Indians

Playing with House Money: Why I think the Dolans should consider selling the Indians

The Dolan family needs to step away from the blackjack table and leave the casino with house money well in hand.

After selling STO to FOX, they need to go to the next level and sell the team before they lose any of that money they just “won.” This is the only way I know how to describe what just occurred with their sale of STO to FOX Sports for an estimated $230 million while also selling the broadcast rights for $40 million a year.

First of all, this isn’t some angry fan thing that is telling the Dolans to go away. This is purely how I see it in light of the recent business victory the Dolan family scored. Some may think it’s wrong to liken the situation to gambling when the Dolan family built STO in order to leverage the Indians’ broadcasting rights. They built a new company and sold it, so why would that be anything like gambling?

Well, first, I am trying to figure out what exactly FOX just bought. No offense to any of the STO employees. This has nothing to do with shows on the network or the broadcast quality. This is just the fact that STO is mostly co-located with WKYC in Cleveland. Presumably the only thing that FOX actually got for their nearly quarter of a billion dollars as far as I can tell, was pre-negotiated carrier fees with the likes of Time Warner Cable, DirecTV and other carriers in the Indians viewing area and a couple league partners like OHSAA.

That obviously has some value as it produces cash flow that will now benefit FOX, but think of it this way. FOX didn’t really need STO. Everything that STO does is completely within the existing competency of FOX’s business from the production and broadcasting all the way to negotiating subscription fees with TV carriers. So, did FOX just pay all that money for a minor shortcut in negotiations?

I would assume that really all FOX wanted were the rights to the Indians, which they still have to pay the Indians $40 million per year to get. Remember that FOX didn’t get a discount on the $40 million either. This number is monitored and audited by MLB to make sure that teams are maxing out value so as not to hurt the overall bargaining power of MLB as a whole.

So in essence they had to pay an estimated $230 million ransom to the Dolan family in order to get the Indians broadcast rights. All told, FOX just paid $630 million in order to acquire something that should have cost only $400 million. In any other market where FOX might bid against another TV company, they’d presumably just have to come in with the highest offer for broadcast rights without having to acquire a company they really probably didn’t even want.

And good for the Dolans. They found a way to use their ownership of the Indians to score a $230 million windfall that is outside the auspices of the game and shared revenue. It’s a one-time event though and they should probably just complete this transaction and sell the Indians now. They achieved a huge business coup making that money and now they’re just risking giving it back via spending on the baseball operations. This influx is presumably a one-time opportunity as FOX Sports Ohio is locked into the Indians for 10 years with their rights deal. And even an influx of $230 million doesn’t really help the Indians compete in an appreciable way in MLB.

The Anaheim Angels have a TV deal worth an estimated $3 billion over 20 years. That’s $150 million per year and these are the guys who will always be signing the Josh Hamilton and Albert Pujols type free agents. Even if the Indians decided to spend all of their newfound cash it means the team could only afford one really really top line free agent over a 10-year span assuming they find a guy they deem to be worth north of $20 million per year.

So, the way I see it, why wouldn’t the Dolan family sell the team?

Even based on Forbes’ sometimes fuzzy math the Indians were worth $410 million a year ago. Since that time the team signed a new TV deal and has the benefit of new national TV deals estimated to jump from about $10 million per year to $23 million per year in the near future. So, even coming off a very frustrating season on the field, it’s never been a better time to sell the team. Businesses always derive their greatest value from cash flow and revenue, and sports is no exception. Over the long run, winning will improve the value of a team, but the baseline value will almost always be driven by cash flows first and other factors second. Knowing that both those things – revenue and presumably cash flow – will be jumping via guaranteed contract soon means that the Dolans are in the driver’s seat with potential buyers.

As I said in the open, this isn’t just reactionary fan recommendation to try and get a new owner either. There is no guarantee that anyone who buys the Indians will find a way to do it better or will be willing to deficit-spend in order to put the best team on the field against impossible systemic economics in the game. You know, “the devil you know” and all that jazz. Just from a pure business standpoint, if I was a member of the Dolan family, I’d be telling my family that we just had the biggest Vegas run in history. We won, but we can only realize the victory if we take the next step and walk out the front door of the casino with our winnings. Until the Dolan family does that, the money is at-risk.