Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, we turn to a July 1997 feature on the Los Angeles Dodgers. Team owner Frank McCourt announced this week that he will sell the baseball franchise to a consortium led by Magic Johnson for a record-shattering $2.15 billion. In 1997, however, the O'Malley family still owned the team, but the longtime owners were on the cusp of selling it off to Rupert Murdoch's News Corp. Fox Entertainment Group paid approximately $350 million for the Dodgers in 1998 -- a record price at the time (News Corp. sold the team to McCourt in 2004 for $430 million). Murdoch's purchase portended an end of an era for both the Dodgers and major league baseball, as corporations took a greater controlling interest in sports franchises.
By Roy S. Johnson, with Rajiv M. Rao and Erin Davies
FORTUNE – Peter O'Malley sounds like a man who's tired of the fight. His family has owned the Los Angeles Dodgers for 47 years --a longer tenure than any other ownership group in Major League Baseball -- but earlier in the year he stunned the sports industry by announcing that the team, one of baseball's crown jewels, was for sale. It is a sunny afternoon in May, and in a few days O'Malley will make a deal with Rupert Murdoch's News Corp., selling the team for an extraordinary $350 million, the most ever paid for a sports franchise.
But on this particular day O'Malley is troubled. He's a baseball man, after all. Running the team has been his full-time job -- practically his only job -- and the Dodgers franchise has also been the O'Malley clan's primary investment. Yet as a family business, baseball has become almost absurdly expensive and contentious. Labor wars. Rising salaries. Marketing ineptitude. Disappearing fans. A commissioner? Please. For O'Malley it is time to cash out and leave the headaches to someone more battle-ready. Someone who can afford to ride out the squalls of the tempestuous sports scene. Someone who might bring some fiscal discipline to the sport. Someone who can afford to pay him what he wants. O'Malley knows that that someone will almost certainly be a corporation.
"Corporate ownership is the way of the future, and I think that's good," O'Malley says, looking out at the field from his wood-paneled office inside Dodger Stadium. "I think it was [the late Chicago Cubs owner] Phil Wrigley who said that baseball is too much of a sport to be a business and too much of a business to be a sport, and golly, he was right on target. The last four years have been very tough for fans, players, owners, executives, everyone. In many cases, corporations have a greater sense of responsibility and more financial stability -- as well as fewer personal agendas -- than some of the individuals who have bought franchises, and that appeals to me a lot. Corporate ownership is good for sports."
Good or bad, it is revolutionizing the economics of professional sports. Once the sale of the Dodgers is approved by baseball owners -- and they will approve it, despite Murdoch's running feud with Ted Turner -- News Corp. (NWS) will become one of 52 public companies owning at least a slice of the 113 Major League Baseball, National Basketball Association, or National Hockey League franchises (the NFL doesn't allow corporations to own teams, at least for now). Once a playground for the rich, pro sports is swiftly becoming a company picnic. "Almost total corporate ownership is an inevitability," says Leigh Steinberg, the influential agent. "It's a trend that can be delayed but not reversed. Leagues can resist it. They can create rules trying to discourage it, but ultimately the nature of the sports-entertainment matrix will demand it."
Murdoch, in fact, is staking claims on the sports landscape as if he were in the Oklahoma Land Rush. While still crunching the numbers on the Dodgers deal, he actually ended up owning pieces of the New York Knicks and the New York Rangers as part of an $850 million investment in Rainbow Media, the sports programming arm of Cablevision Systems. (Murdoch is expected to sell his stakes in the New York teams to clear the way to purchase two teams closer to corporate headquarters: the Los Angeles Kings and a portion of the Los Angeles Lakers. That way he'll have the part of Southern California that doesn't already belong to Disney (DIS), owner of the Anaheim Mighty Ducks and 25% of the Angels.)
