Sunday, July 23, 2006

"The House That Steinbrenner Is Building" NY Times 07/23/06

The House That Steinbrenner Is Building
By KEN BELSON in New York Times, Sunday, July 23, 2006

IT’S another June evening in baseball and the Boston Red Sox are visiting New York for the latest showdown with their archenemy, the Yankees. As it is at every meeting between the teams, the stadium is packed and crackling with energy.

Few in the stands, though, notice that the man perhaps most responsible for the revival of their rivalry is not there. George Steinbrenner, the principal owner of the Yankees and the man New Yorkers love to hate, now watches more games at his home in Tampa, Fla., than he does in his private box above home plate.

Although he is 76 and noticeably slower than he was when he took over the Yankees 33 years ago, Mr. Steinbrenner remains, according to those who know and work with him, deeply involved in the Yankees operation. Despite rumors that failing health has shrunk his ambition, the Boss, as he is known to all in baseball, is pushing all of his employees to try to win championships — and spending hundreds of millions of dollars a year to accomplish it.

That perennial drive is a big reason, analysts say, that the Yankees have broken new financial ground on the field and off. Bankers, analysts and others familiar with the team’s finances say the franchise is now worth about $1 billion, nearly 70 percent more than the next most valuable team, the Red Sox, and nearly three times more than the average major league team is worth.

Making the most of a winning tradition and their home in the nation’s biggest city and media market, the Yankees generate nearly $300 million in annual revenue, according to an individual with knowledge of the team’s finances. He requested anonymity because of his continuing professional relationship with the team.

But as Mr. Steinbrenner’s stewardship of the nation’s most-fabled baseball franchise stretches into its fourth decade, his win-at-all-costs business model appears stressed. Yes, the Yankees earn the most money, but analysts say they also spend the most, giving the team razor-thin profit margins. And the Yankees offer such a pre-eminent model for how to milk money from a sports team that its well-being has become a proxy for the financial prospects — and limitations — of professional baseball as a whole.

“If the franchise that is the beacon for the league is not making an operating profit, that has to be a major concern for any league,” said Bernard J. Mullin, the chief executive of the Atlanta Spirit, which owns the N.B.A. Hawks and the N.H.L. Thrashers, and a former executive with the Colorado Rockies and the Pittsburgh Pirates.

The Yankees’ haul is produced by its share of the No. 1-ranked regional sports network, YES, as well as the more than four million fans who flock to the Bronx in a season and pay top dollar for tickets, parking and food at the 83-year-old shrine known as the House That Ruth Built. The Yankees also get some of the highest licensing and advertising fees in Major League Baseball.

TO keep up with the escalating prices that it pays its players — a surge that Mr. Steinbrenner himself set in motion — the Yankees need still more revenue. Yet they have extracted about as much as they can from Yankee Stadium, which now suffers from a dearth of luxury boxes, parking and retail outlets. The Yankees’ bottom line is also hammered because the team, like the Mets and Red Sox, must pay millions of dollars to prop up less-prosperous teams. Effectively penalized for their success, the Yankees have become a symbol of baseball’s partially inverted economics.

Mr. Steinbrenner — now the longest-serving owner in baseball — shows no intention of stepping down, which is good news for the fans, sportswriters and even team owners who thrive on demonizing him. But the Yankees’ juggernaut has been built in part on Mr. Steinbrenner’s willingness to routinely fund the team’s outsize payroll, a munificence that may not continue when he eventually steps down.

Mr. Steinbrenner, who declined to comment for this article, is grooming his son-in-law, Steve Swindal, to take over the team. Meanwhile, the Yankees are trying to cut their payroll by using younger and cheaper players when possible and staking their financial future on a new megastadium.

“The new stadium is going to have all the tradition of the old stadium, with all the modern amenities,” said Randy Levine, the team’s president. “Bleachers will be there. Restaurants will be open. There will be a great hall when you walk into the stadium that can be used for events. The idea is to make this a year-round destination.”

Set for a 2009 debut, the stadium, including building costs and debt payments, will carry a $1 billion price tag. To pay for it, the Yankees will need to generate an additional $50 million to $60 million a year in revenue, according to analysts. Mr. Levine declined to discuss how much money the team expects to earn in its new digs, though he ruled out selling the naming rights to the stadium.

Other baseball executives and analysts, though, question whether the stadium will be as much of a bonanza as the team may hope. The Yankees already sell out most of their current seats and suites, they say, and the new stadium will have several thousand fewer seats. To offset that loss, the Yankees plan to have 60 suites in the new stadium, three times as many as they offer now. If the stadium does not create a financial windfall for the Yankees, it is likely to cast a financial pall over other teams that are making an art out of chasing dollars with the same urgency that they chase titles.

