Loveable Losers?

I’m not going to do a lot of baseball commentary in this space, because in real life there are actually very few similarities between business and our national pastime. This post is about the Chicago Cubs, but it’s actually about a business topic involving the Cubs; specifically, it’s about the pending sale of the Cubs, the fact that being swept out of the postseason was actually good for them, and something called the “ego premium.”

First, let’s take the financial part. In the story on MSNBC Online we find the interesting note that following their three-game swan dive in the postseason, the Cubs market price has risen from about $600 million to at least $660 million, and probably a lot higher. It doesn’t make a lot of sense on the face of it, until you realize that the one home game held at Wrigley Field last week brought in well over $5 million in revenue for the team. A full run through the playoffs and the World Series would mean at least 5 and possibly 10 such home playoff games, raising another $30 to $60 million in tickets, parking, concession sales, souvenir sales, and so on. Even without a championship (or even a pennant), the team’s success is building (they did win their division in 2007 after a miserable 2006 season) and their revenue should continue to improve next season.

Now, no one is suggesting that losing the first round was actually a good thing in itself; the team’s value would doubtless have increased even more if they’d actually won the first round series. But it seems very clear that just having been to the postseason has boosted the team’s value by 10% or more. But what’s really mind-blowing about this story is the note about the “ego premium” on page 2. Basically, the idea is that while owning a manufacturing company or a meat-packing plant has only minimal status associated with it, owning a sports franchise – particularly a century-old franchise with a 90+ year old stadium like the Cubs – immediately makes the owner a public figure; a sort of balance-sheet celebrity. A team owner who managed to bring a championship back to the Cubs faithful after 100 YEARS without one would simply be a king in the North Side of Chicago.

Sounds like an attractive proposition, doesn’t it? At least, if you have $660 million to spend, plus the funds you will need to operate the team. The problem is that this is not a sound basis for purchasing a business. There is no way to insure success in baseball; consider for example that the New York Yankees, who had the highest payroll in baseball in 2007 ($189,639,045) were beaten in the first round by the Cleveland Indians, who spent less than one-third as much on payroll ($61,673,267) according to USA Today. If you’re interested in looking up other pay-for-performance statistics, you can take a look at their MLB Payroll database for yourself, but the point is that the owner can never be sure of on-field success, which in turn drives the team’s financial success.

“Why do I care about this?” I hear some of you asking. “I don’t have $660 million to spend, and if I did, I’d never blow it on something as goofy as a baseball team that hasn’t won a championship in a hundred years.” Probably not, but I regret to say that baseball owners aren’t the only people to fall victim to this sort of thinking; many lesser financiers are taken in by the “ego premium.” I’m not going to dismiss the potential value of being a public figure; things seem to have worked out well for George Steinbrenner, just to take the obvious example. And I’m certainly the last person to advocate against doing something you love for a living, whether it’s spending $660 million for the Cubs or $6,000 for your own hotdog cart. What I’m saying is that if you make any business decision based solely on what it does for your ego, you’d better be prepared to lose your money…