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G&M: "How the Blue Jays dropped the ball" (or: How the Globe failed Business Economics 101)

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Last month, the Sun ran less than well-informed column about Rogers by Steve Buffery, and we spent a little time ripping them a new one desconstructing it. In the interest of fairness, I think it's only fair to go after other MSM outlets when they run something less than well-thought out as well. In this case, it's not an opinion column. It's an article written by someone named Bruce Dowginnin whose basic premise is that Rogers (the parent company) reportedly only "pays" the Jays about $36 million a year for the local broadcast rights, compared to the mega-million contracts recently signed by Texas, Anaheim and San Diego. As a result, so claim the authors, the Jays are not able to be competitive in pursuing talent and players (apparently we were pursuing Jose Reyes?), whereas other teams are doing this on the backs of their television rights contracts. Unfortunately, the whole premise is incorrect. Rogers does not pay or negotiate for the television rights at all, they merely allocate a number on paper. Ultimately, if the number is $36 million, it is being paid from one Rogers pocket to another, in the end, the numbers get consolidated anyway. The number is completely irrelevent, because the goal of Rogers is to increase total company value. Let me illustrate my point. Let's say that If the Blue Jays were independently owned, and they auctioned off their local broadcast rights and got $100 million a year. In that case, they would be worth $100 million a year because the entity buying them would be able to sell commercials to generate revenues, and after expenses (including the rights fees), they would be left with some profit (hopefully more than thier cost of capital). The Blue Jays would then take that $100 million, and use it as revenue to fund their expenses, and hopefully have some profit left over. Under Rogers ownership, however, the Blue Jays are vertically consolidated with the broadcaster, meaning that whatever you allocate for broadcast rights is cancelled out. Whether it's $200 million of $20 million, the revenue of one is the expense of another. It's just moving money around. This fallacy is on display in the following excerpt: "Why would Sportsnet pay more to the Jays for television rights? In theory, by helping the team boost payroll to become more competitive, ratings, attendance and merchandise sales would all increase." Ultimately, at a high level (the corporate parent), what matters is the total profit, which is a function of how many people watch (this is what generates more advertising dollars) and how much you pay in expenses - largely player costs. If you add payroll, you will likely win more, and you will likely have more people watching. The question is how much is the added expense, and how much is the added revenue? This is the fundamental consideration that will determine how much the Jays spend on players (how much added revenue they generate), and this is what the Globe's article misses. It has absolutely nothing to do with how much money moves around on paper. To believe otherwise is to assume that Rogers executives are stupid, and that they don't understand ultimately where the revenues come from and where the expenses go. It's possible this is the case, I suppose, but would bet against it. These are some of the smartest people in the country at squeezing dollars from the pockets of customers and putting it into shareholders' pockets. Consider a hypothetical. What if the Jays had been given an extra $20 million for their rights the past year? It just means that Sportsnet would have made $20 million less (or lost $20 million more, same idea) and the Jays would have made $20 million more (or lost $20 million less). To Rogers as a whole, it's the exact same thing in their financial statements. Indeed, the author alludes to this: "A publicly traded company, Rogers may choose a price point to make one branch appear more or less profitable for tax or regulatory purposes." Now, I highly doubt it's for tax purposes, since this is essentially transfer pricing, and that's one the first areas a tax auditor will look at to see if a company is trying to unfairly manipulate to evade taxes. I have no idea about regulatory purposes. But I think they point to a better reason: "Because of revenue-sharing arrangements among MLB teams, MLB employs a firm in Denver, Bortz Media and Sports Group, to conduct assessments of markets to monitor TV rights values." If anything, a lower-range paper valuation on the TV rights could help suppress the paper revenues, and therefore increase the revenue sharing dollars. This would benefit the Jays. Far from the Blue Jays dropping the ball, it's The Globe and Mail that dropped the ball on basic business sense.