Major League Problems : Franchise Values Take a Hit

By JAMES FLANIGAN

Oct. 26, 1994 12 AM PT

Is baseball a past-tense national pastime or a low-priced growth stock with a promising recovery in its future? Baseball team owners and players are losing more than revenues and bonuses from cancellation of the World Series--which would have been played this week.

Team values have fallen 20% because of the strike, which is more than 2 months old, says Paul J. Much, an evaluator of sports franchises for the Los Angeles investment banking firm Houlihan Lokey Howard & Zukin.

But strike losses only continue a pattern that has seen values of most major league teams decline 20% to 35% since 1991. Baseball’s revenue from network television has been cut 50% as broadcasters and advertisers have backed away--even as TV has showered more money on football, basketball and hockey.

Increasingly, the term national pastime seems like an exaggeration.

And yet, five investor groups (from Phoenix, Orlando, Tampa-St.Petersburg and two from the northern Virginia suburbs of Washington) will be bidding for expansion franchises Tuesday in Chicago. “All sports move in cycles,” says Jerry Colangelo, owner of basketball’s Phoenix Suns and leader of that city’s bid for a baseball franchise. With baseball in a crisis, “a baseball team could be a good buy if a new economic system emerges in the aftermath of Armageddon,” he says.

Colangelo is referring to the hope that a new climate of cooperation will characterize player relations after the strike and that a formula will be found for revenue sharing in baseball so that teams in less-than-giant markets, such as Phoenix, won’t operate at a disadvantage to teams in the largest markets.

With local TV revenues of almost $50 million, the New York Yankees can better afford a high payroll than can teams in smaller markets. Local TV, and larger gate receipts, also give teams in Los Angeles, Chicago, San Francisco, Boston (which has the New England market) and Baltimore (the Washington market) the ability to operate on a grander scale than teams in Milwaukee, Pittsburgh or Kansas City.

Size doesn’t guarantee pennant winners, but it sets up a disparity in baseball--where eight of 28 teams lost money last year. Football and basketball have alleviated such disparities with revenue sharing, reckoning that a balanced league makes a better attraction.

And the marketplace agrees. Even though basketball’s Indiana Pacers and football’s Detroit Lions lose money, the values of their franchises have increased in recent years--to $67 million for the Pacers and $138 million for the Lions--according to annual rankings in Financial World magazine.

But in baseball, where gate and concession receipts have been flat in recent years for most teams, the cut in TV revenues made tough situations worse. Player costs, even if they didn’t rise rapidly, creamed off much of what revenue growth there was--rising to an average 56% of operating expenses.

Some teams took drastic, if counterproductive, action. The San Diego Padres fell into the red in 1992. So the owners cut payroll by trading or selling star players. They turned an operating profit in ’93 but fielded a sub-par team. The fans were the losers.

And not only in San Diego, says Paul Much. With some exceptions, baseball owners and players don’t accommodate fans the way other sports do, he says. “They say they’re reaching out to young fans but don’t schedule early-evening games on school nights,” he says. And “the players charge for autographs.”

The result is that when--and if--major league baseball comes back next season, it will have to hustle to win back fans angered by the rich men on both sides of the bargaining table who canceled the World Series.

“The sport is at a crossroads,” says Steven Matt, who evaluates sports franchises for Arthur Andersen, the accounting firm. But the new direction also could be a high road, he adds. With revenue sharing and a new arrangement in player costs, baseball could thrive.

It’s worth remembering that fans haven’t turned away from the game of baseball. Minor league teams all over the country are offering customers a pleasant, entertaining night out and doing well. In the major leagues, the Dodgers and Angels, Minnesota Twins, Chicago White Sox and Cubs and some others haven’t forgotten how to make fans welcome.

Baseball is already a major sport in Latin America and Asia, so the game has great prospects internationally.

And here in the United States, the business has turned around in cities with new stadiums. Jacobs Field in Cleveland opened this year, attracted fans who cheered an improved team, and the Indians’ franchise value rose to $100 million from $75 million just three years ago.

The emphasis of new stadiums is “intimacy,” a smaller park encouraging fan involvement, says Phoenix’s Colangelo. He has a commitment from Maricopa County for a quarter-cent sales tax increase to build a $253-million stadium if major league owners award Phoenix a franchise next week.

The price could be steep. The Phoenix bidders, and those from Florida and Virginia, will be asked to pay more than $100 million as a franchise fee, compared to $85 million in fees paid a few years ago by the Florida Marlins and Colorado Rockies.

Evidently major league owners think baseball is a sport with a growing future. They’re probably right, but given their record in running a business, you don’t want to put that one in the books just yet.

Past Its Time?

Even before the strike, the value of most major league baseball franchises had been declining in recent years--although some got a boost from new stadiums or consistent winning. Percentage decline or rise in value from 1991 to 1994 for a sampling of franchises:

Los Angeles Dodgers: -31.0%

New York Yankees: -26.2%

Toronto Blue Jays: -15.7%

Baltimore Orioles: -35.5%

Atlanta Braves: +29.7%

Chicago Cubs: -4.0%

Kansas City Royals: -23.0%

Oakland Athletics: -1.7%

San Francisco Giants: -11.4%

California Angels: -8.8%

Texas Rangers: +30.7

San Diego Padres: -14.1