For years, we have run a moderately successful defense contracting business in Bangor, Maine. It is called J&K Screw Inc., and our main job is supplying expensive screwdrivers to the Pentagon. Identical screwdrivers can be bought for $4.95 in any hardware store, and they cost us only $1.95 to manufacture. However, like all defense contracts, ours contain many clauses to allow for cost overruns, administration charges and the like, so we can unabashedly attach an $8,000 price tag to each of our screwdrivers, which we do.
We have prospered for many years, but during the crisis in the Persian Gulf, we at J&K Screw were called upon to increase production by 1,000%, which we did. Our resultant soaring profits have made us suddenly rich beyond our wildest dreams. Looking back, we do not attribute our great wealth to random world events and insanely good luck; we attribute it directly to ourselves and our infallible insights into the complex universe of screwdrivers and the national defense. Thus, with egos as swollen as our wallets, we are anxious to expand into new ventures.
We decide that we are ready to own a major league baseball team.
We begin by making a few telephone calls to some of the game's bigwigs to find out what's for sale. After it has been duly confirmed that we have the massive wealth and matching egos to qualify as prospective owners, we are informed that the only club publicly on the block right now is the one in Houston. So be it. We begin our quest to buy the Astros.
April 14, 1991
The first two things we discover are that 1) the price for the Astros will be more than $100 million and 2) Houston is a strong candidate to finish dead last in the National League West this season. Now, $100 million is no problem for us, because we have made roughly twice that much in the last six months manufacturing our desert screwdrivers. However, we want to be sure that we are looking at true market value, and we quickly deduce that this $100 million figure is based on the National League's intent to award expansion franchises to two as-yet-unnamed U.S. cities.
Each of those franchises, which will field teams for the 1993 season, will cost its owners $95 million. Thus, we are told, $100 million-plus is a reasonable price for a smooth-running, 30-year-old baseball machine like the Astros, which comes complete with players under contract, front office staff, season ticket holders, TV and radio deals, marketing programs, farm system, scouting network and spring training facilities—not to mention the famed Astrodome for home games (though we're told the lease on the 'Dome is not part of the $100 million package).
O.K., but what about the second point, this last-place business? We are told that, yes, the Astros are definitely expected to lose a lot of games—perhaps 100 or more—in 1991. We do some research. How bad was Houston last year? Its record was 75-87. We ask, Why are the '91 Astros, our 'Stros, as we've taken to calling them, expected to be so much worse?
The answer is quickly apparent. Over the past several months, the current Houston management has stripped last year's 25-man roster of no fewer than 11 veterans, all of whom were at least 30 years old, and several of whom were the Astros' best talents. Five are pitchers who accounted for 41 of those 75 wins as well as 35 of the Astros' 37 saves. Three are hitters who accounted for 55 of Houston's 94 home runs.
Even before the 1990 season was over, the Astro front office had traded away reliever Larry Andersen and second baseman Bill Doran. After the season, the Astros lost six other players as free agents, including starting pitcher Danny Darwin, who led the league with an ERA of 2.21; closer Dave Smith, who saved 23 games; and outfielder Franklin Stubbs, who had a team-leading 23 homers. Houston then completed its winter clearance by trading away slugging first baseman Glenn Davis.
We want to know, of course, what the Astros got in return. We are told that Davis was dealt to Baltimore for three young but as-yet-undistinguished major leaguers: outfielder Steve Finley and pitchers Curt Schilling and Pete Harnisch. For Doran, Houston got two minor leaguers and a second-string catcher. For Andersen, Houston got Jeff Bagwell, a promising young infielder. And that's it.
But now we are introduced to the bottom-line result of this strategy. The 11 former Astros will be paid a total of about $19 million this season by other teams. The Astros total payroll for 1991 will be a miserly $11 million—smallest in the majors. (For a point of comparison, we learn that the Oakland A's have the highest payroll in baseball: $36 million.)
We are also told that Houston management may not be done yet. The Astros have two more veterans that are available for the right deal, starting pitcher Jim Deshaies, a $2.1 million-a-year man with a 56-47 record in five years with Houston, and Astro ace Mike Scott, a $2.4 million-a-year man and a former Cy Young Award winner. If Houston sheds these two and brings in a pair of $100,000-a-year rookies to replace them, its payroll would shrink to a puny $7 million.
