The Detroit Tigers in Dollars and Cents: part 2

This is a continuation of last weeks piece on the fiscal foundations of the Detroit Tigers.

You can find last weeks piece here.

Last week I talked about the fact that profit maximization models simply don’t work to explain business decisions in sports.  The only team that really seems to behave like an economist (or a financial analyst) would expect it to or want it to is the Florida Marlins.  Most owners want to win, which is why they bought the team in the first place and are willing to give up big chunks of their own hard-earned cash to do it.  To our great benefit as Tigers’ fans, Mike Illitch seems to want it quite a bit more than most.  Owners, it seems, spend as much as they are able in pursuit of pennants so – the three foundations of a teams budget are the owners own resources (and willingness to put them to use), fan spending, and money redistributed from the central fund.

The point of all of this, in the end, is to provide a discussion of how good the Tigers can afford to be and for how long.  But first, a few things about ‘parity’ should be gotten out of the way.  The low-water mark for team revenues is not really all that low.  According to Forbes magazine the lowest gate revenues in 2008 went to the Florida Marlins at $22 million.  Even a team that ships out all its arb-eligibles can’t do much with that.  However, the Marlins’ “other” revenues (including media, revenue sharing, central fund redistribution, etc…) came to $117 million.  The big-market Mets took in $147 million in gate revenues in 2008 but the same $117 million in ‘other revenues’ as the Fish.  That ‘other’ category is a big one, accounting for more than 60% of all MLB revenues and the way the system works, it doesn’t seem to vary all that much with market size.  Of course, there are some ‘fixed’ overhead costs to running a baseball team as well, which average about $65 million a year (again, according to Forbes magazine) and even the stingiest teams spend at least $50 million on costs unrelated to payroll.  Still, “small-market” teams can feasibly afford payrolls above $80 million at this point assuming that the owners have goals other than profit-taking and that the money is spent on productive players.

The Texas Rangers won with a payroll well within reach of even the smallest of small markets, it can be done.   Any team can exploit the underpaid young player – or at least any team can try – to squeeze more wins per dollar out of a team.  The difficulty is in maintaining success, and this is where those gate revenues are key.  Some revenues don’t depend much on the fan – particularly those that come from the central fund.  Over the very long run, teams that win will get better TV deals – but those depend more on the size of the market than genuine fan interest. Gate revenues and the like also depend on market size, but they are more quickly and noticeably impacted by fan interest – caused by such things as winning.

What we expect is that teams with a larger market should have both a larger lower bound for gate revenues (no matter how bad the team gets) but also a larger increase in ticket sales with each additional win.  So, the Yankees might take in slightly more than the Pirates’ $26 million if they fielded the same sort of hopeless team but they are able to bring in vastly more revenues with 90 wins than the Pirates ever could.  The Yankees took in $217 million at the gate in 2008 – a year in which they contended for but did not make the playoffs.  The Rays made it to the World Series, but only sold $40 million worth of tickets.  That’s market size at work.

So the first question to ask is… how big is our market?  If we use the government’s “metropolitan statistical area” definition to define the market of each team, the table below shows how we compare in terms of total spending power.  Note: for lack of a more precise method, I’ve simply halved the numbers for New York, Chicago, L.A. and San Francisco to reflect the presence of multiple teams in each market.  Of course, the A’s don’t really have a 50% share of the S.F./Oakland market, etc… but how much they actually do have is an open question.

As you can see, the Detroit Tigers are a mid-market team as opposed to a small market team.  12th out of 25 does not indicate a bad place to be, and within our division we are well situated.  The only other AL Central team that can claim a larger market is the White Sox, and that is only true if they can stake a claim to more than 40% of the Chicago baseball market – which is possible but definitely not certain.  We can maintain a payroll of $100 million without much red ink, to keep a payroll of $130 million we need the enormous stimulus that we’re getting from Illitch.  At this point, $100 million seems to be about all the White Sox and Twins are able to afford.  Kansas City can’t come close to that, at least until wins put fans in seats.  Cleveland used to be able to fund teams like that, but fan apathy is striking hard after their sell off.

The future doesn’t look as bright.  The whole of the AL Central falls outside the growth regions of the United States (though that seems like an oxymoron in today’s economy), which is a blessing in a way.  No city in the division has had growth in spending power of over 100% since ’95 – something 12 MLB teams can boast.  Detroit’s growth has been lowest of all, at 44% over 14 years it mostly reflects a fall in the purchasing power of the dollar rather than more demand for baseball tickets.  It isn’t that we’re getting poorer, even relatively speaking, it’s that we’re losing population.  The only other MLB team in the same boat is Cleveland (though Pittsburgh is close).  New Stadium aside, the purchasing power of Twins fans is rapidly gaining on that of Tigers fans – and likely to pass us soon.  Chicago isn’t growing terribly fast either, but whatever lead the Sox have on us is slowly widening.  K.C. has been showing respectable if unimpressive growth, but K.C. is so much smaller than Detroit that we’re not likely to be passed by in my lifetime.  Cleveland has the same disturbing trends as Detroit, but starts from a much lower base.   Right now, we have a distinct edge (on the financial side of the game) because while our fans put us neck and neck with the Sox and Twins, Mike Illitch puts us a head and shoulders above.  In the long-term, particularly a long-term under different ownership, it looks like we’re destined to settle into third place as the Sox and Twins pull away.

A few other things of interest stick out here:  first, in terms of market size New York is far and away the biggest even shared between two teams – no other market comes close.  Should we be considering another expansion team in New York if we want payroll parity?  Second, the next biggest market isn’t Boston… it’s D.C.  Are the Nats going to be a force to be reckoned with?  Boston is only 7th (making the Red Sox 9th) behind both Texan teams.  Can they maintain the payroll required to match the Yankees blow for blow?  And last:  Miami is 9th.  Higher than Atlanta.  The Marlins aren’t a small market franchise either, just an opportunistic one.

Next week in part 3, a look at how much a win costs  in Detroit and how much we’re willing to pay for it.