Major League Baseball FAILING ECONOMICS 101


Back when I was a sophomore in college taking Economics 101, I was taught that if a businessman buys a widget-maker for $100, he should expect to make at least $100 worth of additional widgets. If he doesn't, he'll soon be an ex-widget-maker.

I've been thinking about that a lot during the baseball strike.

I keep thinking: The Baltimore Orioles pay Cal Ripken Jr. $7 million a year. How the hell does he earn $7 million in additional income for them?

Assume that the average fan pays $20 for a ticket plus concessions. Then $7,000,000 divided by $20 equals $350,000. To paraphrase George Steinbrenner of the Yankees, that's how many extra fannies Cal would have to put in the seats every year. That's 4,300 extra fans every game.

Does he?

Probably not. The Orioles already fill every seat in the stadium.

Well, he helps them win games, then.

Not really. He's quite average as a clutch hitter. How often does he leave runners in scoring position? How often does his heavy hitting come in losing games or one-sided wins?

I don't mean to pick on Rip particularly. He's no different from Barry Bonds, Ken Griffey Jr., Cecil Fielder, Jose Canseco, or most of the other big-money stars. How many of their home runs come in the eighth inning after the game has long been decided and the pitcher just wants to throw strikes and get it over with?

Mr. Fielder makes $35,000 per game ($9,000 per at-bat) for the Tigers. With the score 18-2, he'll smash a 500-footer over the roof for you. But his bat goes strangely limp when it's 2-2 in the sixth.

Mr. Griffey especially was an all-American out in the clutch, which is why Seattle was the second-worst team in the American League despite his 40 homers and its relatively generous payroll.

But let's assume that Cal starts slashing long line drives into the gap when the game is on the line and leads Baltimore to the pennant. How much extra money will that bring into the Orioles' coffers?

Probably nothing. According to Financial World magazine, in 1993, the last time there was a World Series, the two Series teams, Toronto and Philadelphia, broke even financially. (The Phils dispute that, saying they made a $6 million profit on the year.)

The Giants and Dodgers, the two biggest winners in the game that year, claim they barely stayed above the red ink. Far from making a profit, they spent their profits trying to get into the Series -- and failed to do it.

If we can trust the teams' reports, 10 of them lost money in 1993. (Financial World says it was eight). The biggest profit-maker was Baltimore at $27 million.

However, almost certainly every club did worse in '94, except probably Cleveland and Texas with their new stadiums. That's because each team lost $8 million when the CBS-TV contract ran out.

Subtracting $8 million from each club's '93 bottom line would leave only three in black ink, 23 in the red, and two (Atlanta and St. Louis) that broke even in '94.

The moneymakers:

Orioles $18 million, estimated.

Yankees $11 million.

Rockies $6 million.

Cleveland and Texas probably also finished in the black, for a total of five out of 28.

No wonder Peter Angelos can afford to be a maverick among owners: He's got a kitty stashed away, which Houston, Kansas City or Pittsburgh don't.


And the Orioles are going to raise ticket prices in '95.

Popular and stingy

Baltimore is second only to Toronto in total attendance in the American League.

It's also the stingiest team in the league. Last year, 1994, the O's spent only $8.90 per fan on player salaries, even counting Mr. Ripken's. The other $11 went into the owners' bank accounts.

By contrast, Kansas City, with about half the Orioles' attendance, spent $24 per fan to give its customers a good team.

San Diego claims it spent $20.30, or practically every cent it took in at the box office.

Thus, it's no surprise that the Orioles made the biggest profit in the majors in '93 -- $27 million. San Diego lost an estimated $4 million and the Royals lost $13 million, the most in the American League.

More for the money

Only two National League teams were more tightfisted than Baltimore: Florida and Colorado. The Rockies, with the biggest crowds in baseball history -- averaging 58,000 a game -- spent only $2.80 per fan to pay good players for their customers to watch. Florida spent $7 per fan.

That explains why Colorado made the biggest profit in the National League in '93, an estimated $14 million. Florida was fourth with $6 million.

The three most generous teams in the American League that year in terms of payroll dollars per fan were Kansas City, Detroit and Oakland. All three lost money. The four most generous in the National League were the Mets, Pittsburgh, Cincinnati and Houston; they all also lost money.

Cheapness pays

The two most niggardly in the AL, Baltimore and Cleveland, showed a profit. The five stingiest in the NL -- Colorado, Florida, St. Louis, Philadelphia and Los Angeles -- all reported turning a nice profit.

The inspirational story of 1994 was the Miracle in Montreal. In one of the smallest markets in the majors, the Expos won more games than any other team while spending less than any team except San Diego -- and essentially breaking even financially for their owners! (Financial World says they made a $13 million profit.)

How Expos did it

The Montreal management did it by spotting good 18-year-olds, signing them to low-price contracts, and nurturing them to maturity. Of course they'll pay for it this year, when their young stars' contracts run out: They'll have to start rebuilding again, aiming for 1999.

