Gelf Magazine - Looking over the overlooked

Sports

November 28, 2010

Sports' Winners and Losers

Sports economist Andrew Zimbalist names the franchises and athletic organizations that exemplify the best and worst in management and finance.

Andrew Golding

Last year, the International Olympic Committee selected Rio de Janeiro to host the 2016 Summer Olympics, passing over bids from Chicago, Madrid, and Tokyo. But were the losing cities the actual winners? Was Rio de Janeiro—in part because of the cost involved in hosting the games—the actual loser?

Andrew Zimbalist. Photo by Dick Fish.
"The Red Sox are the one team that for me represents over the last five or 10 years the best-run franchise in professional sports in this country."

Andrew Zimbalist. Photo by Dick Fish.

In Circling the Bases: Essays on the Challenges and Prospects of the Sports Industry, sports economist Andrew Zimbalist explores the benefit of hosting the Olympics and more. While Zimbalist doesn't directly address Rio's possibly Pyrrhic victory, he does discuss the effects of hosting the Olympics on previous host sites Nagano (left with a vacant bobsled track), Los Angeles (a rousing success), and Beijing (beset by cost overruns), among others.

Zimbalist, the author or editor of 20 books, is frequently quoted for his view of that crucial part of the sports world that is removed from the playing surface but pays for the games and the people who play them. In this interview, conducted by phone and edited for length and clarity, Zimbalist names the baseball team he admires most; explains how the NBA salary structure helped bring LeBron, Wade, and Bosh together; and previews lawsuits that could make the NCAA very uncomfortable.

Gelf Magazine: You write that while negotiations over the NFL collective-bargaining agreement are between the players and owners, the true conflict is the small-market owners—like Jim Irsay and Mike Brown—vs. owners in big markets—Jerry Jones and Dan Snyder. How do you see it playing out?

Andrew Zimbalist: How do I see it playing out? Well, I think what's happening right now is that the owners decided to be aggressive in their opening gambit and ask for a massive giveback. It's been estimated variously, but I think it's somewhere on the order of 15%. And of course the players have come forward and said, "Well, this is rather extraordinary. If you really need this kind of a giveback, then show us your books. We'll talk about it, but let's see the evidence." And the owners have said no, unlike in the NBA, where owners generally have shared with the players association their income statements and balance sheets. But in football, they've just said no.
I think that the sides have staked out their battleground, and it's not so untypical in sports negotiations. The owners see an opportunity—because, I think, of the weak economic situation—to force players' hands a little bit, and it doesn't mean that the owners are expecting to get a 15% reduction in payroll. I think at the end of the day they're going to settle for a lot less, but they think that this is strategically the way to go. So, what will happen? I think that they'll make a settlement and the small-city owners in football will be able to increase their profit margins a little bit, and we'll go back to football the way we know it in terms of the fan experience.

Gelf Magazine: You talk about Buffalo and Cincinnati as two teams leaving money on the table with no stadium naming rights. Is there a team in the NFL, or any sport, where you look and say, that's a well-run organization?

Andrew Zimbalist: Sure, yeah, absolutely.

Gelf Magazine: Which ones?

Andrew Zimbalist: I think there's quite a few. The San Francisco Giants, for one. The Red Sox certainly are a well-run organization, and I think the Yankees are a well-run organization. Outside of baseball, one can certainly argue that the Miami Heat are a well-run organization. The Dallas Cowboys have been historically a well-run organization. The Los Angeles Lakers have been a well-run organization.
There are certainly good ownership groups that have done crackerjack jobs in marshaling resources, promoting the team, assembling good talent, marketing their teams well in their communities, and engaging in foundation work and philanthropic work in their communities. If I had to pick right now, the one team that for me represents over the last five or 10 years the best-run franchise in professional sports in this country, I'd say the Red Sox.

