Pulling the Plug : Despite Warnings From Television Executives That Baseball Faces a Severe Cut in Revenue, Salaries Continue to Spiral

The threat of significantly reduced revenue in the next national television contract has accelerated baseball’s economic Armageddon, officials of both industries insist.

As salaries continue to escalate and the gulf between big and small market teams seems to widen, survival may depend on a renewed bid for some form of revenue sharing or a partnership with the players, many in baseball say.

“The working hypothesis for any owner should be that his TV revenue will drop substantially,” Commissioner Fay Vincent said, adding that the drop could be as much as $5 million per club and “any owner thinking there’s a solution that will keep revenue at its current level isn’t in touch with reality.

“Expenses have to go down or the business faces terminal disease,” Vincent said. “The current salary situation is out of hand. The small markets can’t compete. The critical issue is to find a way to provide fairly for a sharing of revenues between players and owners.”

Added deputy commissioner Steve Greenberg: “Whether it’s $1 million, $3 million or $7 million, TV revenue is almost certain to decline. Clubs are already spending money they don’t have, so the affect will be significant.

“I mean, (overall) revenues have been increasing at a rate of about 12% compared to a 35 to 40% increase in expenses. It doesn’t compute. At some point you’re bleeding cash. I’m not a doomsayer, but we’re looking at a potential disaster.”

The national contracts with CBS and ESPN, which provide each of the 26 clubs with about $14 million per year, expire after the 1993 season. However, ESPN has two option years (1994-95) on which it must make a decision before the end of the 1992 season.

Dick Ebersol, president of NBC Sports, predicts the $14-million payout per club will be cut in half, and that baseball is headed for “two enormous earthquakes.”

The first, he said, will be the negotiations over the next network contract, and the second will be the collective bargaining negotiations with the Major League Players Assn., leading to a possible prolonged work stoppage if there is less revenue to pay the players.

“It’s not a pretty picture,” he said.

However, Don Fehr, executive director of the players’ union, said he viewed much of this as posturing--the networks’ desire to lower rights fees, and baseball’s desire to provide a framework in which it can attempt to negotiate a change in the system.

“There are two things to keep in mind,” Fehr said. “The first is that the networks want to pay less, so you have to take what they say with a grain of salt. I mean, Dick Ebersol has been conducting a one-man campaign to lower rights fees because he wants baseball back on NBC.

“The second is that if there are financial problems with the networks, it’s largely because the economy is mired in a recession. If that turns around in the next two years, the gloom and doom will be gone. If it doesn’t, we may see changes in the rights fees, but that would be far more devastating to football and, to a lesser extent, basketball, because their overall structure is more dependent on TV.”

Obviously, there has been no ebb to the salary escalation.

“If you only read the sports pages, you’d think the economy was booming,” said Don Ohlmeyer, former executive sports producer for ABC and NBC who now has his own production company. “How many more people will CBS have to lay off so that baseball can pay its players multimillion-dollar salaries?”

In the two years since baseball signed the CBS and ESPN deals, the average annual salary has gone from $597,000 to $851,000 to what will be close to $1 million in 1992. The Minnesota Twins made Kirby Puckett the first $3-million-per-year player soon after the TV contracts were signed in 1990. There are now more than 40 players at $3 million or more. Six players have multiyear contracts with an average annual value of $5 million or more, including four that were signed this winter: Bobby Bonilla at $5.8 million, Jack Morris at $5.425 million, Barry Larkin at $5.120 million and Danny Tartabull at $5.1 million.

The escalation doesn’t jibe with the doomsday forecasts, but the current spree largely has been the product of big-market teams that have sizable TV and radio packages in their local areas. The spread in local contracts is enormous, from the New York Yankees’ 12-year, $486-million cable TV contract with the Madison Square Garden network to the estimated $16-to-$18 million a year that the Dodgers receive for local rights to the Seattle Mariners’ search for a contract of any size.

