2 THE ENCROACHMENT PENALTY

July 16, 1978

FACT: Pro franchises are unfairly distributed.

Ever wonder why there is no shortage of suckers waiting in line to buy those franchises that the owners keep saying are such lousy investments? The answer is that one of the many hidden charms of a professional team is that it's one of the marvels of the wonderful world of capital appreciation. Win or lose, profit or loss, through wars, inflation and pestilence, the value of almost all pro franchises marches ever upward. For example, here are the prices that three teams paid to enter their respective leagues in the 1960s compared with their estimated value if sold today:

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Los Angeles Kings

1966
$2,000,000

1978
$8,000,000

Seattle SuperSonics

1967
$1,750,000

1978
$12,000,000

New York Mets

1960
$1,800,000

1978
$16,000,000

But for upward mobility in the face of disaster, no franchise quite matches the redoubtable Philadelphia Eagles. Consider the team's breakaway run in the marketplace, beginning with the cost of its entry into the NFL in 1933, on through the prices it commanded in four subsequent sales and finally to its estimated value today:

1933

$2,500

1949

$250,000

1963

$5,505,000

1967

$14,500,000

1969

$16,155,000

1978

$25,000,000

Ben Franklin wouldn't believe it, but then, a guy who preached "Necessity never made a good bargain" just would not understand the beauties of a monopolized market. Poor Richard would also never grasp how men apparently so lacking in expertise could fail so munificently. Mind you, while the Eagles' market value was increasing a hundredfold between 1949 and 1978, their record was plummeting—19 losing seasons out of 28. And though Philly has not had a winning record since 1966, virtually all of the 66,005 seats in Veterans Stadium sold out last fall. "Truth is," says one economist, "you don't even have to run a team like a business. With monopoly rights, even if you are inept, you are going to make money."

The considerable value of those rights is apparent even upon the most cursory look at the books of a pro team. Unlike, say, a manufacturer of widgets, the assets of a team do not include a "plant," because all but a few of the franchises operate in publicly owned facilities. And because the team's product, a game, is an intangible, there is nothing really comparable to an inventory of widget parts or machinery. In fact, outside of a maximum of 100 grand or so in office and playing equipment, an owner has no real investment in physical property. What he does have is several million dollars' worth of monopoly rights.

Thus, when the Seattle Mariners were allowed to expand into the American League last season, what they were really paying for—aside from a roster full of marginal players—was a piece of paper granting them the right to operate in the Seattle area and to negotiate such things as concession, stadium and broadcasting contracts without competition. The price of that right: $5.25 million. The hazing fee: about $2 million, or the sum the Mariners would have received had they not been excluded from sharing in baseball's national TV revenues for three years. The older members of the fraternity do not suffer initiates gladly.

The four survivors of the American Basketball Association certainly learned that, and they also clearly demonstrated how much short-term risk owners are willing to take in order to gain the long-term advantages of monopoly rights. First, each of them was obliged to share the ABA's debts of more than $7 million with the three other ABA teams that were included in the pro basketball merger. Then, though they were established teams with accredited stars, the four refugees were assessed $3.2 million apiece for the right to operate in their own corners of the NBA universe. The money, which was divided up evenly among the existing NBA teams, helped fill a few needy coffers, but it devastated the newcomers. Do not quote to them the old line about a league is only as strong as its weakest team. Would a brother deny you almost all of your share of the national television money until the 1980-81 season?

Though they led the league in attendance in their first NBA season (1976-77), to survive, the Denver Nuggets were obliged to sock each of their 33 general and limited partners for additional capital contributions totaling $1.5 million. The Indiana Pacers have been reduced to staging a telethon to sell tickets. The San Antonio Spurs are tacking an extra 6,000 seats onto their arena in an effort to recover from the $2.4-million loss they have sustained during their two NBA seasons. And the Nets, whose inept management has barely been able to keep them from sinking into the Jersey swamps, were sued by the Knicks for having the audacity to play in the vicinity of Madison Square Garden.

Seems that in 1976 the Knicks graciously agreed to waive their "exclusive rights as an NBA franchise," if the Nets paid them $8 million over 20 years. At 7½% interest, natch. But when the Nets, after having been granted several extensions, missed a payment, the Knicks went after them as if they were kids trying to sneak through the turnstiles.

The inequities of territorial rights are epitomized by the Knicks, who act as if they bought Manhattan Island and its environs for $9.12, which not coincidentally was their league-leading average ticket price last season. A question: If the Portland Trail Blazers can sell out every game in a town of 381,400 souls, surely a megalopolis of 16,557,600 could accommodate another basketball team or two, no? Yes, but the Knicks know that the reason they are one of the most prosperous franchises in sports is that they dominate a market where the demand exceeds the supply by a wide margin. That is why they are trying to put the struggling Nets in their place, which is presumably six feet under.

The restrictive effects of territorial rights are even more apparent in football. According to one study, the NFL could successfully expand into eight more markets, including adding a team in both New York and Los Angeles. Now, before the NFL numerologists come charging out with their studies, it must be noted that the decision to expand requires careful scrutiny of some non-economic factors, not the least of which is whether the world is ready for another rash of New York Muggers and El Paso Enchiladas. Besides, there are more reliably profitable ways of expanding, such as adding two more games to the schedule, which the NFL will do this season.

Overexposure and overlapping seasons be damned; the Stanley Cup will continue to be played in June on melting ice, and if the World Series runs into the Super Bowl, well, the fan can buy an extra TV and catch all the action. Over the past two decades, baseball has added 868 games to its season; basketball, 614; hockey, 510; and football, 124. Owners like extended schedules because they mean more income for a relatively small increase in operating expense.

And that means more profits, especially for teams monopolizing the larger population centers: one franchise in a market that can support two teams equals double the demand, which equals higher ticket prices, which equals greater profits, which is what the game of Moneyball is all about.

