Fixing the Reds’ Payroll Collapse: Part 2

Fixing the Reds’ Payroll Collapse: Part 2

Reds payroll was league average in 2019, 2020 and 2021. But in the past two budgets, Bob Castellini has cut player salaries back to about half what the typical team spends. This is the second of three posts explaining and diagnosing what’s going on. In the final installment, we’ll look at solutions.

Today, we analyze several of the significant factors that have led to the downward spiral in Reds payroll.

Castellini’s Promise To Investors

The Reds have an annual operating budget. Revenues come in from gate receipts, merchandise sales, advertising, national and local sponsorships, national and local broadcast rights (TV and radio), the league’s revenue sharing and other sources. Expenses include salaries for the Major League roster. Bob Castellini sets that amount for the coming year based on revenue and expense estimates.

As part of his pitch to attract the $84.5 million in buy-in shares, Castellini pledged to potential investors that once they put up the initial money, he wouldn’t come back for more. In a scripted, March 2021 interview with Cincinnati Enquirer sportswriter Paul Daugherty, Castellini said he is following through on that pledge.

Paul Daugherty: “You’ve never asked your partners to invest more money. Have you ever considered a cash call to make the Reds be more competitive?”

Bob Castellini: “I’ve always considered avoiding it. I continue to.”

Phil Castellini, the owner’s son, chimed in with a similar statement during a separate interview a few days later:

Phil Castellini: “We have no intention of ever doing a capital call to our partners.”

Here’s what that means in practice. If the Reds lose money (negative operating income) in any year, the 19 owners are obligated to cover it based on the proportion of their ownership share. So, Bob Castellini budgets each year to guard against that happening. It’s been his highest priority.

The Breakeven Policy

Castellini’s infamous “breakeven policy” in some ways, therefore, is less a matter of his choice than inevitable product of the “no cash calls” pledge he made in the run-up to the 2006 sale.

To be sure, there’s positive side to this approach. While Castellini could choose to distribute annual profits to the owners, he instead puts operating surpluses back into the team. That could mean a new scoreboard for fans (and ads), a boost in the following season’s payroll, new international facilities, more scouts or additional front office employees.

By Castellini’s account, he’s followed that policy with one exception. When MLB sold the first chunk of their streaming media technology (BAM) to Disney, each team received tens of millions of dollars. The Reds principal owner said he distributed part of that to the investors. Otherwise, Reds annual operating profits, which belong to the owners in proportion to their number of shares, have been reinvested.

In good times, with rising attendance and revenues flowing in, the breakeven policy generates extra positive momentum for the franchise.

But in bad times, the breakeven policy produces retrenchment and downward spiral we’re seeing. Economists refer to this dynamic as pro-cyclical — when structures and policies magnify upswings and downturns.

Broadcaster Going Bally-Up

A genuine financial crisis in the media industry is also putting downward pressure on Reds payroll.

Most Reds fans watch the team on Bally Sports Ohio, a regional sports network (RSN) available throughout Ohio and parts of six other states. RSNs provide digital television content to carriers – local cable (CATV) and DIRECTV. We consumers subscribe to cable and satellites.

In recent years, the CATV/RSN formula has weakened as carrier customers, particularly in younger demographics, have “cut the cord” with television broadcasting. They opt to receive programming through internet streaming on smartphones, laptops and tablets. With fewer cable and satellite consumers, RSNs have lost both subscriber fees and advertising revenue. Carriers have also cut back what they are willing to pay RSNs for content.

While cord-cutting is not a new concept, the gradual financial slide it has been causing for years may have reached a tipping point in recent months.

In the summer of 2018, the DOJ required the Disney Company to sell its 22 regional sports networks as an anti-trust condition of Disney’s acquisition of assets from Fox. A year later, Disney sold the networks to the Diamond Sports Group, a subsidiary of the Sinclair Broadcast Group that Sinclair formed to buy those RSNs.

Diamond Sports now owns exclusive broadcast rights to 42 professional teams – 16 NBA, 12 NHL and 14 MLB. One of those teams is the Cincinnati Reds. Bally’s paid Sinclair for the naming rights and that’s how we have Bally Sports Ohio.

In the face of cord-cutting and plunging carrier fees, Sinclair’s purchase has been a spectacular failure. In the third quarter of 2022, Diamond Sports reported a $1.124 billion loss. The situation has deteriorated so much that last month Diamond’s creditors stepped in to fire the company’s CEO and put their own person in charge.

Sinclair is desperate to sell the RSNs but as you can imagine, the market is weak. The hope that the pro leagues would ride in to save Diamond is fading.

Sinclair/Diamond has looked for direct-to-consumer alternatives to CATV. In September, it launched Bally Sports Plus for non-cable subscribers. A few days ago, FuboTV, a sports livestreaming service with 1.2 million subscribers, reached a deal with Sinclair to add Bally’s RSNs to its lineup. If you’re interested, FuboTV packages cost between $70-$100.

Despite those moves to increase streaming revenue, there’s a good chance Diamond’s creditors may choose bankruptcy court in coming months. That process could result in the cancelation of current RSN contracts, forcing leagues and teams to find new outlets and do without payments.

What is the implication of Diamond Sports bankruptcy for the Reds?

