Attendance Still the Main Factor in Indians’ Balance Sheet

It is certainly good news that the Indians reaped a windfall by selling their regional sports network, SportsTime Ohio. While we are all happy for the Dolans, what we really want to know is how this affects the ability of the Indians to field a competitive team. If this sale was made under the same conditions that most business transactions take place, it is doubtful that the sale price of $230 million dollars will affect the team on the field much at all. Most of that money will probably go toward retiring debt and improving liquidity, which can make the Indians less hesitant to take on a long-term obligation such as the Nick Swisher deal, but it would be a mistake to think that this money will translate directly into the yearly payroll.

David Richard-USA TODAY Sports

The $40 million in yearly rights fees, an increase of $10 million per year, represents a significant increase in the total revenue of the team. If the Forbes magazine report from March 2012 is to be believed, revenues in 2012 totaled $158 million before the cut of revenue sharing was included. The Indians dispute this figure, apparently feeling that it is overstated. Either way, a $10 million boost in revenues represents at least 6 percent, which any company would take as good news.

It is reasonable to assume, however, that much of this increase will be offset by a corresponding decrease in Cleveland’s cut of revenue sharing, diminishing the overall impact on profitability. Since the real importance of this deal is whether it makes the Indians more competitive, it is important to note that two other mid-market teams, the Padres and Astros, sold their television rights for more money than the Indians, while retaining rights in the companies that were formed to broadcast the games. Therefore, while this deal provides an infusion of cash for the Dolans, it will make the Tribe less competitive in the long run.

The bottom line is that this deal is probably not enough to alter the spending habits of the Indians. The increase in payroll that is evidenced by the Swisher signing is more likely a response to the payroll freed up by the expiration of the Travis Hafner contract and a reaction to the increased revenue that will come from the increase in national TV rights. This deal will bring the Indians an additional $24 million per year, which is essentially free money. While this deal will impact every team equally, it obviously has a greater proportional impact on teams at the lower end of the revenue spectrum.

In my opinion, the bottom line for the financial stability of the Indians still hinges on attendance. At an average ticket price of $22, ticket revenues probably totaled about $35 million dollars in 2012. If most people attending games spend like my family, they probably double that total in parking, concessions, and souvenirs from everyone who comes through the turnstiles. That would come close to fitting the Forbes estimate of total revenues. So if every additional 100,000 fans that buy tickets result in $4 to $5 million dollars in additional revenue. Thus, an attendance of two million would result in an extra $16-20 million.

Jul 21, 2012; Cleveland, OH, USA; Cleveland Indians fans cheer during the seventh inning stretch in a game against the Baltimore Orioles at Progressive Field. Mandatory Credit: David Richard-USA TODAY Sports

This money is almost pure profit and can directly translate to payroll spending. That would give the Indians the ability to spend $80 million on payroll before factoring in the new television money. Assuming that the majority of the roster will continue to be composed of players with less than three years experience and therefore will have their salaries limited by the collective bargaining agreement, this increase will be spent entirely on the top end of the payroll, spread among six to eight players. This means an average increase among the core players of $2 to 3 million in salary, which would have a significant impact on the quality of players they can attract and retain.

I believe that the Dolans realized that they needed to do something serious to rebuild the fans’ trust; they did so by signing Swisher, among other aggressive offseason transactions. Whether these moves are considered a success will be determined by the won-loss record, but also by whether we the fans respond.

This puts the ball squarely in our court, folks. If the Indians increase their payroll by $10 or $20 million and see no appreciable increase in attendance, it will validate the widely held view that Cleveland is not a good enough baseball town to generate the revenue needed to maintain a winning team. It also justifies a strategy of maintaining a low payroll and relying on revenue sharing to turn a profit (like the Marlins).

So step up, people. We asked them to spend money and they did. Not only that, they got players who fit their needs. There is every indication that this will be a fun team to watch, and a decent chance that they will be playing meaningful games beyond Memorial Day. Buy some tickets.