A Dissenting Perspective on BAMTech Revenue

Disney purchased majority stake in BAMTech back in 2017, but did teams ever use the funds on payroll? Photo from the Associated Press

The MLB offseason is starting to heat up and it feels much earlier than last year's almost glacial pace. This is especially true for the Pirates, who are among the league leaders with three acquisitions from the free agent market, albeit not expensive ones by any means. This of course will anger some fans who will never be happy unless the team spends 'enough' on these acquisitions. It's in this spirit that I still hear from several corners of the Pirates' interweb that the team needs to use the BAMTech revenue to finally make that big free agent acquisition that has forever eluded them.

I personally feel like this notion has become so clich that most fans probably have no idea what it actually means, just believing there's extra money to spend because they heard others say there is. They aren't wrong, but I am speaking to how the payment came about and the practical issues surrounding it. Kevin and the site have done a great job of covering this issue in the past, so I won't go much into the details surrounding the payment; rather, I would like to examine whether it appears that money has been used'it certainly doesn't seem like it'but more importantly, look into possible reasons as to why.

Please don't take this as me stating that I don't think this money should have been used to acquire players'I don't really care about that'rather, it's an attempt to explain why it probably wasn't. Back when the news was actually prevalent, I was skeptical it would ever be used as such, and time has only made that estimation clearer.

Upon further review, multiple explanations exist for teams not using this revenue on players'player involvement in the sale, the nature of a one-time payment, and budgeting issues'and it seems more than likely that the business side of baseball got in the way of how fans would like their teams to spend.

Please note, these are just my opinions based on my experience in business. I'm not saying this is or isn't why the Pirates may or may not have spent the BAMTech money; rather, it's a different point of view, not just 'Nutting's Wallet' talk. Also, different businesses perform their accounting differently, so my assertions could be off based on my singular experiences.

What follows are the reasons I believe for what may or may not have happened with the BAMTech funds from most to least likely.

Lack of Player Involvement

To make one thing very clear'I'm not sure I agree with this argument on its face, but I do find it most likely, depending on the initial investment structure.

Most reports claim that every team spent $4 million'or $1 million over four years'as an initial investment in MLB Advanced Media. Also, most reports regarding the sale claim that teams are receiving the revenue from the sale, which would make sense in turn; however, many are insinuating that owners are benefiting from the windfall, not teams. So, my question is, which is it?

If owners truly made this investment independent of their clubs and out of their own pockets, I would say the team'and players in turn'have no right to it. It would be no different than any other personal investment by the owner unrelated to the team. However, if it was a payment that passed through the business, then any revenue resulting from the sale of the investment needs to flow back to the initial investor, in this case the team. Then, in turn, players would see a portion of that revenue, as any revenue stream for the team should rightfully trickle down to them. Is this truly the case, though?

If you enjoy reading dry, academic research on albeit interesting topics, this paper by John Charles Bradbury is for you. I read it because it covered whether the players' share of revenue was going down; however, I didn't expect to find this interesting nugget:

The MLBAM venture increased league revenue by expanding the distribution of its same labor product more widely to garner uncaptured revenue. In addition, the revenue is shared equally across teams; therefore, teams cannot increase revenue through this channel by improving the individual team product. Though the returns to winning remain positive and increasing, the marginal contribution of labor to MLBAM revenues is small and thus a decline in labor's share of income is to be expected. The gains do not result from an increased marginal revenue product of players, and therefore this revenue should not be expected to flow to players in wages.

He echoes the same sentiment in the conclusion, this time more clearly:

Furthermore, the success of MLB's online media venture MLBAM provided a new revenue stream that was equally shared across teams and did not increase player's marginal revenue products. Thus, player wages should not be expected to grow with this revenue stream and thus the decline in players' share of income is expected.

Okay, this is confusing, so what does it mean? Bradbury references Marginal Revenue Product, which in this case is essentially what a player's production is worth on the market. I believe the argument goes that since this money was not the direct result of player production going up, that economically speaking, they can't expect their share of revenue to go up based on this revenue stream. Basically, the BAMTech sale was happening whether the players were good or bad, so they shouldn't expect a slice of the pie.

Bradbury explains this theory using studies, graphs, and what I assume to be sound economic theory; however, on a certain level it's kind of hard to buy in to. Sure, the players had nothing to do with this sale, but without their games, does the streaming service ever take off? On the other hand, Disney isn't buying this service to strictly show Major League Baseball games. They used it to launch an updated version of the ESPN app, stream a wide variety of sports content, and will be using it to power their upcoming streaming service'Disney+'which is Disney's bid to compete with the likes of Netflix and Hulu.