Beyond the sheer numbers, the News Corp. deals are emblematic of a deeper change: Sports franchises are quickly becoming the core asset in the sports communications business, and the long-ball hitters are getting into the game. Murdoch's arrival creates a true Murderers' Row of powerful media and entertainment companies in the owner's boxes. Leading off with Tribune Co., which purchased the Cubs back in 1981, the lineup now includes Disney, Time Warner (TWX) (Atlanta Braves and Hawks, and the NHL expansion Atlanta Thrashers, who begin play in 1999), Comcast (CMCSA) (Philadelphia 76ers and Flyers), and Cablevision (CVC).
What attracts these companies is a powerful mix of potential strategic alliances: a growing need for live-event programming in a zillion-channel broadcast, cable, and satellite universe; the emergence of sports franchises as solid "brands" that can be exploited in numerous ways; and the opportunity to blend sports with the companies' entertainment properties in stadium and arena complexes where the game is only one of many attractions. "Our main goal is to get people to spend their disposable income with properties associated with the company, whether they're our theme parks, videos, movies, or our sports teams," says Tony Tavares, president of Disney's Anaheim Sports. "If you've got a dollar, we want it."
To put it another way: An entertainment brand is really a set of managed allegiances, and there's no quicker way to forge an allegiance than by purchasing fandom. "What else can you go out and buy today that's a living, breathing example of tradition and loyalty?" says Mark B. Mahoney, who heads the investment banking division at First Union, which has represented many companies seeking to tap into the sports industry. "A film library? A music collection? That's about it. Besides, how much would it cost for any company to go out and build a brand on its own? It's easier -- and probably cheaper -- to simply buy something everybody already likes."
For all these reasons, a sports franchise has an entirely different kind of value for a corporate owner than it does for a family or an old-fashioned syndicate. If annual profitability is what you're after, you're better off with a Burger King franchise than with a sports team. Soaring salaries will likely force almost half the National Basketball Association teams into the red for this season, despite an expected increase in league revenues to $1.5 billion this season from $1.3 billion in 1995-96. In baseball, teams lost in aggregate between $200 million and $300 million last season. "Operating the team is essentially the same business it was in the 1920s; you sell tickets and hot dogs," says Stan Kasten, president of the Hawks and Braves. "And there's only so many you can sell. It's not like Microsoft, which can grow a million-dollar business into a $50 billion business."
The Dodgers, for instance, had $13.5 million in operating income last year on revenue of $75 million. Does that justify a price that's about 30 times earnings? Sure, if you're a conglomerate with plans to conquer the world, not just win the World Series. Compared with News Corp.'s $10 billion in annual revenues, the purchase price of the Dodgers looks like a rounding error. "So what if a huge company overpays by $25 million or so," says Mahoney. "It's nothing. Immaterial. Fundamentally, cash flows are generally low in comparison to values, but companies are not buying for value, they're buying the underlying software. The payout's in the pipeline."
No kidding. Baseball as a fully leveraged asset bears hardly any resemblance to what you may recall as a quiet day at the ballpark with Dad. The $242.5 million Turner Field in Atlanta, the Braves' new world, is a testament to what lies ahead: interactive cyberball. You can pitch and hit in simulated games, use electronic kiosks to peruse scouting reports on 300 current and former Braves, or watch any other Major League game in progress on one of the televisions in the Clubhouse Store. Big screens show live locker-room interviews, and there is enough fiber-optic cable buried underneath the place to allow games to be broadcast live anywhere on the planet. Kids can frolic with Bugs Bunny, Foghorn Leghorn, and other Warner Bros. cartoon characters in the children's areas. And oh, yeah, the Braves play there too.
As a business, baseball is learning what basketball has known for more than a decade. "I talk about the NBA as having 29 'theme parks,' cable distribution, a consumer products business, publishing interests, trading cards, and sponsorship relationships," says league commissioner David Stern, in his Manhattan office overlooking Fifth Avenue. "Those are areas that are attractive to the people at any major company. With that combination of opportunities, plus the increasing value of the franchises themselves, it was inevitable that you would soon move toward an ownership mix of the Fortune 500 and people among, if you'll pardon the expression, the Forbes 400."
