August 28, 2002

By James Flanigan

The simple truth is that baseball is not a very good business.

That's the basic problem as major league baseball nears a fateful strike deadline Friday. If there is a strike, the value of baseball teams will almost certainly go down.

Yet if negotiators for the players union and team owners reach an agreement on revenue sharing and other matters, values of leading teams still could go down because they will be penalized to take care of weaker clubs in the 30-team major leagues.

A decline in team values would be a terrible turn for the sport. The chief business attraction of owning a baseball franchise is that team values generally appreciate. The Anaheim Angels, for example, have appreciated at more than 10% a year since 1996, when Walt Disney Co. first bought an interest in the team.

The Los Angeles Dodgers rose in value 11.9% a year compounded from 1950, when Walter O'Malley bought the Brooklyn Dodgers, to 1998, when his son Peter O'Malley sold the team to Rupert Murdoch's News Corp., according to statistics compiled by Moag & Co., a Baltimore-based sports evaluation firm.

On the other hand, the Florida Marlins appreciated at only about 5% during the 1990s, which include the year the team won the World Series. Its owners could have done better in Individual Retirement Accounts with compound interest.

There are fears today that appreciation could be slowing because businesspeople don't find baseball, with teams reporting big losses, an attractive place to invest.

Murdoch is reported to be trying to sell the Dodgers while retaining the television and cable rights to games. (A spokesman for News Corp. said Murdoch has said nothing about selling, and his only recent statement is that he is "thrilled by the improvement in the team this year." )

Disney has tried to sell the Angels but no big-money buyers with serious offers have stepped up to the plate.

Baseball is not doomed. In many ways its losses are overstated and its future could be bright if it could reorganize operations. Unfortunately, current negotiations may not produce such a beneficial reorganization.

In current labor talks, as well as those in 1994 that led to the longest strike in sports history, baseball owners are trying to achieve a cap on salaries and revenue sharing to foster a competitive balance among teams.

Baseball is late. The National Football League has had revenue sharing and salary caps for years. The NFL's overseers realized that if teams could be kept roughly on a par, competitive games could become a national television attraction.

Baseball, which plays 162 games a year, is more a sport of local enthusiasm. Its national TV contracts have never been as large as pro football's. But baseball never devised a successful policy to encourage regional television coverage for its teams.

"The Cincinnati Reds used to be televised in Kentucky, but today nobody sees them or speaks about them," says economist Bruce Johnson at Centre College in Danville, Ky.

And baseball should have been doing more to ensure competitive balance. Now it has become a sport of wealthier teams that are able to hire better players, and other teams that generally have little hope of making the lucrative postseason playoffs.

Baseball is pleading poverty. Baseball Commissioner Bud Selig told Congress that teams collectively are losing more than $500 million. But normal business accounting, which includes depreciation of assets, would reduce losses to $150 million at most, says sports economist Andrew Zimbalist of Smith College in Northampton, Mass.

For example, expensive player contracts offer a tax shelter for new owners of baseball teams. A buyer may take half the purchase price of the team as representing player contracts and then amortize those contracts for tax purposes over five years, gaining a tax shelter for profit in any other business.

A team's connection with media companies owning cable channels, such as the Atlanta Braves, Chicago Cubs, Dodgers and New York Yankees, also changes the profit picture. The team's games add an attraction that increases the cable channel's earnings, but none of that profit shows on the baseball team's account.

"The big value in baseball franchises today lies in regional cable organizations you can create around them," says Michael Mendelsohn, head of Union Patriot Capital Inc., an entertainment industry brokerage in Los Angeles.

The Yankees and their principal owner, George Steinbrenner, have organized a lucrative regional sports cable network in the New York area in recent years. And Steinbrenner has used cable revenue to pay for star players, making the Yankees a frequent champion in the last six years.

But this has made him and the Yankees the target of reform. Yankee revenue should be transferred to San Diego and Kansas City so those teams can pay star players too, goes the thinking behind the luxury tax that other owners hope to place on Steinbrenner's payroll. The Dodgers, as a large-market team, also would have to transfer revenue.

But nothing guarantees that the wealthy owners of small-market teams such as San Diego and Kansas City would invest shared revenue to become competitive. They haven't shown much initiative so far.

And no mention is made of the fact that Steinbrenner's Yankees went 14 years from the early 1980s to the mid-'90s without getting into postseason play.

What that portends is that even if there is no strike, the proposed reforms are not likely to cure baseball's ills.

What could do so? Fresh thinking. John Moag, head of the sports evaluation firm bearing his name, proposes that "100% of all gate receipts go directly to the home team's player payroll." That would "establish a meaningful link between the fans and the players they support," Moag says.

The truth is, baseball could face broadening horizons, with cable and satellite broadcasting able to target subscribers and attract advertisers. Also, international markets are opening to baseball as they may never open to pro football. If baseball can survive this week, perhaps it can become a good business tomorrow.