I started thinking about this when I saw JP quoted by Jordan Bastian as follows:
The current economy has affected many clubs, including Toronto, which is dealing with a weakened Canadian dollar as well. This winter the Jays will not be able to increase their payroll, which was roughly $97 million in 2008, and they don't have an excess of available money to spend.
"It's just the reality of what's going on," Ricciardi said. "We have to be cognizant of what's happening in the world and what's happening from a standpoint of what we're going to be able to get involved with. We don't want to get involved with a contract that might be something that handcuffs us down the road.
"I just think we're really doing a little bit more soul searching and saying, 'What makes sense for us both present and future?' We may have enough answers inside without having to go outside."
Under the circumstances, Ricciardi did say that the Jays aren't ruling out using trades as a way to free up some more payroll. Though he wouldn't go into specifics, two options include possibly shopping closer B.J. Ryan (owed $20 million over the next two years) or trying to move first baseman Lyle Overbay (owed $14 million through 2010).
"We'll be open to anything," Ricciardi said. "We're not in a 'slash payroll' mode, but we're in a situation where if we can make ourselves better via trade, we'll look that way. But if we can't, this is the team we have, and we'll just be creative with what we've got here and try to plug in our holes internally."
The Blue Jays don't usually talk openly about budgets but if I read through those words I see a payroll reduction being in the cards. Why would that be? As I said above I see three reasons, the eeconomy, the dollar and specific sponsor changes. Let's look at each one.
Even a monk in Tibet is probably aware of the stresses in the global economy. More important to the Jays is the state of marketing budgets in North America. Remember that sports teams profit from being a conduit for marketing to attendees, viewers and listeners. When companies are concerned about their financial performance marketing budgets are often the easiest and first cut. Yesterday Bud Selig had Paul Volcker talk with baseball owners about the economy, he wasn't there to tell the owners to spend more money. A slowing economy could hit teams in two areas, lower attendance and fewer marketing dollars being spent on sports. The media is full of stories of people cutting back on spending although these stories are more applicable to the US than in Canada. Nevertheless there will be spillover in Canada and many companies might also cut back on group outings and events. Also the Jays have made money in recent years from fans of the Yankees and Red Sox coming to Toronto to catch a few games. The numbers of those fans coming in 2009 would be uncertain.
Forbes, in their annual sports valuation issue, give $23 as the average ticket price for the Jays. If we include concessions let's say that each attendee earns $30 for the Jays. Will the Jays attendance in 2009 be impacted? We know that a winning team can improve attendance but based on 2008, the spending plans of the Yankees and Red Sox, and the ascent of the Rays, it would be tough for the Jays to budget an attendance increase for that reason. If we assume a .500 season attendance could be reduced by fans being more careful with their dollars. If attendance were to drop by 100,000 the cost to the Jays would be $3 million.
The Volcker story quoted Bud as saying that no-one knows what 2009 will bring. That is probably true, however I would be very surprised if the Jays were budgeting an increase in attendance for 2009.
The Canadian dollar has been on a big slide versus the US dollar since the summer. The Canadian dollar is seen as a commodity currency so as oil and commodities reduced in price the Canadian dollar declined too. The current exchange rate is around 1.25 and as the Jays look at 2009 an average rate of 1.25 would not be unreasonable. Sports Business Journal recently ran a story on the impact of the dollar on Canadian sports teams. In that story they state that the Jays earn 40% of their revenues in US dollars while 85% of their costs are in US dollars. The difference is 45%. The Forbes annual baseball valuation story puts the Jays revenues at $160 million. 45% of $160 million is $72 million. For the purpose of this comparison let's assume the Canadian/US dollar exhange rate was 1.00 in 2008 and will be 1.25 in 2009. By my calculation that change in exchange rate will cost the Jays $18 million.
The Globe and Mail had a story on October 29th, now behind a pay wall, where Paul Godfrey is quoted as saying that each drop in the dollar costs the Jays $760,000. A 25 cent drop would cost the Jays $19 million, pretty close to the $18 million in the preceding paragraph.
Again per Forbes the Jays major sponsors are: General Motors, MasterCard, HSBC, and Labatt Breweries. Obviously GM will be cutting back on spending. I recently saw a news story suggesting that the GM sponsorship would end costing the Jays approx. $5 million per season. It might be possible to find a replacement sponsor but probably not at $5 million.
Richard Griffin recently quoted Paul Godfrey:
"We've submitted a (budget) figure but have not got a definite response," Godfrey said yesterday. "I expect we will know in the next four, five or six days. The thing that makes me nervous is what's happened in the economy. It's taken a big turndown and we already know we've lost two sponsors – Shoppers Drug Mart and General Motors.
The amount of the Shoppers sponsorship is unknown.
As the Jays prepare their budgets for 2009 they will be looking at falling revenue and profitability from several sources. A conservative drop in attendance of 100,000 plus the changes in the dollar and GM's departure as a sponsor will lower the Jays profitability by $27 million. $27 million is a lot of money, about 15% of revenues. In this environment it would be almost impossible for the Jays to increase payroll and in fact it would be not out of the realm of possibilty for JP to be asked to reduce payroll.
Q: Were the Jays not making money before this change?
A: Rogers ownership of the jays is buried within the financial statements of Rogers Communications Inc. The Blue Jays are part of the Rogers Media division which is the smallest of Rogers divisions. The Blue Jays revenues appear to be less than 10% of Rogers Media which includes TV stations owned by Rogers. Rogers media itself is profitable although Rogers has recently lowered their guidance for profitability for the end of the year due to lower ad spending for their TV stations. This makes it even tougher for the Jays to seek more money when the rest of the division is suffering too. Forbes 2008 story on baseball valuations put the Jays at around break-even.
Q: Why doesn't Ted Rogers just cover it, he can afford it?
A: This is the never-ending debate, is a sports team a business or a plaything. In Rogers case it is a business and it is a part of a public company. Ted Rogers does not own the Jays personally, Rogers Communications owns the Jays. Rogers Communications is a public company with the usual expectations of investors that it exists to make money for the shareholders. Rogers Communications could decide to pump money into the Jays but that would depress the stock price and make a lot of widows and orphans unhappy.
Q: What about the true value of the team to Rogers?
A: This is a tough question to answer. If you go to a game you will see a lot of ads for various Rogers products. Most games are shown on Sportnet and radio is on the Fan, both Rogers companies. There is good spinoff for Rogers but there is no way that we can guess at that value to Rogers. However much that value is it won't persuade Rogers to spend more money on the team.
The biggest impact to the Jays is in the currency. While no one knows what will happen in the short term, many experts forecast the Canadian dollar to strengthen long term due to problems in the US and a return to higher oil prices. Until then the Jays will have to muddle through and lower payrolls are probably part of that future.