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Wanna buy a baseball team?
William Oscar Johnson
April 15, 1991
The Houston Astros are on the block, and our intrepid authors, flush with new wealth, venture into the baseball marketplace to answer the question: What's the deal here?
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April 15, 1991

Wanna Buy A Baseball Team?

The Houston Astros are on the block, and our intrepid authors, flush with new wealth, venture into the baseball marketplace to answer the question: What's the deal here?

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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."

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