The Bear's Lair: Bursting sports bubble

By MARTIN HUTCHINSON, UPI Business and Economics Editor  |  March 31, 2003 at 6:43 PM
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WASHINGTON, March 31 (UPI) -- When baseball immortal Babe Ruth was asked after the 1931 season why his $80,000 salary exceeded President Herbert Hoover's $75,000, the lifelong Democrat responded: "I had a better year than he did."

Sports stars, like actors and pop music stars, tend to make huge amounts of money by contemporary standards, even during recessions. Nevertheless, this time around, there are rough waters ahead. Sports stars' remunerations, like technology stocks, got so far ahead of themselves in the 1990s that an orderly retreat to sounder levels, without extensive bankruptcies, seems impossible.

On this Opening Day of the 2003 baseball season, the focus is naturally on baseball, and on an off-season that saw the bidding war for players' services go into sharp retreat. (The focus of this piece had better be on baseball, as my knowledge of sports economics outside baseball and maybe cricket is negligible, although I would guess that in other big money sports -- NOT cricket, outside possibly India! -- the picture is similar, although modified by different contract rules, etc.)

The three monster contracts signed in 2000-01, that of shortstop Alex Rodriguez for $250 million over the 10 seasons 2001-10 (Texas) outfielder Manny Ramirez for $160 million over 2001-08 (Boston) and shortstop Derek Jeter for $189 million over 2001-10 (New York Yankees) seemed a distant memory, as the largest signing this winter was for $85 million over six years, for first baseman Jim Thome, with Philadelphia.

Moreover a number of perfectly competent major league players, such as Boston first baseman Brian Daubach, who would in previous years have expected to achieve through salary arbitration a pay packet of $3 million to $4 million, found themselves cast off by their teams and forced to sign minor league contracts with whichever franchise would give them a chance in spring training. In Daubach's case, this was with the Chicago White Sox, where he has made the major league roster, but at a major league minimum salary of around $300,000.

While the New York Yankees signed new contracts with Cuban pitcher Jose Contreras and Japanese slugger Hideki Matsui, to take their payroll up to $160 million, their traditional rivals the Boston Red Sox, with new ownership that might or might not have "deep pockets" and a willingness to spend money, camouflaged by their choice of a youthful general manager and several promising trades their reduction of team payroll from $115 million to about $100 million.

Even the Yankees may be vulnerable. In Friday news, just before the season began, their captive television network YES announced that talks had broken down with Cablevision, the major cable TV operator that controls about 3 million of the 20 million viewers in the New York region. YES Network had wanted their programs to be available through Cablevision's basic service and to receive something over $2 per month per Cablevision customer (say, $75 million per annum in real money).

Cablevision, on the other hand, saw (more than justified!) consumer resistance to higher cable television charges, and felt that at $2 to $3 per month YES should be a premium service, billed separately -- and therefore presumably chosen by only a fraction of their 3 million subscribers.

At first sight, this looks like a normal market correction. After all, service industries outside sports have seen demand slacken and prices drop over the last few years, so it is not at all surprising that baseball should suffer similarly. Yet just as baseball players have seen over the last 30 years a rise in salaries far exceeding the rest of us, so the downturn too in baseball and other sports may be steeper than we imagine.

It must be remembered after all that sports salaries have not always been at these stratospheric levels. Babe Ruth's $80,000 in 1931, equivalent to just under $1 million today, was far greater than the salary of any other ballplayer -- his great Yankees contemporary, Lou Gehrig, never got above $45,000.

In the 1950s Ted Williams, unquestionably the greatest baseball player of his era and a tough negotiator, never took home more than $110,000, equivalent to $700,000 today. In 1966, the Los Angeles Dodgers' great pitching duo, Sandy Koufax and Don Drysdale, went on strike for a combined $1.05 million three-year contract (about $6.5 million between them in today's money). They settled for $250,000 between them in salary for 1966, after which Koufax retired.

The explosion of baseball players' salaries is normally credited to the advent of a strong Players Union representative from 1967, in Marvin Miller, and to the arrival in 1976 of "free agency" under which after six years in the game, players had the right to sell their services to the highest bidder.

While "free agency" may have had some effect in restricting the ability of owners to hold down player salaries through collusion, it would fly in the face of what we know about economics if the strong Players Union had had any significant effect in the long term.

After all, the increase in salaries has been greatest for the game's stars, whereas a strong union could have been expected to equalize differentials rather than accentuate them -- the differential between the major league minimum salary and the highest paid players, less than 25 to 1 in the 1960s, is now 70 or 80 to 1.

