August 2, 2007

LION IN AUGUST:

Baseball After the Boss: George Steinbrenner transformed the economics of America's pastime. Now with his health declining, who will take over the New York Yankees and what will it mean for the sport? (Franz Lidz, September 2007, Portfolio)

The value of the club Steinbrenner bought 34 years ago from CBS for $10 million—his initial equity contribution was $168,000—has increased to an estimated $1.2 billion, the highest in baseball. The $302 million that the Yankees grossed last season came largely from ticket sales: A team attendance record of 4.2 million fans generated gate receipts of $155 million. Of the $103 million the Yankees pocketed from broadcasting rights, more than half came from the YES network, a regional cable station in which the team has a 35 percent share. The combination of YES money and lucrative marketing deals accounts for how the Yanks lost more than $25 million yet accrued $170 million in value last year. Investment bank Goldman Sachs, which owns a minority stake in YES, has been exploring a possible sale of the network—analysts say it could be worth at least $2 billion. “Goldman is merely testing the market,” Rubenstein says. “They do not represent us. The Yankees have no interest in selling their share in YES.”

The new $1 billion ballpark set to open in 2009 will make a team that’s already the most bankable in sports even more attractive, boosting annual revenue by another $50 million to $60 million from the sale of tickets and luxury suites.

The Yankees will cover 80 percent of the construction and receive a $44 million tax break. Most of their financing comes from a 40-year bond to be paid off in yearly increments of $55 mil-lion. If the Yankees don’t field a good team, they’ll be saddled with some very handsome fixed costs. There will be more pressure than ever on the owner to produce a competitive champion, which is why, in the winter of the patriarch, the person who draws up the flight plan for the Bronx Bombers matters.

Despite his reputation, it has been years since Steinbrenner micromanaged the Yankees. Team president Randy Levine and chief operating officer Lonn Trost have autonomy over business decisions, as does Brian Cashman, the general manager, on the baseball end. “George still calls the shots,” says a prominent baseball agent, “but his passion for the game seems to have faded along with his health, and no one is quite sure who’s got his ear anymore.” Steinbrenner, he notes, loves aphorisms, and one of his favorites is “The speed of the pack is determined by the pace of the leader.” “In the past few years, George’s pace has slowed considerably. He’s been so detached this season that I wonder if he’s still in the hunt.”

The owner who once crowed “I will never have a heart attack—I give them” has said that the only way he’ll leave the job is horizontally. “George used to talk about turning over the operation to his kids,” McEwen says, “but I think he’s gonna run the Yankees until the day he dies.”

Though Steinbrenner’s four children are now middle-aged, he said three years ago that he had never spoken to any of them about the line of succession. In this late inning, with George unwilling to relinquish control, it’s doubtful that Hank, Hal, or either of their two sisters will take charge while their father is still in the picture. Hank has long been George’s pick, but in the past, he’s shown little interest in the job. Hank’s indifference has left the door open for Hal, who clearly wants to be the new Boss.

Regardless of which Steinbrenner leads the Yankees next, the organization is so well managed, the transition will probably be orderly. “This is not Castro dying in Cuba,” Zimbalist says.

Steinbrenner’s children could band together as a single voting bloc, but Major League Baseball requires that each team pick one managing partner to represent it at league meetings. Over the past three years, Levine has largely performed in that capacity for the Yankees.

Whoever inherits the biggest capital gain in sports history will probably face staggering gift or estate taxes. That could be avoided, temporarily, if Steinbrenner bequeathed his stake in the team, which is now at least 55 percent, to his wife, who owns at least 5 percent herself. But Joan has always kept a low profile, and McEwen is sure she would insist on keeping it that way. (There are at least a dozen other minority partners, but it’s unlikely they would play any significant role in the succession. As a previous shareholder once put it, “Nothing is more limited than being George Steinbrenner’s limited partner.”)

Some Yankees insiders believe that once the Boss is gone, his family will sell its stake to an outsider. Donald Trump has expressed interest, and assuming Rudy Giuliani doesn’t land in the White House, the former mayor would be a likely candidate to front a consortium of buyers. But Trump is thought to have too much debt and not enough ready cash. And any billionaire who could afford the Yankees wouldn’t appoint someone else to run them—that would be the equivalent of producing a Broadway show and not sitting front-row center on opening night. At a cost of more than a billion dollars, everyone agrees, this would not be about making money. It would strictly be an ego buy.

If the team is sold, the next Big Ego probably would be someone like Cablevision chief executive James Dolan—overlord of the New York Knicks, the New York Rangers, and Madison Square Garden—assuming he has no financial ties to the Cleveland Indians, which are owned by his brother Larry. (Dolan would not
comment for this story.) Or it could be a relatively unknown hedge fund manager with a forest of performance fees to burn. Not that the thickest bankroll guarantees success. The nine members of Major League Baseball’s ownership committee have absolute say over whom they’ll admit to their club, and they tend to be more arbitrary than a Manhattan co-op board. “The committee polices potential investors to protect the game’s profitability and reputation,” a former high-ranking baseball executive says. The owners don’t want a free-spending financier who would try to better a losing team by upping its $200 million payroll to $400 million. In other words, the owners don’t want another George Steinbrenner.

A new, more frugal owner could roll back salaries and try to increase profits. That would be foolish, says Zimbalist: “The Yankees play on the world’s biggest stage—on Broadway—and they need marquee players. They can’t afford to lose their sex appeal.” By making the payroll cheaper, an owner would risk devaluing the brand.

Still, we will probably never see another baseball owner with his audacity, chutzpah, and dominant stature. “Steinbrenner’s economic legacy is the way he illuminated the synergy between baseball and big cities,” Zimbalist says. “He took advantage of the fact that his team was in the country’s largest media market and the entertainment capital of the world.”

Less a visionary than a canny capitalist, Steinbrenner changed the way baseball owners behaved by refusing to play ball by their rules. As a result, he dramatically increased player salaries around the league, and the other owners hated him for it. In 2002, they tempered his extravagance—and got a piece of his money—by instituting the luxury tax (see “Yankee Dollars,” page 201), the proceeds of which form a pool that is shared by all the teams. Last year, other team owners split $105 million in luxury tax and revenue sharing from the Yankees. For most clubs, that $3 million in trickle-down Yankee bucks would cover the cost of a new starting pitcher. For the Yankees, it might fetch a backup catcher and a half-dozen Yankee franks.

Posted by Orrin Judd at August 2, 2007 8:06 PM
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