Dolan's $ Claims Suspect?

[josemesaisdead]

Some good analysis of the Indians alleged financial situation here:

http://www.josemesaisdead.com/post/1777 ... ory-part-3

Cleveland media is missing this story.

Pinocchio Story: Part 3

I was a little concerned about how to get back into this series because I never intended it to become a trifecta. (If you’re behind, here are links to Part 1 and Part 2.) Things got broken up in ways that I didn’t necessarily anticipate, which threw me off a little.

However, last night I read a recent PD column by favorite Mesa target Terry Pluto, and it resolved all my concerns. Pluto unhesitatingly chugs the Kool-Aid served by Paul Dolan on the Indians’ financial difficulties in a follow-up interview to his infamous August 6th presser. Pluto’s blind acceptance of Dolan’s talking points demands what they refer to in the military as a “swift and forceful response” - and it leads perfectly back into the Pinocchio Story throughline:

Chapter 2: The Big Swill (“Ooooh Yeah!”)

Here’s a recap of the points from Pluto’s pow-wow that are relevant to our discussion:

1) When Dolan stated that the Indians’ would lose $16M this season, he meant that $16M was the amount they’d already lost “in late July.” The total loss they were heading toward for the entire 2009 season was closer to $20M. However, because of the much-publicized trades they are now softening those projections to a loss of about $12M.

2) Had they not made the trades, the Indians’ calculations showed that the team would be on track to lose about $30M during the course of the 2010 season.

3) Sports Time Ohio - the Tribe-owned cable network that holds and sells the rights to telecast the Indians’ games - is in Pluto’s words “‘profitable,’ according to Dolan.”

4) The Dolans have “no plans” to sell the team.

OK, let’s address the above point by point:

1) Paul Dolan made the statement with the infamous $16M loss figure on August 6th. He retracted it on August 29th. Here’s the problem: Garko was traded July 28th. Lee was traded July 30th. Martinez was traded August 1st. So by the time Dolan made the statement about the Indians’ 2009 losses on August 6th, his number-crunchers should already have known that they were going to save $4M by making those trades. But instead, he went into the press conference touting the sweet $16M loss.

I’m not accepting the counter-argument that the analysts didn’t have enough time to run those numbers in the time between the trade deadline and Dolan’s press conference. It’s not a complex formula. Take your already-existing projections for profit / loss, deduct the total pro-rated salary saved by trading away those three players, add in the total pro-rated salaries from adding Masterson and the 7 prospects. Done. We’re not exactly bending spoons in half with our minds here.

I don’t want to belabor this point because it’s not hugely impactful on its own. However, I think it’s indicative of a general pattern: owners (especially the Indians’) spewing out garbage facts that even a rudimentary analysis can bring into question. If they’re lying about things that are this simple to dispute, how can anyone realistically be expected to believe the bigger picture?

2) I’m sure that every team does projections of next year’s revenue numbers. As Dolan demonstrated, those projections are subject to change based on a variety of factors. The whole thing is speculative. I would just make two points about this particular case.

First, when you’re interested in making your financial situation look dismal, it’s particularly convenient to make projections a year ahead of time while a) we’re still in the grip of the worst economic downturn since the 1930s, and b) the team you own is seemingly stuck at 14 games under .500.

Second, it’s worth noting that Dolan didn’t put forth a revised number to show the softened losses thanks to unloading all those contracts.

To do a quick calc on our own, Cliff was due $8M if the team picked up his 2010 option. Victor was due $7M. Garko would’ve been up for arbitration in the off-season and would’ve commanded north of $2M. We’ll say that’s a total of $17.5M in outgoing salary.

Meanwhile, of all the players they got back in those three trades, only one is actually in the majors, and that one guy (Masterson) is making $415K this year. Though I’m having some issues finding his salary for next year, I can’t imagine it’s going to be a drastic raise.

If we assume that the other 7 players acquired by the Tribe are making something in the same neighborhood as Masterson - let’s assume for the sake of argument they’ll all make 500K next year, which is generous on my end - that brings the total for all 8 incoming players to $4M.

To me, $17.5M - $4M = $13.5M in savings. So if Dolan is to be believed, the Indians should now be coming in for the smooth landing of a $16.5M loss for the 2010 season. But he didn’t want to put that on the record, likely so that the fan base could be scared by the $30M number and its potential consequences for the team’s continued stay in Cleveland. It’s an implicit way of saying “Hey, get to the ballpark, or else.”

3) In the same vein, I love that Dolan was content to just say that Sports Time Ohio was “profitable,” without actually telling Pluto how profitable. Truly startling that he would keep the profit numbers hidden but trumpet the supposed losses.

