Theo Epstein on 2019 Budget, How New Network Impacts Payroll Moving Forward

This is a companion piece to an earlier look at Theo Epstein’s comments about the Cubs’ remaining offseason plans during his recent radio interview on 670 The Score. As such, I’m going to dispense with much preamble and get right into it.

The whole idea of the 2019 budget remains amorphous, which is kind of how it has to be since the Cubs aren’t going to share an actual number publicly. And since that’s hard for us to comprehend, there’s a tendency to attach tangible benchmarks to make it more real. Like assuming they’re trying to avoid the second or third tiers of the luxury tax, which Epstein has adamantly denied.

“The CBT (competitive balance tax) threshold is not dictating any of our actions or inaction this winter at all,” Epstein told Bruce Levine and Matt Spiegel Saturday. “We’re not governed by that. There are times when strategically you wanna make sure you’re under it or where you don’t mind going above it. This isn’t one of those offseasons where strategically it makes a heck of a lot of difference to us.

“It’s just traditional budgeting: You spend what you have, you don’t spend what you don’t have and you try to put the absolute best team on the field with what you do have. And that’s what we’ve done every year. We have more than enough resources to win and that’s the way we’re gonna continue to approach it.”

In his typical fashion, Epstein really isn’t saying anything here outside of the acknowledgement that there are finite budget parameters. And though said limits must naturally include an awareness of the luxury tax — since exceeding its thresholds would result in surcharges that will impact the budget — penalty tiers are not being used to determine what the Cubs have to spend.

An even simpler way to view it is to look at where payroll stands right now, which is an estimated $227 million after arbitration raises, benefits, etc. That’s about $21 million over the $206 initial CBT threshold and is actually into the second tier, so we’ve already eliminated those as concerns. And if the Cubs were really worried about the $226 million level, they would’ve kept Tommy La Stella rather than trading him and signing Daniel Descalso.

The last phrase is interesting, though, as it indicates the Cubs do indeed have more money to spend on bringing in additional players. Though I suppose he could also be referring to the existing talent on the roster as a resource, thereby saying it won’t cost anything to improve. Perhaps it’s both.

“This is not an offseason where anyone should be fixated about the tax,” Epstein continued. “Like any business, there are budgets and you can’t ignore them and you can’t spend what you don’t have and you should spend everything you do have.

“And there will be offseasons when being very, very mindful of the CBT and not going just a touch over it for example and hurting yourself with respect to future tax rates or draft position or those things that matter, this is not one of those offseasons.

“So I wouldn’t waste a lot of time thinking about the tax as you’re trying to assess what’s going on.”

Okay, the big takeaway here is the part about “spend everything you do have,” though Epstein is talking about what he’s been allotted for payroll and not what the Ricketts family has access to. That latter pile of cash has been the subject of much conversation and consternation, especially since the earliest reports that the Cubs weren’t going to be as brazen with their spending as many had expected.

The cause of the increased frugality isn’t certain, though speculation has ranged from lack of sustained playoff revenue from the Ricketts’ Wrigleyville businesses to disappointing estimates from their forthcoming broadcast partnership. There has even been scuttlebutt that Todd Ricketts is mulling a gubernatorial run in Illinois during the next election cycle, a gambit that would require quite a bit more of the family’s generational wealth than his bike shop can generate on its own.

It’s entirely possible that all those things have influence over the budget, but the most obvious and pressing is the TV network, reportedly called Marquee. The Cubs may be partnering with massive media conglomerate Sinclair Broadcast Group on the new venture, which will begin operations at the conclusion of the 2019 season. This is huge for the Cubs, who will no longer have to share revenues with the White Sox, Bulls, and Blackhawks as is currently the case with their NBC Sports Chicago deal.

If you’ve been following this subject, you may be aware of the recent prediction that the new regional sports network could charge as much as a $6 carriage fee to cable providers wishing to offer it as part of their package. What you might not understand is that doesn’t mean a Cubs fan can simply choose to add the channel for a nominal fee. No, it means every subscriber would see their cable bill hiked by at least the amount of the carriage fee.