“The Yankees have created tremendous expectations and have created the need to continue spending,” said Henry D. Fetter, the author of “Taking On the Yankees: Winning and Losing in the Business of Baseball.” “The Yankees have created a target for everyone else to aim at and been a stimulus for innovative management.”

High expectations at Yankees Stadium did not begin, of course, when Mr. Steinbrenner, using part of his shipbuilding fortune, led a group that bought the team in 1973. He is only the latest in a line of aggressive, well-heeled Yankees owners who have gone all out to field a winner and to force other teams to adapt.

That tradition started when Jacob Ruppert and Tillinghast L’Hommedieu Huston paid $450,000, then a record in baseball, to buy the club in 1915. At the time, the Yankees had spent nearly two decades as cellar-dwellers in the upstart American League.

Unlike most other owners back then, the men were wealthy enough that they could funnel the team’s profits back into the franchise — and they proved it by buying Babe Ruth from the Red Sox and building Yankee Stadium, which became an instant hit when it opened in 1923.

During the 20’s, the Yankees earned more than $3.5 million cumulatively, according to Mr. Fetter’s book. By reinvesting those profits, Mr. Ruppert — who bought out Mr. Huston in 1922 — allowed the Yankees to buy the best talent, win championships and draw more fans, which gave the team even more money to keep the cycle going. .

Teams whose owners sucked money out of their business typically suffered over the long term — teams like the New York Giants, which sank in the standings after reigning as the National League’s premier team in the early part of the 20th century.

Mr. Ruppert also introduced the template for modern sports management, creating a division of labor among managers on the field, general managers who handled trades and contracts and owners who wrote the checks. Mr. Ruppert also set the tone for his franchise, hammering home — in Steinbrennerian shades — that winning was everything. “There is no charity in baseball,” he said. “I want to win the pennant every year, and the bigger the margin of victory, the better.”

THE Yankees won championships so methodically and mercilessly that cheering for the team was sometimes compared to supporting United States Steel. Teams of lesser means had to innovate to compete. The St. Louis Cardinals, led by Branch Rickey, fished for talent on the cheap in the 1920’s by developing minor-league teams, a strategy that Mr. Rickey mined later when he ran the Brooklyn Dodgers in the 1940’s and 1950’s.

Some teams tried to compete by buying big-name players, but those in cities with fewer fans and media dollars inevitably proved unable to support their big payrolls. After they started cutting salaries, their franchises went into competitive and financial tailspins.

The Yankees were not immune from this vicious cycle.

After dominating baseball for decades, the Yankees languished in the years after CBS bought them in 1964. The company thought that the team would help diversify its portfolio, and CBS bean counters saw a bloated enterprise in need of cost-cutting. Unfortunately for the team and its fans, CBS failed to grasp that success in baseball is often more expensive than losing. As it dumped players with big salaries, the team slid into a decadelong funk and regularly lost money. In 1973, CBS sold the Yankees to a group led by Mr. Steinbrenner for $10 million — $3 million less than what CBS paid a decade earlier.

Yankees fans and the city’s news media, never warm and fuzzy about outsiders, initially greeted Mr. Steinbrenner’s arrival with skepticism. He professed admiration for the Yankees, talking about how as a child he could not wait for the team to visit Cleveland, his hometown, to play the Indians. He also promised to take a back seat, leaving the running of the team to others.

But he quickly did an about-face, bringing in his own people to run things, involving himself in every aspect of the club’s operations and alienating employees, players and fans. He publicly lambasted his managers and players — serially hiring and firing Billy Martin as manager in the 1970’s and 80’s, for example. The ranting went on for decades; in 1999, he called a pitcher, Hideki Irabu, a “fat toad.”

Buster Olney, a former sportswriter for The New York Times, summed up the Boss’s management style in his book, “The Last Night of the Yankee Dynasty”: “George Steinbrenner would never entrust his team to God. That would mean giving up too much control. Instead, the Yankees’ owner audited the team from moment to moment, like a caffeinated rent-a-cop monitoring a Wal-Mart through security cameras.”

Mr. Steinbrenner was capricious, firing employees for perceived infractions, but keeping others on the payroll for seemingly inexplicable reasons. His antics got him attention, whether it meant being lampooned on the television sitcom “Seinfeld,” or finding himself in the middle of messier real-life episodes, such as his ban in 1990 from operating the Yankees after he paid a gambler $40,000 for possibly derogatory information about the outfielder Dave Winfield; the ban was lifted in 1993.

