From: kbanaian@bernard.pitzer.claremont.edu (King Banaian)
Subject: Re: Doubting Thomases (and Teds and Roberts and ...)
Keywords: Independent auditors, fraud, finances
Organization: Pitzer College
Date: Sat, 19 Dec 1992 19:41:54 GMT

In article <1992Dec18.230822.13918@midway.uchicago.edu> thf2@ellis.uchicago.edu (Ted Frank) writes:

>Player salaries have increased faster than the rate of inflation.  Is
>there any reason, ex ante, to think team expenses not going to salaries
>have?
>
>Your Noll numbers, dating from 1983, show average non-player expenses to
>be about $10 million.  The Financial World figures, half of which are
>clearly cooked in every sense of the word, range from $18 million to
>$42 million for 1991.  (I guess the average would be $25-30 million,
>as that's the average team salary cost.)  
>
Since those expenses are mostly services, I took the inflation rate for 
services over the period and estimated that without any change in real costs 
the non-player expenses would rise to about $14.2 mil using the Noll 
figures.  The annual rate of increase implied by a rise to $25 million in 
1991 would be 12.6% vs. the services inflation rate for the period of 4.8%.  
So we need to find a source of real increase of about 8% per year.  That 
source had better be something real (it can't be just that stuff costs 
more:  the CPI rate of inflation for medical services was only 7.4% over the 
same period).

>I claim that these numbers are either (1) overestimates, or (2) show
>where fat can be cut.  If these teams could be run for $10 million in
>1983, there's no reason they can't be run for less than $20 million in
>1991.  The 1983 market is *different* than the 1991 market.  Who was
>earning more than $2 million in 1983?
>
>It's clear that many of the numbers *do* end up being overestimates.  What
>reason have we to think that non-player expenses are correlated *by team*
>with player expenses?  By year?  Even in the midst of collusion, and then a
>huge windfall television contract?
>
But I think collusion may be where the problem is.  Since your affiliation 
is in law, be a source for this:  when did the collusion settlement figure 
(about $10 mil a team, right?) become known to all?  And when did the teams 
book the costs of settlement?  If they booked it in 1991, the teams cooked 
the books, and all these non-player op costs are overstated by that amount.  
I seem to recall that 1991 was the year it was done, but I thought those 
numbers would be screened out by FW.  I have to believe now that they 
probably weren't screened if they were present.  (If I'm computing franchise 
values off revenue streams, that collusion settlement will be factored into 
franchise selling prices.)

>>FW report that they have used independent sources.  They are selling the 
>>database they used for these estimates (plus the other major sports) for 
>>$5000.  That is clear evidence that this is an independent analysis.  
>
>Hey, I can do an independent analysis also.
Please do!

  The numbers they've published
>publicly don't make sense.  
>
We await your findings.

>>
>>The purpose of their study was to estimate franchise values (BTW, Ted, the 
>>lowest was $75m, for Montreal), not to accurately demonstrate the profits of 
>>each team.
>
>Computing franchise values from revenue streams is like trying to calculate
>what 19th-century impressionists will go for on the open market based on
>bond price fluctuations.  It's purely a function of how many rich men want 
>to buy sports teams and how many sports teams there are out there to buy.  
>The days of the Bill Veeck/Calvin Griffith type owner who had 100% of his 
>net worth locked up in his team are over, for better or worse (or both).
>
Aw, Ted, this is a very disappointing statement.  You mean to tell me that 
franchsie prices are capriciously chosen by two men (and Large Marge) out of 
thin air over cigars and cognac?  Nonsense -- the price of the team is 
computed in FW, reasonably, by a multiple of sales.  This is the way mergers 
and acquisitions are done in all industries.  (The multiplier for baseball 
is computed at a base of 2x revenues, with higher multipliers for teams with 
favorable stadium leases or local media contracts;  the Dodgers rank the 
highest with a 2.5 multiplier.)  You might wish to explain the Veeck/
Griffith comment, for I fail to see its relevance.


>>	And we got into all this because Dr. Dave posted some guesstimates 
>>for team revenues and costs.  My point was that the non-op he guessed at 
>>were very much below recorded experience.  The critics of my post seem to 
>>have the view that if one number is estimated, everything else is in doubt.  
>
>Well, no.  I, as a critic, feel that if one number that can range from
>thirty to seventy percent of a team's cost is *guessed* at, rather than
>"estimated", the *results* are in doubt.

For all sports franchises -- the four major sports -- the share of expenses 
that goes to player salaries is in the 50-60% range.  How many observations 
do I have to have before the guess becomes an estimate?  (You are going to 
have a hell of a time with expert witnesses, aren't you?)

>Furthermore, it's not just the cost figures.  John Palmer convincingly
>demonstrated that the Braves hide about $10-$20 million in television
>revenue by vertically integrating, and my guess is that the Cubs do
>pretty close to the same.

Yes, and I agreed with John before.  Since Turner had to pay $12 mil to MLB, 
he must have made more than that off the TBS contract.

>
>>You can believe what you choose;  as there is no other independent source 
>>for these figures, I put my faith in them.
>
>Hey, I'm an independent source.

No, you are a critic of another source.  To be a source, you have to produce 
your own estimates, n'est-ce pas?
Newsgroups: rec.sport.baseball