Royals Authority

Deconstructing The Process

Browsing Posts tagged David Glass

Big news this week as Forbes released their annual look at the valuations of baseball teams. I know, I know… Financials, dollars, blah, blah, blah. This may not be the most exciting post you’ll read this week, but to me, how the Royals (and other teams) go about their business is as important as the prospect rankings. We’re a small market. This stuff matters.

Anywho, included in the report was something that should have made you sit up and take notice, no matter how you feel about ledgers and spreadsheets. Here, according to Forbes, were the most profitable teams in baseball in 2011:

So the Glass family banked a cool $28.5 million last year. Wow.

As always, we need to have a little perspective. How does that number compare to past seasons? Here’s a table going back the previous five years.

Why the huge leap? According to Forbes, revenue went up only a million dollars last year. From $160 million in 2010 to $161. Most of it has to do – as Clark mentioned yesterday – with payroll. The Royals saw their expenditure on player contracts nose dive thanks to the trade of Zack Greinke, the retirement of Gil Meche and the overall youth movement which featured cost-controlled contracts. And like Clark said, they didn’t go cheap. They went young. Big difference.

What’s interesting, there’s very much a plan in place about the amount of money ownership would like the Royals to post in the Operating Income side of the ledger. It seems extremely obvious the Glass family would like to hit an operating income number somewhere close to $10 million. Hey, I’m a free market capitalist. Glass owns the team, it’s his right to make money. It’s a good thing he’s turning a profit. As long as he sinks that windfall into an area of the team. Maybe hire a few more scouts. Or beef up the Latin America academy. Hell, he could reseed the Little K.

Besides, where ownership really makes their money is in the value of the team. About 10 years ago – when Glass officially bought the club – the Royals were valued at just under $100 million. Glass paid $96 million. Of course, there’s the whole situation with the Kauffman Trust and the question of whether or not the Glass family can make a profit, but throw that out for just a moment. Under normal circumstances, if Glass put the team up for sale right now, he could expect a profit of at least $255 million.

For 12 years of ownership. That’s $21.25 million per year. The value of his initial investment has returned over 350%. You know how everyone thinks they should have bought Apple stock 12 years ago? If you couldn’t get in on Apple, you should have bought yourself a baseball team.

Payroll

Looking ahead to 2012, I don’t expect the Glass family to rake in a similar profit. If only because the payroll is going up. Thanks to Cot’s Contracts, here are how things stand with my mythological 25 man roster.

My roster has 12 pitchers and 13 hitters. I left Chris Getz and Danny Duffy off the list, as I think both open the year in Omaha. The more I think about it, Bourgeois and Maier are backups in the outfield, Betancourt is the super utility guy (ick) and Pena/Quintero are the catching tandem. I’ll also go out on a limb and hypothesize that the Royals will assign specific catchers to each starter like they did last year. It seemed to work well enough. That gives Pena three starters and Quintero two. Or vice versa. Giavotella opens the year as the starting second baseman, but loses his job to Betancourt in May.

For the rotation, while I still have serious doubts, Mendoza has certainly earned a shot. The starting five looks like Hochevar, Sanchez, Chen, Paulino, Mendoza. Your bullpen has Broxton as the closer and Holland as the set up man. I’d flip-flop that, but you know that the Royals love Broxton’s pants experience. Crow is in the setup mix. Mijares is a definite lefty and Collins is forcing his way into the conversation, but for now I’m leaning Teaford. The pen rounds out with Coleman.

Or the Royals could deal for a 5th outfielder and blow up my whole roster.

(By the way, the payroll also includes Sal Perez and Joakim Soria, who will open the year on the DL. Players with guaranteed contracts who start the season on the DL are counted as part of the Opening Day payroll.)

So it looks like the Royals Opening Day payroll will be right around $60 million. That’s up from last year’s $36 million. And pretty darn close to their all time record of $72 million set on Opening Day 2010. See how that works? Low payroll means increased profits. And I don’t even have an accounting degree.