Now, I’m not saying that STO is the YES network, but they’re clearly making bank off of it. Though until someone does some serious muckraking, we won’t know how much bank.

This leads us into…

4) The Dolans have no plans to sell the team.

Let me repeat that: despite the fact that their current “projections” show that the Indians are a financial sinkhole slated to bleed the family fortune for $28.5M over the course of 2 years, the Dolans are so philanthropic and dedicated to producing a winner for the city of Cleveland that they will not even explore the possibility of unloading this investment.

Obviously, this is the point I’ve been harping on since the beginning of this series – and really, even all the way back in my “Mythbusters” posts last month. If these teams are so gut-shot financially, why are their owners so willing to dig in their heels and try to weather the storm when their own math says that the smart play is to get the F out of Dodge?

The answer is, of course, that the numbers are a lie. It’s just hard to prove because the few people who seem to be paying attention don’t have access to the real figures…with a few notable exceptions.

One of these is Forbes Magazine. Every year, Forbes runs an independent accounting of the 30 MLB franchises. Shockingly, they come back with vastly different financial pictures of each team than the League itself presents. Why? Because in theory, Forbes takes into account all of the accounting tricks I detailed in parts 1 and 2 of this series.

If we go back to the 2001 season -the first for which Forbes ran this independent analysis - here’s the story: Forbes found that as a whole, MLB had an operating profit of $75M. Meanwhile, Bud Selig had just testified before Congress that MLB had a total operating loss of over $200M. Not only that, but Selig also swore that in the previous five seasons, only two teams made a profit.

In other words, Bud Selig testified that MLB was on life support. The only problem was that there was a $275M difference between his figures and an independent analyst’s. Not surprisingly, Selig also testified that Forbes’ numbers were “pure fiction.”

But that was way back in 2001-2. What about this past season? The Biz of Baseball website did a league-wide financial analysis of 2008 based on that year’s Forbes findings. As a whole, BoB found that the league increased in value - but only because the gains by the Mets and Yankees were so inordinately large that they were able to pull the entire league of the red.

On the other side of the coin, 10 teams decreased in value between 2007 and 2008. One of those teams was the Indians.

They decreased in value to $399M.

If you recall, the Dolans bought the franchise for $320M.

So if Forbes’ analysis is correct, the Dolans have made $79M since acquiring the team in 2000. That’s roughly a 25% ROI over the course of 8 years. Not bad.

Before we go on, I should emphasize that there are two separate categories that we’re considering here: operating income and total value. Operating income is, again, single-season profit before taxes, interest, and depreciation. Total value includes earnings plus the value of the team’s stadium, so it acts as a more complete picture of a team’s financial well-being.

I bring this up to highlight that you could theoretically have an operating loss for several consecutive seasons, but if the total franchise value after those losses is still higher than what you paid for the team, you’re still in the black on the investment.

That said, let’s look at what Forbes calculated as the Tribes’ yearly operating income, from 2002 to 2008:

2008 OI: $29.2M

2007 OI: $24.9M

2006 OI: $34.6M

2005 OI: $27.2M

2004 OI: $10.4M

2003 OI: -$1M

2002 OI: -$3.6M

NET 2002-2008: $121.7M

Obviously, there are 2 years of Dolan ownership not accounted for in this analysis. And as discussed above, operating income is trumped by total franchise value.

To me, those numbers are pretty eye-opening - especially if you consider the fact that Forbes supposedly did not take into account the “related businesses” aspect of the 30 franchises. In other words, profits of the team-owned cable networks are not reflected in their analysis…and despite that, they’re still showing massive yearly windfalls for the Indians.

To try to bring this to a close, here’s what I can’t do: I can’t provide hard evidence that says definitively “Paul Dolan’s projections differ from economic reality by $___M.”

However…operating income is what Paul Dolan is referring to when he states that the Indians are going to lose $12M this season. So if we accept the Forbes analysis despite its flaws, Dolan’s projections require us to believe that this year has been so utterly catastrophic that the team’s annual operating loss will be 3.333x greater than the biggest operating loss on the books since 2002. Or another way to look at it, a -$41.2M single-season crater ($29.2M in 2008 to -$12M in 2009) that would’ve nose-dived to a -$49.2M single-season difference without shipping off Victor, Cliff, and Ryan.

This is not only unlikely, it borders on the financially impossible. Short of adopting a string of promotions like ”Hepatitis C Day” and “Feral Dog Give-Away Night,” there are few circumstances that could swing the pendulum so far from black to red in one year.

So we end where we started: the Dolans’ numbers shouldn’t be believed. And that’s a good thing to keep in mind, since they’re not going anywhere anytime soon.