Devil’s in the Details with Forbes’ Value Report

The Cleveland Indians made money in 2011. A lot of money, actually — the largest amount of operating income earned among all of Major League Baseball. At least according to Forbes Magazine who published the latest edition of their annual take on the sport.

Credited with a net worth that grew 16 percent year over year, the Indians, per Forbes, hauled in $178 million in revenue, had a debt ratio of 27 percent  and operating income figure of $30.1 million, leading the pack among the bat-and-ball franchises. The business-focused publication cites several variables which played into their estimated totals, including but not limited to an extremely low payroll, an alleged $30 million received from their regional sports network SportsTime Ohio, and a check from MLB to the tune of $20 million from revenue sharing — the Indians reportedly received the largest slice of the reallocated pie.

Accounting 101 tells us that the operating income (or “EBIT” for the business folks) is a pre-tax and interest figure that is used to gauge how well a team is taking care of their baseline expenses as compared to their top-line revenue.  Common Sense 101 tells us that, given the fact that MLB figures are not public record, all of Forbes’ figures are best-guess estimates based on accessible numbers. Public Relations 101 tells that the Cleveland Indians vehemently detest this annual array of information as it leads to fan discomfort over a perpetual lack of spending coupled with the idea that the man holding the purse strings is reaping all of the benefits for his own good.

“Their information, once again, is inaccurate,” a team representative tells WFNY. “They acknowledge they do not get their information from us or anyone within Major League Baseball. Totally inaccurate.”

Forbes’ executive editor Michael Ozanian, in turn, claims that his company runs all of their estimations by sports-focused bankers as well as consultants. “They’re not pulled out of thin air,” he claimed in an interview on Thursday afternoon. “They’re not spot on, but they’re close.”

Just how close? The “revenues” section of the team’s income statement will traditionally include items like in-game revenue, broadcasting revenue, ballpark signage/naming rights, concessions and — everyone’s favorite — revenue sharing. The “expenses” will filter down to player salaries, coaching/training/scouting staff salaries, broadcasting compensation, ballpark operations and team — marketing, public relations, administrative — costs. Apply an effective allotment for error across all of these items and numbers can sway substantially.

The $30 million estimated to have been earned with the team’s STO deal corroborates reports published earlier in the year, though these figures were also rooted in estimation. While the exact amount of the revenue-sharing total was not made available, Forbes is able to back into specific totals by taking the 34 percent revenue sharing figure and allocate it based on their estimates of team-specific revenues.

But their estimation of in-game revenues? Naturally, a big source of revenue falls in the lap of ticket sales. The Indians, with one of the lowest average ticket prices in the game, claim that their average seat costs an attendant approximately $22. That said, one cannot merely multiply this figure by total attendance for the year. The early-April totals through the turnstiles was bad enough. And while this would be improved after the team compiled a successful win total early on, the bargain-priced bleacher section was a huge hit amongst fans. Discounts for group sales? Complimentary seats?  That league-low $22 mark could become even lower when volume-weighted.

Turning the focus to the ancillary game-day income and it becomes even more blurry. What percentage of concession purchases were made via “loaded” — the team-supplied food and drink vouchers — tickets?

The local reaction to these reports have been not kind, but expected. The division rival Detroit Tigers, a region that is said to be economically worse-off than Cleveland, recnently signed Prince Fielder to a lucrative deal. It was only about a year and a half ago when Indians fans were told that it was “not the right time” to spend with the word “deficit” bantered about. And then comes this report and deficits are nowhere to be found. It’s also worth mentioning that operating income (or EBIT) is not what the owners take home — there are several below-the-line transactions that could continue to reduce the overall income stream, be they interest-related or one-time, non-recurring charge-offs.

Ideally, if Major League Baseball made their records public, Forbes would be tearing apart cash flow statements — just where is the money coming from/going — and the disclosures that accompany the income statement. Ratios would be compiled, forecasts could be made. There would be no room for debate, no need to rally the troops in a public relations war, and everyone celebrates transparency. But this is far from an ideal world, one where Forbes gets to play traffic cop and the teams involved have to deal with the outcome, including the hand-wringing from fans who rely on the tellings of a national publication and wonder when, just when, will the spending occur. Certainly, opening up the books for analysis — even a one-time scrub –would put an end to the annual war of words, but the likelihood of this is considerably less than a decade full of championship parades down E. 9th Street.

  • Boomhauertjs

    Two ways the Dolans can refute the whispers about their being cheap and hoarding their cash:

    1) Show us the books that say the team isn’t making money.
    2) Spend some cash on free agents or lock up your core players.