Gelf Magazine: They've got a regional sports network…

Andrew Zimbalist: They own 80% of NESN. Look, I could give you an hour-long lecture on the Red Sox, but the fundamentals are these: The owners inherited a team that had a plan with the city of Boston with $600 million of public money, to build a new stadium basically across the street from Fenway Park. That's $600 million of public money. They got the team and did some engineering studies, and they discovered that with some investment, they could preserve Fenway Park. They did a lot of redesign work and they did a lot of structural engineering on it, and you have now a baseball cathedral—a spectacular place. It doesn't have all the comforts and amenities of, say, Yankee Stadium or Citi Field, but it's a very comfortable facility, and all of that work has been done with about, as we speak, maybe $275 million of investment by the owners of the team. I think they got something like $12 or $13 million of public money for historical preservation. Ninety-percent plus of the money that's been invested is private money—they simply said, we don't need the $600 million, and they saved Fenway Park.
Then, what else did they do? They happened to have won the World Series twice in the past decade and they go to the postseason practically every year. That's an amazing accomplishment for a team that previously hadn't won the World Series since 1918. They have a very, very active and successful and involved foundation, with all sorts of innovative projects in the community. And they've been very innovative and creative with NESN. They've formed New England Sports Ventures so they have a variety of branch-out activities from the baseball activity, and they just bought Liverpool FC. They've hired terrific front-office people. I think they've sold out every game since 2003. That's a remarkable record. And they've paid the second most in revenue sharing in the majors despite being in the sixth- or seventh-largest media market in the country.
So I think that's a pretty extraordinary record. That's not to say the guys walk on water. But they've been smart, they've been attentive, they've listened to the community, they've hired top, top talent, they've been aggressive, and they've taken risks. So I guess they would get my vote. I haven't really calculated all this, but since you asked me if there's a good franchise, that's certainly one that jumps out at me.

Gelf Magazine: You mentioned revenue sharing and you write about it in the book—how a team can guarantee profits of $30 to $40 million, like the Pirates, for example. Did you check out those financial documents on Deadspin on MLB finances?

Andrew Zimbalist: I sure did.

Gelf Magazine: What did you think? Did anything surprise you there?

Andrew Zimbalist: No. In fact, Deadspin showed me the documents in the middle of the summer and asked me to comment. I think my comment was something like, this isn't at all surprising. Here's why: I think that these politicians in Miami who are saying we got swindled by Jeffrey Loria, the owner of the Marlins, and team president David Samson, are either very poorly informed and bad managers of their city, or they're being disingenuous, because anybody who knew anything about baseball or bothered to look and ask, would have known that this is a team that was getting $30 million to $40 million in revenue sharing, $30 million-plus in central-fund revenue, and had a payroll, depending on the year, of $15 million to $30 million, and there's practically no way that they could have left each year without a profit.
The system is set up to be taken advantage of, and it certainly wasn't just the Marlins. There are several teams that were on the dole, and found it in their economic interests to keep their revenues low and put all the central-fund money, all these revenue transfers, in their pocket. Virtually without selling a ticket, they would be guaranteed a profit every year. The incentive system was very perverse and the revenue-sharing system as it exists continues to have all sorts of problems. Baseball's trying to work on it, but it's still hard, politically, to change anything.

Gelf Magazine: I want to ask you about the NBA. This season, I heard about declining revenue, tickets not selling, and other gloom from the commissioner. Then at the end of the season, free agency opens and I see Rudy Gay and tons of players getting these huge contracts. Did that surprise you?

