But at the end of five to seven years he’d better get rid of his team because then it will not be generating enough depreciation to keep it attractive. Of course, it might actually be making money, or it might have won a championship, and B might want to hold on to it for sentimental reasons, but it will probably be wiser for him to sell to New Buyer Z, because then B can pick up a capital gains advantage, while Z can start the depreciation all over again. The justification for this strange system is that depreciation encourages industry to be innovative, to reinvest earnings, to gamble on the future.
That they operate destructively in the ownership of sports teams is an accident that could easily be corrected. All that is required is that the tax people in the government become involved after the sale of a team has been negotiated. Then let a rule of reason apply in allocating the sale price as between the intangibles and the tangibles; let a common schedule be drawn up as to what center Jenkins is worth, to Seller S and Buyer B alike, and let the deal go forward from that agreement. In effect, this rule of reason has always operated: buyer and seller could not establish ridiculous allocations; they had to be approved by the government. But the rule was never stringently applied, and some sales went through with allocations not much different from the imaginary example I cited. Noll and Okner in 1972 summarized the situation in these terms:
The fast write-off of nearly all of the purchase price of a sports franchise through amortization of player contracts appears to be highly questionable. It is not that the profits this practice creates are inherently evil, but that they create socially undesirable incentives for team owners. Except for a very few teams, the maximum profit a team could hope to earn is a few hundred thousand dollars. This is dwarfed by the tax avoidance made possible by depreciation. The gains to a rich individual or a corporation from owning a team depend very little on the quality of the team or its operations. In fact, among the most profitable teams are the lowly NBA expansion franchises. They field poor teams and do poorly at the gate, but the fast write-off of the expansion fee saves the owners half a million to a million dollars a year in income tax. According to our conception of the public interest, society would be better served if the profit-ability of a team depended upon its ability to please the fans, not the tax accountant.
Five or six years ago it became apparent to everyone that this preposterous way of doing things could not continue for long. And in 1974 the federal government finally decided to take a close look at the way these transfers were being conducted.
The case was ideally suited for adjudication, because the confrontation between the owners of the government was clear-cut, the difference between their two positions radically different. In 1966 a group in Atlanta acquired from the established clubs of the NFL a franchise to launch a new club to be called the Falcons. For this privilege they paid $8,500,000, of which $727,086 was for debt service. This was subtracted from the sum in contention, and we will not hear of it again. The effective sales price was $7,772,914, and the new owners, as in the example cited above, wanted to allocate most of this to player cost, which would permit depreciation in the future, whereas the government wanted to apply most of it to the cost of the franchise, which would diminish depreciation and lead to immediate taxation as soon as the new club started to collect money.
This discrepancy, as we shall see in the next table, was so great that a lawsuit became inevitable. Known as Laird, Federal District Court Georgia, it was followed with more than usual interest because it epitomized the whole problem of sports ownership. As the case progressed, I consulted with various interested parties and concluded that the government would win, that depreciation allowances would be revised downward radically, and that the five-year switch of owners would be halted because it would no longer be profitable. When pressed, I pessimistically predicted that owners who had been allocating as much as 90 percent of their purchase price to player cost would be cut back to something like 20 percent. The financial holiday that professional sports had been enjoying was over.
I was surprised and pleased when Judge Frank Hooper handed down a most judicious award. The allocations involved were as follows:
LAIRD, FEDERAL DISTRICT COURT, GEORGIA COUNTERCLAIMS AND DISPOSITION
The fact that the buyers were trying to allocate 99.35 percent of their purchase price to player cost probably alerted the IRS to the fact that in such cases a decision now had to be made. The fact that IRS wanted to allocate 86.42 percent to non-depreciable costs meant that the owners had to contest the decision, in defense not only of themselves but of all professional sports. The judge’s award of roughly 60–40 in favor of the government was much more favorable to sports than I had anticipated; in retrospect it qualifies as Solomonic. If the case is appealed, some rough division like this could possibly be approved by higher courts, and if so, the owners of professional teams will be able to handle their franchises in a reasonable way.
One practical outcome of this decision will be that owners will no longer have a built-in compulsion to sell at the end of five or six years, because the depreciation awaiting the new owners won’t be large enough to make the purchase enticing. Buyer B will no longer be able to determine arbitrarily what percentage of his purchase price will go to depreciable player costs, to be offset by profits he makes in his non-sport businesses.
One aspect of recent ownership has been disturbing. In far too many cases teams have been owned not by local people interested in the welfare of both the team and the community, but by outsiders, sometimes from the opposite end of the nation, who happened to be in a financial position in which ownership was a practical rather than an athletic consideration. I once had dinner with four major owners, not one of whom lived in the community in which he owned his club. They were interesting men, intelligent, street-smart and responsible. In their regular businesses, they were not fly-by-night operators, but it seemed to me that their ownership of sports teams had been dictated more by curious national law than by allegiance to sports. I preferred the old system, in which a local family dedicated itself to the sponsorship of a team, and rose or fell with its fortunes. I am afraid Congress has served us poorly by allowing laws which were reasonable when applied to business to dictate how games should be run.
