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The soul of sports.

Driven by free agency and exploding salaries, team owners and CEOs are manipulating the market in ways long since discredited by conventional businesses. The result is a battle for...

It's game night for the National Hockey League's New York Rangers at Madison Square Garden, and having already missed the opening face-off, Dave Checketts, the Garden's CEO, is clearly in a hurry. Striding down a corridor in the building's upper level, Checketts opens a plain metal door that could pass for a janitor's closet, and hustles up a 15-foot ladder into perhaps the most secluded spot in the stadium - a narrow, private box near the ceiling, where dozens of pennants hang commemorating the championships of the Rangers and basketball's New York Knicks. Motioning at the sprawling, 20,000-seat complex below, Checketts waxes sentimental, ticking off a list of the Garden's most significant moments, including the Rangers' 1994 Stanley Cup victory and the celebration of Patrick Ewing as the Knicks' all-time scoring leader. "There's a lot of history in this building," he says, drowned out suddenly by the roar of the crowd as the Rangers' Ray Ferraro grabs his own rebound and slams a shot home past Philadelphia Flyers goalie Ron Hextall.

Though "best-of" sports lists are notoriously controversial, particularly in a building as rich in tradition as Madison Square Garden, several non-sports moments might have qualified for inclusion. Like last year's $1 billion purchase of the building and its half-dozen operating affiliates from Viacom by Cablevision Systems and Rand Araskog's ITT Corp. Or ITT's decision to scratch out "interim" from Checketts' title as the Garden's president and CEO and turn him loose on a slash-and-burn mission, paring operating costs and boosting the profits of a formidable portfolio of businesses, including the two marquee sports franchises; 6 million-cable-customer MSG Network; the 5,600-seat Paramount Theater; and MSG Productions, which produces the "Ice Capades" and other family entertainment. Despite its role as operating company for these entertainment jewels, for much of its history, the Garden has lagged in profitability, explains Checketts, 40, a one-time management consultant who previously ran the Utah Jazz and the Knicks. Thus, his tightfisted, strong-armed approach to running the operation - and his clear success: Between 1994 and 1995, Checketts' MSG chalked up $20 million in cost reductions, and quadrupled cash flow. But the turnaround underscores a dilemma facing sports executives: how to win and turn a profit at the same time. A laudable effort, if one that places Checketts and others in the eye of the storm, surrounded by fans angry about strikes and soaring ticket prices, television networks that no longer write blank checks, and players seeking a bigger slice of the pie.

It boils down to this: Though in some ways more successful than ever, American sports is at a crossroads, facing a crisis of confidence similar to that faced by oil, airlines, utility, and financial-services industries in the '70s and '80s. Baseball, in the aftermath of The Strike and still without a new collective bargaining agreement, is hurting worst of all. But each of the other major sports also has had a brush with labor problems in recent months, and for now, owners and players seem to have retrenched in makeshift Maginot Lines, crying to Congress and other government agencies, trotting out teams of economic experts, and playing on public sympathies in the press.

Sports owners and executives - some of whom have made their fortunes in other businesses and crave the spotlight, and others who are professional athletes or administrators who've worked their way up through the ranks - say, "Stop the salary madness." The only way to protect pro sports, they maintain, is through wage and price controls, small-team subsidies, antitrust exemptions, and other anti-market mechanisms generally discredited in the conventional business world (see sidebar at left).

On the flip side, critics urge owners to set aside rancorous, union-busting collective bargaining tactics and put an end to the work stoppages that alienate customers. Corporate luminaries with a stake in the games, such as ITT's Araskog, Disney's Michael Eisner, Time Warner's Gerald Levin, and Microsoft co-founder Paul Allen, push bottom-line discipline. Meanwhile, the Cleveland Browns' Art Modell and other owners skip town for greener pastures, and corporate Cowboys such as Jerry Jones pocket millions in revenues through independent marketing deals that snub the NFL's antebellum revenue-sharing arrangements. Both these moves are calculated gambles to beat sports' command-and-control economy and win on the field. Both have precipitated lawsuits that will snarl the courts for years to come.

