This is a two-part series examining baseball at spring training coping with uncertainty. Part one analyzes the core business issues. Part two will focus on marketing challenges.

Major League Baseball begins its formal slate of spring training games this week with more questions than answers: When will contraction take place? How will labor peace be restored? Can the playing field between the "haves" and "have-nots" be leveled? Despite these uncertainties, the industry is expected to generate $4 billion in revenues this year, and the recently completed Red Sox sale of $700 million raises the value of all franchises.

On the other hand, owners say they lost more than $600 million as an industry last year, and that the debt load has risen from $500 million in 1994 to over $3 billion currently. In Congressional testimony last Fall, baseball's management contends that 25 of 30 franchises lost money last year. Additionally, Congressmen John Conyers, Jr. and Paul Wellstone introduced the Fairness in Antitrust in National Sports (FANS) Act of 2001 in November, followed by intense Congressional hearings Dec. 3.

At the state level, Minnesota Attorney General Mike Hatch challenged the proposed contraction of the Minnesota Twins, and Florida Attorney General Bob Butterworth subpoenaed Commissioner Bud Selig and others for questioning about the prospect for potentially contracting the Florida Marlins or the Tampa Bay Devil Rays.

Obviously, this has been quite an offseason since the heralded Game 7 between the Diamondbacks and Yankees last November. Any objective business analysis of the baseball industry during this unprecedented uncertainty should evaluate at least three factors: (a) player salaries; (b) market stability; and (c) franchise values.

Player salaries

The 2001-02 free-agent season was less lucrative for players than in years past. Fourteen of the 55 free agents won increases averaging over $2 million per year; 16 received raises of less than $1 million; and 14 free agents actually reduced their salaries. The overall average raise was 23.6 percent, or $736,413 yearly. The big names continue to ink huge contracts -- Jason Giambi's seven-year, $120 million deal with the Yankees leading the way.

However, labor and management alike believe that the free-agent offseason took a small step towards trimming back salaries. Many believe that this was an aberration, rather than a trend -- no new ballparks opened this season, and the Red Sox, Orioles, Indians, Rockies, Dodgers, and Astros have publicly announced payroll reductions; the threat of contraction reduced the appetite for long-term mega-commitments; and the post-Sept. 11 economic environment may have caused some to reevaluate their spending habits.

From the players perspective, one clear result has been the widening of the gulf between "have" and "have-not" players. While the average salary of the 108 one-two year service players was $330,038 last year, the 25 major leaguers with over 12 years of experience earned an average of over $6 million annually.

Whether these numbers reflect a momentum shift in future years, or whether the titanic spending pattern will return after this season remains to be seen -- especially with the "small market" desire for major economic restructuring on the labor/management horizon.

Market stability

The gap between big market and small market clubs continues to increase, illustrated by baseball executives in their fall Congressional testimonies. In a press release announcing contraction, Major League Baseball cited the fact that one team (Montreal) had local revenues that were less than eight percent of the highest local revenues in the league and less than 18 percent of the industry average. The Expos revenues were a bit over $20 million, while the Yankees exceeded $250 million. The largest point of difference remains local television. Unlike the early 1960's historical NFL revenue sharing pact, each baseball team continues to capture as much local media revenue as possible. While the Yankees generated $56.7 million in local media last year, the Kansas City Royals produced merely $6.5 million, Milwaukee at $5.9 million, and Montreal at $536,000.

Revenue sharing remains the major method of "leveling the playing field." Last season, owners shared 20 percent of $2.8 billion in local revenue; the discussion has focused on sharing as much as 50 percent in the future (though this is precisely the reason that contraction has become so generally acceptable among owners). In his Congressional testimony, commissioner Selig reported that baseball effectively "sent $165 million from the top six teams to the bottom six teams" with no perceived benefits in return.

