If You Spend It, Will They Come?

Jerry Colangelo got a crash course in baseball economics. Time will tell what his grade will be.

It was a short honeymoon, far more fleeting than Jerry Colangelo and the Arizona Diamondbacks expected.

The lovefest was supposed to last for years--just like it has in Colorado, where fans still fill the stadium every game to watch their beloved Rockies, a team that drew 4 million fans last year. The Denver expansion franchise served as the model the Diamondbacks' management hoped to emulate.

The Diamondbacks were expecting a $20 million profit for the 1999 season.
Instead, Colangelo woke up one morning last fall and was stunned to discover that season-ticket renewals for the 1999 season had plummeted by about 35 percent on the heels of a 12 percent ticket-price hike.

The marketplace had spoken. The honeymoon was over and the marriage threatened--after only six months and 97 losses in the Diamondback's first season.

Colangelo knew it was time for drastic action.
"Because of the response that we received when we sent out our renewals, it caused me to sit back and take notice in a big way," Colangelo, the managing partner of the Diamondbacks, tells New Times.

The free fall in season-ticket renewals cut more than $7 million out of the heart of the Diamondbacks' most important revenue stream. The renewal rate was so tepid that Colangelo projected the team would lose money during the 1999 season unless something was done.

Red ink certainly would not be good news for members of the consortium of corporations that have invested more than $140 million and own 99 percent of the Diamondbacks.

Those partners had already been hit up for an additional $29 million in January 1998 in the face of more than $100 million in unanticipated expenses, most due to cost overruns to build Bank One Ballpark.

The looming loss and mounting debt forced Colangelo's hand. The Diamondbacks abruptly abandoned their long-term development philosophy, which called for building a team slowly from within the organization, and set a course aimed at putting a winning team on the field immediately, no matter how much it would cost, now or in the future.

Colangelo went into a "creative financing" mode, pulled out his credit card and signed five expensive free agents to the roster. All of them are older than 30, and most could be considered at the peak of their careers.

Lead by Uberpitcher Randy Johnson's $52.4 million contract, the Diamondbacks committed to pay the five free agents $119 million to assemble a team that could contend for a playoff position this year.

But the club will be paying for this stable of stars long after they hang up their Diamondbacks uniforms. At least three of the five free agents agreed to defer up to half of their monster salaries years down the road--after they will be in the twilight of their careers or retired.

Colangelo hopes that by that time, a group of promising young players moving up through the farm system will be ready to take the reins. It's a risky, spendthrift strategy that has drawn the wrath of some baseball owners. But to Colangelo, there was no option.

"The purpose of doing what we did was to focus in on how do we protect the major investment we already have made, and how do we deal with this [revenue] shortfall?" Colangelo says. "Well, it meant to us, you had to compete now."

If the team doesn't win, if more season tickets aren't sold the next couple of years, Colangelo's gambit could hamstring the club for years to come. Randy Johnson is 35, and paying his salary once he retires will mean less cash to retain the services of the league's budding stars in 2005 or 2006.

But even Colangelo's detractors would admit that if any sports executive can shift strategies and pull this off, it's Colangelo.

If he can't, well, can you say, "Montreal Expos?"

In a candid interview last week, Colangelo described just how uncertain the Diamondbacks' financial future has become, and in fact, just how little was really known in 1994 when massive public and private investment commitments were made.

That investment today--public and private--is approaching $650 million.
The Colorado Rockies were the model the Diamondbacks hoped to replicate. But stark differences between the two teams and their markets have emerged, leaving Colangelo no choice but to scrap that mold.

"We looked at models of what we might anticipate, because it was all on the come," Colangelo says. "We didn't know anything for certain. We felt that a good model for us was Denver."

After lengthy discussions with the Rockies management, Colangelo says he was convinced that the Diamondbacks would enjoy an extended period of fan goodwill.

In retrospect, Colangelo says there were vast differences between the Rockies and the Diamondbacks.

Before the Rockies played their first game in Denver, that city had one of the most successful AAA baseball clubs in the country--and with it a loyal fan base. The Phoenix Firebirds, the AAA affiliate of the San Francisco Giants, were barely on the radar screen in the Valley.