George W. Bush, owner of the Texas Rangers, reflected on the New York Mets’ signing of Bonilla and the New York Yankees’ signing of Tartabull and called it a “classic example” of big-market teams catering to their local fans with no concern for the ramifications on the industry.

Of the big markets’ failure to react with caution, Greenberg said: “It’s alarming to everyone in the industry, but what’s clear is that relatively few clubs can play the free-agent game anymore. I’m not surprised, because if you don’t have it you can’t spend it, and more and more clubs don’t have it.”

They will have even less, if the predictions of reduced TV income are accurate.

One clue comes from the NHL, which did not have a contract on the eve of its 1991-92 season and then signed a one-year deal with SportsChannel America for $5.5 million. The previous three-year contract with SportsChannel America paid $17 million per year, an $11.5 million difference.

ESPN may provide the next clue. While basically holding a four-year, $400-million contract that expires after the 1993 season, ESPN must notify baseball before the end of the 1992

season if it is going to pick up options on the 1994 and ’95 seasons at a slightly higher annual fee, or buy out the options for what one baseball executive said is a multimillion-dollar figure.

ESPN reported losses of $35 million and $40 million in the first two years of a contract calling for about 175 telecasts per year, but Vincent, in a speech at the winter meetings, said there was more to the story.

“I believe ESPN has wisely used baseball to dominate cable programming throughout the summer,” he said. “Where would ESPN be without baseball? There are only so many tractor pulls and billiard matches you can televise.”

The comment didn’t sit well with ESPN.

“We were disappointed, especially in the light of the enormous effort we’ve put into televising baseball six months out of the year and the tremendous financial losses we’ve suffered in the process,” ESPN President Steve Bornstein said.

Bornstein added, however, that baseball has been a “terrific product” for ESPN, and he is hopeful of maintaining the relationship “at the right price.” The belief is that ESPN will attempt to renegotiate the two option years at a reduced rate, looking to have a new contract in place in the next six months.

As for the possibility of a CBS, NBC and ABC bidding war for rights, that seems unlikely. All learned from the four-year, $1.06-billion deal CBS made with baseball.

NBC’s Ebersol called it “the biggest overbid in the history of entertainment,” and said that it sentenced everyone else in the industry “to three years of hell,” a reference to rights fees that NBC and ABC have had to pay for other sports.

Curt Smith, senior speech writer for President Bush and author of “Voice of the Game,” the definitive work on the history of baseball broadcasting, calls the CBS deal “the Exxon Valdez of sports contracts,” the worst in TV history.

“It’s not only a financial catastrophe. CBS has written off half of America by doing away with the Game of the Week,” Smith said, referring to the CBS commitment to televise only 16 regular-season weekend games.

“The ratings have been abysmal, the ad sales have been abysmal. Baseball will go into these next negotiations with absolutely no leverage,” Smith said.

Ebersol blames Neal Pilson, president of CBS Sports, for bidding $400 million more than NBC or ABC. Ebersol said the huge overbid created a situation in which NBC has lost $50 million on NFL telecasts the last two years and has only one profitable sports contract: its four-year, $601-million package with the NBA.

“And that’s only because we sold $510-million worth of advertising before we ever signed the deal,” he said.

“If consumers hope to keep sports on free TV, they better hope someone takes away Neal Pilson’s safe-deposit box key.

“He wanted baseball at any cost. It was his plan. He thought baseball would help promote the network’s failing entertainment programming and rally the affiliates. It didn’t work. It was a terrible plan.”

CBS claimed after-tax losses of $55 million on baseball in 1990, but industry sources estimate those losses to be about $100 million in each of the first two years and predict they will continue at that rate in the last two years of the contract.

Although it has been denied by network and baseball officials, CBS reportedly approached baseball hopeful of negotiating a partial refund on the contract but was rejected, with the only agreement being that both sides would do a more vigorous job of promoting the telecasts, and that CBS would be allowed to try some innovative concepts such as having the managers wear microphones. It is characteristic of the climate CBS has encountered that it had to cancel pregame shows on the baseball playoffs last season because it could not sell enough advertising.