Andrew Zimbalist: No. I think what's going on in the NBA is that they have a salary cap; and they have the supplement to the salary cap, which is the escrow system, so that if a team goes through the cap because of these exceptions, then basically players have to give it back through escrow tax; and they have the supplement to that, which is the luxury-tax system, which imposes a 100% tax rate.
In the salary-cap system, they have individual caps, so that unless a player is grandfathered in by certain provisions that would go back many years, I think the top salary these days is somewhere in the neighborhood of around $20 million.
Go back if you can in your memory: I think the year was 1997, when Jerry Reinsdorf signed Michael Jordan to a one-year contract for $33 million—that's roughly 13 years ago. Some economist did some work on that and estimated that Jordan's value was actually closer to $55 million. Since that time, all sorts of revenue streams have grown handsomely in the NBA, so if Jordan was worth, let's say, $33 million instead of $55 million in the mid- to late-'90s, how much is LeBron James worth today? How much is Dwight Howard worth? How much is Dwyane Wade worth? How much are some of these guys worth? We know that the limit they can be paid is somewhere in the neighborhood of $20 million, but if they're actually worth $30 to $35 million—or maybe $40 and $45 million, depending on the player and the team—what you're going to have is kind of a permanent state of excess demand for certain players. There are always going to be some teams out there that know the value of these guys. Which is to say, the incremental revenue that you expect them to produce for your team by having them on your team—the incremental revenue they are going to produce is way above the amount that they are going to get paid, because there's this artificial cap on how much they can get paid.
So even if the country hits an economic slide like we have now, and attendance goes down by 2% league-wide or whatever the number might be in any particular year, you still have this pent-up excess demand for players because of the disparity of what they're actually worth and what they're allowed to be paid. It was because of that disparity that Micky Arison in Miami was able to get James, Wade, and Chris Bosh all on the same team, because they decided to take their pay in the form of saying, we all want to play together. I think LeBron James is getting $18 million next year. Let's say he's worth $35 million. Rather than him being able to say, I'm worth $35 million, I want $35 million—which is not possible because of the CBA—he's saying, OK, I'm going to take my remuneration in the form of playing with my buddies, because I want to win a championship. So as long as you have these artificial constraints that produce this gap between what somebody's actually worth and what they're allowed to be paid, it's not going to matter that much if attendance drops 2% or if the economy flattens out instead of grows. If it were the case that LeBron James was worth $26 million and he was getting paid $25.8 million, then maybe it would matter. But the disparity there is much greater than that, and so it's simply not going to have an impact that all of a sudden there aren't these high salaries in the NBA.

Gelf Magazine: Ted Leonsis said last month that he expects a hard cap. Do you expect that to happen?

Andrew Zimbalist: I think they have a hard cap right now so I think that's a silly statement. Do you know what the payroll share has been in revenue in the NBA? It's been a steady 57% and its stayed there. So what's a hard cap? How do you get harder than that? It hasn't varied. They have a salary cap that's soft because it has a Bird exception in it and then some midlevel exceptions, etc. But players have had steady share at 57%. And yeah, you've got mechanisms in there that allow there to be flexibility from team to team. But league-wide, it functions like a hard cap. Do you really need more of a hard cap than that? I don't think so.
I think you want to have a little bit of team-to-team flexibility if the league is going to be well-managed. You don't want the San Antonio Spurs to win every year; you want the Knicks to win more often and you want the Lakers to win more often because they play in the cities that are going to drive the most people to the television sets and get the most signage revenue and corporate sponsorship and ticket sales and so on and so forth. I think Leonsis is speaking very sloppily when he says that.

Gelf Magazine: In the NCAA section, you write about the Sam Keller case and the Ed O'Bannon case, and others in which players have sued because the NCAA was benefiting from the sale of their image. In the past, there were settlements with Jason White, Andy Oliver, and the case over restricting coaches' earnings, which cost $54.5 million. Is the Keller/O'Bannon case over student-athlete publicity rights the one that's going to cost the NCAA the most?

Andrew Zimbalist: The NCAA is trying to settle and has been since the restricted earnings case Law v NCAA in 1998. They've been trying to settle these things out of court because they don't want precedents to be established. The deal with Andy Oliver is the same thing—Oliver won with a very decisive decision, but it was a county-court judge in the state system, which has no precedental value at all, so the NCAA said, we'll give you three-quarters of a million dollars if you go away.
I think they're playing with fire, especially now because you've got David Boies involved here and some other very prominent and well-endowed law firms that are committed to the struggle. In the past, a lot of law firms have taken these kinds of cases on as pro bono cases, but they don't want to stay in for the long term, which could be five years or more. They simply want to get a settlement and say, look, we won, we did a nice thing, we had a good principle, and we won some money for our clients. And that's a good pro bono PR result for them. But I don't think David Boies is in this for that. He's in this because he's got a real issue that he's going to pursue.
One can never tell what's going to happen in our crazy court system. I think that the arguments here are very strong and the law firms are very committed. The NCAA is going to have a really hard time wiggling its way out of this one.

