The owners' new game is managing (Fortune, 1991)August 4, 2013: 8:00 AM ET
Editor's note: Every Sunday we publish a favorite story from our magazine archives. With the passing of the MLB trade deadline this week and the ongoing controversy with Alex Rodriguez and his potential suspension from baseball, sports salaries were on our minds. This 1991 feature looks at how various professional sports had to navigate a variety of business issues, including salary, broadcast rights and stadium financing.
You think you have cost problems? Have you tried paying Roger Clemens his salary? The squeeze is forcing the sports business to get sophisticated.
by Bill Saporito
FORTUNE -- Sixty feet, six inches is the distance from a baseball pitching rubber to home plate, a span that Roger Clemens of the Boston Red Sox, applying formal physics, reduces to 0.44 second per pitch. The Rocket throws his heater at 95 mph. In the less formal physics of the game, this speed reduces many a would- be hitter to Jell-O in spikes clutching a big toothpick. Clemens starts 35 games a year and pitches 250 innings, tossing about 120 pitches each outing. Next year the Sox will pay him $5.4 million, roughly $1,286 a pitch. That's $21.26 a foot for horsehide delivery, if you're counting.
And in sports these days, everybody is.
Professional sports are grappling with management troubles more complex than the leagues have ever faced before. Revenue growth is slowing while costs are fast breaking away. Says National Football League Commissioner Paul Tagliabue: ''There have always been cycles when revenues did not grow.'' In the past, however, near total control of the movement of players from team to team gave the leagues an iron fist over salaries, their biggest expense. And fierce bidding by the networks for the rights to televise the games eventually made the revenue problems go away.
Now, escalating player salaries and declining network TV viewership -- indeed, declining networks! -- are forcing sports bosses to come up with a more thoughtful long-range game plan. Peddle more tickets? Not likely. Basketball, football, and hockey teams already sell more than 90% of the available seats, and baseball attendance is on the road to another record season. Says David Stern, commissioner of the National Basketball Association: ''Our arenas are full, our ticket price increases will moderate, and the number of games on TV won't rise dramatically. So we've got to grow new TV audiences and deal with global opportunities.''
The squeeze play is on. Half the National and American League baseball teams may well lose money this year. Profits in the National Hockey League are expected to show a drop of two-thirds for the season recently completed. The National Football League is facing an ugly labor situation that could put it in baseball's cleats soon. And all the leagues suffer from a problem that only a sports monopoly can have. The teams compete on a level field -- literally -- but revenues aren't level at all. Clubs in big, rich markets get more money than those in smaller, poorer markets, and that disparity threatens the competitive future of first-rate teams in second-tier cities.
Just like their players, the better owners are finding a way to win. The buzzwords in sports biz are now ''additional revenue streams,'' ''extending the arena,'' and even ''customer service.'' Stadiums are being transformed into quasi cruise ships and marketed accordingly. White-glove meal service and champagne in first class; hot dogs and beer in steerage. Got a 20-year-old stadium? It's outdated. Tell the politicians to build you a new one or you'll take your pucks or balls and blow town. That's how Jerry Reinsdorf, the chairman of the Chicago White Sox, got the new Comiskey Park for a playground. Still selling your broadcast rights to the local station? Buy a station instead as the Boston Celtics did or go to pay-per-view like Norman Green and his Minnesota North Stars.
Expansion is another sure bet to bring in the bucks, and all the leagues are getting bigger. Sunbelt cities in particular are clamoring feverishly for a franchise and the status they believe comes with it. Franchise fees, the price an owner pays the league to start an expansion team, are leaping higher than Michael Jordan (see table). The NFL will award two new franchises next year, and the going price is estimated at around $150 million apiece and possibly as much as $200 million. The last time the league added teams was in 1976, and the price then was only $16 million. This month the National League will name two baseball franchises, and the price of admission is $95 million, up a mere 13 times from the last expansion in 1977. Here's the play-by-play on how the four most popular sports are coping:
BASEBALL. The problem is a double-header. Revenues vary by local market, but salaries are set on a national basis, partly because of an arbitration system that all but guarantees big increases. Says baseball commissioner Francis T. ''Fay'' Vincent wryly: ''It's such a good system that no one has copied it.'' This summer looks like another banner year for the sport in attendance, revenues, and especially millionaire hardballers -- more than 200 of them were on the field opening day. That stat is altering the economics of the league and, according to Vincent, of the game itself. ''In two sentences,'' he says, ''baseball is not threatened. Baseball as we know it is.''
