The Power Brokers of Sports
Team owners may be living a dream, but disparate goals have them in a financial neverland
The tidy corner office looks much like every other office inside America Online's drearily antiseptic campus near Dulles Airport. Only the framed photos of Ted Leonsis with Michael Jordan hint at a difference. Leonsis is the vice chairman of AOL Time Warner and a close confidant of the chief executive, Steve Case. He also happens to own most of the National Hockey League's Washington Capitals and 45 percent of both the National Basketball Association's Washington Wizards and Washington's MCI Center, where both teams play. Jordan, who also owns more of the hockey team than he does of the basketball team, is his business partner.
From this AOL office, Leonsis runs his sports domain by phone, fax and -- more than anything -- e-mail. "I get hundreds a day," he says while punching out his response to yet another. With help from several minority partners two years ago, Leonsis paid $200 million to Washington businessman Abe Pollin for a percentage of the two teams and the arena. He had amassed a list titled "101 Things to Do Before I Die," shortened by him long ago to The List. "Own a sports franchise" was right there at No. 40.
He has spent much of his time in the past year learning how to run the Capitals, though he keeps his day job. He'd better, the way his teams are losing money. "I planned by essentially thinking that success is breaking even," he says. "And we are a million miles from breaking even."
And yet, earlier this year Leonsis helped engineer a deal that made him a minority owner -- granted, we're talking about a tiny percentage -- of three more sports franchises. By buying out Time Warner in a multibillion-dollar transaction that Leonsis helped sell to both shareholders and government regulators, AOL also acquired its Turner Broadcasting subsidiary, which includes the NBA's Atlanta Hawks, the NHL's Atlanta Thrashers and Major League Baseball's Atlanta Braves.
Leonsis had sold off some of his AOL stock to finance his sports acquisitions, but he still has plenty of it left, enough so that NBA commissioner David Stern and NHL commissioner Gary Bettman each called to discuss possible conflicts of interest. Never before, each told him, has a corporate entity owned one franchise in a league at the same time that an employee and shareholder of that entity owned a competing franchise.
Leonsis lifts his eyebrows in merriment when presented with possible scenarios that could lead to trouble. "What's going to happen?" he asks. "Is Steve Case going to send me an e-mail telling me to have my team throw a game?"
What's telling here isn't the potential conflict of interest, but the idea that owning a sports franchise is viable for both Ted Leonsis and the conglomerate that employs him.
For every big-league owner, there's a particular reason why the investment made sense -- or why it didn't make sense, but he made it anyway. Some bought their teams for ego gratification, some for profit, some for synergy (or some combination of the three), and some inherited the family business. Some are successful businessmen with all the money they'll ever need, longtime fans who bought in as a way to enjoy their mature years. Others sweat every nickel because they live off the profits. Some are public corporations with a mandate to keep share prices high; others are private consortiums beholden to their investors.
Ownership, like labor, may be a monolithic concept, but that sound you hear emanating from every league meeting ever held is a cacophony of voices. In fact, it's fair to say that other than numbering Ted Leonsis among their owners and playing in the same division, the Washington Capitals and Atlanta Thrashers have almost nothing in common.
Leonsis loves the romantic notion of The List, but admits that he bought the Capitals for three reasons, all of them logical. Like many businessmen, he's unusually competitive, and sports provides the ultimate arena. "In business, it's unclear whether you're the best at something," he says. "In sports, it isn't. When you talk with Michael Jordan, on occasion you'll be arguing about something and he'll put up six fingers, as if to say, 'I have six rings. I know what I'm talking about.' My competitive side says there's something really wonderful about that."
Leonsis also understands that a sports franchise becomes an integral part of a community in a way that a business never can. If a citizen wants to tout his quality of life, he isn't likely to run through the streets praising the virtues of his library system or city government, let alone a Procter & Gamble or Sun Microsystems. But he will cheer for the teams with the name of his metropolitan area on their shirts, letting their success represent his own. "I honestly do think the community owns the teams, that these are public trusts," Leonsis says. "And if you can create a winning team, something the community can be proud of, nothing brings the city closer."
Perhaps most important, nearly all of Leonsis's estimated $675 million personal fortune existed as AOL stock. Buying a team or two was a way to broaden his portfolio. "I figured I could diversify into something I liked, and it would appreciate and I could keep it in my family," he says.