So if we’re still thinking about profit, by boosting payroll by $24 million, most of that will go away. If I were a betting man, I’d say that at this time next year, Forbes will peg the Royals at around $8 million for Operating Income in 2012.

In other words… Back to normal.

In an annual tradition that excites me almost as having pitchers and catchers report, Forbes released their valuations and rankings of the teams of major league baseball.

Your Kansas City Royals rank 25th.

Money (pun intended) quote:

Early last season the Royals became the first MLB team to lose 600 games since the start of the 2004 season. The team averaged 97 losses a year from 2004 through 2010. Even though the Royals averaged just 20,191 fans (53% of capacity) per game at Kauffman Stadium in 2010 the team was profitable because it is among the biggest recipients of welfare from the league’s richer teams and fielded a modest player payroll ($72 million).

Let me bottom line this for you:  The Royals are bad.  They’ve been bad for a long time.  Nobody goes to the games.  And David Glass and his brood are still flush with cash.  There.

None of this should surprise you.  We’re fans.  We know the team has been awful and we know that attendance is sparse – with the exception of dollar hot dog night and Cardinal games.

We’ve all suspected that Glass is making serious coin.  Obviously, that’s something that doesn’t show up in the papers (like the standings) or it’s not something you can actually witness (like poor attendance.)  Long time readers know, I’m all about the market and capitalism and people making as much money as they possibly can.

David Glass purchased the team for $96 million in 2000.  Forbes currently values the team at a whopping $351 million.  We should all be so lucky to have a 265% return on investment.

Here’s the Royals payroll from the last five seasons, compared with operating income from those years:

Now we begin to understand.  While we’ve applauded Glass for green lighting payroll increases, he’s obviously doing so with the understanding that income remains consistent from year to year.  The Royals have posted an operating income between $8 and $10 million each of the last five years.

Obviously, the Royals player expenses will shrink dramatically in 2011.  After about $90 million in expenses (including bonuses and benefits) team payroll will open at roughly $35 million.  Given that the Opening Day payroll last year was $70 million, that means around $20 million went to additional expenditures.  Since the Royals don’t figure to be sending money in trades (since they don’t have any bad contracts – except for Kendall, naturally) and the potential bonuses are few and moderate, let’s just estimate an additional $10 million in expenditures.  That would bump the Royals to a total of $45 million – or roughly half of their 2010 total.

That would put them in the neighborhood of the San Diego Padres – baseball’s most profitable team in 2010, with an operating income of $37 million.  Of course, the Padres are in a larger market, but the similarities between the teams are notable.  After maxing out at $90 million in player expenses for the 2006 season, San Diego held steady a couple of years before really slashing in 2009.  Last year, their player expenses were at $51 million and revenues were at $159 million.  Those numbers are extremely close to what the Royals will post in 2011.

According to Forbes, last season the Padres were gifted more than $30 million… And Moorad and Moores pocketed $37 million last year.  It’s not difficult to understand why revenue sharing is so controversial. (Yes, I brought it up. No, I don’t want to get into that debate here and now.) Reduce that number just a bit because of market size, and it’s not outside the realm of possibility that the Glass family is set to realize a profit of nearly $35 million this year.

There are a couple of reasons to own a professional sports team.  One is ego.  Chicks like a guy who owns the team.  Not surprisingly, Glass seems devoid of ego.  Another reason is money.  Clearly, you make some cash in this line of work.  As I said before, I don’t begrudge the man his profit.  But when you make too much money and your product isn’t very good, things can get kind of dicey.

Glass is a walking PR disaster, but someone should convince him to explain what he’s doing with the windfall he will realize this year.  Spending more on the draft? Perfect.  Expanding scouting operations in Latin America? Excellent.  A simple promise to add payroll as The Process begins to show significant strides?  Yes, please.