What's going on here? As newcomers to the baseball business, we're a bit confused. The Astro general manager, Bill Wood, a patient, avuncular fellow who has been in the Houston front office since 1976, calmly tries to explain it all: "We want the most value for our money; it's that simple. We do not want to have a $25 million payroll and still finish fourth. For that kind of money, we want to finish first. We have been in the top third in salaries around the league until now. But we have been outspoken against high salaries for free agents for years."
Wood warns us that baseball is in "a collective industry hysteria" and that owners today seem to feel compelled to throw around millions just to give, at the very least, the impression that they are trying to win, thereby keeping their fans in the fold. "But in Houston we don't have the money from tickets, from local TV and radio, to support a $25 million payroll unless we are winning. And we could not have had a winning team with the players we have just let go."
Hmmmm. We decide it's time to do some homework, to get some facts on this franchise. We learn that the club opened for business as the Houston Colt .45s, one of two National League expansion teams (the New York Mets were the other) in 1962. In 1965, the team moved into the much ballyhooed Astrodome and was renamed the Astros. (As we hear this, it occurs to us simultaneously that if we buy this team we, too, will want to rename it in our own image: the Astro-Screws. We don't mention this to anyone yet.)
For years, Houston played badly, was managed badly and made money badly. By the mid-'70s the Astros were being run by creditors, who wanted to sell the team. No one from Houston wanted to buy it, no one from Texas, no one from the Southwest, no one from the South or from the West. Finally, late in 1978, a fellow named John McMullen, from Montclair, N.J., entered the picture. He was 60 then, a rich but little-known maritime businessman. His only previous experience in baseball had been as a minor partner with George Steinbrenner in the ownership of the New York Yankees. ("Nothing is more limited than being a limited partner of George Steinbrenner," McMullen once said.)
McMullen bought the Astros and the lease to the Astrodome on May 10,1979, for an estimated $19 million. At first he was hailed as a savior, and the club, under the guidance of president and general manager Tal Smith, began to prosper. In 1980, Houston won its first division title and drew 2,278,217 fans into the 'Dome, the best attendance figure the franchise has ever seen. But then, stunningly, McMullen fired Smith, who soon thereafter would be named executive of the year by The Sporting News.
That cost McMullen dearly in Houston, where the fans and the press flayed him as a carpetbagger, an ingrate, a Steinbrenner clone. His image never recovered, and in 1988 McMullen made it worse when he didn't resign free-agent pitcher Nolan Ryan, a baseball god in Houston. Ryan migrated north to the Texas Rangers, for whom he performed miracle after miracle on the mound, while Astro fans burned. Even Wood, a loyal company man, calls Ryan's departure "a public relations disaster." (Ironically, it was McMullen who, in a splashy p.r. gambit in '79, had made Ryan the game's first $1 million player, though it was widely understood that Ryan could have been signed for much less. "There is no doubt," says a former Astro official, "that McMullen and the Astros contributed greatly to the spiraling salary structure we have today.")
Now, McMullen wants to sell. And we, of course, want to talk. We would like to ask, for example, "Why are you selling?" But McMullen says he can't talk to us on the grounds that he might hinder the sale (clearly he doesn't consider us legitimate candidates). He tells us only two things: 1) "The Houston press has always been dastardly to me," and 2) "Our whole point here is that baseball will go out of business, the way the salaries have been going." He does say, however, that we are more than welcome to talk to anyone else in the Astro organization.
So we go back to Wood, the next-best authority. As potential owners, we want to know whether the Astros' roster stripping was a matter of good baseball management or just McMullen's method of reducing the club's overhead, thus making the franchise a more attractive buy. Wood denies the latter. Rather, he says, we must think back to 1986, a splendid year for Houston, when the Astros won the National League West by 10 games with a 96-66 record, the franchise's best ever, before losing to the Mets in the playoffs. "After 1986, we thought we had a good nucleus to repeat," Wood explains. "We played along for four more years, hoping it would happen again. But it didn't, and then everything went on a downslide. Things happened: age, injuries', attitudes. We had thought we would clean out the team slowly, go to youth gradually, filter in a couple of kids every season. And we thought it was working. But we sputtered.
"We were faced suddenly with a choice. Either we went public with that dread word rebuilding and used young players on a salary base that was manageable, or we went with long-term contracts for players in their 30's and held the old club together for millions of dollars. We also knew that with expansion coming, we'd have to give up players to the new teams. If we had to protect most of our long-term-contract players, it would leave our good kids vulnerable to being picked off. We decided we'd rather keep the kids. It was a baseball decision, not a financial decision. We had made up our minds to do all this before John announced he wanted to sell the club, in November."