None of that applies to the Thrashers, a second-year NHL expansion franchise that came into being mostly to fill empty dates at Atlanta's Philips Arena. Ask Stan Kasten, who serves as club president for all three of Turner Broadcasting's franchises, why his company has invested in sports, and he offers a wry smile. "I can't tell you that if we didn't own sports teams, there would be the same motivation to go out and buy them today," he says. "A lot has to do with historical events. Everything we did was important to us at the time."
What started as Ted Turner's personal passion became an investment in programming for Turner's television station. "The idea was, he would own the Braves and not have to negotiate for the rights," Kasten says. "Then WTBS became a superstation, and the team took on a value completely unforeseen." Once TBS and Turner Network Television were national cablecasters, the Braves and Hawks served as ways for the company to be involved in the internal decision making of the leagues whose games it broadcast. "You're privy to the inside," says Kasten, "and you have relationships that help you."
That access, in turn, became an asset to be acquired by Time Warner, and later swallowed into the AOL empire. Turner, who spends much of his time on his Montana ranch, remains wildly passionate about his teams, but their value in the combined corporate entity is today only marginally significant. Rather, they offer a way for AOL Time Warner's equities to augment each other. From behind his desk, Kasten pulls out a folder stuffed with papers. "This is my Synergy file," he says. "I have a full-time team, and four separate task forces, dedicated to nothing but synergies."
Leonsis isn't looking to exploit synergies. He's too busy responding to a fan who exhorts the Capitals not to play such loud music during stoppages of play. For Leonsis, owning a team means helping his son make a get-well card for an injured player, then letting him deliver it in the locker room. About all the Capitals and Wizards have to do with his AOL career is his office, and the e-mails he sends on his AOL account.
So it shouldn't be surprising that the owners of the Capitals and the Thrashers will probably concentrate on different issues during negotiations for the league's next labor agreement. Or have different expectations from the next television contract. Or differing opinions about the next marketing agreement. Collude to throw games? They'll have a hard enough time finding common ground on anything, other than wanting the Stanley Cup.
To see these disparate ownership entities make a laughable attempt to come together in some kind of unity, watch what happens when baseball's labor agreement, forged during the near-calamitous work stoppage of 1994-'95, expires this autumn. Labor negotiations in sports are inherent mismatches because all players are basically in the same situation (some are wealthy, others wealthier, and none will play for very long) and can speak with one voice, while owners aren't, and can't. They try to sound united, but they never are.
And who could expect them to be? Each has a different perspective based on his market size, his stadium lease, his payroll and what he wants out of his team. Though most try to do what is in the best interests of the sport, the specifics of what those best interests entail will doubtless provide a point of raucous contention. They always do.
Already, George Steinbrenner, the Yankees' profligate chief executive, has criticized the Texas Rangers' Tom Hicks for the $252 million that he'll be paying shortstop Alex Rodriguez in the coming years. In fact, the Rodriguez deal actually makes sense for the Rangers, at least in a vacuum. The key is that the economics of that franchise -- which has a 2001 payroll of $80 million, substantially less than the $110 million or more of Steinbrenner's Yankees, incidentally -- don't necessarily apply to any others.
Hicks calculates that by signing Rodriguez, the value of the Rangers and his cable TV company, as well as their earnings capabilities, will increase enough to warrant the additional expense. "He has $250 million in television revenue to spend," says Preston R. (Bob) Tisch, a billionaire who owns half of the National Football League's New York Giants and understands the economics of sports as well as anyone. "That's a good investment. For him, it is."
Trouble is, his business decision affects his peers. If Steinbrenner is upset, it's because he'll inevitably have to pay his own players more, as will every other owner. Before this season even started, Frank Thomas, who will earn $9.927 million a year over the next six years from the Chicago White Sox, pronounced himself miffed that his salary is dwarfed by the Rodriguez deal. "It's not about money; it's about respect," he said, but as usual in such cases, respect is conferred by cash or check.
Rodriguez's contract will also be used for comparison in salary arbitration. If another shortstop puts up numbers that equal or exceed what Rodriguez does, his agent will doubtless claim that he deserves similar compensation. He won't get $252 million, but he's sure to get more than he would have, from a team that -- no matter how it tries to hold the line on salaries -- will be obliged to pay him.
Despite what the talk radio guys say, the truth is that owners can't hold the line on salaries when one or more of their peers are pushing ever upward, for whatever the reason. The economic playing field is altered, blatantly or subtly, each time a player is signed. "We are really dependent on the decisions of our competitors for our own decisions," says Kasten. "A bad contract somewhere means I'm pretty much going to be affected by it."
