Financial Baseball and the Finance of Baseball

If I was asked to investigate buying a (Major League) baseball team, I’d start by building a mental model of the finance of baseball.  I’d start by observing that a team consists of 1) a roster of players, 2) an collection of player contract and player and pick options, 3) a management and coaching team, 4) a stadium and stadium support staff, 5) league contracts and obligations,  6) marketing, television, and media rights and contracts, 7) financial assets and liabilities,(8) ball park ticket and concessions sales.   Well, that’s a start anyhow.

I’d then consider the competitive environment.  It consists of other ball clubs and is played about half of the time on other ball fields.  Naturally AL vs NL is an important consideration.   Generally, wins lead to more revenue, and better (more expensive) players contribute to more wins.  However, that is not always the case.

A baseball team aptly called a baseball franchise.  It exists as a privately owned piece of a larger governing organization.    That larger organization makes all sorts of rules that effect everything from the buying and selling of franchises to the “luxury tax” paid by high-payroll teams such as the Yankees.

I’d love to get my hands on a MLB franchise’s income statements and balance sheet, say for the Chicago Cubs.  I wonder if they made or lost money in the last decade?  I’d be curious to see what correlation there was between their revenue and their win/loss record for each season.  I’d wager that the Chicago Cub’s win/loss-to-revenue correlation is much less than that of most other MLB teams… simply because the Cubs fan base is more forgiving of (or simply more used to) losing.

So, an MLB baseball team is a privately-held franchise of the larger MLB organization.  Similar to a McDonald’s franchise being part of the the larger McDonald’s Corporation.  A key difference being that MCD is publicly traded whereas MLB is not.  (And, of course, a baseball franchise is way more expensive that a McDonald’s franchise.)

Switching gears, consider the derivatives market surrounding baseball (and other sports).  I’m referring to sports betting.    In Nevada alone, sports betting exceeds 2 billion dollars per year.  Many sports bets are analogous to binary options… they either pay nothing or 2X (less the vig) depending on the outcome of a game (and the point spread).

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