  • Ritz

    IF, and thats a huge if, these numbers are accurate then this is a disgrace.

  • Ritz

    And unfortunately, based on the Dolans past, neither will happen, although I would prefer no. 2.

  • Brandonthehero

    I would be quicker to at least consider Forbes numbers than I would something a team rep. had to say. Although I’m willing to bet that the Forbes number are higher than the real number, I’m totally believe that they did make a good chunk of change last year. With that said, I don’t think this tells us anything that we don’t already know about the Dolans. They aren’t willing to spend money. If they don’t get some of our core guys locked up though, I’m going to go windmill punch the entire front office.

  • The_Real_Shamrock

    “It was only about a year and a half ago when Indians fans were told that it was “not the right time” to spend with the word “deficit” bantered about. And then comes this report and deficits are nowhere to be found,” thanks for the reminder.  The Indians have so many excuses they probably just lose track.  The biggest being that when they felt they were contending they’d add a player.  Well the key words were “they felt” and what they didn’t say was the player they would add would be resigning their own player in Grady Sizemore.  Well that’s worked out well so far.

  • TOJ

    Perception is reality with paying customers, so really, it doesn’t matter.

  • Jeff Nomina

    I think this highlights the fact that in MLB, it pays to lose. You make more off revenue sharing than you ever would from ticket sales, so there is little incentive to spend.

    I will also say this – most everyone sided with the NBA owners’ desire to guarantee themselves a profit and are now damning an MLB owner for making one. The team did better than expected in a down year, which significantly increased revenue. By that same logic, when payroll was near $90 million and the team lost all year in ’09, they probably were not turning a profit.

  • EyesAbove

    There you have it, should have signed Pujols. 

  • kjn

    Forbes’ executive editor Michael Ozanian, in turn, claims that his company runs all of their estimations by sports-focused bankers as well as consultants. “They’re not pulled out of thin air,” he claimed…
    Uh… it kind of sounds like they are.

  • Steve

     Everybody wants the other guy to open their books, but when its their turn, they have no interest in it. And payroll is going up significantly this year and next to keep the core players. But go ahead and pine for Josh Willingham’s 1.8 WAR as a sign that this team is committed to winning.

  • Mark Novak

    The indians are like every other MLB TEAM (or for that matter, almost any pro sports team) in that they zealously keep their numbers out of the public eye.  They are a private corporation and have the right to do so (the NFL owners wouldn’t even turn their numbers over to the union in the middle of a CBA dispute, so good luck to us fans to get a sniff of the numbers).  nothing out of the ordinary there.

    However, given the teams’ tendency to harp over and over about how disadvantaged they are in the small Cleveland market, I think they do owe us a little bit of disclosure on how the team does financially.  The last time the organization went on record about profit/loss figures was in 2009, when Paul Dolan repeatedly insisted the team has lost a significant amount of money.  This, of course, was used to justify the 2009 deadline trades and the full-on rebuilding that followed.  Now that the team appears to be on the upswing, it would be nice if we could get a little clarity on when or if the payroll will increase.  I know payroll is up some $20 million this year but that is mostly raises for players already on the team.  That’s fine, but these are arbitration guys and to some extent captive to the team.  These are not guys the Indians are actually outbidding other teams for.  I’m not saying the indians should go after Prince Fielder but guys like Michael Cuddyer and Josh Willingham should certainly be within reach.  Remember also that this is a team that said they would have to cut payroll in other areas to give Carlos Beltran $12M/year.  In other words, they can’t afford him.

    One thing about DiBiasio’s defense of the Dolans that always irritates me is when he blames the Cleveland and the local economy on attendance.  I’ve heard him say many times how weaker the local market here is than it was in 1994 when Gateway opened.  He always talks about how many corporate headquarters the city has lost since then, the job losses, and number of vacant and abandoned homes within a 10-mile radius of downtown Cleveland, yadda, yadda, yadda.  C’mon, have some pride in your city.  yes, we are a relatively small market but you’re talking about revenue, not profit/EBITDA.  Clearly, small market teams can compete with the Yankees, Red Sox, and Dodgers when it comes to the bottom line.

  • Steve

     What do you want, DiBiasio to lie to you? The economy here sucks, and has really tanked since the early 90s, and it has really killed the Indians’ ticket base. That’s simply the truth of the matter. It sucks, but having pride in your city doesn’t change that. And revenue is more important than profit when it comes to building a team. Sure, the Indians could completely scrap everything like the Marlins and turn a nice profit every year, but they will never be able to get the revenues of NY, Boston, or LA, which is what actually allows you to build a winning team. Fortune 500 companies are determined by revenue, not profit, for a reason.