Professional baseball has evolved over its long existence, since Cap Anson laced up for the Chicago White Stockings in the late 1800s to Jackie Robinson’s barrier-breaking debut in 1947 to the steroid scandal of the 2000s. The economics of the game have changed dramatically as well. Major League Baseball is now a worldwide enterprise with large corporate sponsors and annual revenues of $7.5 billion.
Player salaries are at levels that would make Goldman Sachs CEO Lloyd Blankfein blush. Whereas in 1993 the then reigning World Series champion Toronto Blue Jays paid their entire roster just under $50 million, at the time the highest in the league, the New York Yankees will end May 2013 on the hook for around $110 million — just for injured players on the disabled list.
Even in 1993, though, managing the finances of a ball club was no can of corn. Michael Peltz, now editor of Institutional Investor, profiled the ’93 Blue Jays and CEO Paul Beeston as the team’s finance ace worked to produce a winner off the field.
Read the full story below.
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How the Blue Jays Stay Fiscally Fit
By Michael Peltz
Institutional Investor
July 1993
The national pastime is caught in a financial squeeze play. Luckily, Toronto’s Paul Beeston has a head for finance as well as baseball.
Never one not to complain, George Steinbrenner has a gripe about Paul Beeston, CEO and finance ace of the Toronto Blue Jays. “He absolutely refuses to wear socks, even in the middle of winter,” mutters the New York Yankees owner. When the Blue Jays won the World Series last year, relates Beeston with a loud chuckle, “George called me a beach bum and sent me a pair of socks.”
Beeston’s barbaric bare ankles notwithstanding (he just likes to feel the breeze, though he insists that he does attire his feet in winter), the affable 47-year-old accountant is in the Boss’s good graces. “Toronto’s a first-class operation and it reflects on the guy running it,” says Steinbrenner. Despite carrying Major League Baseball’s fattest payroll -- some $49 million -- the Jays have shown that, unlike the Los Angeles Dodgers, the New York Mets and, yes, Steinbrenner’s own Yankees, it’s possible to spend a lot of money and still put positive numbers in both the wins column and the profits column.
Smith College economist Andrew Zimbalist, author of Baseball and Billions, estimates that the Blue Jays rake in more than $25 million a year. A December 1992 report on the state of the game by baseball’s independent Economic Study Committee, whose members included former Federal Reserve Board chief Paul Volcker, put the Blue Jays’ annual internal rate of return from 1976 to 1991 at close to 16 percent. “We don’t make nearly as much money as we used to make,” contends Beeston, “but I wouldn’t be sitting here if we were losing money.” (Brewer John Labatt Ltd., the Jays’ majority owner, does not disclose the team’s financial results, but they can be reasonably estimated; see below.)
In a business that traditionally has been run like a sport, Beeston has endeavored to run the sport like a business. He and his five-person finance team draw up an elaborate operating game plan each season that bristles with a different kind of baseball stats: detailed cash flow, revenue and profit forecasts. When Beeston joined the Jays in 1976, his rigorous financial approach was as rare in baseball as a perfect game. Regarded as a capable administrator and -- vitally in these free-agent days -- a savvy negotiator, Beeston is described by Richard Ravitch, head of the Major League Baseball Player Relations Committee, as “one of the smartest businessmen I’ve ever met.” Adds Ravitch, “It’s not surprising the Blue Jays do well.”
Fun business
Yet even Toronto, with its winning team, loyal fans and astute management, is caught in Major League Baseball’s squeeze between flat revenues and soaring player salaries. “I don’t know where the money is going to come from for salaries to keep going up,” admits Beeston. The Blue Jays’ own payroll has shot skyward like a Dave Winfield pop foul, from $10.6 million in 1985 to almost $50 million today. “A few years ago I would have told you you’d never see a $2 million salary, and look how wrong I was,” says Beeston.
Much of Toronto’s sustained success off and on the field -- the Jays have had the best overall record in baseball during the past decade -- can no doubt be attributed to continuity in its ownership and management. Labatt and two partners paid a modest $7 million for the fledgling American League franchise in 1977, and then two years ago the brewer alone paid $60 million to buy out the 45 percent stake still held by the estate of Montreal financier and publisher R. Howard Webster, bringing its share to 90 percent. (Canadian Imperial Bank of Commerce owns 10 percent.)