"They (Denver fans) were in the hunt for Major League Baseball for a long time," he says.

Colorado was awarded the franchise in 1993, before Denver even had a baseball stadium. The fee levied by Major League Baseball for Colorado to join the league was $95 million. Colangelo's investment group had to put up $130 million.

The Rockies played the first year in Mile High Stadium (home to the NFL Broncos) to enthusiastic crowds that snapped up inexpensive tickets. The team was a big hit the first season, and turned a $30 million profit, Colangelo says.

The Diamondbacks were also a big hit in their first year, but the team isn't releasing any documentation on how much money--if any--it made in its first season. Diamondbacks president Richard Dozer told the Arizona Republic in December that the team broke even.

The Rockies received an additional boost in year two when the team moved into a new stadium, Coors Field. The Rockies had the luxury of putting the $30 million profit from the first season into player development the second year, primarily because the team didn't have to contribute any money to Coors Field, Colangelo says.

While the Rockies got a free stadium (voters approved a one-tenth cent sales tax until 2012), the Diamondbacks had to make a substantial investment in Bank One Ballpark.

Maricopa County taxpayers put up the first $238 million through a Maricopa County Stadium District-imposed quarter-cent sales tax that has since expired; the county also agreed to kick in a $15 million loan that will be repaid from baseball revenues.

The balance of stadium costs were the responsibility of the team, which had anticipated a total price tag of about $280 million. Instead, the tab has soared to about $360 million, with another $34 million in claims being fought over in Maricopa County Superior Court.

The Rockies got more good news in year three when the team made the playoffs. The Rockies' first three years--highlighted by a profitable new team, a free stadium, and, ultimately, success on the field--solidified a strong fan base.

Colangelo, perhaps naively, thought he could replicate the Denver model in Phoenix.

"I looked at that and felt, gee, I don't really know how long a honeymoon we are going to have, but I have confidence in the marketplace, and I think we will have a good ride," Colangelo says.

With an anticipated "good ride," the Diamondbacks developed a go-slow approach to building the team.

"Our philosophy was we were going to build through the draft and player development," he says. "Yet we wanted to go out and get some franchise players, so to speak, in our first year, and that's why we signed people like Matt Williams and Jay Bell."

Those signings have been roundly criticized by many baseball observers who believe the Diamondbacks paid too much for Williams ($48.5 million over five years), and Bell ($34 million over five years).

Yet as the Diamondbacks took the field for the first time on March 31 before a packed house in a state-of-the-art ballpark, it appeared the team's strategy was on track. And as the season progressed, there was no reason to think otherwise.

"We were first in the league in season-ticket sales at 36,000; we were third in attendance at 3.6 million; and we projected we would be one of the top revenue-producing teams," Colangelo says.

The team estimated it would gross $108 million in 1998, according to documents filed with the Phoenix Industrial Development Authority.

But Colangelo's estimate that the team's revenue would put the Diamondbacks in baseball's top five turned out to be erroneous, because, he says, many teams increased ticket prices last year. The Diamondbacks' average ticket price last season ranked 17th out of 30 teams. Instead of being the fifth- or sixth-highest revenue team when the season concluded, the Diamondbacks fell to ninth or tenth, Colangelo says.

Even as the season ended there was still no indication the Diamondbacks would scrap their long-term development plan. While the team knew which free agents would be available, Colangelo says, "It was not a conscious belief or game plan as the season was unfolding that we would make a major run in terms of free agents when the season was concluded."

But that was before the Diamondbacks unleashed a public-relations debacle. They clumsily announced a ticket price hike for the 1999 season during "Fan Appreciation Week" in September. The price hike drew banner headlines in the Arizona Republic, which has a $5 million investment in the team, and stoked the passions on the Valley's radio talk shows.

Colangelo says he considers the 12 percent increase to be "modest," noting it was smaller than some teams are imposing.

"I came to find out that many of the price increases with many of the teams this year were in the 20 to 25 percent range," he says. "We are now anticipating that we will be probably closer to 20th in the league (in average ticket prices, down from 17th in 1998)."

While the ticket price boost seemed "modest" to Colangelo, consumers thought otherwise. Season-ticket renewals plunged for a number of reasons. The biggest factor appeared to be that many season-ticket holders realized they couldn't attend so many games, and chose to consolidate their seats with friends.

