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Take me out to the ball game | ||
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By DAVID MOON, Moon Capital Management Each evening for several months I've passed a hive of construction activity at the former coin laundry on my drive home. I stopped and asked about the drywall and paint trucks and learned that a couple is about to open a neighborhood diner.
They're doing all the construction work themselves and haven't borrowed a nickel to do it. I congratulated them on their business acumen and began thinking about ways to resist the temptation of a neighborhood restaurant that delivers both pizza and ice cream.
Then I realized that these young entrepreneurs are wasting their vision and talents on small ideas ' they are perfectly suited to own a professional sports franchise.
These small will-be restaurant operators realize that if they can minimize the construction cost of their facilities, they lower their monthly overhead. They won't have a monthly note to stroke. They won't have a rent payment.
These are two substantial fixed costs that most businesses incur before generating any cash flow to pay salaries or buy pizza dough, much less compensate the owners or generate any profit. It is a fantastic model if you can successfully start your business with little financial capital ' or better, get someone else to provide a significant amount of it.
That's how the pro sports owners do it. They combine political influence, business hubris and OPM (other people's money) so you and I can subsidize the hundred-million-dollar salaries of professional athletes.
Washington, D.C. is spending $400 million to build a stadium for the new Washington Nationals Major League baseball franchise. The new stadium and sports complex in Indianapolis will cost taxpayers $900 million. Scores of examples abound.
Because these owners don't have to bear the full cost building their 'restaurant,' it frees up their cash flow for other uses, like signing megabucks player contracts. When the Washington Nationals lease one of their 78 luxury suites, none of that revenue will be used for rent. It can all be used for salaries or accumulated as owner profit.
Team owners argue that public financing is required to build these massive stadiums, and public money is justified because of the huge economic payoff to the communities.
Wrong. Wrong. The Miami Dolphins and Denver Nuggets recently built new stadiums with almost completely private money, so it is possible. And if you've been to the Dolphins' Joe Robbie Stadium you can attest that it is not poorly constructed or modestly designed. It's a great place for football.
The local economic benefit argument doesn't hold water, either. Most professional sports franchises attract local fans who would otherwise spend their money in town somewhere. The sales tax revenue would still be there.
Economist Allen Sanderson of the University of Chicago argues that cities would create a greater economic impact if they simply scattered the hundreds of millions of dollars from a helicopter over the city. Instead, I would suggest a reduction in local taxes, but I'm not a real economist; I just play one in print. I wonder what my neighborhood restaurateurs would suggest?
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In writing about the declining popularity of the NBA last week, I misidentified Shaquille O'Neal as a Los Angeles Laker, rather than a member of the Miami Heat. Apparently, I missed the news of Shaq's trade in 2004. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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