Of course, the ideal sports operation is not one that builds up a loss which can be charged against profits elsewhere. The intention of every owner is to have a winner, and if he does, he usually makes a considerable profit. But even if he comes up with a loser, he can still make a profit over a span of years. In 1953 the Cleveland Browns were bought for $600,000. Eight years later they were sold for $4,000,000. In 1969 they were valued at $14,000,000 and now they are worth about $20,000,000. The New York Jets showed a comparable growth, and the Chicago Cougars of the upstart World Hockey League were established in 1972 for an outlay of $25,000 and two years later were worth $6,000,000. Similar stories could be recited about scores of teams whose value has multiplied spectacularly.
In fact, such success stories aroused the cupidity of hundreds of otherwise sane businessmen and they began laying out huge sums of cash to acquire franchises being peddled by an imaginative pair of young men from California who organized three nationwide leagues in three different sports. Gary L. Davidson, forty years old at the time, and Donald J. Regan, one year younger, sensed that America was ripe for a picking, and in quick succession they sold eleven franchises for a new basketball league (ABA in 1967), fourteen for a lively hockey league (WHA in 1972). and twelve for an improvised football league (WFL in 1974).
At the same time a radical new idea was being promulgated in professional tennis: a league composed of sixteen teams of men and women affiliated with large cities, playing a regular schedule throughout most of the year. A soccer league was beginning to flourish. Box lacrosse, a vigorous game much like ice hockey but more lethal, had its own league and was catching on in various eastern and Canadian cities. And groups of highly skilled volleyball players—four men, two women to a team—wer
e organizing themselves into a league in the southwest, with a fair chance for success.
It was a sports explosion of bewildering proportion, and many critics began wondering if there were enough fans to support the proliferating teams. In New York, for example, there were the Mets, the Jets, the Nets, the Yankees, the Giants, the Stars, the Knicks, the Rangers, the Islanders, the Cosmos, the Tomahawks and the Sets, and few could identify what snort each represented.
It was obvious that some of these new teams were going to be in trouble, when I saw that the newspapers were not giving them traditional coverage. There were no interesting stories about the players, or the theories of the coaches, or the trades that were under consideration, and as I have stressed before, I do not believe professional sports can survive without constant and favorable newspaper attention. I think the papers wanted to cover the new teams but there was neither the space nor the interest, and the innovators found themselves in peril.
When an economic depression slowed ticket sales, gloomy statistics began to emerge. This was the situation as described in the August 12, 1974, issue of U.S. News and World Report: of twenty-four baseball clubs, one-half were losing money; of twenty-seven basketball teams, twenty-two were losing; of the twenty-six super-prosperous NFL teams, two were not breaking even; of the twenty-eight hockey teams, ten were losing. Also, all teams in the new tennis league were in distress, as were most of the teams in lacrosse. But it was the World Football League that was in the direst predicament; all fifteen of its teams faced potential trouble in the 1975 season. Davidson, who had created the WFL, confessed, ‘Some clubs are put together with string, baling wire, stickum and gum. I spend half my time on the phone shoring up financial deals.’ Peddling doomed clubs to hopeful new owners seemed the way out, and many proposals were floated. At the end of seven years’ existence, the ABA had only one team which was still owned by the men who had launched it originally; all other teams had been sold and resold, some of them three times. The great sports boom had peaked.
Consider what was happening in Philadelphia. The tennis Freedoms dropped a bundle, called it quits, and moved to New York. The lacrosse Wings came close to financial collapse but were picked up by a new owner prepared to give the fledgling team one more whirl.* The hockey Firebirds lost $450,000 in cold cash but resolutely decided to field a team in 1975. The basketball 76ers had a dismal season, and the Bell of the WFL admitted losses of $1,500,000 but kept hoping that things would turn for the better next year. (On the other hand, the baseball Phillies had a good year at the box office, while the hockey Flyers played the entire season without an unsold seat; when they nabbed the Stanley Cup for the second year in a row, one and a half million people tore the town apart in a victory celebration. The city had to spend $186,000 to clean up the mess and another $46,000 to repair the joyous vandalism done to the transportation system.)
But in 1975 the ax fell. The ABA, caught in the vise of indefensible salaries and diminishing attendance, saw its roster of teams drop to seven, with Baltimore, Utah and San Diego abandoning the game and dissolving their teams. The cash loss must have been substantial. But the WFL collapsed altogether despite heroic efforts by the Honolulu businessman Chris Hemmeter to keep it afloat. Reports said that the owners who had so eagerly grabbed for the original franchises dropped at least $34,000,000.
