On at least three occasions over the past year, I predicted that the Cubs could afford Bryce Harper. Oops. Shortly after New Years, I wrote a mea culpa about this failed prediction, but I was not satisfied with my half-answers as to why I was so wrong.
Since then, I spent time going through my numbers and I identified my mistake so that my future estimates will be more accurate. I suspect this four-part series may only have initial appeal to a small subset of our readership, but it’s certainly interesting to me and my hope is that you’ll agree.
To understand my mistake, you need to first understand how I predicted the Cubs could afford Harper to begin with. I estimated how much the Cubs could spend in 2019 using two basic assumptions. One, the Cubs would ignore the luxury tax and spend as much on payroll as they could afford. Two, the Cubs could afford to spend 50% of their revenue on a combination of payroll and luxury tax payments. Thus, to estimate payroll I first needed to estimate revenues.
This is easier said than done because MLB teams are very private with their finances and the only publicly available team revenue estimates of any repute are provided by Forbes. Every April, Forbes values every franchise in major league baseball, conveniently including the prior season’s revenue for each franchise. For example, the 2019 edition estimated that the Cubs earned $456 million in revenue during the 2018 season.
I based my payroll predictions for this offseason (the 2019 season) on the 2017 revenue data that was available on the Forbes website prior to April 2019. Needless to say, I was not trying to estimate 2017 payroll. So to calculate for this season, I needed to account for extra revenue that developed in the meantime. For example, the Cubs opened three new premium clubs for 2019 (the Maker’s Mark Barrel room, the W Club, and the Catalina club). I estimated these clubs would bring in in $11 million in new revenue by comparing the publicly available season ticket prices of those clubs to existing box seat prices.
By combining the Forbes revenue estimates and my new revenue estimates, I predicted 2019 revenues. I then divided that total in half, subtracted out current payroll, estimated arbitration salaries, luxury tax payments, etc, and predicted the Cubs had $44 million to spend on free agents in 2019 and even more in the years beyond. More than enough for Harper.
So what went wrong?
My big mistake was believing that Forbes published post-revenue-sharing numbers. Revenue-sharing is a mechanism by which wealthier teams partially subsidize poorer teams. Teams contributing a “blended average” (designed to be about 33%) of their revenues into a giant common pot. Each team then receives an equal 1/30th share of this pot back. Because the Cubs have the fourth highest revenues in baseball, their share is far less than their contribution, resulting in a loss of money.
In April 2018, Forbes reported that the Cubs earned $457 million in revenue in 2017. I used that number as the baseline for all of my calculations. Yet this year, Forbes explicitly stated these numbers are pre-revenue-sharing estimates. So my numbers were off by the Cubs’ revenue sharing loss.
To calculate how big a mistake I make, I created a mock revenue-share spreadsheet. I took the 2018 revenue numbers off 30 teams (as reported by Forbes), put 33% of each into a pot, and then evenly divided up the total among all 30 teams. The Cubs contributed $149 million (based on $452 million in 2018 revenue) but only received back $109 million. Thus, they lost around $40 million (just under 10%) to revenue-sharing. This amounts to $20 million less in available payroll and luxury tax cash.
How did I make such a large mistake? Well, prior to this April, I had been unable to find any statements on the Forbes’ website as to whether their numbers were pre- or post- rev-share, so I guessed based on the numbers themselves. I noticed that Forbes reported Tampa earned $205 million in 2017. Yet the Rays only earned $28 million in gate receipts, $35 million from their TV deal, and $1 million from stadium naming rights; that leaves $141 million in revenue unaccounted for.
I felt the most reasonable explanation is that this figure included the estimated $45 million in revenue-sharing payments the Rays received. And in case you were interested, I used the Rays because I had more information on them than most clubs. Now that I know the truth, the Rays’ finances make even less sense, even as the Cubs’ make a little more.
In June, I predicted the Cubs had $44 million in available cash to spend this offseason past. If I combine my $20 million mistake with the unexpected $20 million the Cubs spent on Cole Hamels option, suddenly the numbers all add up.
But while the 2019 numbers now make more sense, Forbes also reports that the Cubs had huge operating income over the past several years even as they chose to limit payrolls to luxury tax levels. What happened to the Ricketts’ pledge to reinvest every available dollar back into the team? Surely the Cubs had enough money banked away to cover a Harper-sized contract.
I will discuss this issue in Part II of this series.