Houston's assistant general manager is another impressive baseball man, former Astro outfielder and first baseman Bob Watson. Watson has a pair of spikes in the Hall of Fame as the man who scored baseball's one-millionth run in 1976 and is now in good position to reach another major league milestone: to become the game's first black general manager. Watson speaks to us with candor. "This is not a game where you sign 33-year-old players to five-year multimillion-dollar contracts," he says. "You sign a young guy who gets to be an MVP in Triple A and then comes to the bigs with great ability and a great attitude."
Watson agrees with Wood that the Astros had held on to memories of '86 for too long. And though he is aware of the doom-and-gloom forecasts concerning the current team, Watson is firmly optimistic about the future of the Astros. "We have great scouting and one of the three best farm systems in the majors," he says. "We have seven of the top 50 high school draft choices this year. We will play exciting, enthusiastic, fast ball. We won't lose 100 games, we won't lose 90 games. We are buying the future. The whole industry will go the way of the Astros. The way other teams are spending, some will eventually go elfoldo. If we keep giving $4-million-a-year long-term contracts to 33-year-old players, we'll be back to 16 teams in the major leagues. The Astros are the team of the future."
We are moved by Watson's upbeat analysis, and we discuss the idea that after we buy the Astro-Screws, we can promote Wood to president and make Watson the general manager, thereby making baseball history with our first decision. At the same time, though, we are becoming a bit anxious about buying a team so bereft of marketable names. Will the fans bear with us? Can we afford to rebuild?
We call Sandy Alderson, the successful general manager of the A's, who suggests to us that the current methods of Houston management should not be viewed as destructive. He tells us, "Under their circumstances—and by their circumstances I don't mean the sale, but where they are competitively and what their chances are in the future—it was a very legitimate strategy to say, 'Look, let's start over.' It's not a new strategy. It's been pursued many times before, and recently by the Orioles, by the White Sox and, in fact, by us, a few years ago. And with the free-agent market the way it is, a new management could rebuild that team overnight."
O.K. That's encouraging. But now we're beginning to wonder, Isn't there something of a Catch-22 here? The more an inexpensive team of talented youths succeeds, the more its payroll expands and expands until the whole delicate structure blows up—and maybe it happens a season or two before the club is actually good enough to win a pennant or a World Series. We don't have to look far to find a relevant case history: that of the Pittsburgh Pirates.
In 1985 the Pirates were a last-place team with a season attendance of 735,900, worst in the league. To keep the Pirates in town, a group of 13 investors put in $2 million each, backed by a promise of another $20 million from the city's urban redevelopment authority. From there, a stirring ascent began, fueled by a fresh roster of inexpensive but blooming superstars including Bobby Bonilla, Barry Bonds and Doug Drabek. Last season Pittsburgh won the National League East for the first time in 11 years and, in doing so, drew more than two million fans for the first time.
But.... In 1989, Bonilla, Bonds and Drabek were paid a total of $1.43 million. In '91, thanks to arbitration, they will be paid $8.05 million. The total Pirate payroll has risen from about $11 million in '89 to roughly $23 million in '91. Because Pittsburgh is a small market with limited local TV and radio fees, even huge attendance and high morale doesn't necessarily produce enough revenue to pay such salaries. And despite their first-place finish, the Pirates' books for '90 show an operating loss of $7 million. We wonder, How does that bode for our Astro-Screws?
We take out a calculator, a current salary list and a crystal ball, and we start to make some rough projections. Let's see, catcher Craig Biggio is the man the Astros' staff has tabbed as their foundation player. In a little over two years in the majors, Biggio has hit .261, with 20 home runs and 52 stolen bases-solid numbers, especially for a catcher. He's making $437,500 this season. Since he's only 25, we're going to assume he'll get better. That would mean that three or four years down the road, Biggio should be comparable, at least offensively, to someone like Benito Santiago, the San Diego Padres' premier backstop. Santiago is making $1.65 million this season but had asked for $2.5 million in arbitration. If current salary trends continue and Biggio develops as we hope, then by '94 Biggio could cost us somewhere around $2.5 to $3 million a year.
