Almost no one in the Houston Astros organization is making big league money. The highest-paid player is pitcher Erik Bedard, who is playing on a one-year, $1.15 million contract. No one else is pulling in over $1 million a year. That is, no one besides Jim Crane, who owns the worst team in the majors and is quietly making more money than any baseball owner in history.
The Astros are on pace to rake in an estimated $99 million in operating income this season. That is nearly as much as the estimated operating income of the previous six World Series championship teams — combined.
Yet the Astros are 43-86, worst in the majors. Of the 270 Major League Baseball teams who have taken the field since 2005, none have finished with a worse winning percentage than Houston’s.
They have become so profitable thanks to slashed payroll expenses and soaring television revenues.
Since becoming the Astros’ owner in 2011, Crane has gutted the team of its most expensive players while building up the farm system. Over the course of this season, the team will pay its players an estimated $21 million in salary and bonuses. That is down $56 million from 2011, when Crane bought the team.
The Astros opened this season with a league-low $26 million active payroll and have since cut it to under $13 million, according to the Houston Chronicle. Houston traded or released four of its five players making over $1 million.
The Astros did not respond to repeated requests to discuss the team’s finances and rebuilding strategy.
But Crane told ESPN The Magazine, “Once our minor league system is filled in, we’ll move up into the top five or 10 in payroll.”
Other teams have said the same thing, only to keep payroll low year after year. But the Astros might actually mean it. Crane doesn’t appear to be gouging fans for profit. Since becoming the owner, he has introduced fan-friendly policies like allowing food and drinks into the ballpark.
But he will likely use some of the cash flow to pay down the reported $275 million debt he took on when buying the team. He financed the purchase with a $220 million loan from Bank of America BAC +0.34% and assumed $55 million of debt from a previous loan with Major League Baseball, according to the Sports Business Journal.
If the Astros were to use their current gains to pay for future players, $99 million could make a huge difference. The Astros could have taken on the contracts of the entire starting lineup for the National League all-star team this year for just $84 million.
Sixty-four major leaguers make more individually than the Astros’ current 25-man active payroll makes collectively. The New York Yankees pay nine players more than the Astros payroll. Twenty other teams pay at least one player more. And Jason Bay, who is not even on a team, is earns more than the all of the Astros, thanks to an old contract with the New York Mets.
Crane has dropped payroll despite raking in revenue from one of the biggest television deals in all of baseball.
The regional sports network Comcast CMCSA -0.66% SportsNet Houston pays the Astros $80 million a year to show their games — about $50 million more than the Astros got under their previous deal.
The massive boost in revenue means that the Astros have plenty of spare money. They could pay for their current payroll six times over with money from their local television deal alone. And they bring in nearly $40 million from other television and radio deals.
In an age when DVR and Netflix allow people to watch TV without commercials, live sports remain one of the few types of programming that advertisers consider DVR-proof. No one wants to miss a play, and everyone has to see it live — and is therefore stuck with the commercials too. Just 19% of television households owned DVR in 2008, but 44% do today, according to Nielsen. Sports programming has never been so valuable.
Owners like Crane are getting in on the action.
The Astros own 45% of CSN Houston, the Rockets own 33%, and NBC Universal owns the rest. It is becoming increasingly common for sports teams to take equity stakes in the networks who buy their rights.
“Sports rights are escalating astronomically, so ideally, on a team you want to be benefiting from anybody who is in there trying to take a piece of margin out of it,” said Derek Baine, an analyst at SNL Kagan who covers sports media. “It’s a way you can generate big fees while still capturing some of the upside if they ever get sold. Because when they get sold, they go for pretty big valuation also.”
But CSN Houston has run into problems. Since launching last fall, the network has had trouble signing deals with local satellite and cable providers who do not want to pay their pricey rate per subscriber — $3.03, 38 cents above the average for regional sports networks, according to SNL Kagan. CSN Houston is shown in just 40% of the TV households in Houston, according to the Houston Chronicle. As a result, the network lost $63 million last year, according to SNL Kagan, which analyzes the business of television.
As the largest stakeholder in CSN Houston, the Astros absorbed the brunt of those losses. FORBES considers regional sports networks separate businesses and does not include their losses or gains in its operating income estimations. But even if the Astros’ roughly $23 million loss were included, they would still have an estimated operating income of $71 million, higher than any team in history.
From Crane’s perspective, it does not much matter whether the revenue is coming from the Astros proper or from the regional sports network partially owned by the Astros. And fortunately for Crane, CSN Houston should make more money as basketball season nears. With Dwight Howard in town, ratings for Rockets games will likely soar. TV providers may be more likely to sign on with CSN Houston once Rockets games start. If that happens, both the Rockets and the Astros will cash in.
As teams take stakes in regional sports networks, owners now have a new formula for making teams profitable. No longer can they rake in huge gains by filling stadiums with as many people as possible and keeping player payrolls low — regardless of wins and losses. Now on-field performance, and the buzz it creates in town, make TV ratings soar or plummet — and owners’ profits go with them.
“That’s the bottom line here is that the operators who haven’t carried CSN Houston yet think it’s overpriced given how the teams are performing,” Baine said. “If they did better, then they would probably be more likely to be picked up by DirecTV and others, so that would definitely help.”
That is good news for Astros fans. Although Crane is making money off of the old formula now, he could make even more if he ups payroll and fields a team good enough to draw fans back to the ballpark — and more importantly, back to their television sets.