Right now, Glass is set to take a beating from the East Coast media and plenty of folks from Kansas City (I’m thinking talk radio bloviators) for slicing the payroll.  I’m on record as supporting what Dayton Moore is doing, and as I said earlier, I’m all for someone making a profit.  However, a baseball team and it’s fans have an emotional relationship – not a business one.  The Royals need to get out in front of this and explain that despite what should be huge profits, Glass and Moore continue to position this team for the future.  It’s a tough sell given the history of this team and regime.  Still, they at least have to try.  Stuff this crap about competing this year… Nobody with half a brain buys that.  Continue to talk about the future.  And tell us where the money will be spent.

Otherwise, it’s going to get rough.

Still, it’s a good time to be the owner of the Royals.  A very good time.

The lesson from all of this?  If you had $100 million rattling around your pocket in 2000 and didn’t try to buy the Royals (or just about any other similarly valued baseball team) you are a sucker.

Love it or hate it, the Greinke trade seems to have generated one common feeling throughout the land of Royals’ blogs:   this, at last, really is The Process.  

For better or worse, after somehow getting older at the major league level over the past few years and getting worse at the same time, the trade of Zack Greinke really, really feels like the beginning.   I should clarify in that The Process has been underway for some time and that is evidenced by the glowing reviews of what is generally perceived as the best farm system in baseball.   However, The Process has not been in evidence at the major league level in any truly perceptible permutations until last week.

While there are learned Royals’ fans who, for very logical reason, are skeptical of the return on the Greinke move, but they are also intrigued to see what happens the next couple of years.   The Process is either working or leading all of us down another dark hallway, but it is now, truly underway.   That’s got to be worth something.

If The Process is in full effect at all levels now, it certainly is an inexpensive little mechanism.   The Royals are likely to have a payroll south of $50 million and be pretty awful.   In 2012, however, they are still likely to have a payroll under or around $50 million and be considerably better.   In theory that means that come 2013 when you might be looking at signing some of the young players to long term deals and maybe add an actual impact veteran free agent (‘actual’ being something different than any free agent signee of the Moore era not named Meche) they should have a stash of cash with which to do so.

However, I have some vague recollection of either David Glass or Dayton Moore mentioning something along the lines that the Royals look at payroll/budget issues on a ‘year to year basis’.   I was unable to find that actual quote, but it is a shame if my memory is right on this topic.  

You cannot have ‘a process’ without a budgetary plan that spans four or five years instead of just one.   It is foolhardy, in fact.   Hopefully, David Glass (who by the way is not an idiot when it comes to money) has told Dayton Moore that he has $400 million to spend on payroll over the next six years or something along those lines.   I just picked those numbers out of the air, but what should be the timeframe and the total dollars amount?

Anyway, the point of all this is that the Royals are going to make some money this year and probably a good deal of money in 2012 and even 2013 if this all works out.   A young roster is a cheap roster and if your young players are as good as we all think/hope/pray they are, then the revenues will be up in the coming years.   If Dayton Moore has ‘The Process’, than Mr. Glass better have ‘A Plan’ when it comes to banking some profit to have some ammunition when it comes time to go the table with Scott Boras.

Okay, now a little fun (or agony for those of you who hate lineup projections).   How will the Royals’ lineup mutate through 2011?

If Opening Day brings us this:

Pena C, Ka’iahue DH, Butler 1B, Getz 2B, Escobar SS, Aviles 3B, Gordon LF, Cabrera CF, Francoeur RF; with a rotation of Hochevar, Mazzaro, Davies, O’Sullivan and somebody.     Then how many of those fourteen guys will be in the everyday lineup on June 1st?  August 1st? September 15th?

Well, you know Jason Kendall will be back at catcher and pretty much can count on Mike Moustakas at third base come June and Lorenzo Cain in the outfield no later than August, so there’s three.   By mid-September is it conceivable that as many as six position players will be different and three starting pitchers?   Is it likely that of those NINE changes, at least eight will be dramatic upgrades?  