It was clear to Colangelo that the Diamondbacks would have to take dramatic action.

"If we were to proceed on our [present] course, we were looking at losses this year," Colangelo says.

Losses?
Nowhere had the Diamondbacks ever projected losses. Not in the March 1995 "Confidential Private Offering Memorandum" that sought investors for the team, or last summer when the club submitted projected financial statements as part of a Phoenix Industrial Development Authority (IDA) bonding issue.

Losses on the field are painful. Losses at the bank, verboten. It was time to set a new course.

A mere seven months ago, the Diamondbacks appeared to be raking in cash. They projected an $18.5 million profit for 1998, according to Phoenix IDA bond-disclosure documents.

As late as last July 1, the Diamondbacks were telling potential bond buyers that the team "feels it can establish positive financial results in each year of operation."

The team made the assertion in a disclosure statement associated with the Phoenix IDA's issuance of $126.9 million in bonds on behalf of the Diamondbacks. The team is using the money to pay off bank loans and cover some construction costs.

It doesn't appear the Diamondbacks were anywhere close to the $18.5 million profit projected in the bond disclosure for the Diamondback's inaugural season.

When it was wooing bond buyers with its disclosure statement, the team said it expected to generate $113.5 million in revenue during the 1999 season, and $20.1 million in profits.

The bond-disclosure documents--which include a six-year revenue, expense and profit projections for the team--state that profits were expected to continue apace: $16.7 million in 2000, $17.5 million in 2001, $17.2 million in 2002 and $22.2 million in 2003.

But those projections were made before season-tickets sales plunged, and Colangelo acknowledged the Diamondbacks faced the prospect of losing money in 1999. Instead of cutting costs, Colangelo elected to sharply increase spending and defer paying bills well into the future.

"The only choice was to protect that investment by moving forward as we did," Colangelo says. "There's really no choice. Either you compete, or you are down at the bottom, and that would never fly."

It remains to be seen how decisions made since the IDA documents were filed will impact the financial projections. What is known is that the Diamondbacks will have to vastly boost revenue at some point to cover significantly higher payroll.

The team projected in the bond documents that payroll for 1999 would total $35 million. The signing of five free agents increased payroll to $42 million, with another $20 million of 1999 payroll (plus interest) deferred.

The bond filing also provided details on how much money the Diamondbacks expected to generate from sources other than ticket sales. The team has secured sponsorship agreements worth $350 million from 50 sponsors, most of whom have signed deals of 10 years or longer. The largest sponsorship agreement is with Bank One for the stadium's naming rights--the team will get $66 million over 30 years.

The Diamondbacks also have a 10-year television contract with Fox Sports Arizona worth $59 million. Combined local television and radio contracts were projected to earn the team $17.7 million in 1999.

The signs that blanket the stadium would generate $7.875 million this year. Luxury suites were to kick in another $6 million, while concessions were projected to generate $7.4 million.

The IDA bonds helped the Diamondbacks reduce interest expense and loan payments. While the bonds are officially issued by the Phoenix Industrial Development Authority, the city has no obligation to repay them if the team should default, says IDA attorney Bryant Barber. A bond insurance company--AMBAC Assurance Co.--stands ready to pay bondholders in the unlikely event the Diamondbacks default on the $10 million-a-year payment.

The original bond documents obtained by New Times contained a provision requiring the team to submit quarterly audited financial statements to the IDA board. Those statements would have been accessible to the public.

But IDA records show that the team and the IDA board agreed to remove this stipulation in December. The reason, according to minutes of the December IDA board meeting: "The Ballpark and the Authority do not want unnecessary information on file because of the possibility of public records request."

IDA board president Victor Flores says the board didn't need to see the team's financial reports because the city was well-shielded from potential liability in the event of a default.

"Our only concern was to make sure the authority was protected," he says. "Whether somebody is making a ton of money or a little bit is really not my concern."

Making a ton of money is certainly a concern of Colangelo's. After lengthy discussions with his staff, Colangelo says he decided his only option to protect the massive investment in the Diamondbacks was to "go out and compete, and compete now."

