The Bucks Stop Here

Spiraling salaries and a potential loss of TV loot imperil baseball's prosperity
July 28, 1991

That little auction that major league baseball recently ran to bring two new expansion teams into the National League—"Who will bid 95 million dollars for the worst team in baseball? Who will bid 95? I've got 95! I've got 95! Sold to the man with the video rental chain!"—may have inspired more confidence in the game than the national pastime deserves. Just because there were a half dozen civic-minded entrepreneurs like Miami's Blockbuster Video owner Wayne Huizenga around, all waving their $95 million checks, does not mean major league baseball is once more flush. In fact, it may be in more trouble than ever. Here's Jerry Reinsdorf, the chairman of the Chicago White Sox, who just scored a $3 million cut of the National League's expansion jackpot: "Disaster is coming."

You go around baseball and you hear pretty much the same thing. There is astonishing gloom all over. After all, what does $3 million buy you these days? You barely get one season's use of Bud Black, a pitcher with a lifetime .500 record and a four-year, $10 million contract with the San Francisco Giants. Baseball is set to haul in $190 million in expansion fees for new franchises in Miami and Denver and continues to enjoy national TV contracts that pay each team about $14 million a year, yet eight to 10 teams were said to have lost money last season. Disaster may not be the correct word. "How about cataclysm," suggests Peter Bavasi, who ran three different teams before becoming president of Sportsticker, a company that provides scores and results for media and retail subscribers. "Or catastrophe."

This is a familiar story so far. Except for the collusion years of 1985 to '88, when the owners conspired to hold down salaries (for which an arbitrator has ordered them to pay $280 million in damages), baseball moguls almost always have wailed against the prevailing economy. This is owner mischief-as-usual, according to one point of view. "You go through The Sporting News for the last 100 years, and you will find two things are always true," says Donald Fehr, executive director and general counsel of the Major League Baseball Players Association. "You never have enough pitching, and nobody ever made money."

What's different now is that the owners are not only crying poor, some of them are acting poor:

•On June 23 the Seattle Times reported that Mariners owner Jeff Smulyan is seriously behind schedule in repayment of the $40 million he borrowed to purchase the team in 1989.

•Minnesota owner Carl Pohlad predicts a $5 million loss by the Twins despite the departure of expensive players such as pitcher Frank Viola in 1989 and third baseman Gary Gaetti this spring.

•In Houston, the Astros remain unsold, with an asking price of around $100 million. Don't be afraid to offer less. Owner John McMullen has been looking for a buyer for more than a year.

•In Baltimore, Eli Jacobs has indicated a willingness to sell the Orioles less than two years after buying the team from the estate of Edward Bennett Williams.

•In Montreal, Charles Bronfman finally unloaded his majority share of the Expos last November after the club had been on the market for a year. Only $65 million of the selling price could be raised from a consortium of private businesses. The other $33 million was kicked in by the city of Montreal and the province of Quebec.

The clubs that are ailing have been somewhat overlooked in a year when their better-off brethren made millionaires out of 220 players, fully one-third of the major league work force. Times can't be too tough, you would think, if the owners can afford to pay no fewer than 32 players at least $3 million a year. Average player salaries have continued to go up about 40% a year, to $900,000 this season. Yet the business outlook is bleak.

Financial World magazine recently appraised the value of nine teams as actually lower than the $95 million that the expansion franchises are being charged. Lowest of these was the Mariners, valued at $71 million. That's bad news for Smulyan, who two years ago paid $76 million for a team that he says has lost $20 million during that time. This in spite of the fact that the 15-year-old organization is having its best season both on the field and in the stands. Smulyan does not rule out a move to another city. And while Smulyan doesn't have baseball's blessing at the moment, commissioner Fay Vincent has appointed a committee to study the conditions under which clubs can be moved. These may be different times, after all.

The panic may be keener than usual this time around because owners, accustomed to a rising revenue stream, are suddenly anticipating a drying up of one of the main tributaries. Network TV money was something baseball could count on; the rights fees generally escalated in breathtaking fashion. But that escalation may be replaced by free-fall.