"Greedy, greedy," that's how many fans see sports executives and players, says Paul Godfrey, CEO of the Toronto Sun newspaper group, who, as mayor of Metropolitan Toronto, supported the Skydome project and helped lure baseball north of the border in the 1970s and '80s. "It is the dawn of free agency for owners," says Roger Knoll, a Stanford University economist who worked as a consultant to the baseball Players Association during the 1994 strike. "But you ain't seen nothing yet."

In a recent television advertisement for Pizza Hut, Cowboys owner Jerry Jones offers a glib reprise of his extensive, widely publicized courtship of mercenary star Deion Sanders. Jones peppers Sanders with a series of questions, such as "Deion, do you want to play football or baseball?" "Offense or defense?" "Do you want to make $10 million or $20 million?" "Both," Sanders responds to each of Jones' parries.

While a metaphor in one sense for players' greed - in fact, Sanders hooked Jones for $35 million over seven years - the commercial offers supreme irony. For in reality, it is 53-year-old Jones, the club's owner, president, and general manager, who has decided to have it both ways, standing the National Football League on its ear by tapping into its clubby revenue-sharing arrangement - which divvies equally television money and other revenue streams - while simultaneously striking independent marketing pacts with American Express; Nike; and Pizza Hut parent, PepsiCo. While the NFL sued Jones for $300 million, Jones countersued for $750 million.

Jones' business spark and aggressive approach to football stem from his background as a phenomenally successful, wildcat oil-and-gas contractor, and, earlier, as a starting guard and co-captain of the 1964 University of Arkansas team that went 11-0, defeated Nebraska in the Cotton Bowl, and captured the national championship. Not much of a delegator, a "Steinbrenner South" of sorts, Jones bought the Cowboys in 1989, firing legendary coach Tom Landry and replacing him with college coach Jimmy Johnson. Of the last four Super Bowls, the Cowboys have won three of them.

"The NFL is evolving," Jones says of the revenue-sharing system of the organization he's challenging in court. "But it has to be willing to try something new." Can Jones market the Cowboys better - and more profitably - than the NFL? "Yes, that just about nails it," he says. "We're in the community, We have the interest and the magic, and there's no way you can do that from [league headquarters in] New York.

"They tried a system where everybody pitches in - in Russia - and it didn't work," Jones concludes. "We've got to have the incentives to create additional revenues ourselves."

It's not easy to love a winner; like the peripatetic Modell, Jones has made a number of philosophical opponents. "Jerry Jones declares the Dallas Cowboys an independent state and says: 'I'm going to generate my own revenues,'" says MSG's Checketts. "That's dangerous for the NFL." Says a sports executive who declines to be identified, "You've got to play by the rules."

The golden rule, perhaps the only absolute commandment in the football business: Thou shalt not covet independent wealth. Hyperbole, perhaps, but beginning in the late 1960s, the NFL lifted communal values almost to the level of religion, sharing a full 77 percent of its revenues, compared with just 36 percent in baseball, according to league sources. The aim is to ensure equal spending opportunity - and, thus, an equality of talent - among league members, with stiffer competition leading to higher visibility and greater profits, particularly on the TV side. Executives credit the approach with sparking the metamorphosis of the NFL from a mom-and-pop business, roughly on a par with college football, to a genuine, sporting superpower. Over the years, other sports have developed their own redistributive models based on the premise that cooperation bakes a bigger pie, while the invisible hand smashes it flat.

"We couldn't compete without revenue sharing or the salary cap," says Robert E. Harlan, president and chief executive of the Green Bay Packers, a team with a home-city market of just 100,000 people. Interestingly, similar sentiment comes from the other end of the population spectrum. "The cap is in everyone's best interest," says Stan Kasten, a lawyer by training who met Ted Turner in 1976 and ended up running Atlanta's baseball Braves and basketball Hawks. "Sports requires a stable economic environment between labor and management, but also among individual teams. We're not like the airlines, where players can go belly up."

