Baseball Team Owners Play an Expensive, Risky Game : Sports: Investors still flock to the business despite huge costs, management headaches and eroding profits.

Profit margins are eroding, operating expenses are spiraling upward, start-up costs are astronomical and still rising, and Congress is talking about doing away with some of the industry’s cherished legal protections.

Throw in a shortage of qualified labor, strained relations with key customers, a lousy economic climate, and it is a wonder why anybody would want to get into this business.

But when the business is big league baseball, investors are ready to play--even if the ante is $95 million.

Major league baseball’s owners are gathering today in Santa Monica, where they will consider adding two teams to the National League--the first expansion in the big leagues since the Toronto Blue Jays and Seattle Mariners joined the American League in 1977. The National League expansion committee selected Denver and Miami as the new venues, making also-rans of Buffalo, N.Y.; Orlando, Fla.; Tampa-St. Petersburg, Fla., and Washington.

Given the current economics of the game, however, some observers believe that today’s winners will ultimately be losers.

“I haven’t been able to figure out a way where financially it is a justifiable price,” Tim Mueller, director of the sports-industry consulting group at the accounting firm of KPMG Peat Marwick in New York, said of the $95-million entry fee. And Mueller, as an adviser to the Buffalo investing group, has tried hard to make the numbers work.

Among the problems he and others cite: Player salaries--by far the biggest cost in any team’s operations--have nearly doubled in the last two years to an average of over $850,000 per player per year.

Meanwhile, the broadcast and cable television networks that are paying a combined $350 million a year to carry ballgames nationally are grumbling about big losses. There is speculation that after the current contracts with CBS and ESPN expire, baseball may have to settle for lower TV revenues, which would make huge player salaries all the harder to justify.

Baseball Commissioner Fay Vincent has said that as many as 10 of the 26 major league teams lost money last season, despite the revenue boost from the new TV contracts. The California Angels will probably lose $2 million this year on projected attendance of over 2.5 million, well above the league average, according to team President Richard M. Brown.

If even strong teams struggle to make money, how can the National League justify a fee of $95 million just to get in the door?

The short answer, of course, is that somebody’s willing to pay it.

“No question about it, we are in this to make money,” said H. Wayne Huizenga, chairman of Blockbuster Entertainment Corp., a video-rental chain, and the investor behind Miami’s franchise bid. Huizenga, in a telephone conversation earlier this week, agreed that $95 million would be too much to pay for a team in many cities.

But Miami, he added, is unique.

“I think that we have the best market going for us by far,” he said. For one thing, Huizenga owns 50% of Joe Robbie Stadium, where the team would play. With the city’s large, baseball-loving Latino community--and the fact that the new franchise will be the only big league team in the fourth-largest state--he expects no problems drawing 2 million fans a year and securing a big contract from local television.

“Two million?” asked an incredulous Peter Bavasi. “Do you know how hard it is to draw 2 million people?”

Bavasi, who labored for two expansion clubs in his 20 years as a baseball executive, pointed out that the major league attendance record for a new team was 1.7 million by the Toronto Blue Jays, who have since gone on to set the major league single-season mark of 3.8 million fans.

As an expansion team, Bavasi said “you’re going to be hard-pressed to turn a profit of any sort on a cash-flow basis, much less earn a decent return on your capital outlay.”

To justify the approximately $110 million it will take to put a team on the field in 1993 (the first year the new clubs would play), Bavasi said a franchise needs “positive cash flow of $12 million to $13 million a year.

“It’s not reasonable to expect many, if any, major league clubs to produce in today’s baseball economy cash flow of $13 million,” he said. By cash flow, he means the difference between revenues and out-of-pocket costs.

Bavasi, who served as general manager of the San Diego Padres and president of the Toronto Blue Jays and Cleveland Indians, described the financial progression of a typical baseball team this way:

A prudent general manager of an expansion club starts out by hiring a majority of young players who make the major league minimum salary (currently $100,000) or close to it. Bavasi estimated that he could put a first-year team of 25 players on the field for $9 million in salaries, or about a quarter of what the high-paying Oakland Athletics and Boston Red Sox are shelling out this year.

