The Yankees: Steinbrenner's Money Machine

Why George Steinbrenner may be tempted to sell the New York Yankees

Outside Yankee Stadium, an August sun is broiling the Bronx. Inside the executive offices of the New York Yankees, the air conditioning is set somewhere below Arctic, overmatching even George Steinbrenner's hot-blooded constitution. "It's cold in here," Steinbrenner complains.

"Want me to turn off the air conditioning, sir?" offers an aide.

Steinbrenner leaps from his chair, strides across the room, and peers up at an offending air vent on the ceiling. "I'll stop it," he growls and draws a fist back behind one ear, a caricature of himself. Steinbrenner holds the pugilistic pose for a second, then drops his arm, and retakes his seat. "Where were we?" he says brightly, a smile playing at the corners of his mouth.

George M. Steinbrenner III, the Yankees' famously combative principal owner, has been pulling his punches all summer long. He hasn't harangued his manager or reproached a player for weeks now. He has stayed out of the clubhouse and more surprising still, out of the tabloids. "George and I fight like hell, but not this year," says Arthur Richman, a senior adviser to Steinbrenner. "This year he's been an angel."

At 68, Steinbrenner remains a compulsively competitive man of emphatic opinions and nearly uncontainable energy. But he has had the good sense to realize that indulging his penchant for controversy would only detract from the extraordinary performance of the Yankees in what is truly a baseball season for the ages. Besides, the Boss is preoccupied with weighty issues of business and family. After 25 tumultuous years, he has reached a critical juncture in his ownership of what might well be the most valuable sports franchise in America.

For starters, the Yankees' current $486 million local television contract--the foundation of the team's prosperity since it was signed in 1988--expires in less than two years. While Steinbrenner pronounces himself pleased with the performance of the current rights holder, Cablevision Systems Corp.--"I consider them like partners," he says--he is weighing many options. James L. Dolan, Cablevision's president and chief executive, says that he "is open to any ideas that Mr. Steinbrenner may have."

At the same time, Steinbrenner is grappling with the financially critical and politically loaded issue of where the Yankees will play after their Yankee Stadium lease expires in 2002. (The team holds options that could extend the lease to 2012.) The "House that Ruth Built" opened in 1923 and was remodeled in the mid-1970s. A second overhaul is a possibility, as is an entirely new stadium in the Bronx. But Steinbrenner, who has been bad-mouthing Yankee Stadium and the Bronx for years, is entranced by visions of a deluxe $850 million stadium in midtown Manhattan.

A swanky new ballpark in the very heart of the nation's corporate and media capital could well be a revenue machine the likes of which U. S. sports has never seen. But for Steinbrenner, the issue is as much pride as money. "George has a firm, almost visceral belief that the current stadium and the location is wholly inadequate," says David W. Sussman, who stepped down a year ago as executive vice-president and chief operating officer of the Yankees to join MTV Networks. "The state of the art has so far eclipsed what the Yankees have to offer that he views the stadium as a huge source of discomfort and even embarrassment for the fans."

Finally, circumstances are conspiring to force Steinbrenner to think more seriously than ever about selling the Yankees. Cablevision, which already owns the New York Knicks and New York Rangers, is expected to try to preempt the TV rights negotiatioNs by making a bid to buy the Yankees outright. "I think they'll go to George with a number calculated to shock him with its size," says Neal H. Pilson, a former president of CBS Sports, who now runs his own Manhattan consulting firm.

MYSTIQUE COUNTS. Earlier this season, Rupert Murdoch's News Corp. bought the Los Angeles Dodgers for $311 million, the most ever paid for a baseball team. Unlike the Dodgers, the Yankees do not own their stadium or the land around it. Even so, most experts attach a higher value to the Yankees, and not only because they play in the nation's most lucrative mediamarket. The Yankees are the Yankees--the pinstriped embodiment of baseball tradition, the team of Babe Ruth, Joe DiMaggio, and Mickey Mantle. By most estimates, the Yankees would fetch at least $500 million in a sale and perhaps as much as $800 million.