Gelf Magazine: Do you think this lawsuit is going to cost the NCAA the most, more than the $54.5 million in the restricted-earnings case?

Andrew Zimbalist: I think the NCAA modus operandi is being challenged in a fundamental way. I haven't tried to calculate what the financial bill will be, but I think in terms of the massive contradiction that is at the core of our intercollegiate sports system and the disjuncture between paying the Rick Pitinos of the world $7 million a year and the athletes getting bubkes, those things are being challenged here, and it's going to force the NCAA—if they lose, as I expect they will—it's going to force them to look into their soul and do some serious reforming.

Gelf Magazine: I read the entire book and I have no idea what sport you like, what teams or players. Who are your guys?

Andrew Zimbalist: [Laughing] I don't know if I have my guys. I grew up in New York in the 1950s, and you can't grow up in New York in the 1950s and not like the Yankees, because they won ever year. I guess you could be a Dodgers or Giants fan, but they split for California. I grew up a Yankees fan, a Knicks fan, a Rangers fan, and a New York Giants football fan, but over time, as I have studied the industry and worked in the industry and consulted in it and made friends, I tend to root for the sports doing the right thing, the sports being successful, the sports having good contests. If I root for particular teams, it's because I like the ownership of those teams. That's pretty much where I'm at.
In terms of what sport I've been most connected to emotionally, it's baseball. I think that's in part due to when and where I grew up. I played baseball through high school. On my high-school baseball team, I was a shortstop and a catcher, and one of the guys I caught was Charlie Williams, who was a Mets pitcher, and he ended up being traded for Willie Mays when Mays came to the Mets. Charlie went to the San Francisco Giants, so that's the sport I've been most connected to, I think. But I've really followed and enjoyed all the sports to varying degrees, not just the team sports, but certain individual sports—tennis, golf, skiing.

Gelf Magazine: I want to ask you about your kids. You're known for your analysis. How would you analyze their movie, The Two Escobars?

Andrew Zimbalist: [Laughing] How would I analyze it? I think it's a terrific documentary. It's a fascinating story. The footage and interviews that my sons got are just mind-boggling. It portrays the way that soccer in Colombia—but really many sports in many different countries, depending on the sport and the country—penetrate the culture to such a degree that it ends up being a dominant influence in not only cultural development but political development in the country. I think what this movie does is, it talks about narco-soccer and the funding mechanism for the national team and the strength of the national team in Colombia. And it shows Pablo Escobar's need to launder his money, his drug money, and his love for soccer—his ability to use soccer to portray himself publicly as a great generous figure, which he does in other ways, as well.
The movie shows how much Colombia as a society is gripped by soccer and its national team, and it does it in a way that, in my mind, is very evocative. Even though it's a documentary and documentaries can be dry, I think it has the passion and the narrative that you typically expect out of a good fiction film. That's how I analyze it and, frankly, that's the way its been received in its critical reviews.

Front-page image of Fenway Park courtesy of charliekwalker's Flickr via Creative Commons.

Andrew Golding

Andrew Golding works in the television industry in New York. He twitters at Twitter.com/AndrewGolding







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Comments

- Sports
- posted on Nov 29, 10
Nancy Berg

Great article, quite perceptive about the the way sports influences and shapes lives. Wonder how many reading this article knows what a pyrrhic victory means......would be very interested in reading more of Andrew Golding's thoughts.


Article by Andrew Golding

Andrew Golding works in the television industry in New York. He twitters at Twitter.com/AndrewGolding

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