Yes, on an economic level, this reasoning makes sense, but I'd imagine it's one the players wouldn't be too fond of hearing.

Merely a One-Time Payment

Forget the 2016 payment which gave Disney a 33% stake in ownership of BAMTech'this payment came with much less fanfare, as apparently approximately $33 million per team isn't enough to make waves'as we are only talking the 2017 purchase which made Disney the majority owner.

This one-time anomaly makes it difficult for teams to sink long-term funds into a player for which it is going to take a long-term commitment to sign. Sure, it would have made sense to get into the market of pillow contracts for 2018'Mike Moustakas or Carlos Gonzalez, for example'but not as much for the more expensive players. Consider it like this'does it make sense to put a down payment on a car with a bonus that you won't be able to afford the monthly payment on? Obviously, the answer is no, and if the Pirates weren't going to have the money in 2019 and beyond to cover the rest of the contract, then a deal specifically using these funds wouldn't have made sense either.

While we've seen no indications of such purchases, a large capital expenditure'such as buildings or equipment'would have made more sense, given the one-time nature of such expense. Debt paydown would also be a reasonable outcome for the funds.

Yearly Budgets

This is always a sore spot with fans, who seem to think the Pirates are the only team who sets a budget'the 'Self-Imposed Budget' if you will'but this simply isn't the case. Businesses set budgets, and an understanding of how they work sheds some light on why the BAMTech payment may not have been used.

First, this agreement was made public in August 2017, and the timing is important. According to the leaked financials from 2008, the team runs a Fiscal Year from November to October, meaning that that 12-month span is a year'at least financially speaking'for the Pirates. This lines up with the dates predicated in the CBA as far as calculating yearly payroll, which is December 2 to December 1, as well as any particular baseball season, which runs anywhere between March and September.

Again, this is all important from a budgeting standpoint. Personally, I started working on my company's January to December 2019 budget this past September. Following a similar timeline, the Pirates may have started determining their Fiscal 2018 budget (November 2017 to October 2018) sometime in July 2017, if not earlier. For something as temperamental as a $1.58 billion transaction, I can almost guarantee that the accounting department would be advised not to budget for any revenue from the sale, even if they had an idea an agreement was being worked on. Yes, the item still could have been added into the budget because the news came in August, but it's also possible that the club still wouldn't have included it in any kind of budget because 1.) it's an extraordinary classification and 2.) they didn't have a clear enough idea how much it would be until they actually received it.

Another budgeting issue surrounding this payment is year-to-year budgeting and spending. As much as I think Jim Bowden suggests horrible trade ideas in his post-GM analysis days, this is the closest idea we have on when the payment was indeed made:

According to multiple sources all 30 MLB teams are expected to receive a payment of approximately $50 million dollars in the first quarter of 2018 for the previous sale of BAM. #MLB

— Jim Bowden (@JimBowdenGM) December 15, 2017

If the payment was truly made in the first quarter of 2018, that would be somewhere around January to March 2018, which is somewhere in the Pirates second quarter of Fiscal 2018. This means it is considered revenue in Fiscal 2018, and while many fans don't like to hear this, revenue and expenses are basically contained to the fiscal year in which they happen, meaning that the team isn't going to look at revenue gained in 2018 and think 'We can spend this in 2019 and beyond.' More than likely, that revenue hit the income statement in first quarter 2018, showed as a large over-budget item that was explained in the financials and any gains or losses'more than likely gains'attributed to those funds in Fiscal 2018 were rolled into Retained Earnings forever to be just another amount on the Balance Sheet.

For 2019, revenue and expenses will be based on what the club plans on making and spending from November 2018 to October 2019, and this obviously doesn't include a payment that happened early in 2018. Also, businesses don't budget to lose money, and basing large expenses on large revenue streams that aren't in the same time frame will result in said losses.

*****

This topic is an emotional one for fans'especially Pirate fans, who view ownership as a group who never miss an opportunity to make a dollar. While many won't find solace in this, it's hard to say whether any team used these new funds to their advantage in 2018. Overall, payroll was down from 2017 to 2018, but this was after a very different offseason then the game has ever experienced. On a more granular level, the Braves saw a profit increase of roughly the very $50 million the payment was estimated to be, giving circumstantial evidence of benefiting financially from the windfall.

Simply put, this was an attempt to look at the payout from a different perspective'purely a business one. The opinion, bordering on undeniable truth for many, of teams having to spend this money was all too common and somewhat too easy. Take this for what it is'an unemotional, business perspective.

Fans don't like it, but sports are only that'business masquerading as entertainment. Unfortunately, fiduciary responsibility and customer service often don't go together and the shrewd business decision often wins out.