Sales reached $1.3 billion last year and are likely to increase to $1.5 billion this season. Profits, however, which hit $210 million in 1989, began to drop in 1990. Baseball is still profitable as a whole, but the top eight teams make all the money. Meanwhile, the cost of talent is rising like a Nolan Ryan fastball. More than 30 players will make at least $3 million each at their summer jobs, and the average salary is nearly $900,000, a 50% increase from 1990.
Unlike the NFL, which tries to keep all its teams competitive by maximizing revenues from sources like network TV that the entire league shares, each baseball team retains its local broadcast rights. So the size of its market can mean huge differences in TV fees. The Yankees, for example, collect $42 million a year to besmirch the legends of Ruth, Gehrig, DiMaggio, and Mantle. The Pirates get only as many millions as there are rivers in Pittsburgh (three). Says Reinsdorf, the White Sox owner: ''There are a handful of teams who cannot lose money, and a handful of 'can't makes.' The rest are in the middle. To me, that's an unhealthy situation.''
That differential hasn't drastically affected the standings yet -- the champion Cincinnati Reds hail from a small market -- but the potential is there. Vincent says the payroll of the Oakland Athletics, the American League champions who were wiped out in the World Series last year, is greater than the total sales of the Seattle Mariners. The player payroll at the Pittsburgh Pirates, who won the National League East last year, will likely rise to $24 million this year, from $11 million in 1989. As Reinsdorf puts it: ''Pittsburgh hasn't run out of money, but they're moving along nicely.''
Even clubs that want to play rough in negotiating salaries are hamstrung. Under the collective-bargaining agreement with the Major League Baseball Players union, athletes with six years in the bigs are free agents when their ( contracts expire and can shop themselves around. Stars command the market rate -- as they should -- $3 million-plus in many cases.
What's worse, the owners don't have the ability to control costs in negotiating for players with three to six years' experience, who don't qualify for free agency. A clause in the agreement allows salary disputes to go to binding arbitration. The team and the player (or his agent) each submit figures and the arbitrator picks one of the two. But what does the arbitrator consult as a salary barometer? The going rate for free-agent contracts. So a big signing by Boston of a second-rate second baseman who happens to be a free agent affects salaries in Seattle.
Commissioner Vincent's ability to figure out a way to share revenues among players and owners in big and small cities will probably serve as the measure of his success on the job. As a former president of Columbia Pictures, he isn't new to wretched excess, and the enormous salaries don't bother him. But he is convinced that he needs to find some combination of a salary cap and revenue sharing to control expenses and keep the league competitive.
Members of the union may be hard pressed to sympathize. The owners' last attempt at cost control, between 1985 and 1987, was termed collusion by two arbitrators, and the league is paying out damage awards of more than $280 million to players whose earnings suffered as a result. Union President Donald Fehr says today's salaries are just catching up to where they would be had collusion not interfered with the market. He and others argue that clubs have used depreciation of player contracts and other accounting practices to hide earnings -- a notion the owners dispute, naturally. To get at the issue, the owners and the union have formed a joint economic study committee to develop a more rational approach to the business of baseball.
FOOTBALL. The state of labor relations in the NFL makes baseball's look absolutely cozy. In 1987 the owners hired strikebreakers to crush a 24-day player walkout. Eventually some highly paid stars broke ranks with the National Football League Players Association, and the rebellion was over. But the owners have yet to claim the real rewards of winning: Labor costs continue to skyrocket, and the free-agency issue, over which the players struck, has not been settled. Currently a team that signs a free agent must compensate the player's former employer. Only two players have switched teams on that basis.
Big question: With whom is the NFL going to negotiate to come up with a collective-bargaining agreement? Following the strike the union sued the league on antitrust charges and lost. Then in an effort to declare all its players unconditional free agents, it acted to decertify itself as bargaining agent. A group of individual players has also filed suit and won its case, but the NFL owners are appealing.