One final word must be said about owners. Many are difficult for a sports lover to tolerate; they seem obsessed with financial manipulation rather than the welfare of the game or the players. They are obtuse in clinging to archaic rights which the courts will soon be striking down, and they show contempt for the public. They are warts on the body of sports, and that they should be in positions of power and control is indefensible. James Quirk has shown, in a remarkable article in Law and Contemporary Problems (1973), that most recent franchise shifts were dictated by commercial considerations: the departing team was doing as well as could be expected in its present home; in its new home it did pick up extra customers, but usually only for a few years; the change was typically made in order to garner television income, was rarely permanent, and accomplished little in stabilizing the league. In other words, rapacious carpetbag owners were allowed to perform unsocial acts for personal profit.
However, the majority of owners that I have met are like Joe Robbie of Miami, real devotees, men and women to whom the building of a respectable team becomes a passion, and they add luster to the sporting scene. Some of them may originally have bought their teams for financial advantage, but they soon found themselves bewitched by sports. In the end they are willing to make extraordinary sacrifices in order to build a winner, and their loyalty to their team often excells that of their players. Once when a group of us were discussing the transfer of a franchise, the owner of a club made this revealing statement:
If you’ve never owned a big-time club, you can’t appreciate what it means. I was a pretty good businessman in this town, and nobody gave me the time of day. But when I bought the team I became somebody. The newspapers asked my opinion on things. The television guys wanted to interview me. People would stop me on the street and say, ‘Hey! I saw you on TV!’ When I came into a restaurant people stopped and I could hear them whispering, ‘He owns the ball club.’ And the more good things like that happened to me, the more I determined to do for this town what Art Rooney did for Pittsburgh. Give them a champion. It may take me ten years, but this town is going to have a winner. Me sell? Even if the depreciation is used up? Are you crazy? Owning a team’s the biggest thing’s ever happened to me.
Clint Murchison, who masterminded the building of the stadium for his Dallas Cowboys, spoke for the legitimate owners when he said, ‘You could make more money investing in government bonds. But football is more fun.’
In discussing player salaries, one basic fact must be kept in mind, and unless it is, much nonsense will ensue. Superstars like Kareem Abdul-Jabbar, Bobby Orr, O. J. Simpson, Joe Namath, Nolan Ryan and Billie Jean King earn for their teams something more than twice as much as they are paid. This means that if economics is to be the sole criterion, our twenty or thirty top athletes are grossly underpaid.
The reasoning is this. Roger Noll, using sophisticated correlation techniques, identified nine measurable factors that relate, perhaps causally, to the success of a professional basketball franchise:
Number of competing teams in area
Team won-and-lost record
Price of average ticket
Population of area played in
Number of home dates played
Stadium capacity
Per capita income
Years located in city
Number of superstars on team
Two of the factors were found to exert a negative influence: the longer a team stayed in one location, the more likely it was to run into box-office trouble; and the more competing professional teams in the area, the smaller the cut for each. (Later Noll cranked in a tenth variable and found that the higher the percentage of blacks living in the area, the lower the attendance: ‘The connection is simply that ball parks located in undesirable neighborhoods tend to be old stadiums in very large cities in the north and midwest, and these cities also tend to have atypically large black populations.’)
The major factor determining success was the size of the population in the hometown area. (We have seen earlier that television viability was also a major factor, but it, too, was a measure of available audience.) The owners could do nothing about this population factor except move to a larger city. There was one variable, however, that they could control: the number of superstars on their team. This really mattered, because the team with the superstar drew at the gate, whereas another team with five journeyman players might have an equally good won-lost record but be unable to generate enthusiasm. That club lost money. Noll and Okner have summarized the situation in this way:
Having a superstar on the team is worth 25,000 attendance during the season. This figure, of course, is an average for all tea
ms and for all seventeen players in the two leagues classified as superstars by our criteria. Still using the $4.50 average ticket price, this means that about seventeen professional basketball players produce about $100,000 a year in gross revenues for their teams beyond whatever contribution these talented athletes make to the won-lost record of the team. Including the contribution the superstar makes to his team’s winning percentage, the results suggest that basketball superstars are worth salaries exceeding $100,000, as measured by the contribution they make to team revenues.
Furthermore, a player such as Lew Alcindor [Abdul-Jabbar] is probably worth much more. If he is the difference between winning and losing in twenty percent of the Bucks’ games and if he is twice the fan attraction of the average of our seventeen superstars, then, by himself, he accounts for nearly $500,000 a year in gate receipts for the Bucks. Despite the acknowledged statistical error in such regression estimates, the evidence is strong that Alcindor is grossly underpaid in relation to his value to his team—even if he earns $250,000 annually.
The problem is, therefore, not with the superstar. If Nolan Ryan or Catfish Hunter pitches thirty-five times a season, and if their pitching rotation is well publicized, each may attract an additional 15,000 paying customers every time he goes to the mound. At an average admission of $3.50, this means a windfall of $52,500 per game, or $1,837,500 for the season. Now, the salary paid to Ryan or Hunter has already taken much of this augmented income into consideration, but it is obvious that baseball could pay these gifted pitchers at least twice as much as it does.