DYNAMICS OF TEAM OPERATION

During the past several hours we have discussed issues relating to various aspects of professional sports business operations including the relationship with broadcasters and politicians. There are other relationships that are also important. These relationships are dynamic in that they ebb and flow, wax and wane, or live and die. Their vibrancy is critical to the success of a sports franchise. During the next few minutes, I will discuss club\club and club\player dynamics. The dynamics of club\fan and club\sponsor are the subject of a seminars of their own. The due diligence inquiry that must precede the purchase of a sports franchise requires careful consideration of these dynamics bfore the transaction can be seriously considered.

The club/club dynamic can be described as the willingness of the various clubs to recognize that the value of a club is directly related to the value of the competition offered by the other teams in the league. No team in professional sports has any value of and by itself. Each teams' value is created when other teams meet them on a field, court, or rink where they jointly create a game. The value is in the fans' willingness to pay to see the game thus created. The willingness of fans to pay is related to the quality of the game and the perceived competitive balance between the participants. The club\club dynamic relates to the clubs' understanding of this relationship as being the ultimate source of their value. As we will see, not very many leagues do this well.

The most important concept here is that there is no product or game unless two teams meet and create one. Chrysler can produce a car without Ford, but the Twins cannot produce a game without another team. Once a game is created, it disappears for all time, except for tape and our memories. That is the ultimate appeal of sport; every game played is unique. There have never been two identical games in the long history of baseball, football, basketball, or hockey. Where clubs, like those of the National Football League, recognize that whatever value they have is dependent upon values added by the other teams in the league, their dynamic works very well. Where teams refuse to acknowledge that their values are directly dependent upon the value added by their opponent, the club/club dynamic fails.

The club/player dynamic is the relationship between the clubs and the players' association with regard to their willingness to work together to further mutual interests. The NBA has done this well for the past decade. Hopefully, they will be able to continue. The NFL does it very well, however, it took the NFL a very long time to get there. The NHL is temporally there, and Major League Baseball owners are trying to improve its club\player dynamic while the players refuse to even negotiate the subject.

Previous speakers have dealt with several of these issues and other issues that are beyond the scope of this program. For the next several minutes, therefore, I will describe the club/player dynamic that exists in each major sport as it may effect the decision to purchase a franchise. This is the most important dynamic to investigate prior to the acquisition of a sports team, as it most directly relates to the success of your operation from an artistic and financial point of view.

In January 1992, at the first M.I.L.E. Sports Law Seminar, I described the labor contracts of basketball and baseball, because, at that time, these were the only games that had labor contracts. Football was locked in battle in the 8th Circuit and hockey was beginning a long dispute that only ended in December. However, after three years, we now find that football and hockey have long term labor contracts that will, in my opinion, promote labor peace for a long time in the NFL and for as long as six years in the NHL. Basketball is in danger of having significant problems. Baseball's problems, sadly, are described in great detail in every paper, television, and radio on a daily, if not hourly, basis.

Generally speaking, the relationship between a sports league, its member clubs, and its players' association is one of enormous tension. The classic division between capital and labor has never been more clear than in the confrontations that takes place between capital, in the form of the owners and teams, and labor, in the form of highly skilled professional athletes. A large part of this is due to the fact that "labor" is not purely labor but has many attributes of capital as well. The baseball players run a $90 million licensing business that competes with Major League Baseball's own licensing activities. Furthermore, NBA players often run their own licensing companies. Therefore, in the world of professional sports labor relations, you find capital v. capital with the players pretending to be labor and evoking the protection of labor laws when it is convenient for them to do so. The result is that there is no group of employees in the world more capable of resisting the economic pressures that can be created by management than the professional athletes. Also, there is no labor force in America that is more indistinguishable from the product than is the professional player. This labor force operates under the National Labor Relations Act which was designed to protect workers from the abuses of powerful management groups. I am not certain that the strict enforcement of the act is appropriate under professional sports scenarios.