Fortunately for the NFL, it has never had a problem generating revenues. Last year the league's 28 teams took in about $1.2 billion. Says commissioner Tagliabue: ''Our top priority is to come up with a collective-bargaining agreement. There is an opportunity for everybody as the league grows.'' --
BASKETBALL. The NBA had its crisis years ago, and since 1984 has led a charmed life with David Stern as commissioner. He is justly credited with transforming the league from a lackluster piece of entertainment with serious financial problems into the model of modern sports management.
Last year the NBA more than tripled its network television contract, moving from CBS to NBC for $600 million, and so far this season sales of such merchandise as warm-up suits and hats licensed by the NBA Properties subsidiary are expected to reach $1 billion at retail this year, from $107 million in 1986. When you're good you get lucky. The NBA championship now under way features the extragravitational Michael Jordan of the Chicago Bulls against the extraordinary Earvin Johnson of the Los Angeles Lakers, nom de hoop: Magic. Big-market teams. Even bigger TV ratings.
Basketball is the only sport so sage as to tie salaries directly to revenues. In 1983, when it was apparent to the players that several teams would fold if drastic action were not taken, the union agreed to a revenue- sharing plan that capped player salaries at 53% of the NBA's sales. Thus, the league has avoided the cost escalation that is hurting other sports; at the same time, the stars can still shoot for big money. Magic Johnson pulls down $2.4 million a year along with those rebounds. Says Stern: ''To the extent that those shared revenues grow substantially, you have a satisfactory blueprint.''
A corporate lawyer who first learned about business in his parents' New York City delicatessen, Stern is hard at work developing an NBA that is an integrated marketing machine. Says he: ''The issues for us will be the same as for other businesses we are going to resemble.'' Those businesses are entertainment companies like Disney and integrated media outfits like Bertelsmann of Germany that can deliver related products worldwide. And just like their executives, Stern looks at his business as an entertainment company with a global brand.
The strategic issue is to enhance the value of NBA-brand basketball by increasing its exposure. Along with other sports, basketball's TV ratings are down this year, reflecting declining network viewership. Even so, basketball still makes money for General Electric's NBC Network because it is a relatively low-cost sport, and Stern is jumping through hoops to keep it coining cash. As part of the deal, NBC has to advertise the NBA during prime time, when games generally aren't played. The league is producing for NBC a feature program called NBA's Inside Stuff that the network will air for 36 weeks alongside the regular season and playoff games.
Basketball seems tailor-made for global expansion, but don't expect an NBA European division soon. Instead, you'll see what Stern calls ''event-driven NBA promotions.'' These include the McDonald's Open, a preseason tournament that pits an NBA team against three top European clubs. The NBA's opening game for its regular season this year was played in Japan. Each event is backed up by a full-court press of promotions. Dribble down the supermarket aisles in Italy, and you are likely to see the NBA logo on signs hawking Lipton tea; buy a Big Mac in Milan, and there's an in-store burger promotion touting the McDonald's Open. Other partners looking to have their message relayed globally include American Airlines, Avis, Gatorade, and Sheraton hotels.
HOCKEY. Among big sports leagues, the NHL has become the classic niche marketer. Says the league's president, John Ziegler: ''We used to want to be the Ford or Chevy in everyone's garage. Now we want to be the Cadillac.''
The NHL has no American television network contract and is unlikely to get one for a couple of years because too many affiliates don't want to carry the games, Ziegler admits. As a result, the Stanley Cup playoffs could be seen in fewer than half the homes that have television. So the league must focus on revenues inside the building and look for new territories to conquer across the country.
With only 14 U.S. clubs in the 21-team league, hockey could be on the verge of its greatest expansion ever. But the league will have to market itself in places that are hot enough to melt ice in January. It is gambling that two new franchises, in Tampa and San Jose, California, will erase previous disasters in Atlanta and Oakland, where teams were underfinanced and undermarketed to the uninitiated. A third new franchise, in chilly Ottawa, the capital of a nation that takes its hockey seriously, has a virtual lock on success.
SUCCESSFUL STRATEGIES. As the cost of new or purchased franchises rises, owners are coming to realize that it's not whether you win or lose, but how you raise cash flow per seat that counts. That's why control of the stadium or arena where the game is played has become vital to the owners. In Chicago, the Sox are sitting pretty in the spanking-new Comiskey Park built by the state of Illinois and the city of Chicago to keep the team from heading south. To call Comiskey a stadium is a misnomer. There are 85 private suites, accessible by private elevator, with catering and concierge service. A two-level club restaurant ''designed to accommodate even the busiest executive,'' according to a press release, includes private phone booths, fax machines, and other amenities. A couple of times a week they even play baseball there too.
