2K21 - Houston Astros

[Kevin Seitzer]

http://blog.chron.com/sportsupdate/2013/09/jim-crane-astros-will-fight-bankruptcy-case-against-comcastsportsnet-houston/

Kibbe said the Astros had to return 46 percent of their monthly rights fee payments for May and June to keep the network financially solvent and have not received any payments for July, August or September.

Crane said the team was scheduled to receive “in the $50 million range” for rights fees this year. Kibbe, however, said the team has received “in the teens” from CSN Houston and has been paid less money for TV rights this year than any team in Major League Baseball.

[Kevin Seitzer]

As I noted on the prior page, I know who he is and where he works. And in which part of the organization (which is not the finance group).

I have to be careful about what details I share here because a lot of what I know is not public knowledge. Baseball clubs are not huge enterprises where the left hand doesn't know what the right hand is doing. Baseball ops has to know what the budget is and the condition of the revenue streams when we are making decisions about player transactions.

The idea that Alexander can make a $60+ million error on the RSN revenue in his calculations, but his central premise can be still basically correct, just doesn't hold water. No, I don't agree with every single sentence that Maury Brown wrote, either, but at least Brown understood the sloppiness of Alexander's approach, which was obvious to anyone who was following the CSN Houston situation.

I understand the difference between operating income and cash flow, and that in fact was one of my original issues with Alexander's article. He chose to focus on operating income to an extent that made no sense. There are reasons/situations in which that is the proper approach, but this is not one of them. TV rights are the largest revenue driver for MLB franchises, and to handle them as Forbes does is a poor approach for understanding the financial health and performance of MLB teams. To be technically correct and practically very wrong would be no victory for Alexander (though he wasn't in the right ballpark, technically speaking, either).

[RSF]

I have to be careful about what details I share here because a lot of what I know is not public knowledge. Baseball clubs are not huge enterprises where the left hand doesn't know what the right hand is doing. Baseball ops has to know what the budget is and the condition of the revenue streams when we are making decisions about player transactions.

The idea that Alexander can make a $60+ million error on the RSN revenue in his calculations, but his central premise can be still basically correct, just doesn't hold water. No, I don't agree with every single sentence that Maury Brown wrote, either, but at least Brown understood the sloppiness of Alexander's approach, which was obvious to anyone who was following the CSN Houston situation.

I understand the difference between operating income and cash flow, and that in fact was one of my original issues with Alexander's article. He chose to focus on operating income to an extent that made no sense. There are reasons/situations in which that is the proper approach, but this is not one of them. TV rights are the largest revenue driver for MLB franchises, and to handle them as Forbes does is a poor approach for understanding the financial health and performance of MLB teams. To be technically correct and practically very wrong would be no victory for Alexander (though he wasn't in the right ballpark, technically speaking, either).

If you understand what Alexander was trying to do---value the baseball enterprise on its own--then I do not understand why you continue to cite things that relate to capitalization problems with the RSN. That is, in fact, what you've cited again in both the article and with your $60 mil number. Even the Astros owner acknowledges that the RSN rights number is 'in the $50 mil range' and both Alexander and his editor (and people in this thread) have explained why people might use $80 mil instead of that $50 mil number given the analysis.

Forbes has focused on operating income for a long time, and it is consistent with how MLB and MLBPA have agreed to assess revenue sharing issues, so while it is far from a perfect lens it is presumptively reasonable for what Alexander sought to do. As was noted a couple times previously, if those RSN revenues are uncollectable, then MLB has to determine what the fair market value of the rights are. That is not, however, the same as the team bailing out a co-owned related entity---which is what you seem to think is the way to look at it and gets to (I'm guessing) your number 'in the teens'. There is little chance that MLB would value those rights 'in the teens' since even small market teams get $30 mil or more in RSN revenue....and Houston is not a small market, even if not a huge baseball town.

I understand the operating reality you live in and why Alexander's article is frustrating---it describes a cash flow situation that does not exist for you. But the attacks on his approach need to recognize that the reality you are living is impacted by a whole set of things he explicitly says are outside of the metric he, and MLB/MLBPA, have chosen to include in any assessment of team revenues. When a team owns a big chunk of an RSN there are significant implications for revenue sharing, and that is why MLB looks at this as it does. Ozanian explains this in his comments and I really encourage you to read them and think about the implications.

[james33]

I think I'll make an argument completely the opposite of RSF's: the Astros real problem may be that they aren't making enough money this year.