2011 might suck record wise.  In fact, it WILL suck record wise, but I think it will be the most interesting season since maybe as far back as 2003.   I know, I know:  it’s just another year of ‘wait until next year’, but it feels different.   Let’s hope it actually turns out to really be different.

In a recent Kansas City Star article, David Glass dispelled rumors that he was selling the team.*  Many fans and large swaths of the commentariat greeted this news with dismay.  Some of the rumors have also suggested outspoken Mavericks owner Mark Cuban has an interest in the team, a proposition that excites many in K.C..  These reactions are not surprising.  The Royals have been historically abysmal during David Glass’ ownership. Mark Cuban has done wonders for his NBA franchise, and his over-the-top style is something fans gravitate to, especially at a distance.  I don’t want to further these rumors because I have absolutely no substantiation to them whatsoever, and I’d prefer writing things which I know are based in fact.  Instead, I thought I would take a look at David Glass as an owner.

*Rumors which the Star suggested came from the blogosphere, but to which I can find no evidence.  Every mention of this rumor came from either Jack Harry or sports talk radio.  While the blogosphere does in many cases spread rumors, in this case it isn’t true.  This is the first mention of this rumor on Royals Authority, and I’ve been unable to find mention of it on any of the more than a dozen Royals blogs I subscribe to.

How exactly does one grade an owner?  At the most basic level it has to be about how well a team produces on the field.   That isn’t a complete look at an owner, but it certainly is important, especially to fans.  Identifying when David Glass became the owner of the Royals is kind of murky, since he was appointed the Interim Chairman and CEO when Ewing Kauffman died in 1993 and didn’t become the sole owner until April of 2000.  For these purposes, I am going to use 2000 as the starting date of his ownership.  Since 2000 the Royals have a 725-1019 record, which ends up being a .415 winning percentage.  That winning percentage would average out to a 67-95 record.  That is phenomenally bad, but you probably already know this.  So if you were to judge him on the record of the ballclub alone then you have to rate him as one of the worst owners of all-time.  Other than moving the team out of the city, he couldn’t have been worse.

However, grading the owner involves a bit more than just the record on the field.  Although in the end, he can’t be a considered great owner until he builds a winner.  Taking a step back from how this particular owner has been, I think it would be instructive to identify the qualities that one would want in an owner.

First, he has to be willing to spend money.  It takes money to win. He is the guy that has complete control of the purse strings. You can’t be a good owner if you refuse to spend money in the draft, in development or in free agency.  It’s just not possible.  Of course what that amount should be is certainly up for debate, as is where specifically it should be spent.  But where is less the owners job than that of the General Manager.

Second, a good owner doesn’t meddle in the baseball affairs of the club.  This isn’t a hard and fast rule. I mean if Bill James was a billionaire and owned a ballclub, then I’d be happy if he put his two cents in.  However it is pretty commonplace to have owners who do NOT have expertise in building winning baseball teams, and therefore when they get involved in specifics it almost never works out.

Finally, and this is more a subset of the first point, an owner should attempt to improve the ballclub as much as possible in an attempt to create a winning franchise.  This point is in some ways the least important and in some ways the most.  I believe that every owner in baseball truly wants to build a winning franchise.  Yeah, they get into the game for the money and prestige, but I would be amazed to find any owner that genuinely didn’t want to win games, even if it cost them some profits.

So how does David Glass fit into this mold?  Honestly, it depends on when you ask.  If you were to ask that question in say 2004, by all accounts he was being extremely cheap and meddlesome.  The team cut expenses in Latin America, spent little money in the draft or free agency and was widely rumored to have squashed deals or made his front office take certain players in trades.  So on both counts he failed miserably.  However, when taking a closer look at the David Glass of 2010, we find a completely different owner.