FOIBLES aside, Mr. Steinbrenner, according to associates, cared deeply about the Yankees as a team and an institution, going so far as to cry on national television after a World Series victory. And like Mr. Ruppert, he was also willing to put his money where his mouth was — a fact he also made abundantly clear soon after he arrived in New York.

“When the Yankees signed Catfish Hunter in 1974, it signaled that ‘We want to win again and we’ll do everything we reasonably can to win,’ ” said Donald M. Fehr, the executive director of the Major League Baseball Players Association. The signing was a watershed in huge contracts for free agents.

Mr. Steinbrenner went on spending, luring Reggie Jackson, Goose Gossage and other big-name players. The largess paid off quickly. In 1976, the Yankees won their first pennant in a dozen years; the team won the World Series the next two years. They lost the 1981 World Series, during which Mr. Steinbrenner broke his hand. (He said the injury came in a fight in an elevator with two fans who insulted the team, but his aggressors never materialized. Others suspected that he punched the elevator in frustration.)

Mr. Steinbrenner’s willingness to spend heavily for players helped to drive up salaries across the league — a boon to players, but the source of endless grumbling among other owners. It has also led to efforts to quantify the impact of money on a team’s performance. The most prominent attempt came in 2000 when the baseball commissioner’s “Blue Ribbon Panel on Baseball Economics” published a study about the matter.

The panel found that teams with more money did better than those with less money, and that the gap between the haves and have-nots was growing. According to the report, the gap between the clubs with the highest and lowest revenue from tickets and other locally sold items more than doubled from 1995 to 1999. During the same period, no club that ranked in the lower half by payroll won a playoff game.

“Too many clubs in low-revenue markets can only expect to compete for postseason berths if ownership is willing to incur staggering operating losses to subsidize a competitive player payroll,” the panel concluded.

Many others in baseball, though, say the Yankees and other prosperous teams are good for the sport because they raise the level of competition and force other teams to be more aggressive.

“Their success and payroll raise a few eyebrows that one team is so dominant,” said Andrew Zimbalist, a sports economics professor at Smith College and the author of “In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig.” “But I happen to think it’s good for baseball that the Yankees and Boston are the teams others can gun for.”

There is also plenty of evidence to show that money does not necessarily equal success. The Oakland Athletics, with one of the league’s smaller payrolls, have consistently fielded winners in recent years. The Chicago Cubs, with fat payrolls and plenty of revenue, have not won a World Series in nearly a century.

Despite Mr. Steinbrenner’s heavy spending and quick success on the field after he became owner, the Yankees lost money in five of the six seasons from 1974 to 1979, according to financial statements prepared by Arthur Andersen & Company and as reported by the sportswriter Murray Chass in The New York Times.

“In his willingness to outspend everyone, the team became a focal point,” said Maury Brown, co-chairman of the business of baseball committee at the Society for American Baseball Research. Mr. Steinbrenner, he said, “seems to be a man driven to succeed at all costs and pours his money back into payroll.”

Even with all that spending, the Yankees haven’t always maintained a lock on winning. While it currently has a $195 million payroll, the biggest in baseball by a wide margin, and has advanced to the playoffs every year since 1995, the team has not won the World Series since 2000. In 2003, the Florida Marlins — a team with a payroll one-third the size — beat the Yankees in the World Series.

Analysts also say that money alone does not explain Mr. Steinbrenner’s success. They note that he has surrounded himself with creative marketers, as evidenced by the team’s deal in 1988 to broadcast its games on cable television — a page taken from Ted Turner, who did the same with the Atlanta Braves.

In 2002, an investment group that included the Yankees formed the YES Network, further leveraging the team’s brand. YES brought in $257 million last year, surpassing MSG to become the country’s top regional sports network for the first time, according to Kagan Research.

“It’s not just attendance any more,” said Tracy Dolgin, the chief executive of YES. “The better you do as a franchise, a cycle develops. When you’re winning, there’s interest in the team and your ratings are higher. Then attendance increases, you sell more food, more parking. It’s an upward spiral.”

The team has also signed big licensing deals with sponsors like Adidas and formed partnerships overseas, including one with the Japanese newspaper, Yomiuri Shimbun, many of whose readers follow every move of Hideki Matsui, the Yankee left fielder. Two years ago, the Yankees formed a venture with Steiner Sports Marketing called Yankees-Steiner Collectibles to market jerseys, bats, helmets and other gear that players use.