As the result of the strict enforcement of the act in sports, labor disputes are often long and bitter. In the last few years, the long legal battle waged by the National Football League was only resolved when the Eighth Circuit Court of Appeals reversed the district court with respect to a subtle antitrust issue. The National Hockey League had to suffer a lock out for half its season, and a threat to the entire season, before they arrived at labor peace. Baseball, of course, was struck by its players in August 1994 causing the cancellation of the Playoffs, World Series, Hot Stove League, Spring Training in its magnificence, and the beginning of a new championship season. Labor peace has yet to arrive in baseball. Furthermore, due to complications left over from the negotiations, such peace will not arrive for some time.

Nothing indicates the fragility of the club\player dynamic more than the recent activities in the NBA. Management and representatives of players, with their shared interest in the future well being of the National Basketball Association, have reached an agreement. However, where this agreement works at cross purposes to the financial interests of player agents, the agents have been able to convince a certain number of players that the elected representatives of the players do not, in fact, represent their interests in the negotiation and that the union itself should be brought down. The aim of these agents, who thrive on chaos, is to create a world in which virtually every NBA player negotiates his own contract without restrictions set by collective bargaining. The NBA has enjoyed the most satisfying dynamic with its players during the past decade. However, the NBA situation exposes the fragile condition of this dynamic and the players' exploitation of the labor laws.

The National Football League does it best. In fact, because National Football League club/player and club/club dynamics work so well, all other aspects of its operation also fall into place. This hasn't always been the case. For the better part of the decade from the late 1970's to the late 1980's, the National Football League and its players' association were at war in the federal courts over all of the issues that characterize professional sports labor negotiations. Primary amongst these issues was free agency. Because of the protracted conflict that had occurred over this issue, both sides finally agreed to negotiate and make a labor deal that contained protection of those bedrock issues that were very important to each. These bedrock issues can be stated quite succinctly as the player's right to free agency and management's concern over salary control and roster stability. Where both of these issues appear to be mutually exclusive, the National Football League was able to create a system that worked for both sides. The players wanted free agency, the players got free agency after four years. Management wanted a salary cap, management got a salary cap at 63% of designated revenues, which equates to approximately 57% of total revenues. Where excluded revenues grow faster than the defined revenues, the portion of excluded revenues that has grown faster than defined is "spilled over" into the defined revenue category. In football, unlike in basketball over the last decade, there is no advantage for the league to focus on the development of excluded revenues as a way of bypassing the collective bargaining agreement. There are, of course, permanently excluded areas and these are, for example, capital gains on the sale of franchises, permanent seat licenses, where those fees go to debt reduction, and payments made by expansion teams.

At the "bedrock" of this agreement, is the fact that both the commissioners office and the players' association worked very hard to determine what their shared interests were. Once the bedrock interests were defined and understood, negotiations proceeded that lead to a very, very excellent deal. The players seem to agree that this is a good program. Agents, by the way, hate it. Again, agents thrive on chaos.

In the 1994 Financial World estimate of team values, the range of football team values was $138 million for the Detroit Lions to $190 million for the Dallas Cowboys. The variance in this matter is approximately 8.1%. Variance is defined, by the way, as the standard deviation as a percentage of the mean.

By the way, I said that football handles the club/club dynamic very well. This means the clubs share revenues in a very significant way. They share television equally and gate revenue is shared 60/40. Furthermore, all licensing revenue is equally distributed. This creates enormous competitive balance within the league and, understandably, high franchise values based on cash flow and profitability. Leagues without significant revenue sharing cannot reach NFL values because the income disparity between large and small market teams will always have a negative impact on competitive balance and the leagues' profitability. This, understandably, depresses franchise values in those sports that do not follow the NFL model.

The National Hockey League is the other organization that has shown a great improvement in its club/player dynamic and which has a labor agreement that shows signs of producing labor peace. During the several seasons prior to the current agreement, hockey salaries had soared and it was said that hockey had contracted the "baseball" disease. By the way, before baseball got it, this was described as the "basketball" disease.