'Crane said he is aware of fan discontent but that the team is sticking with its plan and believes the foundation is in place for improvement. He said signing free agents for the 2013 season would been a mistake because “I don’t think we could have spent enough to make a difference, based on where we were at the time. It would have been a big blow to sign three or four players for, call it, $40 million.”'

I find what the Astros are doing to be phenomenally interesting gamble. Fantasy baseball-wise, it completely makes sense to be miserable for awhile so you can rebuild and get top picks- why waste $40 million, as Lane explains. Especially if he is willing to spend that $40 million in years that will get the Astros from 85 wins to 95 wins.

But the average fan doesn't want the team to have completely given up on the year, and that hurts attendance and TV ratings, and therefore revenue. So if their revenue tanks to small market levels, are the Astros able to invest enough in the ballclub for future years? Even worse, do you become the Marlins: is your cost cutting perceived by enough fans who buy what Forbes and others are selling - that the Astros just care about money and not winning?

[mjl]

RSF, is it accurate that what you're trying to argue is that the Astros have a paper income of $60M from RSN, and the question of whether they're ultimately able to collect on that or only on some small subset of that isn't relevant to Alexander's analysis? That seems like the sticking point between you and KS, at least to this vaguely-interested observer.

[RSF]

That's a key distinction, but more important (I think) is a disagreement is over what question we're trying to answer.

If the question is the original one posed a couple pages ago---"Is Forbes/Alexander's assessment a reasonable one given its own parameters" than we simply haven't seen any facts that suggest otherwise; the only issue is whether everyone recognizes the parameters of the article and understands the differences between those and a more common 'facts on the ground' cashflow assessment.

It is pretty much undisputed that under the revenue sharing methodology and under the financial approach Forbes took that if the Astros are owed $60 mil (and that is a reasonable description of market value) from the RSN that it is not anyone else's problem (meaning, other teams or readers) if they can't actually collect that. In other words, if the RSN is run poorly and you don't get paid, that is your problem...and if it isn't paying you because you are a part owner of the RSN, that's also your problem---not that of the baseball team.

If the question is "should we care about how MLB/MLBPA and Forbes calculates team values?" I think that's a little different. Netted out, KS is basically arguing that the kind of economics and accounting used for revenue sharing purposes should not be used to assess an individual team's moves; that's more or less what the Maury Brown's Forbes article also argued. I think this one is a closer call---there's a reason rev sharing is done this way and I'm not sure that's being fully appreciated, but I also agree there's a difference between that and what any given team experiences day-to-day.

If someone is using the second question to really say "Alexander's insinuations about the team being cheap are not well-conceived since he's using real-world decisions about players and a more hypothetical assessment of income" I don't wholly disagree with that, but as I noted a couple pages back I think that is more a statement that one wants to ask a different question than Alexander did than it is that he was unusually sloppy or missed things completely.

[RSF]

I think I'll make an argument completely the opposite of RSF's: the Astros real problem may be that they aren't making enough money this year.

'Crane said he is aware of fan discontent but that the team is sticking with its plan and believes the foundation is in place for improvement. He said signing free agents for the 2013 season would been a mistake because “I don’t think we could have spent enough to make a difference, based on where we were at the time. It would have been a big blow to sign three or four players for, call it, $40 million.”'

I find what the Astros are doing to be phenomenally interesting gamble. Fantasy baseball-wise, it completely makes sense to be miserable for awhile so you can rebuild and get top picks- why waste $40 million, as Lane explains. Especially if he is willing to spend that $40 million in years that will get the Astros from 85 wins to 95 wins.

But the average fan doesn't want the team to have completely given up on the year, and that hurts attendance and TV ratings, and therefore revenue. So if their revenue tanks to small market levels, are the Astros able to invest enough in the ballclub for future years? Even worse, do you become the Marlins: is your cost cutting perceived by enough fans who buy what Forbes and others are selling - that the Astros just care about money and not winning?

That's not inconsistent with my argument---I have no trouble believing that they are not making (in terms of cash flow) anywhere near the revenue Forbes projects. However, as noted above, there's a reason Forbes and MLB/MLBPA calculate revenue the way they do, too.