That point was made all too clear when H. Wayne Huizenga built a World Series champion with his 1997 Florida Marlins. He did it by paying free agents far beyond the market rate for their services. He was single-handedly undermining baseball's salary structure, but he didn't care. The year after winning the World Series, he dismantled the team. Then he sold it. "He consciously undertook to lose $30 million," says Kasten, whose Braves' payroll increased markedly as a result of Huizenga's strategy. "He did it, got what he wanted and got out."
The numbers may not have made sense for anyone else, but they made sense for Huizenga, a fiercely successful businessman who has amassed fortunes in businesses as varied as trash removal and video rentals, and who still owns the NFL's Miami Dolphins and the NHL's Florida Panthers. "Wayne did the most fantastic job financially of anyone in the industry," Tisch says. "He will sell his hockey team in the next year and his football team, eventually, for a big, big price. He will make a lot of money." That's good, because making money is, after all, the point of business.
But professional sports, though undeniably a business, is a different animal. Player unions love to invoke the free market, but they're not working under true capitalistic conditions. If you own a toothpaste company and you corner the market on quality toothpaste, you'll make a killing. If you own a sports team and all the other sports teams -- or even a few of them -- go out of business, not only do you not make a killing, but the value of your own equity plummets.
Once sports teams start to fail, the system begins to topple. "It happened to me with World Team Tennis," says Jerry Buss, who owns the NBA's Los Angeles Lakers. "We were extremely successful and we won the championship, but we looked around one day and we didn't have anybody to play."
So Kasten wonders about the impact a domed baseball stadium in downtown Miami will have on the NBA's Heat, and he frets about the huge mortgage payment the San Francisco Giants have to fork over every year. The teams his teams play against every night are his competitors, but they're his partners, too. "We truly are only as strong as our weakest link," he says.
Sports is different in other ways. If a conventional business is failing, or even if it's thriving, and the owner wants to move it to another municipality, he's free to go to where opportunity takes him. If it's a sports team, the city he's leaving will likely react as if he's selling state secrets to the Russians. What's more, his league may not permit him to leave, even if it's clear that he'd do a far better business in Los Angeles, say, than in Seattle, where Ken Behring was forced to sell his Seahawks when permission to relocate to Southern California was denied by the NFL. "Think about that for a minute," says Kasten. "The notion that someone could have a say on whether a team owner can pick up and move is bizarre in any other setting."
In any other business, you can create a niche product that flies below the radar of the category's gorillas. Not in major league sports, at least not in America. Fans of the Cincinnati Bengals have the same hopes, if not the same expectations, as fans of the New York Giants, even if their market is a fraction of the size and the owner is, by comparison, a pauper. In most businesses, success is gauged by the bottom line on the balance sheet at the end of the year, but sports has two bottom lines. Former San Francisco 49ers owner Eddie DeBartolo won championships while losing more money than any of his peers. He might be seen as a bad businessman, but he can hardly be said to have failed as an owner if winning -- just winning -- is what he set out to do.
"And if you make a lot of money and you don't win," Kasten acknowledges, "you don't get an 'A,' but you're also far from failing." That's his opinion, but how many fans are happy that their favorite team turned a profit when it finished in last place?
There's a wood-paneled, member-only lounge underneath the expensive seats at L.A.'s Staples Center where actors, producers, rappers, rock stars and trial lawyers congregate before, during and after Lakers games, paying a fee rumored to be in five figures for the privilege. "It's the most exciting 15 minutes of sports," says Tim Leiweke, president of the arena; but in Indianapolis or Milwaukee, it would be among the dullest.
"There may have been five or six cities where we could have had the same kinds of opportunities, but unquestionably being in Los Angeles has contributed heavily to our success," says Buss, a former chemist and real estate investor who now lives off his Lakers earnings.
Buss was the first owner in professional sports to sense the revenue possibilities inherent in high-end tickets, and the existence of a client base that wants the view and the visibility of courtside seats at whatever the price. Today, that's an industry given. At Miami's AmericanAirlines Arena, for example, luxury seating is responsible for about three-quarters of the annual ticket income of the NBA's Heat. That's a few hundred seats, led by the $500,000-a-year Starboxes that provide ergonomically correct swivel chairs by the court, far outearning the 19,000-odd in the rest of the building. Suffice it to say that doesn't happen to the same extent in San Antonio.