The view is impressive from Jerry Colangelo's fourth-floor, corner office in the America West Arena, home to the National Basketball Association's Phoenix Suns, taking in the downtown skyline, where the towers of corporate luminaries such as BankAmerica and Banc One sparkle in the late-day desert sunshine. Colangelo - who holds a stake in three teams: the Suns; baseball's expansion Arizona Diamondbacks; and the NHL Jets, late of the hardscrabble, north-of-the-border Winnipeg market - is talking about his love affair with Phoenix and the profitable partnership he's forged with the local business community, including Dial Corp Chairman John Teets, the owner's partner in the Suns and Diamondbacks.

Recently, however, the partnership is under fire because of Colangelo's suggestion that a quarter-of-a-cent sales tax over three-and-a-half years finance the construction of a $278 million, retractable-dome baseball stadium. Colangelo, 56, yesterday's hero for building the NBA's winningest team over the past seven years and reversing the downtown area's progressive blight with the construction of the Suns' home, is cast as a fat cat.

The collar heat is emblematic of several phenomena: the greening of fans as customers of sports-business products and the role new stadiums play in franchise value and profitability (see sidebar on pp. 50-1). As quickly as leagues make like kibbutzes, owners find holes in the fence. And the hottest new proprietary revenue streams - those that aren't poured into the common fondue pot - are from new stadiums and premium-priced seating, such as luxury boxes. A decade ago in the NFL, stadium sales accounted for less than 5 percent of total revenue. Today, such revenue comprises a quarter of the total.

Art Modell says a shortage of stadium revenues drove him to Baltimore. Colangelo's Suns, meanwhile, located in the 17th largest media market, rank an astounding fourth in the league in operating income, according to a survey by Financial World magazine, a scant $200,000 behind the "threepeat" world-champion Chicago Bulls. While claiming some degree of management expertise, Colangelo, the Suns' president and CEO, freely attributes the apparent anomaly to America West Arena itself. He hopes to achieve similar magic with the Diamondbacks' stadium. "A new stadium gave us the opportunity to compete on a different level," says Colangelo, a Big Ten All-Star with the University of Illinois who took over as Suns' GM in 1968 and served two tours of duty as coach with the team. "It could be the single largest differentiator" in terms of team profitability and valuation, he says.

"It's no coincidence that the Cleveland Indians won the American League pennant their second year in a new stadium," says Peter A. Magowan, former CEO of the Safeway supermarket chain who took over as president and managing general partner of the San Francisco Giants in 1993. "Or that Toronto won two World Series after moving to a new stadium."

Though stadium revenues are rebalancing team checkbooks, says MSG's Checketts - who took the Utah Jazz from red to black partly because of a new stadium - fundamental differences remain between sports and conventional business, most notably sports' zero-sum competition, in which only one team at a time reigns as champion and few feel comfortable with second- and third-place niches.

"Wall Street gives companies a scorecard every day in stock price," Checketts says. "Our shareholders are people who buy tickets. But they come not just to see us play. They come to see us win."

"There's a lot of talk" about running sports more like a business, says Atlanta's Start Kasten. "But I don't know of a single owner - big-market or small - who would not have traded a profitable season for winning season."

RELATED ARTICLE: You Can't Tell The Issues Without A Scorecard

Why does the sports business seek a planned, protected environment? The quality of athletic competition between teams is highly dependent on the degree of business cooperation achieved among them, points out Arthur Zabarkes, director of the Real Estate Institute of New York University and a consultant who advised New York City on the $100 million renovation of Yankee Stadium in the 1970s. Therefore, both income and the purchasing power of that income - talent - need to be distributed. "If the same team wins every year, fans stop watching," Zabarkes says.

On the cost side, the primary mechanism now in play is the salary cap, with the luxury tax, a kinder, gentler levy on high-spending teams, under discussion in baseball. On the revenue side, the issues are more diverse, with revenue sharing, the income from new stadiums, and franchise migration all generating a share of controversy.

REVENUE SHARING

Owners in all major sports credit former NFL Commissioner Pete Rozelle with developing the modern version of this concept. Rozelle determined that expansion means exposure; exposure means popularity; and popularity means, among other things, a television windfall. Meanwhile, the system also was designed to temper the ability of major-market teams to corner the market on star players.