Cleveland was almost as shrewd. The Indians probably would have won the '94 American League pennant if the strike hadn't cheated them out of 11 home dates -- they were the best home team in baseball. In '93, even before moving into their new park, they were turning a tidy profit. It was surely even higher in '94. Their formula also was to sign youngsters early, but for slightly higher and longer-term contracts than Montreal offered. Thus all the Indian stars have another year on their contracts.

Buying stars

The Orioles' strategy has been to buy stars that other teams have developed. Last year they spent $11 million for Lee Smith, Rafael Palmeiro, Chris Sabo and Sid Fernandez. The O's had finished third in '93 without them; they finished third again in '94 with them.

Now the team wants the fans to pay for the Four Mistakes through higher ticket prices.

Dividing victories into payroll gives us a handle on baseball's smartest general managers, the men who got the most bang for the buck.

The worst were Tom Grieve of Toronto (now replaced by Baltimore's Bob Melvin), who spent a million dollars per win in '94. He was followed by Larry Himes of the Cubs (since replaced by Andy MacPhail of the Twins) with $900,000 per win.

The best was John McHale of the Rockies ($240,000 per win) and Bill Stoneman of Montreal ($270,000). San Diego came in at $480,000. In the American League, Cleveland's John Hart spent $300,000 per win; Baltimore's Roland Hemond was second best

at $500,000.

Great teams, low prices

The two best GMs all-around were Mr. Stoneman and Mr. Hart, who put great teams on the field, perhaps the two best in baseball, without spending their bosses into the poorhouse.

This leaves teams in a dilemma: Are they in business to make money or to win the pennant? It used to be the same thing. Not any more.

Is big-league ownership a hobby for sportsmen like Mr. Steinbrenner or Atlanta's Ted Turner, who buy a world champion as other men buy a Senate seat? Or is it an investment for a businessman like Mr. Angelos or Richard Jacobs of Cleveland?

The data show pretty clearly that:

* Spending big bucks on stars does not guarantee a winning team; it does lead to losses in the ledger.

* Saving money on payrolls means profits in the bank -- and a damn good general manager can still win a pennant on the field.

For those teams that do make money, baseball can be a spectacular investment.

Using Financial World's data, in 1993 Florida spent only $32 million in expenses and turned a profit of $28 million for an amazing profit of 87.5 percent. The most profitable teams, according to Financial World, were:

Florida, 87.5 percent

San Diego, 58 percent

Colorado, 42.5 percent

Cleveland, 42 percent

Baltimore, 38 percent

Montreal, 36.5 percent

(San Diego claims it actually took a loss in '93, and Montreal says it broke even. FW disputes them.)

All these teams turned handsome profits by holding expenses down.

There are only two ways to make a profit: increase income or cut costs.

Two factors put an effective ceiling on income: the size of the local TV market and the size of the park.

The TV market is a given. The Yankees can afford to charge $50 million; the Royals and Expos are lucky to get $3 million.

As for the park, six teams -- Colorado, Baltimore, Toronto, Boston, Cleveland and Texas -- are already bumping up against their ceilings. Buying exciting stars or winning the pennant won't bring them a dollar extra in income. Therefore, they have little economic incentive to buy a pennant.

Cutback on seats

Baseball, in its infinite stupidity, has ordained that Colorado can no longer sell 72,000 tickets to a game. Starting this year, in their new "intimate park," they will have only 45,000 seats. That gives the Rockies even less incentive to spend.

(There's a third potential source of income. Those teams that don't yet have skyboxes can beg their cities to build new parks and thus increase their revenues from that source.)

There's also a fourth source, but it's just a temporary quick fix. With expansion, each team will receive about $10 million from the new clubs. But after that's spent, the teams are back in the same stew pot.

On the cost side, administration and overhead are pretty much constant (except perhaps for cutting the general managers' salaries).

That leaves only only one other thing to cut: player salaries.

This cannot be good reading for Donald Fehr and the Players Association.

Even using the higher numbers published by Financial World, it seems clear that teams simply cannot pay exorbitant salaries. Teams that do, go broke. Those that don't, go to the bank.

As Mr. Stoneman of Montreal says, "Montreal has had a 'f spending cap for several years." And it still produced the best team in baseball. More and more teams are looking at Montreal's record and getting the same message: De facto spending caps will be the wave of the future, whether they are legislated or not.

Ironically, the players say they are striking for the next generation. Young men, with average careers of three or four years in the majors, are being asked to give up one of those precious years on strike. Are their dreams of some day making $7 million, as Cal Ripken does, realistic?

Probably not.

Mr. Fehr can stand on the beach and command the waves to cease. But the economic facts are stronger than one man.

Most of the players have never taken Econ 101.

But he has.

John B Holway is an author and baseball historian who lives in Springfield, Va.

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