When the TV contracts, both for network and for cable, for the 1990-94 period were signed in 1989, there were more than a few gasps from observers. NBC, longtime purveyor of baseball's Game of the Week, had figured a new deal to be a formality and had submitted a bid in the $600 million range. What happened next is still the talk of the TV industry more than two years later. CBS—and wouldn't you like to have these guys at your estate auction?—sort of topped that offer with a bid of $1.06 billion, a doubling of baseball's previous contract, signed in 1984. "The worst deal ever made," said then NBC chief Brandon Tartikoff of the 1989 contract.

CBS entered into the agreement with a strange agenda. In last place in the ratings race, the network wasn't buying baseball as much as the chance to billboard its fall season. It planned to broadcast only 16 regular-season games a year on Saturday and Sunday afternoons and left the rest of the regular season to ESPN, which gave baseball an additional $400 million for the right to cover 175 games a year for four years. In effect, CBS wanted the playoffs and the World Series to advertise its fall prime-time lineup. And who can forget the promotion of shows like The Flash and Doctor, Doctor during last year's postseason? O.K., who remembers shows like The Flash and Doctor, Doctor"?

The idea that a struggling network might seize a must-see event like the World Series to bolster prime-time ratings isn't entirely new. But in this case it didn't work. The network, like the rest of the economy, was slammed by recession in 1990. Advertisers became scarce or dickered for lower rates. CBS, which was asking $300,000 for a 30-second commercial during the 1990 World Series, filled some spots for $240,000. Worse, because the playoffs and World Series ended so quickly, there were few spots to fill. "You can look it up, and we did," says CBS Sports president Neal Pilson. "Statistics tell you that you will not have two four-game series [the American League Championship Series and the World Series, both of which in 1990 did in fact last only four games]. I no longer believe in statistics." Had the World Series gone six games and the American League playoffs at least five, Pilson says, CBS would still have lost money but would have remained within its projections. As it is, CBS chairman Laurence Tisch has apologized to stockholders for CBS's "mistake."

Something very remarkable would have to happen in the next three years for Tisch to make that mistake again. The network is said to have lost upward of $100 million in the first year of the contract and, according to the ratings, relief is not in sight. (ESPN lost $36 million last year and will probably lose at least that much this season. Nevertheless, it professes to be happy with the high profile that baseball gives it.) CBS's deal is so bad that network executives now hold out little hope that it will ever bear fruit. "I hate to preach to baseball," says Pilson, "but even if the marketplace does strengthen, I don't think we're going to realize the revenue that we anticipated when we made the contract. It is unlikely that sports rights fees are going to increase, and it is quite likely, with respect to many franchises, there will be a decrease in rights fees, especially from the networks. Baseball has three and a half years of advance information here."

It baseball owners think one of CBS's competitors will save the day, they received a rude surprise last month when the president of NBC Sports, Dick Ebersol, told Electronic Media magazine that unless there is a significant change in the economic climate, his company would not even bid on the next contract when CBS's deal runs out after the '93 season. "Maybe baseball will come up with some really innovative plans that will add a lot more value to the package," Ebersol said. "Otherwise, we won't change our minds. We're in a business where we have to show, in the sports division, that we're clearly going to do better than break even. We won't carry any loss leaders."

Some owners may not be reacting quickly enough to this sobering news. There were no $3 million player contracts before 1990, but the owners, each collecting an extra $7 million per year from the new TV contracts, began flashing their bankrolls to admiring agents. Presumably, if you have an extra $7 million, it is no problem to sign Darryl Strawberry to a contract for $3.8 million a year. Of course, that assumes that Strawberry's team, the Los Angeles Dodgers, will still be collecting that extra $7 million in 1994, after the TV contract expires but a year before Strawberry's does. And all testimony suggests the Dodgers won't.

We refer you to the word cataclysm mentioned earlier. While Fehr argues that rights fees always go up, and that all this poor-mouthing is simply advance negotiation, there is not much evidence that any combination of network and cable broadcasting will provide the escalation in fees that the owners' current rate of spending will demand. As for pay-per-view as a source of new revenue, well, Philadelphia Phillies owner Bill Giles talked this spring about charging TV viewers $9.95 each to watch the Phils' home opener against the St. Louis Cardinals. The outrage among fans was so great that he withdrew the plan a week later.