Experts argue that sharing can be demotivational, citing the NFL's policy of dividing playoff revenues equally among all the league's teams as the most blatant example. "Once you pass the point of incompetence in football," says Stanford University economist Roger Knoll, "the incremental incentive to go beyond that isn't that great."

In baseball, the fight over what is shared may get particularly nasty. "Everything is on the table," insists Peter Magowan, managing general partner and president of the San Francisco Giants. Tell that to the New York Yankees' George Steinbrenner, who consistently has bristled at the notion of passing around the proceeds of his 10-year, $50 million local cable contract with Madison Square Garden CEO David Checketts' MSG Network.

SALARY CAPS

For better or worse, sports owners remain committed to salary caps, which Checketts describes as a system of "cost sharing." The mechanism is deemed critical, given that teams spend between 50 percent and 70 percent of their gross revenues on salaries. There are currently caps in the NBA and NFL, and none in hockey. Baseball, meanwhile, is considering a luxury tax, that would redistribute to the broader league population a penalty on teams that surpass a designated salary ceiling.

Typically, caps have been fraught with loopholes. In the NFL, San Francisco 49ers owner Edward DeBartolo Jr. signed up stars including Deion Sanders and Ken Norton Jr. before the 1994 season by deferring salary until after the cap expires in 1999. With the spotlight on that loophole, Jerry Jones slipped last year's $37.2 million team cap by doling out $62 million in salaries and bonuses - including, you guessed it, a fat chunk of the booty to Neon Deion - effectively front-loading, rather than back-loading, his payroll.

While defending the cap, Stan Kasten, president of Atlanta's Braves and Hawks, challenges conventional wisdom: "It's ironic the league with the tightest restrictions on salaries - the NBA - is the sport with the highest average salaries." Equally interesting, Magowan's Giants cast doubt on the owner's cherished tenet that high-spending teams dominate their opponents: Ranking second in 1994 National League team salary (behind the Atlanta Braves, according to Financial World), Magowan's Murderers failed to reach .500 for the second consecutive year.

MUNICIPAL MERRY-GO-ROUND

This is known, of course, as the Modell syndrome, after Cleveland Browns owner Art Modell, who decided in November to pack up his team and move to Baltimore - lured by an up-front payment of $75 million, and the promise of a new, $200 million stadium with 108 luxury boxes. Overall, the package is expected to triple Cleveland's $7 million in stadium revenue last season.

The key to the Modell move is that sweeter stadium revenues don't go into the shared NFL pot. Instead, they will be used to defray some of the debt the owner says he piled up in Cleveland the past several seasons, and to keep up with the Joneses on player contracts.

Fans fear a domino effect: Last season, the Los Angeles Rams moved to St. Louis, while the L.A. Raiders returned to Oakland, and there's talk that the Houston Oilers soon might call Nashville home. Hockey, too, has been churned by franchise movement. NFL Commissioner Paul Tagliabue recently asked Congress for antitrust protection similar to that of baseball, where the league has the right to veto franchise moves.

Another fear is that franchise hopscotch will prompt owners who stay put to seek comparable deals, playing cities like slot machines and launching an economic cost spiral similar to that faced by the owners amid free agency in the '70s and '80s. Already, Baltimore Orioles owner Peter Angelos is on the warpath, seeking similar terms to Modell's at his state-financed stadium, Camden Yards. Maryland Sen. Christopher Van Hollen Jr. says reworking Angelos' arrangement could cost taxpayers several million dollars.

"To play with tradition and allow moves for money isn't in the best interest of the game," says the Giants' Magowan, whose investor group resisted a lucrative offer from Tampa, FL. "Franchise stability is an important part of ownership responsibility."

THE STADIUM SHUFFLE

Three years ago, player costs were rising twice as fast as team revenues, according to a survey by Financial World. Now the pattern has been reversed. Why? The key has been new stadiums, which are boosting team profitability because of the cash they generate through luxury seating, concessions, and advertising. Here's an example: Because of new stadiums, small-town franchises such as the Baltimore Orioles are leapfrogging past larger teams such as the New York Mets and the Boston Red Sox. The Orioles franchise jumped 27 percent after the 1994 season to $164 million, says FW, placing it second in valuation in baseball behind only the New York Yankees.