Financially, our projections only get worse as our performance on the field gets better. We imagine Opening Day, 1994: A packed Astrodome crowd cheers as the Astro-Screws take the field. But where the fans see a group of gutsy youngsters who challenged for the division title until the final weekend of the '93 season, we can see only dollar signs. Starting pitcher Darryl Kile, the ace of the staff and a 19-game winner, is on the mound, trying to prove that he's worth the $2.5 million contract extension we gave him over the winter. Outfielder Luis Gonzalez, our newest slugging sensation, is miffed because he received only $2 million in arbitration. Even versatile platoon outfielder Karl (Tuffy) Rhodes is making $1 million. And lefthanded closer Al Osuna, who set a team record with 40 saves in '93, is already collecting a neat $3 million. We are dizzy with conflicting emotions. We can win the pennant this year, we really can, but it's going to cost us $25 million in salaries. And for most of these players, free agency looms just around the corner. What then? Forty million dollars? Fifty million? We shudder and put away our crystal ball.
It's time, we decide, to look at the big picture. What is the greater truth of all this? Is baseball itself really in danger of going out of business because of scenarios like the one we have just envisioned? We call in a consultant, one Gerald W. Scully, a professor of management from the University of Texas at Dallas, who in 1989 wrote an authoritative tome called The Business of Major League Baseball. He pulls no punches in the book: "Whining about the lack of profit from owning a baseball club has been a sacred tradition among owners from time immemorial." Having said that, he goes on to relate that the bizarre but long-standing policy of the IRS to allow owners of sports teams to depreciate their player contracts—just as they amortize physical stadium wear—over several years has "no economic justification" at all. Scully writes, "The only reason for amortizing these intangible assets in sports is to create a tax shelter, and as such, this practice represents a taxpayer subsidy to franchise owners and consumers of sports."
This, of course, is our kind of accounting: profits at the expense of taxpayers. But we are still concerned about the potentially destructive effect of huge free-agent salaries. We talk with Scully on this matter, and he says, "Free agency in itself has nothing to do with the basic economics of the baseball industry. When you buy a baseball team it is the same as a Kentucky Fried Chicken franchise: You get a monopoly—the right to sell a product in a specific, protected geographical market. The question of free agency has to do with your bidding a player's salary up to a point where you are paying more than the man's measurable return to your franchise."
Scully then assures us that "so far, free agents are not being overpaid. We are not on a road to disaster. In general, when the players' share of revenues rises above 35 percent, then the distress begins. In 1982 the players' share hit a historical peak of 35 percent and there were clubs in trouble. That's when the owners started to collude loosely on salaries for free agents. Thus, between '82 and '88, the share of revenue for a 25-man roster stayed below 30 percent. It is higher than that now, but still well below 35 percent. In 1990 the average major league salary was $600,000, and that was up 20 percent over the previous year. However, revenues were up much more than 20 percent because of the TV largesse. The real concern is that individual owners don't overbid for free agents to the extent that the salary structure drives them out of business."
But what's ahead? Scully says, "TV is overpaying for baseball, and the prospects for much more TV revenue are not optimistic as it is now structured. However, if pay-per-view TV comes in, all bets are off." We are intrigued by this. In baseball as well as other sports, pay-per-view is the new revenue stream owners hope will supplement or someday even supplant the current network deals. With pay-per-view, fans with the appropriate cable TV equipment will pay anywhere from $5 to $15 to watch a particular game. With baseball's 162-game schedule, that could add up to huge new revenues.
With the introduction of pay-per-view, Scully ventures that "$8 million or $9 million ballplayers will be the mode. But without pay-per-view, bidding for players will slow down and salaries will probably not increase much beyond the rate of inflation. In any case, no one sane enough to pay players only what they are worth in the scale of revenues will have a problem."
So, it's manageable as long as we stay sane? O.K., then what of our buying the Astros? Scully tells us, "Houston is a big market, and it is a sports-minded area. The Astros are underachieves in terms of their market. If they were playing .550 ball instead of .450 or .475, they'd make lots of money. Winning seasons are what make the Astros salable, not slashing salaries. But if you buy the Astros and you have to operate them for long without pay-per-view TV, you are going to have to work 12 hours a day to eke out a marginal competitive return."
Hmmmm. We are sobered by this. But now we speak to Robert Harter, a lively, white-bearded fellow with an endlessly optimistic attitude. He is president of the McMullen-owned Houston Sports Association, the umbrella corporation that owns the Astros as well as the master lease to the Astrodome. As such, Harter is obviously pro-Astro and pro-McMullen. But he proves to be so logical, so professorial, that we listen intently. He says, "Now, you must ask yourself: Why do you want to buy a baseball team for $100 million? Well, first, if you have $100 million for a baseball team, you must really have $200 million, because you're not going to sink all your life savings into a baseball team. And if you have $200 million anyway, you're not looking to make money—not immediately. There are a lot of things involved in the thinking of someone who's going to buy a team. You may be saying, 'I'm a $200 million man, but nobody knows my name.' Or you might be saying, 'I'm a $200 million man, and I can do a lot of good for this community.' All the reasons revolve around ego in one form or another."