Nevertheless, even the major league minimum has increased since the 1960s from $6,000 to $300,000, about nine-fold in real terms, and yet baseball teams have until very recently shown no great signs of incipient bankruptcy. This symptom points the finger at the real reason for the increase in salaries: the increase in revenues coming into the game.

In 1972, when I first went to Fenway Park, Red Sox grandstand tickets cost $4 (about $17 in today's money.) Today, they are $45 or more, yet major league baseball attendance is close to all time records, with 3 million ballpark customers over the season regarded as an expectation for the lackluster Baltimore Orioles, compared with what was still in the 1970s the old record of 2.6 million by the Cleveland Indians in 1948.

In general, the ballpark experience in 2003 is slightly superior to that of the 1960s, with more comfortable seats and a high-tech scoreboard -- but on the other hand, fans are expected to sit peaceably while each between-innings intermission is extended beyond two minutes to allow for the TV commercial break.

The other major revenue sources that were not available in the 1960s are, of course, cable TV and merchandising rights. Sports have always been central to the cable TV business, and with the spread of cable TV across the United States in the 1980s and 1990s, revenues soared, particularly in the major markets such as New York.

In network TV too, the current contract for major league baseball's TV rights, negotiated with Fox at the top of the boom in 2000, comes in at $570 million per annum, compared with $3.75 million per annum ($21 million per annum today) in the 1960s. In addition a new, albeit modest revenue source has appeared in the Internet, with selling an Internet TV package for $79.95 to several hundred thousand subscribers.

Merchandising, too, has been fueled by an explosion in the sport's marketing capability, so that for example 30-year naming rights to Houston's new baseball stadium were sold to the late unlamented Enron for $100 million in 1999.

So why the downturn -- other than the simple economic cycle? Cable TV and modern merchandising are not going to disappear, and millions of baseball fans have demonstrated their willingness to pay $40 to $50 for a baseball ticket -- albeit only in the major East and West Coast cities.

Therein lies the rub. Major league baseball as a whole lost $500 million in the relatively good year of 2001, according to Baseball Commissioner Bud Selig. Others have disputed those figures, yet there is little doubt that a number of the poorer franchises, such as the Montreal Expos, stuck in a non-baseball-crazy market in a foreign country with a weak currency, are in fairly severe financial difficulties.

The Tampa Bay Devil Rays too, cursed with an unattractive stadium lease with 25 years yet to run, have chosen to run a franchise on a bare bones basis, paring the team's player payroll for 2003 to $15 million, one-tenth that of the Yankees and little more than half the lowest team's payroll in 2002.

A revenue-sharing deal signed in 2002 and running till 2006 may alleviate the pressure on these weaker franchises. In any case, many baseball owners are wealthy men who can afford to take moderate losses in stride in the hope of long-term capital gains from sale of the franchise.

The Boston Red Sox, after all, together with its captive TV network, sold for $700 million in early 2002 -- compared with $1 million ($14 million in today's money) that previous owner Tom Yawkey had paid for the club in 1933.

With revenue sharing now fairly substantial and poorer clubs able to pare their payroll and use young ex-minor leaguers to produce a team that is at least nominally competitive, baseball's real financial pressure may come at the top, not the bottom of the scale.

George Steinbrenner, owner of the Yankees, paid (together with partners) $10 million ($42 million in today's money) for the club in 1973. It is now of course worth many times that amount.

Yet Steinbrenner's family company, American Shipbuilding, is out of business, and it is not at all clear how deep his pockets are outside baseball. In Boston, John Henry, leader of the group that paid $700 million for the Red Sox, is a former commodities and financial trader, whose operations must presumably have suffered somewhat in the downturn.

If the Yankees and Red Sox start losing $50 million to $100 million per annum for more than one year, not at all impossible given their player salary structure and the other costs the team must bear, disaster could loom very quickly.

There can be no question that a major team bankruptcy -- not necessarily the Yankees or Red Sox, but one of the "blue chip" names -- would shake the baseball business to the core. So too would a lengthy recession that left baseball stadiums at $45 a seat half empty and reduced the willingness of cable and network television to pay top dollar for rights.

At that stage, player salaries would enter a downward spiral that brought them much closer to ground level, although as with film stars in the 1930s, top players would doubtless remain extremely well paid. Long-term contracts such as those of Jeter or Rodriguez that run year after year through a baseball economic downturn might well prove either albatrosses for their teams or difficult if not impossible to enforce against financially bleeding owners.

Contrary to the deep economic beliefs of most baseball players, a strong union cannot repeal the laws of economics, and an industry blessed with such an economic bonanza as was baseball in the 1990s must eventually return to Earth, probably in a cataclysm of team bankruptcies and dishonored player contracts.

(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

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