The rewards of staking out even part of a major market can be enormous. In the '50s a subcommittee of the House of Representatives succeeded where other investigators have failed. It obtained hard financial data on all the teams in baseball for the periods 1946-50 and 1952-56. The results were revealing. Despite the competition of a third team (the New York Giants), the Brooklyn Dodgers during that decade accounted for 44% of the National League's pretax profits, while the Yankees glommed 38% of the American League's take.

Why then, in 1958, did the Dodgers desert such a gold mine, not to mention that era's most rabid fans outside of an Elvis Presley concert? Like any businessman, owner Walter O'Malley wanted to boost revenues by moving to a larger ball park, and though New York City offered to build him one on the very site where Shea Stadium stands today, he decided West was best. Among Los Angeles' enticements were the promise of lucrative broadcasting deals and the gift of 300 prime acres where O'Malley could build his own park. But essentially O'Malley's move was a straight business deal, based on the equation that 100% of a big virgin market was better than 33‚Öì% of a big tested market. That did nothing to placate Brooklyn fans, but unlike Congress, they at least found out the answer to the old question: Is baseball sport or business?

The Dodger move touched off a westward-ho! land grab that has since swung around and headed south to places such as Houston and Atlanta. Although Memphis' and Birmingham's bids for NFL franchises were turned down, the cities are likely to be tapped sometime—later rather than sooner, because of another equation: owners share equally in the entry fee paid by a new franchise. Therefore they tend to expand slowly, because the longer they wait the greater the demand for new franchises. The greater the demand, the higher the entry fee. The higher the entry fee, the bigger each slice of the communal pie.

There also is the claustrophobia factor. As the leagues have grown, owners have become more protective of their territories. This has been reflected in their attempts to stake out multiple cities (Kansas City-Omaha Kings) and even whole regions (New England Patriots). In baseball it often seems like the sheepherders versus the cattlemen. The major reason the American League galloped into Toronto was to cut the National League off at the pass. And when Walter O'Malley recommended that the National League go grazing in Washington, D.C., hard by the Orioles' spread, Jerry Hoffberger, the brewer who owns the Baltimore franchise, foamed in his beer. He had a better idea: How about dropping an American League franchise into Chavez Ravine? "Los Angeles County is as big as France," he exclaimed.

Phoenix is large enough to support an NFL franchise, but chances are that it—or another city of its size—will be kept on the sidelines as a safety valve. Teams need likely places to threaten to move to so they can force better stadium deals. Thus in every league's future there will always be a Phoenix rising—but never quite making it. James Quirk, an economist who has studied these strange tribal rites, says, "On the one hand, you want to keep a few cities hungry, and on the other hand, you don't want to keep too many cities hungry. You don't want to start a new league."

Nor do investors who are denied the opportunity of purchasing a franchise want to sue on antitrust grounds. They are trying to buy territorial rights, not destroy them. Similarly, the four ABA survivors could contest the NBA's dictatorial ways in the courts, but in doing so they would undermine the monopolistic advantages they want to protect since they will eventually benefit from them, too.

Because they are unencumbered by such considerations, some city governments have taken legal action to keep their wayward teams. The leagues, rightly fearful that some judge might step in and muck up the wonderful world of territorial monopolies, have acquiesced before the suits ever got out of hand. The reason why Seattle got the Mariners was that the American League stood a good chance of losing a $7-million suit brought by the city, county and state after they had lost the Pilots. You remember the Seattle Pilots; they are the quick-change artists who lasted one season in the great Northwest before bounding out of the bankruptcy courts to become—shazam!—the Milwaukee Brewers.

In general, though, the shuffling of teams has gone on virtually unimpeded and irrespective of the fact that the number of viable markets is finite. Deny lovers of a game long enough, and they become setups for what is known as the "honeymoon effect." Many of the shifts in recent years have, in fact, been little more than love-'em-and-leave-'em affairs. In charting the circuitous history of team movements, Quirk has discovered that the customary excuse given for skipping out of town—lack of fan support—does not hold up. Greater revenue potential elsewhere is the real reason, but there is a hitch. All of the best markets are not only spoken for, but they are also surrounded by moats and guard dogs.

So what a restless owner does is move to another market of equal or even lesser promise. There he trades on the rapturous support that usually goes with being a new act in town, taking a short-term profit before selling out or moving on to a new paramour. But there are only so many nubile virgins, so the recent trend has been to court the desperate damsels with nice personalities. Of the last 10 moves in baseball, seven were to markets of lesser potential where most of the flings flourished for three to five years.

Once the honeymoon is over, it is over. In picking up what was left of the ricochet romance that carried the Braves from Boston to Milwaukee to Atlanta, Ted Turner feels as if he has been stuck with the alimony payments. "I dropped about two mil last year," he groans. "I lost so much money I'm down to my last pair of Gucci loafers." As a result, during the winter he divested the Braves of $630,000 in salaries by sending Andy Messersmith to the Yankees and Willie Montanez to the Mets. "Sure, the rich guys in the big cities always win," says Turner, "but they still let guys like me try. Only in America." It goes with the territory, Ted.

ILLUSTRATIONMICHAEL RAMUSIn Indiana, pro basketball staged a telethon to survive.
ILLUSTRATIONMICHAEL RAMUSOverlapping seasons confuse the fans. Is it time for pitches, pucks or picks? ILLUSTRATIONMICHAEL RAMUSA lonely victim of a love 'em and leave 'em franchise shift.

HOLE YARDS PAR R1 R2 R3 R4
OUT
HOLE YARDS PAR R1 R2 R3 R4
IN
Eagle (-2)
Birdie (-1)
Bogey (+1)
Double Bogey (+2)