If the franchise were a free agent, it would probably fetch upwards of $200 million. “The stability of the Blue Jays ownership sets the team apart,” says Pete Bavasi, the team’s first top executive and now president of Dow Jones & Co.'s SportsTicker service.
Beeston didn’t grow up in Welland, Ontario, dreaming of becoming a Major League bookkeeper someday. Though he’s never been much of an athlete, he has always been a big sports fan. His father used to take him to baseball games in Detroit, and he still cheers for the Tigers -- unless they’re playing the Blue Jays. So when the young Coopers & Lybrand accountant was offered a job balancing expansion-team Toronto’s books, he lunged at the chance. He became president in 1989, though he’d already been running the show since 1981, and CEO last year. “It’s a fun business,” says Beeston.
But a business, nonetheless. Beeston compares his job to running a law or an accounting firm: “We are a people business, we’re not widgets.” Points out executive vice president Pat Gillick, who as general manager handles all matters that fall inside the baselines, such as player development, scouting and trades: “The only assets we’ve got are the players. It’s important to be able to work with them.”
Beeston, the CEO as fan, likes to get to know his assets personally. Although he was able to spend more time with the players when the Blue Jays were at Exhibition Stadium -- his office was right next to the clubhouse -- he still makes an effort to visit with them two or three times during each homestand. “They didn’t get to where they are without people like Gillick and Beeston,” says former Blue Jays pitcher Jimmy Key.
Maintaining a good rapport with the players helps, of course, when it comes to renegotiating contracts. Beeston and general manager Gillick handle the large, multiyear contracts and the high-profile free agents; assistant GM Gord Ash is responsible for the smaller deals.
Beeston almost never misses a Blue Jays home game, which he watches from Skybox 337, where “we don’t wear ties,” he says. Or, in his case, hose. He also tries to catch five to ten games on the road, especially if the team is in a pennant race. When there’s a night game in Toronto, though, Beeston breaks for home on the final pitch, so he can hustle back to his wife and teenage son and daughter by 11:00 p.m.
Beeston’s management style is not that of the typical buttoned-down -- and sock-clad -- executive. From the moment he arrives at the stadium, usually by 7:30 a.m., he’s a Charlie Hustle of constant motion, prowling the corridors, greeting colleagues in his booming public-address-system voice, radiating enthusiasm. “His |upbeat style makes him effective,” says Milwaukee Brewers owner Bud Selig, chairman of baseball’s Executive Committee and the sport’s de facto commissioner.
Toronto and the loan arranger
Beeston’s financial regimen has none of the easy languor of spring training. His financial team starts each summer by poring over revenue projections, a process complicated by the fact that revenues are in both U.S. and Canadian dollars. For the voluminous final business plan, which ends up thudding thickly on the desk of Labatt CEO George Taylor, everything is converted back to Canadian dollars. Once the plan is approved by Labatt, the Blue Jays lock in an exchange rate through forward currency contracts handled by CIBC. Beeston also relies on the bank owner for a rarely used line of credit.
The biggest chunk of the Jays’ revenues still comes from gate receipts, about half the total. For many other teams, broadcasting revenue has outpaced ticket sales, thanks to the league’s $1.06 billion television contract with CBS. However, that lucrative deal (Barry Bonds, eat your heart out) expires at the end of this year, and CBS won’t be taking up its option. The new national television agreement with ABC and NBC is expected to slash the league’s broadcast revenues by as much as 50 percent. “The impact for the Blue Jays will not be as dramatic as it would be for a club that relies heavily on that income,” notes vice president for business operations Bob Nicholson.
Gillick and his baseball people next calculate player pay. “We lay out our payroll based on what |Beeston’s projections are,” Gillick says. “Once our financial controls are in place, I can go ahead and make a move |such as trading for Mets pitcher David Cone during the homestretch of last year’s pennant drive , as long as it’s within the budget.”
For the third consecutive year, the Jays set a major league attendance record in 1992 by selling more than 4 million tickets. Toronto regularly sells an incredible 99 percent of the 50,516 seats in the SkyDome, compared with a leaguewide average of about 56 percent. Before the first pitch was thrown this season, Toronto had sold 3.4 million tickets, at an average of $11.60 a seat.