Crane tacitly acknowledges they were putting away some money, and that is why (from a PR perspective) they came out so strongly against the Forbes article. It's bad timing for them---as we've seen, one pretty much has to have forensic accounting or economics experience to understand what Alexander did and why, and the average fan just isn't going to take the time to really dig into such things. They are going to say "this team is making a ton of money and not investing it in the team" which is a problem.

If I were as Astros fan (or team employee) I'd be very supportive of this approach. The marginal revenue from a couple extra wins right now is not much, and the real payoff economically is building a long-term winner. That's true of the baseball team, and the RSN. On the field, I think the Astros did a lot to make progress this year. The cupboard was obviously very, very bare and so the w/l record looks bad, but I see a lot of progress both at major and minor league level. It's hard to sell the fans on that message, and doubly so when Forbes publishes an article suggesting you aren't just pocketing 'some money' but instead 'record money.' The PR response is understandable, and if I worked for the team I'd do the same. But sitting here on the outside, I also can see clearly that 1) what Forbes did is more or less correct and 2) what the team did investment-wise is also correct for long-term success.

[Kevin Seitzer]

That's a key distinction, but more important (I think) is a disagreement is over what question we're trying to answer.

If the question is the original one posed a couple pages ago---"Is Forbes/Alexander's assessment a reasonable one given its own parameters" the facts are pretty clear that it is; the only issue is whether everyone recognizes those parameters and understands the differences between those and a more common 'facts on the ground' cashflow assessment. If there's any material facts suggesting otherwise, we're still waiting for them, so the criticisms made of him look (on the whole) pretty weak.

It is pretty much undisputed that under the revenue sharing methodology and under the financial approach Forbes took that if the Astros are owed $60 mil (and that is a reasonable description of market value) from the RSN that it is not anyone else's problem (meaning, other teams or readers) if they can't actually collect that. In other words, if the RSN is run poorly and you don't get paid, that is your problem...and if it isn't paying you because you are a part owner of the RSN, that's also your problem---not that of the baseball team.

If the question is "should we care about how MLB/MLBPA and Forbes calculates team values?" I think that's a little different. Netted out, KS is basically arguing that the kind of economics and accounting used for revenue sharing purposes should not be used to assess an individual team's moves; that's more or less what the Maury Brown's Forbes article also argued. I think this one is a closer call---there's a reason rev sharing is done this way and I'm not sure that's being fully appreciated, but I also agree there's a difference between that and what any given team experiences day-to-day.

If someone is using the second question to really say "Alexander's insinuations about the team being cheap are not well-conceived since he's using real-world decisions about players and a more hypothetical assessment of income" I don't wholly disagree with that, but as I noted a couple pages back I think that is more a statement that one wants to ask a different question than Alexander did than it is that he was unusually sloppy or missed things completely.

I'm arguing both things.

1. That Alexander's research was and is sloppy and incorrect, even given the framework within which Forbes calculates values.

2. That using that hypothetical value that does not relate to cash flow to argue about what a team should do with its cash flow is deceptive.

Re #1, Alexander claimed that the team would receive $80 million in rights fees in 2013. That is clearly incorrect. Mr. Crane has now said that the team was "scheduled to receive" $50 million in rights fees, and actually only received "in the teens." Whether Alexander's error was $30 million or $60+ million, either one is a HUGE error. None of that is related to the cash calls, which is all the Alexander acknowledged might change his number, if one used a framework other than the Forbes framework. Even if the actual number wasn't in the public domain, some basic research would have uncovered enough facts for Alexander to know that the real number for 2013 was nowhere close to $80 million.

[RSF]

I'm arguing both things.

1. That Alexander's research was and is sloppy and incorrect, even given the framework within which Forbes calculates values.

2. That using that hypothetical value that does not relate to cash flow to argue about what a team should do with its cash flow is deceptive.

Re #1, Alexander claimed that the team would receive $80 million in rights fees in 2013. That is clearly incorrect. Mr. Crane has now said that the team was "scheduled to receive" $50 million in rights fees, and actually only received "in the teens." Whether Alexander's error was $30 million or $60+ million, either one is a HUGE error. None of that is related to the cash calls, which is all the Alexander acknowledged might change his number, if one used a framework other than the Forbes framework. Even if the actual number wasn't in the public domain, some basic research would have uncovered enough facts for Alexander to know that the real number for 2013 was nowhere close to $80 million.

