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Who Would You Rather Own – The Boston Red Sox or the Houston Astros?

December 11, 2013

This might seem like a stupid question. The Red Sox just won the World Series. The city of Boston held a parade with over one million adoring fans cheering their home-town heroes. Conversely, the Astros finished the 2013 season with the worst record in baseball, losing 111 games. During many games, the stadium was mostly empty of fans.

With those facts, the answer seems clear: it would be better to own the Boston Red Sox. However, some savvy business owners might look at it differently. In 2013, the Houston Astros, with the worst record in baseball, was MLB’s most profitable team. Forbes estimates that in 2013 the Astros had an operating income of $99 million, which is more than any other team, including the world champion Red Sox.

How could a team that many have judged to be losers be so profitable in 2013? Like many other teams, the Astros had signed an extremely lucrative TV agreement. They also cut their payroll to an estimated $21 million, less than half its 2011 payroll. In comparison, the Red Sox had a payroll of $151 million, the fourth highest in baseball. Two players on the Red Sox, John Lackey and David Ortiz, had a combined salary of $30 million, 45% higher than the entire 25-man Astros.

Short term, the Astros had high revenue and low expenses; something many business owners strive for. However, what works in the short term may make long-term success difficult. Even though it is the most profitable, Forbes estimates the value of the Astros is well below most other major league teams. Valued at $626 million, the highly profitable Astros come in at half that of the Boston Red Sox – $1.3 billion. What happens when that lucrative TV contract expires?

We ask the question again, which team would you like to own?

So what does this mean to broadcasters? Severe reductions in expenses can lead to short-term profits, but can also result in diminished long-term success. Small cuts today can have a long-term impact on both your long-term profits and the value of your stick. Broadcasters need to be fiscally smart, but also focus on their long-term brand. The ability to invest in your brand has assisted radio in remaining the premier advertising vehicle. Cuts that hurt your product or brand can not only impact your success against other radio stations, but can also boost the value of non-radio alternatives.

Once the listeners are lost, it will cost even more to get them back. The secret is to never let them go.

-Charlie Sislen, Partner