Since 1990 the cost of entry to the NBA has quadrupled. That year the Orlando Magic and Minnesota Timberwolves paid $32.5 million each as expansion teams. Two years ago the Toronto Raptors and Vancouver Grizzlies anted up a whopping $125 million each to join the party. In baseball, Baltimore businessman Peter Angelos and a group of investors (among them novelist Tom Clancy and former tennis star Pam Shriver) purchased the Baltimore Orioles four years ago for the then handsome sum of $193 million. In light of the Dodgers' deal, the Orioles could likely command much more if they were for sale.
"Individuals are simply being priced out of the marketplace, unless they're infatuated with the thought of owning a team," says Jerry Colangelo, president and CEO of the Phoenix Suns and part owner of just about every sports property in the city, including the baseball expansion Diamondbacks and the Coyotes hockey franchise. "But that will become a more and more expensive toy."
Corporate owners aren't new to pro sports, of course. Teams were wearing the names of local businesses on their uniforms as long ago as the turn of the century. Big business stepped up to the plate in 1953, when Anheuser-Busch (BUD) bought the St. Louis Cardinals.
Big media first entered the game in 1964, when CBS (CBS) purchased 80% of the New York Yankees for $11.2 million (later it bought the rest for $2 million). But a ball team was just a ball team back then; the breathtaking TV deals were still more than 20 years away. Licensing and apparel sales were in their infancy. Autographs were free. Nine years later, with the Yankees faltering, CBS sold the team to a partnership of wealthy individuals led by a bombastic shipbuilder named Steinbrenner. The price tag: $10 million. Nice investment, guys.
A few years later, Turner, then a fledgling entrepreneur, had this zany idea of building a national television network out of a tiny UHF station by beaming its signal to cable systems around the country via the emerging satellite technology. Lacking much juicy programming, Turner had another radical thought: Buy the Braves and the Hawks, slap them on the bird and let 'em fly. So began the "superstation," which ultimately begot a slew of broadcast properties known as Turner Broadcasting System, acquired last year by Time Warner (corporate parent of Fortune's publisher). Turner is now Time Warner's vice chairman.
That strategy will never be repeated: Each league now controls the national and international television rights to its teams, so an owner today can't use the franchise as national programming the way Turner did. Today the opportunities lie in local and regional programming.
Enter Murdoch, the guy who likes to change the rules of every game he plays. The guy who dropped a bomb into the middle of the NFL's television negotiations three years ago by offering a staggering $1.58 billion to broadcast National Football Conference games. Today his Fox network also shares the national broadcast rights for Major League Baseball (it airs a third of all baseball games televised). Now he's at it again. With the Cablevision move, Murdoch makes the sports cable game a real slugfest.
The king of sports cable at the moment is Disney's ESPN, which reaches 71 million homes and carries only national programming. Murdoch is betting that on most nights, fans would rather watch their home team than a nationally televised game between two other teams. In a joint venture with TCI, he is stitching together a network of 20 regional cable outlets, called Fox Sports Net, that televise local teams.
Once the deal's done, FSN will own the regional rights to 49 pro teams and reach 55 million households nationwide. Since telecasts of the home team usually earn higher ratings locally than games televised nationally, Murdoch will be able to offer national advertisers a unique alternative to ESPN: a customized package of regional advertising that could, in aggregate, reach an audience bigger than what ESPN's national telecasts draw. Also, Fox Sports Net will be able to sell the kind of local and regional advertising ESPN can't. "It'll take some time for Fox to find its programming stride, but obviously ESPN will be looking over its shoulder," says Mike Garofolo, vice president of local sports for Zenith Media, a division of Saatchi & Saatchi Advertising.
How does owning the Dodgers, and possibly the Lakers and Kings, fit into this strategy? Unlike national and international rights, a team's local and regional rights can be exploited freely by the owner. And live sports is some of the most valuable programming in the land. "Our business has become more and more event-driven, and sporting events are second to none," says News Corp. co-chief operating officer Chase Carey. "Sports will have a more and more important role in our business. That's part of what justifies our belief in this move."