Steinbrenner has frequently compared the Yankees to the Mona Lisa and has vowed he would never sell. But a new stadium--wherever it might be located--would be a huge undertaking that could expose Steinbrenner to outsize financial risk and consume the better part of a decade. What is more, his attempts to groom a family successor have not gone according to plan. His eldest son, Henry, 41, bolted after an unhappy apprenticeship, and son-in-law Joseph Molloy quit the team a year ago and now is divorcing his wife, the former Jessica Steinbrenner. Another son, Harold, 29, and son-in-law, Stephen Swindal, 43, still work for the Yankees and jointly hold the title of general partner. However, team insiders question the depth of their commitment to baseball--and the Boss's willingness to relinquish control.

Steinbrenner, as always, is keeping his dealmaker's cards clutched tight. Says Harvey W. Schiller, president of Turner Sports Inc. and a close friend of Steinbrenner: "If you don't know George, you might think he makes his decisions by the seat of his pants, but the fact is he does an awful lot of research. He's spent a huge amount of time in the last few years studying all the opportunities open to him."

Whatever moves he makes, Steinbrenner will act from a position of financial strength, for the 1998 Yankees are poised to reap the biggest revenue bonanza in the history of the franchise (table). Most important, the team has broken the Yankee Stadium attendance record of 2,633,701, set in 1988, with eight more home games to play. Regular-season revenues should hit $145 million, and a World Series appearance could fatten Steinbrenner's coffers by an additional $10 million or more.

However, if the past is any guide, precious little of this bounty will fall to the bottom line. Steinbrenner is a talkative man, except when it comes to the finances of his tightly held club. However, BUSINESS WEEK was able to obtain Yankee profit-and-loss figures for the years 1978 though 1990. During most of this period, the Yankees were little better than a breakeven enterprise. Even the $40 million-a-year revenue cushion added by the MSG deal in 1988 wasn't sufficient to assure an annual profit. That year, the Yankees made $27.8 million in ordinary income and posted a $50 million gain in 1989, only to plunge $31 million into the red in 1990.

The Yankees returned to profitability in 1992 and have remained in the black ever since, but barely. In the 1990s, as in the 1980s, the team has averaged just a few million dollars a year in net profit, according to one well-informed source. While attendance has fluctuated from year to year, salaries have risen inexorably. This year's payroll of $72 million is the second-highest in baseball, trailing only the Baltimore Orioles. Says Steinbrenner: "I think it would surprise people to see that we're not a big moneymaker, at least not on a cash-flow basis." Or, as former Cleveland Indians owner Bill Veeck Jr., liked to say: "You don't make money operating a baseball club. You make money selling it."

MAKING HISTORY. An investor group assembled by Steinbrenner bought the Yankees from CBS for $10 million--$6 million of it borrowed. The Boss put up only $168,000 of the original $4 million in equity but has since sunk millions more into the club to buy out limited partners. With his wife, Steinbrenner now holds at least a 60% stake and sits atop what is probably the biggest capital gain in sports.

He also owns what is arguably the best team in baseball. The Yankee squad reached the vaunted 100-win mark on Sept. 4, earlier than any team in major-league history. Although the all-time record of 116 wins set by the 1906 Chicago Cubs is nearly out of reach, Joe Torre & Co. were 104-45 as of Sept. 16 and still had an excellent shot at breaking both the all-time Yankee record of 110 wins (set in 1927) and the American League mark of 111 victories, held by the 1954 Cleveland Indians.

Who needs pennant races? Four years after a players' strike ruined a superb season, this summer's historic individual performances are luring disgruntled fans back to the ballpark in droves. With two more seasons remaining on the existing contract, labor peace is assured through 2000. Baseball's most pressing problem is the yawning revenue gap that separates rich clubs from poor. "Hope is being taken increasingly away from teams whose revenue base is just not large enough to support a winner," argues Peter A. Magowan, managing general partner of the San Francisco Giants.

The disparity in revenues is as much a function of stadium economics as market size. Baltimore, for example, is not among the largest major-league cities, but the Orioles can afford its roster of talent because they play in Camden Yards, one of the retro-style, baseball-only, downtown stadiums that are now all the rage. The five franchises that lead in attendance this year--Denver, Baltimore, Phoenix, Cleveland, and Atlanta--all play in such stadiums. To Steinbrenner's annoyance, the Yankees ranked eighth in attendance per home game through August.

While a half-dozen cities are readying plans to build new baseball stadiums downtown, MLB is taking immediate steps to level the financial playing field. Baseball is phasing in a revenue-sharing plan that was adopted in 1996 and is designed to transfer $70 million a year from have to have-not clubs by the time it is fully implemented in 2000. For each of the past two years, the Yankees made the largest revenue-sharing contribution--$15.2 million, all told.