Pilson, interviewed before Ebersol, said only: “Our losses have been widely publicized and baseball has to be aware of this.” He later declined to respond to Ebersol’s remarks.

Susan Kerr, director of communications for CBS Sports, said no one could predict the downturn in the economy, and that “the decision to acquire baseball was not made in a vacuum.”

“The CBS senior management team, which includes Neal, was as enthusiastic about the acquisition as NBC was devastated by the loss of baseball,” she said.

Cautioned Dennis Lewin, senior vice president of ABC Sports, in an Ernst and Young financial newsletter: “We can only hope that reality will set in for negotiations the next time around. Last time, reality just wasn’t there. The reality is you’re probably going to see fewer hours of sports, at least on the network. We just can’t support all the inventory out there. . . . The networks can’t sell it all anymore.”

These are desperate and changing times in television.

NBC recently put on a show called “Jock Spots” about athletes making commercials. Reportedly, sponsors who bought air time were guaranteed that their ads would be featured favorably on the show. NBC denied this, but the situation seemed to create dangerous questions of integrity.

An increasingly popular concept is a “time buy,” in which the network reduces its risk by selling time to an outside production company, which then puts on the event and sells the advertising.

Ohlmeyer’s Skins Game and Senior Skins Game are examples.

Michael Weisman, former executive producer of NBC Sports and now president of an outside production company, Century City-based Davis Sports Entertainment, said it might not be long before the networks are out of the sports business entirely.

“The trend is to hire an outside company, eliminating a lot of big salaries and overhead,” he said. “I don’t think the networks are going to be in the business of covering sports events if they’re going to lose money.”

Bob Wright, the chairman of the board of NBC, recently said his company is being driven in that direction. He said NBC, because of expensive rights contracts, is going to put sports on the back burner.

“The goal for NBC is to be No. 4 in sports,” he told Reuters. “That’s the goal. The problem is that we are now No. 2.”

On the local level, many teams, particularly in the smaller markets, are looking at different ways to make money off TV.

The San Diego Padres have been producing their own over-the-air telecasts and selling their own commercials since 1987. The Mariners, currently without a local TV contract, are exploring that option.

Baseball, among several considerations, has given thought to a national baseball channel as a means of generating revenue, compensating for the possible loss of national TV income.

Among other possibilities advanced by owners:

--Pay per view.

--Inter-league play, expanded playoffs and realignment as a way of generating new interest and revenue from the networks.

--Reducing the risks by selling pieces of the rights to each of the networks and more than one cable company.

A TV committee headed by Vincent will make specific proposals later this year. The commissioner said he opposed inter-league play because it would dilute the impact of an American and National League meeting in the World Series; opposed expanded playoffs because it would make a long season even longer, and does not think pay per view will fly because there is so much baseball on free TV.

Bill Giles, president of the Philadelphia Phillies and a member of the TV committee, said he agreed with Vincent’s thinking on pay per view but disagreed on inter-league play and expanded playoffs.

“I don’t think we’ll ever take the jewels (playoffs, World Series and All-Star game) off free TV, but the goal will be to be as creative as possible in the area of cable, and that may mean attempting to maximize revenue with inter-league play and expanded playoffs.”

Giles, Vincent and others agreed that the next contract could be the last with traditional TV systems, that fiber optics and satellite reception via hubcap-size dishes probably will change technology.

Said Fehr: “In time, the viewer is going to have vastly more choice, and the networks haven’t shown much ability to compete.”

It is difficult to measure baseball economics. What comes out of an owner’s one pocket may simply go into another. The books have been opened at times, but do they reveal fact or fiction?

If this is a bad business, why were there so many bidders for the two National League expansion franchises at an entry fee of $95 million and estimated start-up costs of $30 million? Why does Eli Jacobs say he can ask $120 million for his Baltimore Orioles? Why does an appraiser put a $100-million price tag on the Mariners? Why, even at that price, is a group of Japanese investors, headed by the president of Nintendo, interested?