Spending the Monies

Glass has been notoriously known as a complete cheap-skate in terms of running the Kansas City Royals. However, he has improved in that aspect.  The Major League payroll has ranked 21st overall the past two years, which is the highest it has been in the 10 years of Mr. Glass’ ownership.  In 2000, the payroll was 28th in the MLB at $24.9m and has risen to 21st with $71.4m.  So suffice to say, he has both increased the raw amount of money he has spent at the MLB level and done so at a rate greater than the overall increase in MLB payrolls during that time.  Part of that does stem from the fact that so little was spent earlier in the decade, but he still has spent more money.  Often, when people critique an owner this is where the analysis stops.  They look at a major league payroll and assume that is all the money an owner spends on a team.  However, that is just part of it.

Recently released documents from the Pirates and other MLB teams have shed some light on how much money some teams spend in all facets of the game and how much revenue they take in.  For example in 2007 the Pirates spent $21m in player development and in 2008 spent $23m.  It is unclear if those numbers include the bonuses paid in the draft, but the Pirates spent $9.7 in 2008 in that department.  David Glass isn’t the owner of the Pirates, but the examples are instructive.  Lots of money is spent on the organization beyond the Major League Payroll.

So beyond the payroll, Glass has spent $24.5m in draft bonuses from 2008-2010, which is fifth in the MLB.  Part of that comes from having high draft picks which get higher bonuses, but they haven’t been cheap with those draft picks and have signed lots of guys for over-slot money in lower rounds like Wil Myers, Mike Montgomery, Brett Eibner, Chris Dwyer, John Lamb and Jason Adams.  Add to that some Latin American signings like Cheslor Cuthbert ($1.4), Noel Arguelles ($6.9) and Humberto Arteaga ($1.1m) and you get lots of money being spent by the organization.  Money that was not being spent in the early 2000’s.

However, spending money is all relative, right?  Yes Glass was cheap earlier in the decade, but just spending more money doesn’t really make him a big spender. It could just make him a little less cheap.  So, again let’s take a look at some of the recently released financial information.  We can do a little extrapolating from the information to get a good gauge of how much money the Royals take in, then do some dirty math on expenditures and see just how much revenue is being put back into the team.  We need to take a deeper look at revenues to determine what is adequate spending.  I think it is fair to expect the team to turn a profit each year, and even to turn big profits if those can be spent in subsequent years to get that one free agent who can take a team to the playoffs.

The Pirates are a great comparison.  They have been bad for a long time, but are in an established baseball community with similar attendance figures and likely similar revenue structures.  In 2008 the Pirates received $39m in revenue sharing and got $30.3m in 2008.  I don’t really see a reason to assume the Royals got much more or less than that.  The Pirates received $39m in TV money, but I believe that is more than the Royals get from Fox.  Across the board teams make about $5 per attendee in concessions, so with roughly 1.5m people coming to the K that is approximately $7.5m in concessions.  The Pirates had gate receipts of roughly $33m, and received $2m from MLB Advanced Media.  All told the Pirates had after tax profits of around $15m each year.  They likely pull in more for TV, more for stadium naming rights and have spent a little more in the draft.  However their major league payroll has been on the order of $20m less than the Royals the past few years.  Looking at all of those numbers, my first thought is that I don’t see how the Royals have made a profit these past few years.  They have claimed to break even or make a small profit, but without a major new source of income I don’t know how that would be.   So in terms of what is spent vs what is coming in the door, I would say that lately Glass has been a very good owner in that regard.

Meddling

This is a little harder to quantify.  I am not around David Glass 24/7 or even .01/1, so I don’t know for a fact whether he meddles or not.  I will have to go on rumor and what people much more connected than me say.  But the consensus is that during the Allard Baird era David Glass regularly killed trades and meddled in free agent signings.  On the flip side, I have never heard that rumor or even the hint of that rumor on the Dayton Moore era.  In fact one of the biggest criticisms fans seem to have lately is that David Glass is never around.  It’s almost assuredly a good thing that he isn’t around.  It means he can’t get involved in baseball decisions that he doesn’t have the skill set to be involved in.  It doesn’t take advanced statistics to realize that the presence of an owner doesn’t make the players on the field better.

