November 29, 2001

The Imbalance Sheet

Catching Up

by Keith Law

Plenty of small items to clean up amongst the mess that is baseball today:

• First, contraction. At this point, it seems safe to say that baseball won't be eliminating any teams before the 2002 season. The lawsuits currently pending will slow the process enough to kill it by means of a pocket veto of sorts.

  That alone is a major embarrassment for the owners, who would have minimized the damage they inflicted on themselves via contraction if they had managed to execute it swiftly. Of course, the owners' failure to bring the Players Association into the discussion is just evidence that either they didn't realize that a swift move was the best path, or they never really intended to eliminate two teams in the first place.

  There remains an incredibly simple solution to the problem of disparity in baseball, once you realize that "disparity" means "the Yankees have too much money." The Expos are the one baseball franchise whose viability is in any serious doubt. While the fan base for baseball exists in Montreal, the ill will created by the current ownership--and even more so, by its predecessor--will be difficult to overcome. The Yankees' extraordinary revenue base is a function of an enormous market that, even split with another major-league team, still dwarfs that of any other team.

  So the solution is simple: move the Expos to the New York area. The Brooklyn Cyclones of the New York-Penn League averaged 7,800 fans per game in their first season in a stadium with a listed capacity of just 6,500. The Lakewood (N.J.) Blueclaws, located in Ocean County, averaged 6,889 fans a game in their first season, mixing in 301 standing-room-only tickets per game as well. The independent Long Island Ducks averaged 6,155 fans per game (capacity: 6,002) despite their stadium's location well into Suffolk County.

  The populations are there: the Newark, N.J., metropolitan area has more than two million people; Brooklyn has nearly 2.5 million people; and Nassau and Suffolk Counties (i.e., Long Island) have more than 2.7 million people. The fan bases are there. Adding a team to the New York area, particularly to northern New Jersey, would reduce the potential market for the Yankees, creating parity without alienating huge swaths of the fan base.

• Have you heard about the 25 guys who had natural monopolies and still couldn't make money? It's a little hard to swallow. Bud Selig claimed that 25 of the 30 teams in baseball "lost money" in 2001, and that on industry revenues of $3.5 billion, the 30 teams lost a combined $500 million. I can't begin to tell you what a crock of pea soup that is.

  One scam is the revenue figure. Baseball teams are notorious for hiding and transferring revenue to affiliated companies. The Braves, for example, book relatively little in local broadcasting fees, because they are owned by the same company that owns their broadcast affiliate, TBS.

  • MLB earned about $417 million this year from its national TV contract with Fox.

  • MLB earned about $250 million this year from its national TV contract with ESPN.

  • The 30 teams sold more than 72 million tickets this year. At an average ticket price of $15, that's about $1.1 billion in revenue. At an average ticket price of $20, that's $1.45 billion in revenue, and that's probably still short, because we're not considering club seats and luxury boxes.

  • Each team earns at least $5 million per year in local broadcast revenues, with the Yankees likely to earn well above the $52 million they received in the last year of their contract with the Madison Square Garden network.

    Conservatively, this adds up to another $600-$750 million.

  • Fans bought $2.4 billion worth of MLB-licensed merchandise in 1999. MLB's cut isn't known, but it's above $150 million.

  A back-of-the-envelope calculation yields about $3 billion in revenue from just five sources. Still to tabulate: a national radio deal with ESPN; local radio revenues; concession and parking revenues; and sponsorship revenues, including lucrative stadium naming rights deals that run several million dollars per year for the teams that have them (currently about half do). Let's see the Braves get their $50 million from TBS before we take this revenue figure seriously.

  But that's not all there is. On the expense side, there's even more flexibility for the creative accountant. Several writers have noted owners' abuse of favorable rules on depreciation of player contracts in force at the time a franchise changes ownership. Owners who purchase a team by means of a holding company--which just about any businessman worth his salt will do--also get to place a ridiculous accounting fabrication called "goodwill" on their balance sheets to account for the difference between the price paid for the team and the book value of the assets acquired. That's a cool $100 million or more in some instances, and it's written off slowly over a period of 40 years. In the 1990s, 21 teams either changed hands or came into being, so there is probably $40-$50 million in aggregate goodwill amortization each year among baseball teams. And so on...

  And there's still a third problem with Bud's pronouncement: nobody cares. Really, nobody cares if baseball teams lose money. They are natural monopolies run by experienced businessmen, often with some form of government subsidy. They need to learn to control their costs, even if it means not buying that shiny new Juan Gonzalez you had your eye on this Christmas.

• Finally, there's the Red Sox, who are for sale--finally. Many insiders expected team chairman John Harrington to declare himself chairman-for-life and hold on to the team as long as possible, even though the terms of the Yawkey Trust's charter mandated a quick sale. It appears, however, that Bingham Dana, the prestigious Boston law firm handling the sale, will be taking final bids this week. While it has been widely reported that Harrington is obligated to sell the team to the highest bidder, there's quite a bit more to it than that.

  Selling a baseball team is not exactly the same as selling a regular company. The remaining owners must approve any change in ownership of a franchise in Major League Baseball, and approval has, in recent years, been a difficult hurdle for would-be owners. So Harrington's obligation is to sell the team to the highest-bidding ownership group that will be approved, which puts a rather heavy burden on his and Bingham Dana's shoulders.

  The problem is that the group widely expected to throw the most money at the team, led by Tom Werner and perhaps soon to include John Henry, is the least desirable bidder now that Roger Marino is no longer in the running. Bringing one owner with a lurid history back into the game is bad enough, but bringing two would be tragic.

  The Red Sox are one of baseball's crown jewels. After the Yankees and Dodgers, and perhaps the Mariners (thanks to Ichiro Suzuki and Kazuhiro Sasaki), the Red Sox are arguably the best-known baseball franchise in the world. They boast one of the most dedicated fan bases. Right now, they have three of the most exciting players in baseball on their roster.

  Should MLB approve the Werner/Henry group, the league would be putting this brand equity at risk. Tom Werner led the ownership group in San Diego in the early 1990s that took a team coming off of back-to-back winning seasons and dismantled it, trading away top players and getting almost nothing in return. It did this, in 1993 and 1994, despite a promise to season-ticket holders before the 1993 season that it would not execute such a fire sale.

  John Henry's record isn't as damning, but it's hardly encouraging. He has waged a publicity campaign against his own franchise, complaining about the inadequacy of the 12-year-old stadium in which the Marlins play, and regularly questioning the franchise's long-term viability in southern Florida. The stadium situation in Boston is a minefield right now; is Henry really someone MLB wants to insert into the fracas?

  Baseball owners have an obvious interest in seeing teams on the block sold to the highest bidder. But when one of the game's best assets is being sold, ensuring that it ends up in the hands of the best custodians is even more important. Tom Werner's team does not fit the bill.

Keith Law is an author of Baseball Prospectus. You can contact him by clicking here.