So that’s $6 for every single subscriber of every single cable carrier that has Marquee as part of their offering. And I know I’m getting a little far afield here, but a lot of people don’t understand how this works and I want to clear things up. Due to MLB’s desire to protect the broadcast revenues of its other teams, you cannot purchase or stream Marquee if you are not in an area considered to be part of the Cubs’ fiefdom.

If you are an subscriber, however, you will still have access to Cubs games like always. Cord-cutters who stream their TV service will probably be out in the cold too, unless of course Sinclair extorts, er, agrees upon a carriage fee there as well. The whole RSN revenue model only works when it can be supported across millions of subscribers, most of whom collectively subsidize the cost of the new channel for the minority portion of viewers who actually want it.

Anyway, the moral of the story is that Marquee will generate whatever the carriage fee is multiplied by however many subscribers have it, plus the advertising revenue it pulls down. If we figure a bare minimum of three million subscribers at $6 per month, that’s $216 million per year before ads. The Cubs obviously don’t keep all of that and not all of what they net goes to player salaries, but even a 10 percent cut means an extra $22 million in payroll. And that’s without ad revenue.

This is obviously all very rudimentary and I’m leaving out most intricacies of the matter, but suffice to say the new deal should be worth somewhere between a crap-load and a butt-ton. Either would be enough to sign Bryce Harper for a decade and still fashion several rolls of toilet paper out of $20 bills.

Thing is, though, we don’t know how much Marquee is really going to earn. No partnership has been formally announced and that $6 carriage fee was merely a prediction, so the cart is still resting motionless in front of the horse. Then you’ve got the issue of locking down carriers, which the Dodgers and SportsNet LA can tell you isn’t a given. Long story short, it doesn’t sound like the Cubs are letting Epstein buy on credit at this juncture.

“First of all, nothing’s finalized yet but I think the way this thing is most likely to work when it comes together is the first few years of any new setup will be really similar to what we’ve had in the past as far as the money coming in,” Epstein said as his phone alerted him to new messages. “But then with continued growth and success as the thing develops and the team on the field stays successful, you can see the potential for greater growth into the future.

“I think our business side is working hard at it and from our standpoint, we’re excited to see the consistency of the dollars coming in.”

Given the timing of the texts Epstein was receiving, I couldn’t help but wonder whether Crane Kenney was listening to the interview and reminding his colleague not to betray any specifics of the pending deal. Not that Epstein is known for such talk, particularly with such a big undertaking, but you never know. Or maybe it was just his wife reminding him to pick up some fresh herbs for the dinner he promised to make.

Regardless, the idea that the new network won’t result in any meaningful profits for a few years sounds like telling your kids they need to prove they can take care of a goldfish before getting a dog or cat. Unless there’s some sort of split ownership or rev-share arrangement that will take a while to really bear fruit, Marquee should represent an immediate, significant influx of money. If not, what’s the point in making the change?

It’s also possible the initial figures are hedging against limited adoption, which is what happened in LA with the Dodgers when they first launched their RSN. That would be a perfect storm of awful, since the Cubs would be freezing out millions of fans and wouldn’t even have additional revenues to show for it. Let’s all hope that’s not the case.

Actually, no, we should all demand that’s not the case, since it’d represent the most asinine turn of events possible.

What seems most likely is that Epstein is simply playing a little coy here, since he can’t very well come out and admit to having access to nigh-unlimited funds once the TV deal is in place. Not only would that show his hand more than he’s wont to do, but all the specifics of the deal simply aren’t hammered out. Either way, Epstein’s comments about offseason targets seems to indicate that his budget remains static at least for the time being.

Could that change if Scott Boras comes back to the Cubs with an option to match what else is being offered to Harper? Possibly. But for now it seems as if Epstein is either in the dark about what kind of new money is on the way or the Cubs aren’t willing to increase the budget based on the remaining unknown variables of the pending venture.

Fun times, huh?

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