“The Yankees have transcended baseball and sports; they are an iconic brand,” said Rick Dudley, the chief executive of Octagon Worldwide, which puts together sports sponsorship deals. “You want to be contemporary, but there’s nothing more contemporary than a classic.”

ALL of these happy economics, however, may be running into a wall, some sports executives say, and the Yankees’ new stadium may not provide the revenue gusher that Mr. Steinbrenner and his executives expect. The YES Network already reaps the highest fees of any regional sports network from cable companies — and those companies are likely to resist paying even more.

“The status quo on the revenue side is well established,” said one former executive who has direct knowledge of the Yankees’ finances and requested anonymity because of his contractual obligations to the team. “George is getting every nickel he can.”

The challenges of financing the new stadium can be softened in some ways. The Yankees will be able to deduct some of the costs of building and operating the stadium from their contributions to other teams under the league’s revenue-sharing agreement. The Yankees will also receive about $400 million in government subsidies, according to Neil deMause, co-author of “Field of Schemes,” a 1998 book that dissects stadium deals.

The city and state governments will build a parking lot at the stadium, for example. The New York City Industrial Development Agency will also issue bonds, most of which will be tax-exempt and carry lower interest rates. That will save the Yankees millions of dollars in payments over the bonds’ life.

The Yankees need the subsidies, tax breaks and new revenue not only to pay for the stadium, but also the team’s hefty payroll. Without that padding, the Yankees might find it harder to assemble a winning team. And without a winning team, it will be harder to raise tickets prices, broadcast rights and other fees.

An environmental impact statement compiled by the New York City Department of Parks and Recreation projects that the average ticket price in the new stadium will be $57, as opposed to $45 in the old stadium. And Mr. Dudley and analysts expect the Yankees to be able to charge a hefty premium for advertising in the new ballpark. The team could also sell personal seat licenses, which are options to buy season tickets, as some N.F.L. teams do.

SOME sports executives compare the new revenue streams to oil wells because they generate quick and handsome returns once developed. But it is also difficult to find new wells, and the pressure to do so is intense, not only in the Yankees organization but throughout Major League Baseball.

Teams regularly raise ticket prices and charge more for food, parking and memorabilia. But they walk a fine line between generating more money and appearing greedy and alienating fans. So they are toying with other innovations, like all-you-can-eat promotions, dining clubs and priority parking, and now sell sponsorships to individual games and sections of parks.

But “you would have to think there aren’t that many more iterations you can do,” said Mr. Mullin, the chief executive of the Atlanta basketball and hockey franchises.

That may bode more darkly for the Yankees than for other teams.

Of course, an array of baseball insiders have predicted for decades that the Yankees’ dynasty would soon end. But the team has almost always found new ways to succeed. Writing in The Saturday Evening Post in 1947, the sportswriter Red Smith asked “What Broke Up the Yankees?” Soon after, the Yankees began the most successful run of championships in the team’s history.

The Yankees, many people say, will keep winning at the gate and on the field because they have the most durable brand in the business, which gives them access to money and, in turn, the best players. Other teams also need the Yankees to succeed because the team contributes so much to the league’s revenue-sharing plan.

“While they curse Steinbrenner under their breath, the other owners are happy to take his money through revenue sharing,” said Mr. Brown of the Society for American Baseball Research.

But the owners will not have Mr. Steinbrenner to kick around forever. He attends far fewer games these days and speaks less often to the news media, often making pronouncements through his publicist, Howard J. Rubinstein.

Questions about Mr. Steinbrenner’s health took on a new urgency in 2003, when he fainted after a memorial service for the football great Otto Graham. When Mr. Steinbrenner stumbled while coming down the stairs after one recent Yankee home game, every New York newspaper took note. His malapropisms and off-color remarks are now viewed as a window into his health.

But those who deal with Mr. Steinbrenner say that he is as involved as ever.

“People are taking a larger role, but there’s no doubt who the boss is,” said David Boies, whose law firm, Boies, Schiller & Flexner, represents the Yankees. “It’s still George’s team and George’s business.”

Amid questions about his health and his role as the Yankees principal owner, Mr. Steinbrenner has been so successful for so long that, in the end, he has created something that even he may never have intended: an organization that will outlive him.

“I don’t ever see the Yankees in a rebuilding year — it flies in the face of the way they have done business for 50 years,” said Rodney Fort, a sports economist at Washington State University. “History suggests that after George Steinbrenner, someone else will come in and make even more money.”


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