Are new stadiums a good deal for cities? Skeptics point to Toronto's Skydome, on which the province of Ontario lost more than $200 million when it sold the facility to private investors recently. But Phoenix Suns CEO Jerry Colangelo says in his own deal to build the Suns' America West Arena, the city of Phoenix provided the land for the building and a capped investment: $35 million. A partnership including Dial Corp contributed $44 million. "We've completely refurbished downtown," Colangelo says. "The stadium's construction generated $400 million in economic benefits, and the city takes in sales tax each year of $9 million. "I'd say it's a win-win for both sides."

INTERNATIONAL EXPANSION

Running out of coal to shovel into the salary furnace, owners anxiously seek additional revenues. The ultimate pipeline may be international expansion: Basketball is moving aggressively into Canada as part of a broader international outreach that includes Mexico City, says Colangelo, who chairs the NBA's expansion committee. Baseball, too, is looking south of the border and hopes eventually to expand to 32 teams and reach South America and the Pacific Rim, says the Giants' Peter Magowan.

BROADCAST REVENUES

On the small screen, clearly, baseball has the blues: While each club received an average of $14 million per season from 1990 to 1993, league sources say, the amount is expected to drop to $10 million per club in the upcoming, $1 billion contract with Fox, NBC, and ESPN.

The NFL's four-year, $4.6 billion television package jumped 30 percent from its previous deal, while basketball, too, is thriving: Its four-year, $750 million deal with NBC covers 55 games a year, including the playoffs, while Turner Broadcasting System will carry three games a week over the period for an estimated $352 million. Hockey has a five-year deal with Fox: $155 million for the rights to big games.

Many experts predict a leveling off of broadcast revenues, noting the saturation of sports programming on TV. But sports television moguls often seem as intent on dominating the opposition as the teams they cover. "Every time I think that the rights payments for major sporting events might be reaching the peak," says Steve Bornstein, president and CEO of the ESPN network, "somebody like Rupert Murdoch comes along and bids an outrageous amount."

- J.M.

RELATED ARTICLE: Who's Running The Show?

Though fans typically view sports teams as exotica that aren't structured like conventional businesses, most have a familiar hierarchy, including a complement of senior executives and a board of directors. But teams can differ depending on how much operating responsibility the owner is willing to delegate to his chief-of-staff.

Dave Checketts, president and CEO of Madison Square Garden, has been on both sides. Under ITT Corp., which purchased the Garden from Viacom last year, Checketts reports to Chairman Rand V. Araskog and President Robert A. Bowman and is directly accountable for the Garden's performance. Previously, as president of the Utah Jazz, Checketts toiled for willful owner Larry Miller, who placed his thumbprint on just about everything. Working for a single entrepreneur can be simpler, Checketts says. "But the down side is you work hard to manage costs, and it's suddenly out of control, because the team is also the owner's toy, and he may be negotiating player contracts independently."

There are a few exceptions to these models. Technically, for example, the Green Bay Packers are publicly owned, having sold 4,600 shares at $25 apiece during the 1950s to avoid insolvency. But that hardly means Packer CEO Robert E. Harlan held a town meeting in 1993 to approve the signing of All-Pro Reggie White. A seven-man executive committee, headed by Harlan, holds the purse strings - and all decision-making power - in the form of a reserve fund. But here's the twist: While Art Modell and others skip merrily across state lines, if the Packers leave Green Bay, the reserve fund, after satisfying its financial obligations, would go to a local American Legion post to build a war memorial. It's a worst-case scenario, the CEO admits, but you never know. "That post has been there a long time," he says. "We send them a little money each year just to keep the relationship alive."

- J.M.

Joseph L. McCarthy is a CE contributing editor.
COPYRIGHT 1996 Chief Executive Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

 
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Title Annotation:includes related articles; American professional sports
Author:McCarthy, Joseph L.
Publication:Chief Executive (U.S.)
Date:Mar 1, 1996
Words:3791
Previous Article:FAS 123: boon or boondoggle?
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