A lot has been made of the Cleveland Indians’ below-value TV deal with FSO. I don’t know why I think about these sorts of things as much as I do, but I do. I’m a spreadsheet guy. I was a finance major. I work in insurance now, but I did financial analysis for a living for almost five years at a gigantic corporation. As a result, I think we’re all looking at the Indians’ TV deal the wrong way when we talk about the 10-year $400 million deal they signed back at the beginning of 2013.
The complicating factor in the whole deal is STO, which the Indians sold at the same time in a separate transaction1 for a reported $230 million. While we were all led to believe that this was a separate transaction, I’m inclined to combine them. Here’s why. With no offense to any friends and colleagues that produce non-Indians-broadcast TV shows on STO, the only real asset worth buying was the Indians’ TV deal. I like Drennan, but that contract brings how much value to a deal, exactly? STO, to my knowledge, rented space at WKYC,2 so they had no offices to speak of. From a TV production standpoint, you have to think any executive management and infrastructure that STO had was redundant rather than additive to FSO’s existing operations. Even though there were two transactions, STO was basically a single deal for the rights to broadcast the Cleveland Indians. Presuming that’s the correct way to think about it, how do we square that, then?
Well, the Indians’ 10-year deal at $40 million per year is easy. We don’t know the structure of the $230 million “for STO,” but let’s presume that it was paid in a single lump sum at the beginning of the deal. Lucky for us, we have ways of calculating the economic value of taking a lump sum at the beginning of a contract period because of Net Present Value calculations. The idea, of course, is that I’d gladly give you $10 if you’ll let me spread out the payments, but if you need money today, I’ll only be able to give you $6. Presuming a 5% discount rate, a $230 million lump sum payment is akin to roughly $30 million per year or $300 million.
In my estimation, the current economic value of the Indians’ 10-year TV deal is not $400 million over 10 years. I think it’s actually more like $700 million. And who knows what kinds of implications their deal structure has on the purported “near 50% split” of revenues that teams have with the MLB Player’s Association. I’m guessing that money that the Dolans took for selling their TV network is not a part of baseball revenue for splitting. I have no idea, of course, because they don’t release their books so I think that gives me wide latitude to speculate, especially when we’re talking about my team’s ability to pay to keep a generational talent in town while current ownership discusses attendance and revenues when every other pro sport is growing revenue everywhere but the turnstiles.
I hate that we’re so obsessed with these things as well, but that’s where we are. In a market where we obsess over attendance and our owners’ cash flow, because “WHAT BUSINESS OWNER IS WILLING TO RUN THEIR BUSINESS AT A LOSS?!” passes for analysis in the wacky wild world of professional sports where nobody ever releases any facts other than the Green Bay Packers, this is what we’re left to ponder.
The fact is that I have no idea if any of my assumptions are true. I could be the best sports business reporter in the history of the world, and I’d never be able to verify any of this without going to jail for my attempts. I’m just pointing out that simply converting a known lump sum into an annual payment would drastically impact anyone’s opinions on cash flow, especially if it’s a deal to the tune of $30 million per year. Maybe none of this is the difference between Francisco Lindor staying or going, but it seems material to me.
Speaking of baseball and money, Michael Lewis of Moneyball fame has a new podcast…
I’ve listened to the first two episodes and I’m hooked. Lewis begins his podcast — under Malcolm Gladwell’s newly established podcast company Pushkin — looking at the degraded relationship between star NBA players and NBA referees. He paints a picture of a breakdown in civility over fairness. Sports is just a launching point to a wider topic about “referees” in other industries as well. Episode 2 focuses on the student loan industry. Like most everything Lewis touches, it’s entertaining and informative all at once. There are only two episodes out right now, but I can’t wait for more.