But how?
"The game plan was very simply this: If we went out to sign some free agents what would you do? It would be pitching. Because pitching would be the shortcut to becoming competitive as fast as we could. That speeds up the process considerably.

"Pitching and defense win in baseball. That can carry you even if you are short offensively. So in my first meeting with Randy Johnson, who was the first free agent we spoke to, one of his first questions was, 'Well, if I did decide to sign with you, how are we going to get competitive?'

"And my reaction was, 'You could help make it happen a lot sooner.'"
Colangelo's "creative financing" plan emerged.
"Let's assume we negotiated a deal that was a four-year deal, and you were willing to take a payout over eight years. I said if I got three or four or five other players to do the same thing, we could get other players, and we could get competitive a lot sooner," Colangelo explains.

"And so I took that into my discussions with the other free agents we were able to sign, and they were all willing to do it. And so it was kind of a collaborative effort to help us deal with the change we had to make under the circumstances."

The team agreed to pay Johnson $52.4 million over 4 years--but $22.4 million will be paid after the contract has run its course. Pitcher Todd Stottlemyre agreed to defer half of his $32 million deal, and outfielder Steve Finley half of his $21.5 million pact. The Diamondbacks also signed free-agent pitchers Armando Reynoso ($5.5 million) and Greg Swindell ($5.7 million) and utility player Greg Colbrunn ($1.8 million).

The deferments to Johnson, Stottlemyre and Finley are in addition to previous deferred commitments of $12.5 million for third baseman Matt Williams and $25 million for outfielder Bernard Gilkey.

The free-agent signings boosted the team's actual payroll to approximately $42 million for the upcoming season--up from $32.5 million last year. The payroll would be closer to $62 million without the deferments.

If one considers the Diamondbacks' payroll to be really $62 million this year, the team appears to be in an excellent position to make the playoffs.

Last season, of the 12 teams with payrolls exceeding $48 million, eight went to the playoffs, and all but one had a winning record. Only three teams--San Francisco (89-74), St. Louis (83-79) and Toronto (88-74)--had winning records with payrolls under $48 million. And the Giants ($47.9 million) and Cardinals ($47.6 million) were just under the $48 million mark.

Analysts guess it will take a payroll of at least $50 million this year for a team to make the playoffs. If that assumption is correct, more than half of the 30 major league teams already are out of the running.

Colangelo's spending spree has drawn fire from some owners and from baseball writers. A Denver Post sports columnist blistered Colangelo in a January story calling him "the crazy uncle of baseball owners."

The Post reported that one baseball executive who demanded anonymity called Colangelo "a time bomb." Others openly suggested it was only a matter of time before the Diamondbacks, already plagued with stadium-cost overruns, fell into financial straits.

Colangelo brushes off such criticism, saying he has the experience to negotiate rough seas.

"I would like to think that after 32 years in the industry, that [I have] a handle on how you do operate, and how you do operate successfully," he says.

But nearly all of that experience has come in professional basketball, which operates under far different rules than baseball, where a strong players' union has repelled attempts to impose a salary cap. As a result, player contracts have soared.

The growing disparity between rich and poor teams and the escalating salaries could lead to another stalemate between owners and players after the 2001 season. That spat could lead to another work stoppage, which would inevitably anger fans and reduce attendance.

"Baseball is a real challenge, let me tell you," Colangelo says.

Being competitive on the field is just a means to an end. Colangelo's top priorities are protecting the huge private investment in the Diamondbacks, turning a profit, and, ultimately, creating a fortune for himself.

Profits can be made without championships. But in baseball, it doesn't appear they can be made without spending to field at least a contending team. The alternative is to spend next to nothing, let the team get creamed, and pick up a few million dollars from the large market teams at the end of the year, an option pursued by some teams like Montreal ($8.3 million payroll last year), but one that Arizonans would never embrace.

It's up to Colangelo to plot the course. Although frequently referred to as the owner of the Diamondbacks, he isn't. In fact, Colangelo owns less than 1 percent of the team.