In October 2016, the Reds agreed to give the Fox Sports Ohio network the broadcasting rights for the club through the 2032 season. The terms have never been disclosed but it’s safe to say the Reds’ annual payment would be several tens of millions. In the short run, the Reds (and Cardinals and others) could lose that revenue.

According to Forbes, total revenues for the Reds (net of debt payments for the stadium) in 2021 were $266 million. Of that, $41 million was from gate receipts. The Diamond bankruptcy, at tens of millions in revenue, threatens a large chunk of the Reds’ revenues.

In the medium term, MLB could step in as a temporary or permanent platform. The league has been interested in the lucrative streaming rights owned by the RSNs. In the longer-term, baseball streaming is expected to end up with Big Tech. A few MLB games have already been provided by YouTube, Facebook, AppleTV+, Amazon Prime and NBC’s Peacock. It’s easy to imagine one or more of those companies coming to own the rights to Major League games.

Restructuring the sports broadcasting market is inevitable. The decades-old reliance on the CATV/RSN framework is due for serious overhaul. Diamond Sports bankruptcy in coming months would accelerate change. But a quick, viable solution is nowhere near guaranteed. Older baseball fans – the core MLB demographic – may be put off by finding streaming services to watch ballgames.

The Reds budget could be hit hard if their rights fees are suspended and/or significantly reduced in coming years. Either way, that large uncertainty reverberates through the “no cash call” promise into the 2023 Reds payroll number.

The Attendance Nosedive

“We depend more on our fans as a percentage of income generation than most teams.”

– Bob Castellini, 2021

Reds attendance in 2022 — 1.4 million total, 17,569 average home gate — was the club’s lowest since 1984. That’s down 22% from the pre-COVID season of 2019. It’s 8% lower than 2021 which included lingering COVID fears and capacity restrictions for the first 26 home games.

It hasn’t always been so. The Reds averaged 2.4 million fans from 2012-2015. That’s a million more fans per year within the last ten years. Even after four 90-loss seasons (2015-2018) the club managed to attract 1.8 million in 2019.

Is declining attendance a league-wide problem that every franchise is facing?

Across MLB, more people attended games in 2022 compared to 2021. All but two clubs – the Rangers and Reds – saw attendance increases from 2021. MLB attendance in 2022 was down 6% from 2019. But that’s less than a third the size of the decline the Reds experienced, the steepest among all teams.

What other explanations are there?

Well, the team wasn’t great. Some fans go to games just for a night out. But others want to see the Reds win or at least watch good baseball. Notable players from the 2021 team – Tucker Barnhart, Wade Miley and Nick Castellanos – were shipped off or left on their own. In March, the Reds front office announced stunning back-to-back trades of Sonny Gray, Jesse Winker and Eugenio Suarez, signaling the onset of scorched-earth rebuilding. Luis Castillo and Tyler Mahle departed mid-season.

Losing hurts attendance. The team’s horrible 3-22 start, which may have been partly caused by those clubhouse-jarring trades, undercut any hope of the team contending and discouraged fans.

The obnoxious and ignorant remarks by Phil Castellini on the day of the home opener were widely publicized and alienated many fans. It’s hard to know the exact magnitude of the damage caused by his boorish, entitled comments, but it had to be significant. In my case it was the final straw.

A few thousand fans showed up for the sad season finale to watch a 15-2 thumping by the Cubs. It was loss number 100 for the Reds in 2022.

In our final segment of this series, we’ll examine how these factors have combined to torpedo the Reds roster. We’ll also take a look at a possible solution beside the obvious one.

Steve Mancuso

Steve Mancuso is a lifelong Reds fan who grew up during the Big Red Machine era. He’s been writing about the Reds for more than ten years. Steve’s fondest memories about the Reds include attending a couple 1975 World Series games, being at Homer Bailey’s second no-hitter and going nuts for Jay Bruce at Clinchmas. Steve was also at all three games of the 2012 NLDS, but it’s too soon to talk about that.

2 Responses

  1. Ernie Pantusso says:

    Phil’s comments were the last straw for me too. I’m 33 years old and last season was the first season I didn’t attend a single game, aside from the 2020 season. On top of that, I barely watched them on TV. After Opening Day, I don’t think I watched one full game. I used to watch almost every night, at least until football season started and the Reds were usually out of it. But I don’t want to waste my time and money giving it to someone who takes it for granted. It’s also hard to care about a team that isn’t trying. The roster moves made that clear. Even if you give them the benefit of the doubt and assume they have a long-term plan in place, the Castellinis have given us no reason to be optimistic that the plan will be executed successfully since they took over. Bad luck definitely played a part in diminishing my interest too, with Votto, Stephenson, and India all getting hurt and missing big chunks of the season. I also have a kid now, and I’d rather play with her. Much easier to follow FC Cincinnati through the summer, who only play a game or two a week and it’s over in two hours.

    As far as broadcasting contracts go, I think it’ll be interesting to see how things go with the MLS deal with Apple this year. Could be a blue print for other leagues moving forward. I’m not sure if they’ve announced how the broadcasting crews will work, but I’d imagine that rather than every team having their own specific crew that travels with the team, Apple will probably only have a handful of crews that are posted up in each city. For instance, Tommy G might call the games played here in Cincinnati, but when they travel to New York, they’ll get the New York announcers.

  1. January 4, 2023

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