And how, we ask him, will our egos be feeling after a season or two of losing 100 games? Harter speaks without hesitation: "If you're buying a team because of who's on the roster now, you're completely missing the point. That team won't be there in a decade. So, of course, the team to buy is the one with the cheapest payroll. Winning won't affect the capital appreciation of your investment. Winning only affects your yearly income, and that certainly isn't a problem that should concern you as a $200 million man. You may lose a million this year, another million next year. But if you're buying a $100 million team, you should be focusing on the fact that 10 or 15 years down the road, your team could be worth $500 million to $1 billion."
But just as Scully explained, for Harter's wildly rosy view of our future in Houston to come true, one very important thing must happen: pay-per-view TV. "If that revenue stream comes in," Harter says with unswayable certainty, "the payrolls will be astronomical but well affordable."
We want to believe this, we really do. And while we are not at all convinced that pay-per-view TV will be so easily brought in as the savior of the game, we do assume that supply and demand will keep the salary costs in control and that common sense will, for a change, prevail. As Scully says, "All these rapid increases in franchise values and revenues over the years just made it easier for owners to be stupid."
So, all things considered, we can foresee good times for ourselves in Houston: first, a contender; then, a pennant; then, yes, a World Series championship—and all with reasonable expectation of annual profit or, at least, of the value of our franchise increasing. We would, in fact, definitely buy this team, but for one nagging concern: When we asked Watson if we should buy the Astros, he paused, then said, "I think you've got to wear a cowboy hat and boots if you're going to own this franchise. You should be from Texas. I also think you should make damned sure you get Nolan Ryan in on the ownership. You might have to buy out his Rangers contract and get him to retire because he can't own any part of a club while he's still a player. But I think buying this franchise without Nolan would be a pretty bad idea."
Well, in fact, Ryan has said that he would be interested in having a piece of the Astros. The hometown hero says he has been contacted by several investment groups that are interested in buying the club. There are at least three local groups who have shown interest. Moreover, commissioner bay Vincent says that as a rule he strongly favors local ownership, and the fans of Houston, after 12 tempestuous years of McMullen, may virtually demand it.
And so, after close study of this deal—and wanting it pretty badly—we decide we aren't right to own the Houston Astros. Rich enough, yes. Arrogant enough, sure. But this Texas ball club deserves to be owned by its own again. So we'll give up our dream and go home to Maine, and we'll wish the new Astros owners—whoever they may be—good luck. In the meantime, we'll have to look for another sporting endeavor to dump our money into.
What's this WLAF thing all about, anyway?
SALE! IT'S ASTRO-NOMICAL!
Be the boss of your very own baseball team!
THE HOUSTON ASTROS
WHAT YOU GET:
•25 MAJOR LEAGUE PLAYERS!
•A WHOLE FARM SYSTEM!
•A HOME IN THE DOME!
•BATS AND BALLS!
•AND FUN! FUN! FUN!
$100 Million (Negotiable)
A TEXAS-SIZED BASEBALL BARGAIN!
Here's the Pitch!
•Out With The Old!
•Must Make Room For New Merchandise!
Salary: $1.9 Million
Salary: $3.275 Million
Salary: $3.25 Million
Salary: $2.1 Million
Salary: $2.413 Million
"Box Seat Excitement at a Grandstand price!"
BUY A PIECE OF HISTORY
Buy the Astros and get 30 YEARS of Houston baseball lore and legend!
THE EIGHTH WONDER OF THE WORLD!
JUDGE ROY HOFHEINZ!
The Challenge: The Astros are the oldest franchise in the National League never to win a pennant.
The Reward: You can be a Texas hero. Buy this team and build a World Series winner!
"Box Seat Excitement at a Grandstand Price!"
BUY THE TEAM OF THE FUTURE!
The Houston Astros
A franchise for the 21st Century, built on ASTRO-LOGIC
NO Free Agency!
NO Salary Arbitration!
A real catch—and cheap!
Great arm-great price!
Slick afield—and such a deal!
Big stick-little salary!
Super speed—and a real steal!
"On Deck for the Future!"
After unloading 11 veterans, the Astros now have time big league's smallest payroll.
Though they play under a dome, the Astros have had a stormy history.
"We are buying the future. The whole industry will go the way off the Astros."