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Play Ball! But Don’t Forget the Big Bucks

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Almost unnoticed amid the distractions of war, baseball spring training has begun and already a salary record has been set. Boston Red Sox pitcher Roger Clemens became the highest-paid player in baseball history with a $21.5-million, four-year contract.

That’s $5.4 million a year--”or $1,000 a pitch based on the number of pitches he threw last season,” notes a banker dryly.

And other ballplayers are making a good buck, too: The average major league salary this year will be $750,000, say experts on the business of baseball, up from roughly $600,000 last year.

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Which means the payroll for a 25-man roster will be $18 million, and some teams, such as the Kansas City Royals--owned by Ewing Kaufman, who founded Marion Laboratories--have a payroll of $20 million-plus. That’s more than estimated box-office receipts for a team drawing 2 million fans to the ballpark each season.

So this season, as in others, fans will ask: How can teams pay such money? How can ballplayers make such money, and is it good for the game? And where does it all end?

The answers are a mixed bag, revolving around television, taxes and a labor shortage--good athletes are always in short supply. And while team owners may not make much money in the short-term, over time sports can be a good--and enjoyable--investment, say experts. So ultimately the money trend is up, although losses are hitting some teams and TV broadcasters at the moment.

Television makes the payroll possible, says Michael Megna, who evaluates sports properties for American Appraisal Associates. “Ten years ago the national television contract for baseball brought $4 million to each team, and the payrolls ran about $5 million to $6 million,” Megna says. Now the national contracts, with CBS and ESPN, bring each team $14 million a year, plus local TV and radio. So the payrolls have gone up to $18 million and more.

And despite low ratings and horrendous losses by networks, sports will still be attractive to television because it delivers prosperous male viewers to advertisers, says Steven Matt, who runs a sports franchise evaluation service at Arthur Andersen Co.’s Dallas office.

Matt acknowledges that CBS lost $275 million on baseball in 1990, the first year of a $1.1-billion contract. But he says the real story is in new ways to pay for sports broadcasting. The network, for example, has sold General Motors rights to be exclusive auto advertiser on the NCAA basketball tournament, thereby recouping 40% of the $1 billion it paid to televise those games.

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Pay-per-view will be another trend: The National Football League has a full-time study of pay-per-view going on. So the fan of the future may have to pay for sports directly.

Buyers of sports team are not in short supply. Baseball’s Houston Astros are up for sale, and at least three separate bidding groups are showing interest at a reported price tag of $75 million to $100 million, depending on whether the sale includes a leasehold on the Astrodome. Potential bidders reportedly include Jack Valenti, head of the Motion Picture Assn. and a Houston native, Houston banker Ben F. Love, Los Angeles businessman Jerry Leider and ace Texas pitcher Nolan Ryan.

It’s not a game for the lightly capitalized or the impatient. “In Houston, any buying groups would want to put up all equity, no borrowed money, because a strain on cash flow in the first five years could produce problems,” says a financial expert. The reference is to rising salaries and operating income.

The Pittsburgh Pirates are said to be heading for trouble because their young team made the playoffs last year and now demands more money. Milwaukee is a small television market, and so the Brewers’ operating income is tight, say experts, and the Seattle Mariners may be heading for difficulty.

Why would well-to-do investors be interested in such a business? Because short-term losses can be partly tax deductible. Teams get to depreciate the value of player contracts, as does any business, says the accounting firm Pannell Kerr Forster.

And over time, team values appreciate. The National League will charge owners of its two new franchises, scheduled to commence play in 1993, a $95-million entry fee. (Tampa-St. Petersburg is mentioned as a probable team location; Miami, Denver and Buffalo are also mentioned.) In the 1970s, the Toronto Blue Jays and Seattle paid $20 million to come into the major leagues. Such figures suggest that as an asset, a team stays ahead of inflation, but not by much.

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Still, baseball should have little difficulty attracting owners for the expansion franchises. “Sure, if you left your money in the bank, you’d do better than owning a sports team,” says one potential Astros owner. “But it wouldn’t be as much fun.”

In a business where fun is an asset, it’s likely that salaries will keep going up, and fans will keep asking if money is spoiling the players.

The answer is no, says Bob Woolf of Bob Woolf Associates, a firm that acts as agent and investment manager for athletes and entertainers. “Athletes making $1 million a year are just like anybody else. Some are wise and disciplined; some aren’t.”

A million dollars is not that much money if you have only a short career to make it. The first thing an athlete who makes a million must do is put $350,000 in escrow for taxes, says Woolf’s investment director, Gary Walters. “Then if we invest in real estate, we might buy for cash--no mortgage--so if anything happens to end the playing career, the athlete isn’t stuck with debt service.”

And some athletes are as capable away from the game as in it. The Lakers’ Magic Johnson not only has an advertising contract with Pepsi-Cola, but an interest in a Pepsi bottling company. And, note well, the soft drink bottling business has made more millionaires over the decades than sports ever did.

“Magic built that business on his own; his own charisma did that for him,” says Woolf. In business as in sports, real talent is always in short supply. Play ball.

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