Is this TV business as dire as it sounds? Some things are certain. There will be two new teams sharing in the revenue of the next contract, diluting each club’s share. And there is legitimate concern as to how often ticket prices can be increased to compensate for lost TV revenue. In the face of the recession, baseball set another attendance record last season even though 12 teams showed a decrease at the gate.

“Attendance remains very strong, but I don’t know how price sensitive it is and I’d hate to test it,” Vincent said.

Eddie Einhorn, co-owner of the Chicago White Sox and a man who has made his livelihood in TV production, agreed with Ebersol’s estimate that each club might lose $7 million in national TV revenue and said there is no single way to replace that loss.

“I recently sold two (TV) properties for $400,000 that I had previously sold for $4 million,” Einhorn said. “It’s prime time as well as sports that’s being affected. Layoffs and cutbacks are rampant in that industry.

“Luckily, we have a strong local (TV and radio) situation, but this could kill some small-market teams. We could all operate like Houston and maintain a low payroll by playing kids, but we’re not in business just to stay in business, or to lose. We all want to win, but we have to learn to control spending, which is difficult when you don’t have unilateral control.”

Einhorn referred to the process of arbitration, which takes control away from the clubs and has the biggest impact on salary escalation. In the last collective bargaining negotiations, the clubs attempted to modify arbitration with a partnership proposal they eventually withdrew.

“We haven’t been willing to pay the price for change,” Einhorn said of the owners’ reluctance to produce a long work stoppage in support of their demands for a change in the economic structure.

The bargaining agreement expires at the same time as the CBS contract. A joint study committee, formed by the last agreement, is expected to report on the game’s economics later this year. Regardless of the finding, Einhorn seemed to suggest that the owners, threatened by the lost TV revenue and sensitive to the expanding gap between big- and small-market franchises, might be willing to pay the price. And, there is speculation that the owners may be willing to do it at the end of the 1992 season, when management and the union have the right to reopen negotiations.

Said deputy commissioner Greenberg: “The need to change the system is the biggest challenge facing baseball. The challenge is in how we design an economic system that will let us thrive and grow into the next century, and the hope is that the union realizes it bears some of the responsibility for finding a solution.”

Does Fehr, who represents the union on the joint study committee, fear a hard-line stance by the owners?

“How much harder stance can they take than they did in ‘81, ’85 and ‘90?” he said of the previous stoppages. “What are they going to do, shoot us?”

The union, he added, has an open mind on change, but to become a partner it must have a voice in all aspects of the operation, a vote in how the revenue is generated. In the meantime, many clubs are attempting to restrict multiyear contracts to 1993, uncertain of what lies beyond in the way of TV revenue and the salary system.

The Dodgers, for example, have only three players signed beyond 1993: Darryl Strawberry, Brett Butler and Tom Candiotti. The Minnesota Twins have none. The World Series champion Twins recently lost pitching ace Jack Morris to the Toronto Blue Jays via free agency. Unless the system is changed, General Manager Andy MacPhail said, the small-market teams will be blown out in signing competition with the big-market teams and left to play “studio baseball.” By that, he meant creating a low payroll team that has no chance to win or draw fans and plays only in front of TV cameras.

It’s a complicated and cloudy picture at present, and Dodger President Peter O’Malley sounded like a voice in the wilderness when he said it is simply a down cycle right now, and he isn’t pessimistic about the ongoing relationship of TV and baseball.

“It may take some ingenuity and creativity, but I can’t accept or agree with those who say the revenue is coming down,” he said.

O’Malley is at odds with his commissioner on that. Said Vincent:

“The good news is that TV has fueled an enormous amount of revenue for sports. The bad news is that TV has fueled an enormous amount of revenue for sports.

“We have to get off that kick now because the market won’t support it anymore. There has to be major adjustments. Those are likely to be painful, but they have to be made. It’s a question of survival.”