Wanting to Win

This one is impossible.  I almost left it out completely, but I know that people want to discuss it and it means something to them.  But all I need to know is the numbers above.  David Glass by all accounts is spending lots of money to create a winning franchise, you can argue whether it is spent properly or not, but that isn’t his job it is the job of the General Manager.  I would say that spending the amount he has given what we know the revenues are, is about the biggest statement one can make about his willingness to win.

So in all three categories which make a good owner, David Glass has morphed from terrible into great.  I am honestly trying to come up with things I wish he would do differently, and I struggle to find somthing.  Every criticism and knock on him as an owner is something which doesn’t seem to be the case anymore.  The old David Glass is STILL killing this team due to the absolute ineptness the club was run with in the earlier part of the decade, so you can continue to blame him for that.  But if you imagine that somewhere around 2006, a new owner bought the team with the same name as the old one I don’t know that there would be much criticism of him.

What I also find interesting is why he has changed and why he was so bad in the first place.  A lot of fans talk about the Wal-Mart mentality, which is simplistic but accurate.  The primary Wal-Mart mentality is that costs are the enemy.  They must be destroyed everywhere possible.  Rising costs will never benefit you in any way.  I can’t imagine a guy so steeped in that culture can swiftly change to a baseball mentality where spending lots of money in the right places can help you to grow revenues significantly in the long run.

I also wonder how much of what David Glass did at the beginning of the decade was designed to bring about increased revenue sharing.  It wouldn’t be surprising  if he and Bud Selig got together and hatched a plan to help bring it about.  A large part of the plan was that Glass had to be on Bud’s side in everything, from paying slot-bonuses to not over-spending in free agency.  Together they worked on some other smaller market owners and got the luxury tax and revenue sharing instituted.  In my mind the coup de grace is the 30 team even-split of MLB Advanced Media money, which is quickly becoming baseballs cash cow.  If in fact, David Glass hurt his own team’s chances of winning to get these changes in baseball and it was the only way it could happen, then I think it was a good call.  It would be a very tough decision in the near term and he took major heat from other owners and his own fanbase, but in the very long term he may have saved Kansas City as a viable Major League city.  Maybe I am giving him too much credit for these changes, but I doubt we will ever know.

The other potential reason he has changed his ways could be due to hiring Dayton Moore.  Most of the changes do coincide with Moore being hired as the General Manager.  I have no doubt that Moore was aware of how much the spending had been cut under David Glass and how meddlesome he had become in baseball affairs.  With that knowledge, I could see Moore asking Glass to let him run the baseball side of things and to increase the budget in all facets of the organization if he was to take the job.  Frankly, if the only thing Dayton Moore accomplishes in his tenure as General Manager was to create David Glass 2.0, I would be pretty satisfied.

Throughout the decade of David Glass’ ownership of the Royals, the team has lost a record amount of games.  Those losses without question are the direct result of the things Glass has done as an owner.  However, from all the information available, it seems that he has become in many respects a model owner in recent years.  His prior mistakes continue to haunt the franchise and will do so for at least a couple more years.  He shouldn’t be given a pass for those mistakes; however he should be praised for changing his ways and doing the right things.  Dayton Moore gets a lot of credit for building one of the best farm systems in all of baseball, and rightfully so.  However, without David Glass increasing expenditures and letting the baseball people make the baseball decisions we wouldn’t be looking as hopeful at the 2012-2015 timeframe as we are now.

Nick Scott is the host of the Broken Bat Single Royals podcast.  You can email him at brokenbatsingle at gmail dot com or you can follow him on Twitter at @brokenbatsingle