Not all corporate team owners have quite so elaborate a game plan, but all are looking for leverage of one kind or another. The beer synergy endures: Coors owns part of the Colorado Rockies, Interbrew SA of Belgium has a stake in the Toronto Blue Jays, and Molson owns the Montreal Canadiens. (Anheuser-Busch sold the Cardinals last year, but it still owns the NHL's St. Louis Blues.)
Other potential owners are forming corporate versions of the old-fashioned syndicates of rich individuals, putting together groups of local companies to either buy an existing team or attract an expansion team to give a boost to the regional economy. That was the pitch Jerry Colangelo made when he began approaching Phoenix-area companies four years ago about forging a partnership that would ultimately bid for a Major League Baseball expansion franchise. Fourteen businesses eventually helped forge a group that pledged $300 million, which the lords of baseball couldn't resist. What was the attraction for the locals, who could certainly have found other, more profitable places to stash their cash than in the Diamondbacks? "I think it was a situation where the private sector invested simply to add to the quality of life in the area," Colangelo says. "All of them, for instance, are competing for talent, just as the teams are. And just as we think this is a city where athletes will like to play, our investors believe that the presence of sports will make Phoenix an attraction for their own potential employees as well."
Beer and boosterism will always have their place in sports, but it is the big media companies that have shown other owners how their teams can play in a larger arena. In Toronto, Isaiah Thomas has a vision for the Raptors that extends far beyond winning an NBA championship: He wants the team's dinosaur mascot to become "the Mickey Mouse of the sports world." (Remember when that phrase would have meant the very opposite of an ambitious dream?) The former all-star guard has owned 9% of the two-year-old team since its inception, and he currently heads a group of investors, Chase Manhattan among them, that's trying to purchase the controlling interest. "I don't see the Raptors as just a basketball team," Thomas says. "I see them as one day being the centerpiece of an entertainment entity. Our intention is to make this a $1 billion company. Even now our corporate culture is to create an environment in every division similar to what Disney has done."
The Raptors may be the only "ride" in Thomas' proto-Disney so far, but already he's thinking in terms of the sports-entertainment matrix. "I want to be able to preserve the sheer enjoyment a fan gets when he walks through the door, sits down, and buys a hot dog from a vender," he says. "They should experience that true joy, not what I feel when I close a business deal. In Disneyland you're in Mickey's World, not Michael Eisner's."
Take a good look around. Take a deep breath. Take your kids. Dodger Stadium won't feel like this much longer. The view from O'Malley's office is a window to an era when natural grass, one-run games, and a Dodger Dog were enough. There are no luxury boxes. No corporate logos plastered everywhere -- just an inconspicuous Coca-Cola sign atop a pole in center field.
It is a special place, and the Dodgers are a special team: winners of six World Series, breakers of baseball's color barrier, the team of Koufax and Drysdale. "We have an extraordinary tradition, and we respect it, nurture it," O'Malley says. "Our reputation is unique and we want to enhance it. We're proud of it, and it's very important to all of us."
News Corp.'s Carey and Peter Cherin, the company's other co-COO, will be charged with preserving what's special about the Dodgers. They're on the hot seat, and they know it. Screw this Dodger thing up, and FOX is fur. Yes, they'll start building sky boxes as soon as the deal is ratified, and yes, they'll welcome corporate sponsorship and advertising. But no, Bart Simpson will not throw out the first pitch of the new regime. "We'll be far less intrusive than others," says Chernin, a former New Yorker who grew up a fan of the Brooklyn Dodgers. "We know the Dodgers represent something special to the people in the city, evoking an era of nostalgia that resonates from Jackie Robinson to Hideo Nomo." Adds Carey, a longtime Yankee fan: "This is a wonderful opportunity to build upon something that already resonates with its fans. With some of our other businesses, that's the hardest part."