His power comes as the managing general partner of a limited partnership primarily made up of such Arizona powerhouses as Viad Corporation, Banc One Corporation, Wells Fargo Bank, BankAmerica, America West Airlines, Discount Tire, Swift Transportation, Tosco Corp. (which owns Circle K), El Dorado Investments (a subsidiary of Pinnacle West Capital Corporation), Kenilworth Investments (a company owned by Nike chairman Phil Knight), Pulitzer Publishing Company (owner of KTAR and KMVP radio), Finova Corp. and Central Newspapers Inc., publisher of the Arizona Republic.

The limited partners have put up 99 percent of the money for the team and the Diamondbacks' share of ballpark construction costs.

Colangelo, along with Phoenix shopping-mall developer Eddie Lynch (who leads an $8.5 million investment group in the team), are the key members of AZPB I Incorporated, which manages the funds invested by the limited partners. Colangelo has controlling interest in AZPB. Joining Colangelo and Lynch on the board of AZPB are accountants Richard Dozer and Thomas Harris.

Colangelo and Lynch have each contributed about $1 million to the partnership, according to Team Marketing Report, a Chicago sports-research company. Despite his relatively small investment, the limited partners have given complete control of the Diamondbacks to Colangelo.

Along with control comes a nice salary--at least $2 million a year, or 3 percent of gross revenue, whichever is greater.

But the salary is chump change compared to what Colangelo stands to make if the Diamondbacks are profitable over time.

Under terms of the partnership agreement, Colangelo stands to reap a fortune if he accomplishes two things. First, he must ensure that his limited partners receive at least a 5 percent return on their investments each year. Second, he must generate enough profits to repay investors their full contributions to the partnership, which currently stand at about $174 million.

Once the limited partners are repaid, AZPB's ownership stake in the team will go from 1 percent to 25 percent. It will likely take a decade to repay the limited partners' share, and by that time, the value of the Diamondbacks could increase to, say, $500 million or more.

Do the math. If the Diamondbacks are worth $500 million by the time the limited partners are paid off, Colangelo's company AZPB would own a share worth $125 million.

But getting there won't be easy. Colangelo must negotiate a treacherous and fickle sports market where fan support can turn to apathy overnight.

Colangelo embarked on the free agent spending spree not to simply put a competitive team on the field, but to right the Diamondbacks' listing financial ship, and preserve his chance for a bonanza.

"The only solution that appeared appropriate was to protect the investment already made," Colangelo says.

How confident is he in his buy-now, pay-later scheme?
"Let's try this game plan and move forward. Now, only time will tell, but the good news is this: We are going to have a four-year run here, with what is now considered to be maybe the second-, third- or fourth-best pitching staff in baseball."

On the field, the Diamondbacks have other serious problems that have not been addressed. The team set a National League record last year for most strikeouts (1,239) and was last in hitting with a .246 team batting average.

Acquiring the free agents also cost the team its second-, third-, fourth-, fifth- and sixth-round draft picks this year, leading some critics to say the Diamondbacks have abandoned their future for a quick fix.

Colangelo says the team determined that the best way to go after free agents was to make a big splash in one year and lose the draft picks all at once, too. He points out that the Diamondbacks have several of the hottest young prospects moving through the minor leagues, whom the team is jealously guarding.

"We don't believe the player-development area has been effected negatively at all," Colangelo says.

Despite the massive investment in free agents, the demand for season tickets has been slow to rebound. Season-ticket sales are still substantially below last year's--26,000 seats have been sold as of last week compared to 36,000 for the 1998 season. The Diamondbacks are offering 20-game packages in the hope of attracting fans with limited time and budgets.

The addition of Randy Johnson to the team is expected to be a marketing plus. But Johnson carries a notorious reputation from his days with the Seattle Mariners, and he clearly lacks the charisma of a Charles Barkley, whom Colangelo used to help whip the Valley into a frenzy over the Phoenix Suns earlier this decade.

One indication of the difficulty the Diamondbacks face in marketing is the fact that the first home game in the 49,075-seat stadium, slated for April 12, is not sold out.

But if all goes well during the season and the high-dollar pitching staff assembled by Colangelo performs as expected, it's conceivable that the Diamondbacks could be in the hunt for a playoff slot during the dog days of August and September.

If the team is in contention, Colangelo expects to see a packed ballpark down the stretch--the time that profits are made, fortunes built and pennants won.

Contact John Dougherty at his online address: jdougherty@newtimes.com

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