This labor agreement was achieved in a classic manner. Prior to the commencement of training camp, the National Hockey League owners locked the players out. This lock-out occurred after many months of collective bargaining. This lock-out continued until December and it became obvious that the entire season was in jeopardy. Because of the losses already sustained and the prospect of loosing an entire season, the parties agreed to a labor contract and, with half the season over, championship season play began. The Stanley Cup has been awarded to the New Jersey Devils who swept the Detroit Red Wings in a series that produced very high ratings for its broadcasts.

In this negotiation, the adversaries again discovered what their rock bottom interests were. In the National Hockey League, consistency of rosters and control of player salaries were very important. For the players, unfettered free agency was very important. The negotiation provided a contract that contained all of these provisions. The players are divided into three groups, players in Groups 2 and 3 have free agency rights, the players in Group 3 are unfettered free agents, which is gained at age 32. For the players in Group 2, there is salary arbitration with the proviso that clubs can walk way from two decisions per year. Clubs receive compensation for Group 2 players who sign with other teams.

The dynamic with the players was forged in the classic labor law way. By this I mean that severe economic pressure was brought to bear on both sides to promote a settlement. In hockey, however, there are problems with other dynamics that will cause long term problems. Primary among these is the club to club dynamic wherein clubs do not share significant revenues. Therefore, as hockey enjoys growth, some markets will far outstrip other markets and their teams will have excess money to spend on player contracts. This situation alone gives me reason to doubt the long term success of the smaller National Hockey League teams. In fact, even as we speak, the New Jersey Devils are involved in negotiations with Nashville, and the Quebec Nordiques have moved to Denver. Of course, we all know about the Jets. The only revenue sharing that goes on in the National Hockey League is the revenue derived from the ESPN/FOX broadcast package and revenues derived from National Hockey League Properties. Because of

this, the Stanley Cup Champion Devils are required to find a larger home. The franchise value variance in the NHL in 1994 was 29.1%, with a range of $35 million to $104 million.

In the NBA, an enormous effort has been put forward this year to avoid even the appearance of a dispute. Basketball has managed the club/player dynamic very well since the 1988 agreement, which pledged 53% of defined gross revenues to the players with a soft salary cap. This has worked very well along with an agreement to market the game jointly. The result has been dramatic. National Basketball Association revenues have climbed enormously, and the value of teams has doubled during that period of time.

Basketball has historically handled club/political power dynamics, and club/broadcaster dynamics very well. There is, however, no revenue sharing in the National Basketball Association other than national TV and licensing. This fact will cause problems during the next decade.

The NBA's ability to handle the club/player dynamic is being challenged at this time. Where an agreement has been reached by the parties that is both beneficial to the clubs and the players, agents whose interests have been placed in jeopardy have filed a decertification petition at the NLRB. Hopefully, this effort will fail. If it succeeds, the NBA will join baseball as a troubled sports industry.

NBA franchise value variance in 1994 was 27.1% with a range in values of $67 million to $168 million.

I have purposefully dealt with football first and baseball last. This is because in the 1950's, football consciously sought to avoid the mistakes they perceived to exist in baseball. These errors were the lack of competitive balance marked by a decade of championships for the New York teams, while attendance throughout the league fell. Furthermore, broadcast rights and fees were concentrated, again amongst the New York teams. The NFL saw the error in this system and decided to divide revenues at the 60/40 level and jointly market all television rights. This is the particular legacy left to the NFL by people such as George Preston Marshall, George Halas, and the other founders of the league. By this simple act, they created a club/club dynamic that allows all other dynamics to work well. Baseball has been attempting to correct this problem for 20 years. However, the particular structure of the game makes this very difficult. It was not until 1993 that significant movement was made. In that year, club/club dynamics were improved enormously when the clubs reached a revenue sharing agreement. An attempt at improving

club/player dynamics was made in 1994 with an offer by management that would have paid the players a guaranteed $1 billion dollars annually in salary, which was 50% of 1994 projected defined gross revenues, and such number would rise as revenues rose. This plan would produce an average player salary of $2 million by the year 2000, or shortly there after. The revenue sharing agreement was tied to successful negotiation of a player contract. The players flatly refused to negotiate over these matters and struck instead.