The new field is the latest sports arena to embrace what is known as the Robin Hood theory of marketing. As the name implies, the idea is to soak the big spenders while providing enough cheap seats to keep the locals rooting for their team. For example, at the Palace, a luxurious complex in Auburn Hills, Michigan, that Detroit Piston owner Bill Davidson opened in 1988, boxes rent for up to $120,000 a season. The team is said to generate $12 million annually from this sybaritic seating.
A zealous convert to the Robin Hood theory is Norman Green, the Canadian developer who mounted a $50 million mission last year to rescue the money- losing Minnesota North Stars hockey team. He had to sell half a shopping center to do it. But the Stars shone for him this year, reaching the Stanley Cup finals.
One of Green's first acts was to rip out the owner's box to install luxury seats. His goal is to nourish season ticket holders. Pampered holders aren't disappointed if the team loses, as long as it is competitive. So far the strategy is working: The Stars sold 3,300 season tickets for 1990-91, the year he arrived, and 7,300 already for the coming year. During the playoffs Green ''extended the arena'' by selling the game on pay-per-view at $12.95 a pop.
Green has also got some other ideas about extending the arena. To him, the North Stars are a shopping center on skates. The terms of his purchase gave him control of the stadium, called the Met Center, including concessions, parking, and development rights. He is planning to wrap a new 30-foot-wide concourse that will include retail shops around the existing building. He reckons that the Met Center mall plus the luxury seating and his share of the concessions and parking could make the difference between winning and losing -- money. Last year the North Stars lost $4 million; Green expects to be in the black next season. With all those extras, says he, quite happily, ''Fifty million becomes a reasonable purchase price.''
THE OUTLOOK. As the leagues evolve, owner-operators like Green are probably going to be the exception. The NFL, which now prohibits corporate ownership of teams, is under financial and legal pressure to change. Corporate owners are not new to sports, particularly when relief help is needed. Anheuser Busch, for instance, bought the Cardinals in 1953 to keep the baseball team at home. Rival clubs feared CEO Gussie Busch would spend wildly to buy players; he didn't. Today the Cards are one of the premier businesses in baseball and regularly draw more than 2.5 million fans a year.
In theory, anyway, corporate ownership works because managers are likely to view the team abstractly, as a place to apply business skills rather than as an extension of ego to be indulged. Many owners like to define themselves as entertainment companies, but Madison Square Garden, the division of Paramount Communications that owns the NBA's New York Knicks and the NHL's New York Rangers, really lives the role. Says CEO Richard Evans: ''Paramount Pictures produces scripted entertainment. We are producing live entertainment and putting people in seats to view a live event or the translation of a live event on a TV screen.''
That's a game that doesn't necessarily stop at sports. The company also includes MSG Enterprises, which presents 420 nonsports events at Madison Square Garden, and MSG Event Productions, which produces the Miss Universe Pageant, the NBA All-Star Game introduction show, and other live events.
To complete the loop, Paramount owns a cable television channel, MSG Network, that broadcasts the Knicks and Rangers. And when MSG paid a staggering $500 million for the rights to carry the New York Yankees for 12 years, the company had year-round programming. MSG Network now reaches 4.5 million homes, creating ad revenues the company can now capture. Says Evans: ''It's a totally integrated approach to all the elements of live events.''
The only hole in the strategy is that the Knicks are stinko and the Rangers haven't won a Stanley Cup championship since the New Deal. Evans vows to change that, but meanwhile score one for the Paramount shareholders.
Rapidly rising salaries and harsh competition are surely not new to sports. In 1882 the upstart American Association -- not related to the American League, born in 1901 -- challenged the National League for baseball supremacy. The new league paid star players vastly higher wages and devised a strategy that included two new marketing ploys: beer in the bleachers and Sunday baseball. In its first year the new league outdrew the Senior Circuit because fans paid to see well-compensated stars play the game. They always will. But the bidding war, regulated in 1890 by yet a third league, eventually outstripped the American Association's ability to make a profit. Beer and Sunday baseball stayed around, but the league disappeared. This is a lesson about cost management that some teams have taken a long, long time to learn.
REPORTER ASSOCIATE Mark D. Fefer