Yeah, as noted before, you really just do not understand what EBITDA is, or why it is different than cash flow. To blame the author for that is pretty weak; your criticisms above all deal with that fundamental misunderstanding of yours, save the one in the next paragraph. This has all been covered already and you clearly don't care to understand it, which is your prerogative. You have a developing org to work on, and that's probably your focus these days! If you want to say "our operating reality is totally different than this article" that's fine--I am confident that it is. But you are going well beyond, and you are just wrong so far as anyone has been able to demonstrate thus far.

As explained before in the thread, and in the comments to the linked article, there's an open question in the finance community about whether one would value the rights on an average annual basis (the $80 mil) or a true first-year-payment basis (the $50-ish mil). To suggest what he did is ridiculous is just wrong; more obviously, since so far as I have seen Crane did not disclose the first year payment at the time Alexander wrote the initial article, it's silly to suggest he was sloppy not to have cited it.

The article you cited most recently said that the Astros returned rights fees to keep the network solvent. That is part of the basis for the 'in the teens' reference you made, and I characterized that as a cash call. I stand by that given the team's ownership stake in the network. So, unless the article you cited is wrong, the cash call aspect does impact the numbers we're discussing.

I am confident this is a hot topic for the team and clearly, the RSN has cratered and caused major pain for the team. Is there any reason to care about EBITDA analysis of a team? Definitely a case that we should not, and if that's all you want to say I wouldn't argue that one too hard. I also don't love Alexander's article in some ways...but to just dump all over it and call him sloppy without understanding what he did and why is, in my mind, very weak...that is how Murray Chass operates (as to sabermetrics) and we know you are a lot better than that.

[Kevin Seitzer]

I understand a lot more about corporate finance than you are giving me credit for. We clearly have different understandings of the facts in this case. I'm going to let it rest at this point, as I don't think we are getting anywhere.

[Don Quixote]

I understand a lot more about corporate finance than you are giving me credit for. We clearly have different understandings of the facts in this case. I'm going to let it rest at this point, as I don't think we are getting anywhere.

That's probably for the best. You're both arguing persuasively, but from different viewpoints.

At some point, I'm going to sit back, read the various articles and arguments, then perhaps give the accountant's viewpoint. I'm skeptical of what most "business magazines" and "business writers" put in print/online, as most of it is agenda-driven, working from conclusion to evidence, but I'll try to be objective.

[TranaGreg]

us plebes would appreciate that DQ ... there's a reason I dropped first year intro-to-accounting ...

[RSF]

I understand a lot more about corporate finance than you are giving me credit for. We clearly have different understandings of the facts in this case. I'm going to let it rest at this point, as I don't think we are getting anywhere.

You certainly could; I can only assess what I read.

There is no question that you could have knowledge of relevant nonpublic facts; if so, I understand you cannot share those and we'll just have to see what happens. I do not think it is likely that the underlying facts justify persistently mixing EBITDA and cash-flow lenses, though. I also recognize that there are a set of approved PR messages in some situations and people can be constrained by those. As noted before it is easy to imagine that someone who has to live any part of the cash-flow reality would find the EBITDA assessment pointless and disconnected. That is, for DQ, what I suspect you'll find if you dig in more deeply, too.

[RSF]

Astros now are suing McLane and NBC/Comcast alleging fraudulent misrepresentation of the cable subscription numbers.

This is more evidence that the problem here is with the RSN; implicit in the article is there being vastly fewer subscribers (and thus far less economic value) in the cable network than Crane imagined there would be. It also adds to the conjecture previously that the Forbes approach is methodologically correct and that the frustration the Astros feel with it is that they aren't actually getting the revenue they are supposed to out of the network.

http://blog.chron.com/sportsupdate/2013/11/astros-owner-sues-drayton-mclane-comcast-and-nbc-claiming-fraud/

As noted several times previously as a likely possibility, Forbes used a very specific lens and the more we see, the more it looks like the big disconnect here is not between Forbes and the data, but rather between the lens Forbes used and other lenses they never have used in sports analysis (but that some people prefer).

Other articles have noted that the carry fee is $3.40/per subscriber per month, which is awfully high for that team in that market. More evidence the core challenge here is the management and due diligence on the RSN. And more evidence that the real income the team is getting is likely to be way below what is projected.

[Don Quixote]

us plebes would appreciate that DQ ... there's a reason I dropped first year intro-to-accounting ...

Son, there are many days when I wish the same thing. Lots of them coming up from Feb. 1st on.

Some day, I hope to have hobbies that don't peak at the same time as my work.