A winning team is baseball’s best sales gimmick, of course, and the Toronto metropolitan area affords a potential fan club of 3.7 million people. But it doesn’t hurt that the Blue Jays play in the 31-story, state-of-the-art SkyDome, with its retractable roof, 346-room hotel, 650-seat center field restaurant and Hard Rock Cafe. Labatt and a half-dozen companies are negotiating to buy Ontario’s 50 percent stake in the dome.
Toronto’s long financial winning streak notwithstanding, Major League Baseball faces a money crunch. The game’s declining popularity, and the consequent decrease in ticket sales, will compound the effect of the drop in TV revenues. “Baseball’s revenues are going to stop growing,” warns economist Zimbalist. Volcker’s committee calculated that from 1985 to 1991 annual growth in player salaries outpaced revenues 10 percent to 9 percent. And the biggest salary bonanza has occurred in the past couple of years. The Blue Jays’ 1993 player payroll alone comes close to the total revenue for half the teams in the league.
Senior managing director Paul Much of investment bank Houlihan Lokey Howard and Zukin, who specializes in the sports business, points out that there’s an inherent financial disparity among big-league teams: “The revenue side is driven by local economics, while the cost side |salaries is nationally driven.” Teams like the Blue Jays and the Yankees share just a quarter of their revenues with other teams (and vice versa). No wonder small-market clubs like Milwaukee complain that they can’t afford to compete for the top players in the free-agent era.
Baseball’s new economics put even more of a premium on winning. “Baseball is merely an alternative form of entertainment,” says banker Much. “If you put a good product in front of your fans, you can turn those fans into customers.” A winning season not only draws more fans to the park, but it also fills lucrative skyboxes and permits clubs to command more for local television and radio rights.
Winning isn’t everything, however. Even the high-flying Blue Jays have had to part with such players as Cone, Key, Winfield and Tom Henke, who were bid away in the free-agent frenzy. “We couldn’t afford to keep those guys,” says Beeston with a shrug. Adds GM Gillick: “Now when you make a mistake on a player, you’re talking a couple million dollars. It forces you to be more selective.”
Whether they’re now in Toronto or elsewhere, the members of the Blue Jays’ 1992 championship squad are collectively pulling down $68 million this season, or nearly 40 percent more than Toronto’s current payroll. “Our goal this year was to put a quality product on the field without dramatically increasing our salaries,” says Beeston. (As of mid-June the Blue Jays were in second place in the American League East, trailing the Detroit Tigers.)
Toronto believes that the best way to build winning teams consistently is to invest in scouting, drafting and developing new talent. “Player development is our version of R&D,” explains vice president Nicholson. Toronto lavishes money on its well-stocked farm system, enabling it to replenish its roster when players are lost to injury or free agency and also to dangle trade bait.
Beeston’s two-handed grip on economic reality has impressed more than just baseball’s owners. Gene Orza, associate general counsel of the players’ union, the Major League Baseball Players Association -- whose labor agreement with the owners expires after this season -- declares, “If all 28 teams had Paul Beestons, my job would be unnecessary.”
Well, what if, in effect, they had? Baseball hasn’t had a commissioner since Fay Vincent was sacked last year, and Beeston’s name has come up more than once. “If baseball decides to look to its own ranks for a commissioner, Paul is certainly one of the guys at the top of the list,” says Steinbrenner. Beeston, who’s on the search committee for a new commissioner, would rather find a more willing candidate. “As commissioner, you’d be cheering for a seven-game World Series,” he says sensibly. “Instead, I’d like to see a four-game sweep for the Blue Jays.”
The Toronto Blue Jays
Paul Beeston, CEO
THE 1993 SEASON:
Estimated revenues:
Gate receipts: $46 million Media contracts: $30 million Stadium receipts: $11 million Licensing and other sources: $6 million Total revenues: $93 million
Estimated expenses:
Player salaries: $49 million Player development: $8 million Travel, front office, stadium and other expenses: $8 million Total expenses: $65 million
Estimated operating income: $28 million