The long strike that followed can be summarized as follows. First of all, management continued to try to negotiate its billion dollar offer. The Union refused to negotiate. I might add at this point, that the union's strategy in baseball labor matters has always been to legislate and litigate, but never negotiate. They know that no matter what they do, the NLRB's Region 2 Director will totally support their petitions. The NLRB General Counsel seems to share this support for the players' position. Given this scenario, management continued in its effort to improve club/player dynamics by making repeated offers, first based on 50% of defined gross revenue and a salary cap, and then on a salary tax proposal. The players simply refused to negotiate through the entire process.

The unfortunate aspect of the baseball situation is that the intervention of third parties created an impossible negotiation. Ultimately, a motion for an Section 10(J) injunction was filed in the Southern District of New York. A federal district court judge issued the injunction returning the parties to the status quo ante with respect to mandatory subjects of bargaining under the expired contract. That judge, by the way , has retained jurisdiction over this matter. The players offered to return to work, and the season started a few weeks late. Unfortunately, had the judge delayed her decision for one or two weeks of the Championship season, this would all be behind us and baseball would be operating under a long term labor agreement. Negotiations will begin again soon with the marketplace noticeably altered.

What is critical here is that Major League Baseball is attempting to address the important issues of its existence. Major League Baseball franchise value variance is 23.1% with a range of $75 million to $166 million.

I was told many years ago that it makes no sense to simply offer information without offering a recommendation. So now, I will do so. The theme of my presentation, hopefully, there has been a discernible one, has been the dynamics that exists within the operation of professional sports leagues and their impact on the decision to buy a team. I stated that the National Football League does it best, and National Football League franchise values reflect the fact that it is extraordinarily well run. I think, by the way, that the NFL has some marketing problems that they better start addressing before erosion sets in, but this is the subject of another seminar. If, however, I were going to buy a team in 1995 or 1996, I would buy a middle to small market baseball team. I would do so for the following reasons:

1. The National Hockey League has labor peace for the time being, but their refusal to address revenue sharing issues will prove to be enormously divisive within that league in the near future, so I would avoid hockey.



2. As for a basketball team, except for the very, very best teams, in Los Angeles, Boston, Detroit, Chicago, and New York, they appear to be at the peak of their value. Unless they can reach labor peace, which may have occurred by the time this material appears, they are in for a very, very difficult time. Furthermore, they don't share significant revenues, and market disparities will tell over time.



3. So, that leaves us with baseball. First of all, even with the problems that are effecting the game at this time, again, problems that you hear about every hour, the lowest value of Major League Baseball teams is higher, sometimes twice as high, as the lowest value for hockey and basketball teams. Baseball teams are found in the major markets. There are no Winnepegs, Indianapolises, Sacramentos, or Calgarys amongst baseball teams. Secondly, baseball teams have the largest potential broadcast inventory. Spring training games, 162 regular season games, three tiered play-offs, and the World Series creates an enormous broadcast inventory, that, if properly marketed, is of enormous value. Thirdly, and most importantly, in the efforts put forward to correct the club/club dynamic and the club/player dynamic during 1993 and 1994, very significant movement has been made by several large market teams that now support the so-called small market efforts to increase revenue sharing and secure a fair player labor contract.

Given these factors, the increased value of baseball teams will be very dramatic if they are able to complete their work with respect to the improved club/club and club/player dynamic. If those dynamics are improved, the club/broadcaster and club/politician dynamic will also improve enormously, as well as, relations with fans and the media. Baseball is close to recognizing this fact of its existence. When it does, it will grow at the fastest rate of the existing leagues and will, in my opinion, surpass the National Football League in overall value.

"Dynamics of Team Operation," from the Sports Law Desk Reference Manual, June 1995.
Reprinted with permission from the Minnesota Institute of Legal Education.
The full publication is available by calling (612) 339-MILE (6453).