Teams Could Score Big via the Stock Market

There is an elegantly simple way to solve the perennial economic issues plaguing baseball and other sports – sell stock in U.S. and, eventually, teams globally and provide stock and options to the players.

As for the current system, the baseball settlement reached last Friday didn’t help. However the negotiators settled on payments from rich to poor teams, the system is inherently unstable: it will be constantly tweaked, challenged and argued over. Except for social welfare, redistribution of business gains from rich to poor seems instinctively disagreeable in a free market system. In fact, it sounds curiously like communism, a system that already failed.

Of course, even under a stock system, owners would want to retain control of their teams. This could be done through a separate class of voting stock, a nondilutable majority, such as that used by New York Times Co., or the owners could simply keep a controlling minority, like the stake owned by Bill Gates and fellow officers at Microsoft Corp.

All of this would have the following advantages for baseball and other sports. It would:

Reduce the advantage of rich teams getting the better players. Many better players would join poorly performing franchise with low sotck prices. Better seasons and greater attendance would raise the team’s fortunes and stock prices. Of course, in the instance of a team such as the Expos, no amount of financial maneuvering is going to help. Montreal is simply a poor town for a baseball franchise. As for the players, they have to face the fact that baseball is going bankrupt under the current system. Under a stock system, they could enhance their salaries by selling their team’s stock if its price rose. They could then move on to pollinate a poor team, hopefully causing its stock price to climb. The entire incentive structure would change without the need for luxury taxes and perennial strike-threatened re-examinations.
Produce a self-correcting system. Star players could not, not example, demand too much stock or overbearing salaries from rich teams because this would hurt their team’s stock price. Players also could take advantage of the 20-percent capital gains tax rate instead of 40-percent rate on ordinary income. Players also might take more of their compensation in shares or options, distributed on the basis of on-field performance.
Provide an integrated, fair system open to investors and players around the world. About 60 sports franchises are already publicly traded, including the Philadelphia 76ers, Boston Celtics and, as part of media conglomerates, the Anaheim Angels and the Chicago Cubs. But the team stocks are either thinly traded or not at all, and have low market capitalization. The system suggested here would be far different, in that all teams would be included and market vibrancy would result.
Involve fans and promote accountability. Trading in sports stocks would bring the public, including fans, into the business of baseball and others games in a much more direct way. Even if it didn’t have voting rights, the public would feel that the management was much more accountable. Annual reports would be published and the public could scrutinize them.
Provide a better financing and growth outlook. If a franchise wanted to finance a new stadium, it would no longer have to beg local governments for aid or maneuver them into supporting the project, or be held hostage to a group of investors. It could raise the money through stock sales, or through the sale of preferred stock.
Raise profitability. Baseball revenues are expected to total about $4 billion this year. It would not be far-fetched for the stock to sell at two to three times revenues.
As such, today’s market capitalization for major League Baseball could easily start at $10 billion. The additional $6 billion could be used to create operating efficiencies, reduce amortization costs and other expenses that now make most franchises unprofitable. It would give baseball a clear chance of getting into the black. One could imagine more alliances, mergers and a much greater market capitalization. More money to go around.
One reason why the baseball industry and the rest of sports haven’t figured this out is because they are too busy trying to grab as much as possible of what they think is a fixed pie.

But it doesn’t have to be a fixed pie. There is plenty for all with the right incentives and structure. Baseball is a good place to start. It’s America’s Pastime, so it should start with America’s capital structure, the one that built America – the stock market.

(Originally published in Newsday.)