Renewed focus now shifts to "targeted" markets. The recently completed complicated ownership transaction between former Montreal Expos owner Jeff Loria and Major League Baseball ultimately allowed MLB to buy Montreal for $120 million, in addition to loaning Loria $38.5 million to complete his $158.5 million purchase of the Florida Marlins from new Red Sox owner John Henry. Stadium discussions continue to whirl around a politically charged South Florida, while daily events unfold in Minnesota as well.

Some markets are stabilizing over time. Milwaukee Brewers revenue in the inaugural season at Miller Park was nearly double what the Brewers experienced in their last season at County Stadium -- the team generating approximately $106.6 million in revenue, as the Brewers drew 2.8 million fans compared to 1.57 million the previous year. Similar positive results occurred with the Pittsburgh Pirates in PNC Park. Understanding this, the Cincinnati Reds look forward to their opening of 42,000 seat Great American Ball Park next year, expecting that their revenues should increase by approximately $30 million as a result.

On the other hand, some teams are having trouble maintaining their "honeymoon-like" economics as the excitement of a new ballpark wears off. The Tigers were second in attendance in their inaugural season at Comerica Park -- last season their attendance decreased 24 percent to 24,000 (60 percent of capacity). On the other hand, the Arizona Diamondbacks demonstrated the success of the new stadium/high expenditure model with this year's World Series victory. While the Diamondbacks made an additional $10 million-$16 million as a direct result of their world championship, they look forward to paying nearly $200 million in guaranteed contracts and deferrals through 2006. Five new investors have committed more than $160 million into the partnership (in exchange for 49.5 percent of the team). The process illustrates the high stakes nature of owning and operating a "successful" franchise in today's economic climate.

Franchise values

The $700 million purchase of the Boston Red Sox by the John Henry-Tom Werner group included $410 million for 53 percent of the franchise, $250 million to buy out limited partners, and $40 million for the assumption of debt. The mid-January 29-0 ownership approval was set up by an additional $30 million "sweetener" after Massachusetts Attorney General Tom Reilly threatened to investigate the bid procedures. Over time, the specifics of the process will be forgotten; business analysts will remember that the purchase price was more than twice that of any other Major League Baseball purchase. Further, the increase over the $22.5 million 1978 previous purchase of the Red Sox provides a return of nearly 3,011 percent, setting the "gold standard" for all future baseball franchise values.

For the most part, baseball franchise transactions appear to fit the mold of the other three major sports -- sales at a hefty appreciation. In 1999, the Expos were purchased for $214 million (as compared to a sale for $86 million nine years earlier); the Cleveland Indians sold for $323 million (compared to $4 million in 1966); the Florida Marlins sold for $150 million (compared to the $95 million expansion price in 1991); and the Cincinnati Reds sold for $186 million (compared to $24 million in 1984). The $150 million "starting price" for Minnesota Twins owner Carl Pohlad in his sale process seems geared to the publicized contraction number. In any event, franchise values remain high.

The specter of a work stoppage and wholesale economic restructuring may produce one of the most interesting seasons in baseball history. Baseball has undergone eight work stoppages since 1972, including a 232-day strike that wiped out the 1994 World Series. While negotiations may be beginning, the players association is entering this labor conflict with half the money it had in its "war chest" during the 1994 dispute -- approximately $114 million at the end of 2001. Lawyers are also researching the implications of a key 1981 United States Supreme Court decision which held that firms closing money-losing operations are not legally required to bargain first with the union that represents workers who are losing their jobs.

While this issue will no doubt play out in the next few months, 62 percent of surveyed fans in a MLB-commissioned poll believe that "baseball is having financial problems," and 55 percent believe that baseball "is in worse economic shape than it was in 1994," and that 77 percent of fans "support increases in revenue sharing among teams." No doubt, the battle during the next few months will be played out at the negotiating table, the courtroom, and in strategy rooms of public relations firms. In the meantime, baseball remains committed to maximizing its revenues through creative marketing techniques -- a process we will explore next week in part two.