With the winter meetings over and Opening Day months away, now is an interesting time to consider the economics of baseball. Earlier this year, I developed a framework for estimating NBA team values for Mid Level Exceptional, which met with a positive reception. With some tweaks, it can be adapted to MLB team valuation.
In my franchise valuation methodology, each team is priced based on a multiple of its revenue. These multipliers reflect future earnings potential: the higher the multiple, the brighter the prospects for earnings growth. This approach is common in finance; Aswath Damodaran, professor of finance at NYU Stern and author of Musings on Markets, used it to generate a back-of-the-envelope valuation for the recently sold Los Angeles Clippers.
Both Forbes and Bloomberg compute estimates of each MLB franchise’s value and annual revenue. But I’m wary of their valuations. Forbes consistently undershoots the sale price of NBA teams. In January, Forbes pegged the Clippers’ value at $575 million; five months later, they sold for $2 billion. Prices for sports franchises have risen sharply over the past few years, as sports programming has become ever more valuable as live TV viewership dwindles. The Forbes methodology hasn’t incorporated this shift in the value of broadcast rights, leading me to guess that its MLB valuations are also too low. Bloomberg’s version reflects the same problem. It values the average MLB team at 3.4 times revenue, not much higher than Forbes’ 2.9 times revenue.
In my version, I started with Bloomberg’s 2012 estimates of franchise revenue, which include revenue from teams’ stakes in regional sports networks and MLB Advanced Media. (Forbes’ revenue figures are newer, but exclude these important revenue sources.) To update the revenue numbers, I increased them by 20%, which is in keeping with MLB’s total revenue growth over the past two years.
Then, I created a range of revenue multipliers, which reflect the team’s market size (approximated by the size of the team’s MSA). They are based on the multiples implied by recent MLB and NBA franchise sales. In the model, big-market teams have higher multiples; I conclude that they generate disproportionate value from greater national media exposure, prestige, and ability to attract top free agents. MLB’s lack of a salary cap makes the big-market advantage even more formidable than in the NBA.
I also chose multipliers that are slightly lower than the multipliers in my NBA team valuation model, since I perceive baseball to be a more mature industry than basketball (which means slower long-term revenue growth; this is analogous to Exxon trading at a lower P/E ratio than Facebook.) Put the revenue and multipliers together, and the result is a range of estimated sale prices for each team.
Before jumping into the valuations, it’s worth explaining the shortcomings of the model. The revenue multipliers are my best guesses, and I have no hard proof that they’re correct. Using 2014 revenue data would be more accurate than assuming that individual teams’ revenue grew 20% since 2012, and multiple years of revenue data would be better than a one-year snapshot. But to paraphrase Donald Rumsfeld, you go to war with the data you’ve got. This is why I compute a range of likely values; unlike Forbes or Bloomberg, I don’t see the point of highlighting a single number of dubious accuracy.
With that said, here are the ranges of values for each MLB team.
A couple of findings that jump off the page:
- To no one’s surprise, the New York Yankees are the most valuable team in baseball, with an estimated price tag between $3.4 billion and $5.5 billion. The Tampa Bay Rays are the least valuable team, with a value ranging between $630 million and $840 million.
- 21 teams have a median value of at least $1 billion; in my earlier research on NBA team valuation, only 11 teams out of 30 were valued as highly.
- The big brother/little brother dynamic of the New York and Chicago teams is reflected in their valuations. The Yankees are worth more than twice as much as the Mets, and the Cubs are worth 40% more than the White Sox.
- The Boston Red Sox are the highest-valued team in a medium-sized market (with a median value of $2.4 billion), and the St. Louis Cardinals are the highest-valued team in a small market (with a median value of $1.1 billion). This reflects their recent success on the field, as well as their fan base’s reach beyond their core MSAs.
- The Miami Marlins and Houston Astros appear overvalued in the model, since their recent poor performance and lack of popularity are only partially reflected in their revenue. Their MSA’s sizes probably overestimate the size of their fan bases. Furthermore, the model doesn’t reflect team-specific issues like fan disenchantment with a team’s owners (Marlins) or difficulty in making the team’s regional sports network widely available (Astros).
Next time an MLB franchise sells, we’ll have a clearer indication of how accurate this valuation method is.