There will be a few speed bumps as the sports industry barrels toward corporate ownership. Conflict of interest, for instance. During negotiations for national broadcast and cable rights, three media company/owners will be represented on both sides of the table. FOX and Fox Sports Net, ESPN, and Time Warner's WTBS and TNT all figure to vie for some portion of the broadcast or cable rights whenever any of the league's current contracts expire. The rights are now negotiated by committees made up of a handful of owners, but as more and more corporations buy franchises, it may become increasingly difficult to screen out the potential conflicts.
Another bump: Each of the leagues has rules preventing owners from circumventing salary-cap regulations by offering "side deals" like stock, options, or movie deals to players. But who's to say some of the major media companies, with their television and movie units, won't be more attractive to an agent looking to sign his client with a team that offers a few (wink, wink) "post-career opportunities?" Leigh Steinberg calls the notion "tempting." NBA team executives, for instance, must sign affidavits stating they won't cut such deals. But if Michael Jordan ambles into Jerry Reinsdorf's office and asks for a piece of the Chicago Bulls in exchange for playing another season, what's the guy supposed to say? You haven't earned it, Michael. Sorry.
Major bump: Do the math. As successful financially as Major League Baseball, the NHL, and the NBA may claim to be, their annual revenues are no match for those of many of the large corporations whose teams they must govern. Could the big dogs someday plot to take over the pound? Fear of such a putsch was at the heart of the NFL's decision to ban corporate ownership decades ago. "We've always had the view that the ultimate value of our franchises is in being part of the overall operation," says Stern. "If you deteriorate into anarchy and are unwilling to check your corporate identity at the door, you're going to wind up with a very damaged asset that won't be able to compete globally."
Traditionalists will warn that the big, bad corporate Cuisinart will ultimately grind sports fans' cherished games into pulp. Decisions will be made with the stock price in mind, not the final score. The number crunchers will force the team's general manager -- the guy who knows sports -- to pass on the high-priced free agent because, well, the numbers didn't work. Fans will be assaulted with nine innings of "It's a Small World," four quarters of Batman and Robin previews, or three periods of insipid scenes from Party of Five.
Relax. It's not likely. Let's face it, many of the sports industry's current ills -- public bickering between players and management, nomadic franchises, and fiscal irresponsibility, to name a few -- can be blamed largely on the few egotistical individual owners who allow personal agendas to override the good of their sport. In fact, corporate owners would probably never commit the sin of moving a franchise -- the bane of the fan's existence. Why? Does Michael Eisner really need a bunch of rabid fans picketing at Disneyland?
"Some rich guy who believes he has only a five- to seven-year window in which to win will spend almost any kind of money to do so," says Peter Ueberroth, the former baseball commissioner. "Corporations will tend to be more responsible. Operating records will be more public and thus available to communities and fans. Ultimately they are more responsible to shareholders than to fans, which should bring some reasonableness to the cost of salaries." It's a nice thought, but probably not a very realistic one. Hasn't at least one of the media companies that also owns a sports franchise paid Demi Moore $20 million to star in a movie?
There is reason to believe that, in the end, not much will change when it comes to what matters most -- winning. Most successful corporations and the people who run them are as competitive as they come. If it comes down to signing the free-agent 20-game winner for $50 million or meeting the Wall Street analysts' estimates, well, which way are the new corporate owners likely to swing? "Do we need to make money?" asks Terry McGuirk, president and CEO of Turner Broadcasting System, which oversees the Braves and Hawks. "Yes, we try to. Do we always? No. But we take a lot of value in winning, and sometimes we're willing to sacrifice profits in order to achieve that."
Our Weekly Read column features Fortune staffers' and contributors' takes on recently published books about the business world and beyond. We've invited the entire Fortune family -- from our writers and editors to our photo editors and designers -- to weigh in on books of their choosing based on their individual tastes or curiosities. Each Friday we feature a different review. This week, Lawrence A. Armour reviews Newspaperman: Inside the MORESep 9, 2011 7:54 AM ET
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