To keep costs down, the club emphasizes research and development (scouting for talented youngsters and honing their skills in the minor leagues) and stays out of the expensive free-agent market, where even mediocre players have commanded multi-year contracts of $3 million a year this season.

It’s well accepted that after a new team’s initial honeymoon period, the only proven means of keeping attendance up is to win games. And historically, expansion teams don’t become competitive--defined as winning at least as often as they lose--until nearly a decade of play. The New York Mets--the fastest expansion team off the mark in recent history--won the World Series in their eighth season, but it was also their first winning season. The Seattle Mariners, on the other extreme, have been plugging away for 14 years without a winning season.

After a few years, the younger players become eligible for free agency, and salaries multiply. The owner is under pressure from the press and the fans to hold onto his young stars or to dip into the free-agent pool. The owner’s choice is either to pay the price and hope it produces a winner or to let the talent emigrate to other teams and start the rebuilding process.

“It’s not a pretty sight; it drove me right into the news business,” said Bavasi, now president of Dow Jones SportsTicker.

So why be in baseball?

Community spirit and love of the game is reason enough for multimillionaires such as Kansas City Royals owner Ewing Kauffman or the Angels’ Gene Autry. The notoriety of the position--and ego gratification--attracts other owners. But as a pure financial venture, the best reason to be in baseball is because it complements another line of business.

For brewers Anheuser-Busch Cos. Inc. (St. Louis Cardinals), Labatt Brewing Co. Ltd. (Toronto Blue Jays) and Adolph Coors Co. (the proposed Denver franchise), baseball ownership provides opportunities to promote the parent company’s products and sell them directly at the park. For Tribune Co. (Chicago Cubs) and Turner Broadcasting System Inc. (Atlanta Braves), the teams provide programming for their cable TV superstations.

But opportunities for such synergies may be waning. Baseball has said it would frown on new purchases of clubs by media companies because such owners tend to put their own programming interests first, sometimes to the detriment of the leagues’ efforts to negotiate good national TV contracts.

Other clouds on the baseball horizon are appearing over Washington. Gerald W. Scully, economics professor at the University of Texas in Dallas and author of a book on baseball finance, said there is a movement afoot to limit the antitrust exemption that allows baseball owners to negotiate as a group on national TV contracts.

Even more dangerous, in Bavasi’s view, is the talk of additional limitations on beer and wine advertising. (Anyone who doubts the importance of beer to baseball need only glance at the huge welcome sign in front of Anaheim Stadium, where the Angels name is dwarfed by the Budweiser logo.)

Beyond corporate tie-ins and some tax benefits, a key reason why baseball has seemed to make economic sense in recent years has been the steady climb in baseball franchise values. Even if operating revenues are scanty or non-existent, a 20% to 25% annual increase in market value can turn the whole picture around.

In that sense, isn’t buying a ballclub something like buying a house in Southern California?

“It’s more like buying a house in New York,” Mueller said. “I mean, property values are at least holding steady in California, right?”

What Mueller is getting at is that sale prices for major league clubs have stopped climbing with the kind of momentum that made prices double and triple in the 1980s.

The Seattle Mariners were sold two years ago for about $80 million, which is more than the $75 million that the San Diego Padres--a more attractive team in a bigger market--fetched last year. And the Houston Astros club, sporting baseball’s lowest salary structure, has gone begging for buyers despite an asking price of no more than the entry fee for an expansion team.

“There is no question the capital appreciation has slowed,” said Michael Megna, who evaluates sports properties for American Appraisal Associates in Milwaukee. But Megna maintains that if baseball is able to effectively tap into the pay-per-view television market, still in its infancy, the revenue stream will keep on soaring.

Besides, he said, “I’m not aware of any seller of a sports team who ever took a loss on a sale.”