Royals’ ‘break-even’ claim is plausible, but front office can still do more

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02/15/2014 11:47 PM

05/16/2014 11:41 AM

The best team in 20 years of mostly sorry Royals baseball is playing in the Arizona sunshine now, all hopes and dreams and James Shields and Sal Perez. Mike Moustakas has cut some fat. Eric Hosmer swears by a new confidence, and Billy Butler swears by an old belief. Danny Duffy is healthy and Yordano Ventura is ready and, who knows, maybe Alex Gordon is going to dominate again. The reputations of lifelong baseball men will be shaped by how this goes. But before we get to the business of the 2014 Royals, it’s worth a few minutes here to talk about the, um, business of the 2014 Royals. This team is the product of seven full years of Dayton Moore’s Process and that doesn’t include 13 clueless years before that under an overmatched board of directors and David Glass’ ownership — so the consequences of failure will be shame and anger. A franchise that’s grown used to talking about three years from now has no more time to make good on the blockbuster trade that sent uber-prospect Wil Myers to Tampa Bay. This will be a Royals season like no other in a generation, at least. An 86-win team that filled two black holes in its lineup not only can win in 2014, it must win to make all of this worthwhile. Following the Royals means following payroll, spending habits and who’s under club control for how long. This is how baseball operates, particularly in the Royals’ tax bracket. So before the spring developments start, this is as good a time as any to look closely at how well the franchise’s best hope since the strike is being supported by an owner who generally has the approval rating of the flu among fans. The answer might surprise you.
The first thing to talk about here is the new national television contracts that kick in this season. You hear a lot about this $25 million figure. That’s the number being thrown around locally and nationally — we’ve used it here — as the per-team increase from last year to this year. But some phone calls around baseball show the number to be misleading. Most relevantly, there is no $25 million-per-team jump in revenues from 2013 to 2014. That figure (which doesn’t account for a share that MLB takes) comes from the average of the new contract compared to the average of the old contract. But the old deal increased every year, just like the new deal is scheduled to. The highest total of the old contract was last year, and the lowest total of the new contract is this year, so the raw increase from last year to this year is thought to be more like $5 million to $10 million, before MLB takes its share. At the moment, the Royals’ opening day payroll projects to be about $90 million, excluding benefits and bonuses, up from around $81 million on opening day last year. It is tempting to think that Glass is getting a $25 million infusion while only increasing payroll by about $9 million, which would mean an extra $16 million to buy an island or something, but it’s just not the way it works. “The $25 million is a made-up number,” says Kurt Badenhausen, senior editor for Forbes Sports. “The $25 million doesn’t mean anything if you’re comparing ’13 to ’14.” The Royals’ payroll is a franchise record, and by Forbes’ estimates, figures to be about half or more of the team’s revenues (including revenue sharing). Many teams around baseball informally use the 50 percent rule as a spending threshold. Depending on where a few remaining free agents land — yes, including Ervin Santana — the Royals should rank around 16th in payroll while playing in the sport’s third-smallest market, with revenues that rank in the bottom four. When Moore said last week that the franchise is past its break-even point on payroll, he was mocked with the math of the $25 million infusion. But according to Badenhausen and sources in baseball, Moore’s claim adds up. Plus, Badenhausen and others will point out that virtually no teams plan on losing money. In 2012, the most recent season for which Forbes has estimates, only six teams lost money. That includes the Rangers and Angels, who knew they would soon make the money back with bigger local TV deals, and the Marlins, who made a one-year gamble that blew up. “Ninety million is a very big number for a franchise like the Royals,” Badenhausen says. “They’re spending money. They’re out of their days of the $30 million payroll. If you told Royals fans four years ago they’d be closing in on a $100 million payroll, I think they would’ve taken it.” Now, if there was ever a time for Glass to lose a relatively small amount in the name of winning baseball games, this is it. Moore calling the $90 million payroll “a gamble” is a bit like a millionaire “gambling” on the penny slots. The Royals’ financial situation is strong, and any one-year loss would be more than offset by past profits and rising franchise value. Glass may very well lose money this year, but an owner more focused on taking advantage of this opportunity and less on a potential one-year loss would be willing to extend further beyond break-even. Then again, an owner solely focused on profit would keep the payroll below that break-even point. Glass is operating, in other words, like a C student.
In terms of payroll and how this is viewed around the fan base, the Royals have given themselves three significant disadvantages. The first is that Glass is either apathetic or just awful at communicating with fans. He carries residual wounds from justified criticisms he took in the miserly, scouts-without-cell-phones days, and hasn’t bothered to push the message of representative spending for a small-money team since Moore’s hiring in 2006. The second is that the Royals have an embarrassingly bad local TV deal, even adjusting for market size. The Royals get about $20 million per year, one of the smallest TV contracts in baseball. By comparison, the Reds, who play in baseball’s smallest market, get about $30 million per year. Plus, in an age where rights fees are stronger than Google stock, the Royals are locked into an antiquated, pre-DVR deal through the 2019 season. Between now and then, whenever any other team signs a new contract, the Royals are pushed even further behind. The third self-imposed disadvantage is that the Royals have been the worst team in baseball over the last two decades. The owner doesn’t have to talk if he doesn’t want to, and they can’t change their TV contract for six more seasons, but they sure can be better at putting together good baseball teams. Which brings us to the 2014 Royals, the team that will ultimately determine whether the last seven years have been productive or more like the Febreze you sprayed on your smelly couch in college.
Without Glass going all Mike Ilitch and bankrolling large operating losses in the name of ending the longest playoff drought in the four major North American pro sports, the Royals have to make it work in the margins. Perez’s contract is perhaps the most club-friendly in baseball, the Royals’ greatest asset, but it’s also an example of how they have to do business to compete with deeper pockets. To that end, there are four spots in particular where the Royals aren’t getting enough value on the dollar: Jeremy Guthrie ($8 million, after restructuring), Jason Vargas ($7 million), Luke Hochevar ($5.2 million) and Wade Davis ($4.8 million) will earn more than a quarter of the team payroll. It’s worth keeping in mind that most projections have each player performing well enough that their salaries will be less than their value on baseball’s open market, but that’s still a lot of money for the Royals to spend on two league-average starting pitchers in their 30s and two middle relievers. Their presence is also a reminder of one of the Royals’ greatest failures under Moore. For all the progress these last seven years in building from an industry punchline to one of the game’s best farm systems, the glaring hole remains the lack of a successful and homegrown starting pitcher. This is part of why Danny Duffy, Yordano Ventura and Kyle Zimmer are so important in the big picture. The Royals had a good offseason, particularly in filling holes in right field (trade for Nori Aoki) and second base (free agent Omar Infante) as well as insurance in case Moustakas can’t hit (trade for Danny Valencia). But if they had been able to develop a starting pitcher or two with suppressed, club-control salaries the way they’ve done with Perez, Hosmer and Greg Holland, the front office would have more money to address other needs — or address the same needs with more money. In the court of public opinion, the success or failure of the last seven years of future-building will be determined this season. Time and effort and reputations are on the line. Their owner could have done more, but is no longer the problem. The front office can claim success in some spots, but only hope in others.

Royals’ five-year financial snapshot

Year Player expenses* Revenue Operating income**
2009 $83 million $143 million $9 million
2010 $94 million $155 million $8.9 million
2011 $90 million $160 million $10.3 million
2012 $69 million $161 million $28.7 million
2013 $83 million $169 million $16.3 million

Source: Forbes

*calculated after the season; includes benefits and bonuses; not opening day payroll.

**not a bottom line profit; reflects earnings before interest, taxes, depreciation and amortization.

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