Yankee fans are helping foot the revenue-sharing tab. Since the 1995 season, Yankee ticket prices have risen by 41%, nearly double the rate of increase for MLB as a whole over this period. At $20.51, the cost of the average Yankee ticket far exceeds the major-league average of $13.60, according to the newsletter Team Marketing Report.

At the same time, Steinbrenner has gone in pursuit of new sources of revenue as aggressively as Yankee starter David Cone goes after hitters. In 1997, he was so determined to link logoswith Adidas in a sponsorship deal that he filed suit againsT each of the other 29 teams and Major League Baseball Properties (MLBP) to force their acquiescence. The suit was settled out of court in April, on terms advantageous to the Yankees and Adidas. At $93 million over 10 years, Adidas' sponsorship of the Yankees easily is the most remunerative in baseball and so wide-ranging that it amounts to brand melding.

NEW BALL GAME? The Adidas matter was resolved just in time for Steinbrenner to turn his attention to the less contentious but even more lucrative issue of TV rights. Yankee programming unquestionably is a hot commodity. Through August, Yankees game telecasts on Madison Square Garden Network (MSG), a subsidiary of Cablevision, have drawn 37% more viewers on average than last season, and ad revenues, by all reports, are strong. However, the competitive dynamics of sports TV in New York have changed to such a degree since the Yankees signed with MSG a decade ago that it is not obvious who has the upper hand in the latest rights negotiations: Steinbrenner or Cablevision's father-and-son team, Chairman Charles F. and CEO James Dolan.

In 1988, MSG had not yet been absorbed into the Dolans' empire but was owned by Paramount Communications Inc. Cablevision did own SportsChannel New York, which broadcast Mets games and acquired the Yankee rights in 1982. Steinbrenner had signed a long-term deal but shrewdly insisted on an escape hatch. Come Nov. 1, 1988, the Yankees would have 30 days to reshop the rights. By the time 1988 rolled around, MSG believed that its very future hinged on breaking Cablevision's stranglehold on New York baseball. Steinbrenner named his price, MSG met it within 48 hours, and the deal was done before Charles Dolan knew what hit him.

Cablevision since has acquired MSG and further narrowed the field of potential rivals for Yankees broadcasts by allying itself with Fox Sports Net. (SportsChannel is now known as Fox Sports New York.) Asked if Cablevision's new market power concerns him, Steinbrenner equivocates: "It's hard to tell. I don't think I do, not really, at this time."

Steinbrenner is not a captive of cable, in any event. He could bring new technologies--notably digital or satellite TV--into play to create a new channel or network around the Yankees. This would put him into the media business and require him to expand the leanly staffed business operation he maintains. Says the Boss: "It's a real possibility."

The Dolans long ago broached the topic of buying the Yankees in discussions with Steinbrenner and would surprise no one by putting a formal offer on the table. However, Steinbrenner has been rebuffing two or three unsolicited buyout offers a year for at least a decade, and many of his closest associates cannot envision him selling now. "So much of his identity and his energy is committed to the franchise," says one. "What would he be without it?"

The X factor in the Yankees' future is the stadium question. The large crowds the Yankees are drawing to the Bronx this season would seem to lengthen already long odds against a city-financed relocation. And with a referendum on the issue looming in November, a poll conducted by Quinnipiac College shows overwhelming opposition to public financing for a Manhattan stadium--even if it meant losing the Yanks to Jersey.

To many fans, Yankee Stadium is an indivisible part of Yankee tradition. Although Steinbrenner proclaims himself a traditionalist, he takes a literal, almost profane view of the issue. "Babe Ruth didn't run on this grass. Joe DiMaggio and Mickey Mantle didn't run on this grass because the stadium was totally redone [in the mid-1970s]" he says. "The only thing they may have used still here are the urinals and the lockers in the locker room."

Despite all the tough talk, would Steinbrenner really make good on his veiled threats to move across the river to New Jersey if he doesn't get his Manhattan venue? Is he willing to go down in history as the 1990s answer to Walter O'Malley, who was forever reviled in Brooklyn after he moved the Dodgers to Los Angeles in 1958. "I think I take it a little more to heart than Walter O'Malley did," Steinbrenner says softly and then pauses. "I don't want to talk about that," he snaps. "So I won't."

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