The Marketplace Although some high-priced players have been signed by teams in small media markets this winter, more have been signed by teams in major markets. List does not include arbitration awards.

BIG AND MID-MARKETS * Angels--Chuck Finley, 4 years, $18.5 million; Bryan Harvey, 4 years, $15.5 million. * Atlanta Braves--Otis Nixon, 2 years, $3.2 million*. * Baltimore Orioles--Glenn Davis, 2 years, $6.565. * Boston Red Sox--Frank Viola, 4 years, $13.9 million. * Chicago Cubs--Mike Morgan, 4 years, $12.5 million. * Chicago White Sox--Kirk McCaskill, 3 years, $7 million. * Detroit--Cecil Fielder, 1 year, $4.5 million. * Dodgers--Tom Candiotti, 4 years, $15.5 million; Orel Hershiser, 3 years, $10 million. * New York Mets--Bobby Bonilla, 5 years, $29 million; Eddie Murray, 2 years, $7.5 million. * New York Yankees--Danny Tartabull, 5 years, $25.5 million; Mike Gallego, 3 years, $5.1 * Philadelphia Phillies--Mitch Williams, 3 years, $9.2 million. * Toronto Blue Jays--Jack Morris, 2 years, $10.85 million; Dave Winfield, 1 year, $2.3 million. *--Nixon, if he doesn’t have a drug relapse, will receive $8.1 million over 3 years.

SMALL MARKETS * Cincinnati--Barry Larkin, $25.6 million, 5 years. * Kansas City Royals--Wally Joyner, 1 year, $4.2 million. * Milwaukee Brewers--Bill Wegman, 3 years, $9.2 million. * Pittsburgh Pirates--Steve Buechele, 4 years, $11 million; Barry Bonds, 1 year, $4.7 million, and Doug Drabek, 1 year, $4.5 million.

Estimated Annual Media Revenues Includes $14 million per team from national contracts with CBS and ESPN, plus local television and radio contracts.

Market Millions Team Rank of Dollars Local TV (cable, over-the-air) New York Yankees 1 $59.4 Madison Square Garden Network, WPIX New York Mets 1 $38.3 SportsChannel New York, WWOR Philadelphia Phillies 4 $35.0 PRISM, SportsChannel Philadelphia, WTFS Boston Red Sox 6 $34.1 New England Sports Network, WSBK Dodgers 2 $29.7 SportsChannel L.A., KTTV Toronto Blue Jays -- $28.0 The Sports Network, CTV St. Louis Cardinals 18 $27.4 No cable, KPLR Texas Rangers 9 $24.6 Home Sports Entertainment, KTVT, WBAP Chicago Cubs 3 $24.2 WGN Chicago White Sox 3 $24.2 SportsChannel Chicago, WGN Houston Astros 11 $24.2 Home Sports Entertainment, KPRC Angels 2 $24.0 SportsChannel L.A., KTLA San Francisco Giants 5 $23.3 SportsChannel Bay Area, KNTV Baltimore Orioles 21 $22.5 Home Team Sports, WMAR Detroit Tigers 7 $22.3 Pro Am Sports System, WDIV San Diego Padres 26 $22.0 San Diego Cable Sports, KUSI Cincinnati Reds 28 $21.8 SportsChannel Cincinnati, WLWT Oakland Athletics 5 $21.2 SportsChannel Bay Area, KPIX, KICU Pittsburgh Pirates 12 $20.0 KBL Entertainment, KDKA Cleveland Indians 10 $20.0 SportsChannel Ohio, WUAB Atlanta Braves 13 $20.0 TBS, Sports South (all cable) Montreal Expos -- $20.0 the Sports Network, CTV Minnesota Twins 17 $19.6 Midwest Sports Channel, WCCO Kansas City Royals 29 $19.0 No cable, KMBC Milwaukee Brewers 30 $19.0 No cable, WCGV Seattle Mariners 14 $17.0 No cable or over-the-air contract

Source: QV Publishing and Financial World Note: Figures are for 1990 season and were essentially unchanged for 1991.