Meanwhile salaries go up and up. "We have a system that doesn't permit owners to level off salaries of their own accord," says Steve Greenberg, baseball's deputy commissioner. "With salary arbitration, it's like a juggernaut. An owner can't just simply say, 'Well, I'm tapped out, I'm not paying you more.' If a player made a million last year and hit .270, you know he's going to make a million-five next year."

It seems impossible for owners to substantially reduce spending, other than by shucking players whenever they think nobody's looking. This spring, the Dodgers' Fernando Valenzuela, the Atlanta Braves' Oddibe McDowell, the San Diego Padres' Mike Aldrete and the Texas Rangers' Pete Incaviglia were all dropped by their teams in what were perceived by most observers as being simple cost-cutting measures. The Players Association claims that such moves are violations of the collective-bargaining agreement and, on behalf of the players, has filed a grievance, which will be heard by an arbitrator.

Fehr argues that if the owners really are strapped—and he's skeptical—"You'll see the free-agent market dry up. And that has an immediate effect on salary arbitration. That was clearly shown during the collusion years. If things actually turn bad, and if the capitalistic system works, the market corrects."

Except that the market for players is set on a national basis, while revenues vary by locale. That is, Seattle must pay the same for top talent as New York, though it can never make as much money as the larger market. Smulyan will take in only about $1.5 million in local TV contracts this year, compared with the Yankees' haul of $42 million. His ability to compete in the free-agent marketplace is seriously compromised. In any other industry he might look for a specialty market to fill, but, "You don't do niches in baseball," he says. "It's not like I say, 'I've got the best middle relief in baseball, come see my guys work innings five through seven.' This game depends on parity."

Increasingly, owners are asking their cities and states for enough extra income to maintain this parity. By threatening to move his team to St. Petersburg, Reinsdorf got Chicago and Illinois to build the White Sox a new stadium. The income from 85 private suites and a two-level club restaurant has kept his White Sox in the black. "Had we stayed in the old stadium, we'd be filing Chapter 11," Reinsdorf says. Baltimore, Montreal and Milwaukee got similar concessions from local officials. Detroit and San Francisco are trying to do the same.

But in most cases, income from such sources cannot keep pace with current spending levels; revenue from sky boxes is just some 12-12 pitcher's walking-around money. There are exceptions—and this only compounds the parity problem. The rich teams—New York's and Los Angeles's, for instance—really do get richer, but it may increase the burden on smaller municipalities already so hard-pressed that they are cutting essential services.

In the meantime, there will be some downscaling in baseball. "What's going to happen is, the stars will still get the money, but the little guys are going to get squeezed out," says Reinsdorf. "You'll see a lot more young players, and fewer backup shortstops making $800,000." And when that doesn't get it done? "We could collude," suggests Reinsdorf.

A joke. But it seems likely that management and labor will have to strike a new deal to ease the increasing financial strains. Says Bavasi, "Things may be so out of control at this point that we will finally have conditions that will result in a real change. The time will come when potential owners in existing cities are not available. Maybe then, in those dire straits, the union will come to management and say, Let's make a deal."

They are beginning to deal already. The owners and players have gotten together to launch a Joint Economic Study Committee, on which management and labor are equally represented by high-level economists. What the committee is studying includes increased NFL-style revenue sharing among teams, to narrow the gap between have and have-not franchises. The committee is also looking at whether there might be merit in tying salaries directly to revenue, as happens in the NBA, where players are guaranteed 53% of the profits. Such measures may seem extreme, but something extreme is necessary.

TWO ILLUSTRATIONSROBERT B. NEUBECKER THREE ILLUSTRATIONSROBERT B. NEUBECKERBaseball's income from TV rights has soared to $365 million a year (above), and salaries have climbed to an average of $900,000 (left), but falling Nielsens (below) may contribute to a reversal of the game's fortunes.

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)