Tuesday, February 22, 2005

The Empty Glass

Fair is fair.

I am as frustrated about the lack of off-season improvement from the Royals as any fan, but I’m going to look at this from a different perspective. Rather than look solely at the baseball aspects of this stagnation, let’s judge it from David Glass’ view. After all, he’s not a baseball guy, and readily admits it.

No, David Glass is a businessman. His purchase of this club and every decision he’s made regarding the team since that purchase, has been driven with business in mind. Period. And, in that case, it’s only fair to allow that he won’t run the Royals on his personal nickel. It has to be a self-sustaining enterprise, so I have no problem with his long-standing direction to Allard Baird that the club’s payroll must be in line with its revenues.

So, if we are to grant Mr. Glass this point, it’s only fair that we judge the club as a business. Is it being run well? Are they reaching the goals of all good businesses, namely to make money?

Let’s look at the Royals strictly from that cold corporate perspective. What does it look like just as a business enterprise? We all know about the shortcomings they face; both the club and Bud Selig are more than happy to trumpet the woes of small-market teams. But what are the Royals’ strengths? What can be used to offset the disadvantages inherent in baseball's current economic system?

  • They have a local monopoly. There’s no other major league ball club within 400 miles.
  • They’re cheap. Compared to the Chiefs, KU basketball, or other major league clubs, a night with the family at Kauffman Stadium is very affordable.
  • They have a loyal fan base. This isn’t Montreal, where the fans will run and hide if the team falters. There is a hard-core group of fans that will always head out to the ballpark, no matter how bad the team performs. On top of that, the not-so-loyal followers proved in 2003, when the club contended for much of the season, that they will return to the park to watch a good product.
  • There is finally a decent base of young, inexpensive talent on the big league club. Most teams in baseball would like to have David DeJesus, Angel Berroa, John Buck, Zack Greinke, Jeremy Affeldt, Runelvys Hernandez, Denny Bautista, Ruben Gotay, Calvin Pickering and many of the bullpen arms. There are even some serviceable trade bait parts that other teams would find attractive at the trading deadline – like Mike Sweeney, Matt Stairs, Scott Sullivan, Eli Marrero, Terrence Long, and Tony Graffanino.
  • They have a workable stadium. No, Kauffman Stadium isn’t chuck-full of luxury suites and wide concourses. But the playing field is beautiful, the seats are comfortable, the site-lines are outstanding, and it can get very loud when it’s a good game. It’s a nice home-field advantage.
  • They will always have an extra source of revenue from Major League Baseball because they are a low-revenue team. The club had a small-market team’s worst nightmare in 2004; the highest payroll in the club’s history coinciding with the worst record in club history. And you know what? They still made a profit. About $5 million net profit, to be exact, thanks to shared revenue and luxury tax from MLB. Most businessmen would agree that it’s not a bad deal if you can get it.

There are other strengths, but you get the point. The question, then, is whether or not they are leveraging their strengths to get the maximum amount of success despite their weaknesses. Are they, in short, being run as a sound business?

The answer is a resounding No.

What Mr. Glass should be able to see, being a good businessman, is that, in baseball, performance on the field directly translates to profits for the team as a business. More wins equals more tickets sold, which equals more beer and hot dogs purchased. It means more demand for Royals merchandise, and greater demand for advertising space on stadium billboards, scoreboards, drink cups and outfield walls. It means more television viewers and more radio listeners, which translates to higher demand for radio and TV advertising time for the broadcasters, giving the team leverage on negotiating the rights to air those broadcasts. Winning is simply good business.

What’s more, winning, to a degree, is a self-perpetuating enterprise. It makes running your business easier. Winning means that young players will want to be drafted by the Royals, and that veterans will want to come to Kansas City through free agency. It means good scouts and front office personnel want to come to the club, or stay with them if they are already here. It means minor league clubs will want to partner with the Royals, and local communities will want to keep them around. It means, ultimately, forcing Kansas City to replace Kauffman Stadium with a more modern park that will generate even more revenue.

That is what winning does. And, so far under the David Glass regime, it’s the one thing the team has failed miserably to do.

Sure, it’s harder to win these days, as players are costing more and more to obtain or keep. Like in most businesses, being successful in baseball is hard. To quote Tom Hanks as Jimmy Dugan:

“It’s supposed to be hard. If it wasn’t hard, everyone would do it. The hard is what makes it great.”

He also said, “There’s no crying in baseball”, and truer words have never been spoken. And for that reason, I don’t want to hear about the troubles involved in putting a winning team on the field in Kansas City.

What I want is results. My real job is with General Electric, and as both an employee and a stockholder, I absolutely expect my hard-invested money to be put to good use. When GE’s stock started diving toward the end of Jack Welch’s tenure as CEO, I was one angry investor. How dare they take my money, give me limited investment options in my 401(k), which basically forces me to buy GE stock, and then allow the stock to drop from $60 per share to $20 in a two-year span. What a raw deal.

As a paying customer of the Royals, someone who pays my hard earned money to attend 6-10 games each year, always with at least one member of my family and often with all of them, I’m the equivalent of a stockholder. I give you my money and I expect results, just like I do with GE.

To date, those results just haven’t been there. Instead, all my money has purchased me is a team picked dead last in ESPN’s power rankings for the upcoming season. A team that proved it can turn a $5 million profit with a $47 million payroll, and then promptly cut that payroll by about $10 million just as revenue-sharing dollars are likely to go even higher. At this level of spending, it’s entirely possible the Royals could turn a $20 million profit in 2005, which is certainly great for David Glass, but it doesn’t do much for me as an investor. Why hasn’t that $20 million been spent on more major league talent? Or, since I will grant the point that it’s hard to recruit veterans to the team in its current state, why have we heard nothing of the club investing that money in minor league facilities or instructors, or in scouts and player personnel staff, or in development and acquisition of international free agents in Latin America?

In short, where is the return on my money?

I’m happy to give you a break, Mr. Glass, and judge the Royals’ performance strictly as a business. Like I said, fair is fair.

But, in case you’ve never learned this lesson Mr. Glass, in baseball, winning is good business. And, no matter what your balance sheet might say, your business is nearly bankrupt.

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