the 2014 revenue for attendance/TV/food and merchandise. By my gorilla math, I have the Pirates getting an additional $25M last year. Using the 50% rule of thumb, that would mean a potential re-investment of $12.5M (just from these streams) back into the 2015 payroll. This is how the Pirates will go from an end-of-season payroll in the mid-$70M range to a projected payroll of $90M+ this year.

Many people like to bring up that Bob Nutting is allegedly the 11th richest owner in MLB and is worth over $1 billion dollars. By their logic, he should be willing to raise payroll up just using his own personal money. Do you know the best way to become a millionaire? Be a billionaire and start putting your own money into the franchise.

There is so much money rolling in the door already, there’s not a need for an owner to personally invest. And even if he would (he won’t), he can’t because the team is not solely owned by Bob Nutting. It’s a partnership with legally binding documents. They can sell additional ownership shares if they choose, but it’s not like they pass the hat and collect a few million every year.

Teams set payroll at what the market allows them. Having an artificially high payroll and not having the revenue to support it is a way to show a negative on the balance sheet and lead the team on the road to financial ruin.

So if the Pirates had 2013 revenues of $204M and there’s at least a $25M increase in 2014, let’s say their revenues were roughly $230M. Using the 50% rule of thumb, the 2015 payroll should be around $115M. But it’s not, as Frank Coonelly has stated that it would be in the low $90M’s range. If the Pirates sign Jung-ho Kang, it may be about $95M.

The question is — where is the extra $20M? Some is surely profits, some be debt repayment, but I hope that in the midst of this contention window with a top-5 player in all of MLB, that the Pirates are putting every available dollar into the team.

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