Sports Business

Profitable Indians enter pivotal year: Local franchise in better shape than most

April 10, 2006

The Indianapolis Indians have one of the winningest franchises in minor league baseball-at least financially. Since 1973, the AAA franchise has been in the black. And, despite new challenges, the team hopes to maintain that streak this year.

But operating expenses that have escalated much faster than revenue in recent years have put all minor league teams on guard, and this season is seen as crucial for the survival of many of those franchises across the country.

Even though the Indians are in a better position than most teams, club officials still have concerns heading into their April 14 home opener against Syracuse.

Indians officials think Indianapolis' shift to daylight-saving time could hurt ticket revenue, but they are hopeful special promotions surrounding Victory Field's 10th anniversary July 11 will be a big boost to ticket, corporate hospitality and merchandise sales.

With Indians' season-ticket sales down 7 percent from last year, single-game ticket sales and promotions will be critical, Indians officials said. On the upside, group sales are up about 7 percent from last year, Indians officials said, signaling an improving corporate climate that could offer an important revenue boost.

After a single-season attendance peak of more than 655,000 shortly after Victory Field opened, Indians' attendance has settled below 600,000 each of the last four years. Attendance dipped from 576,071 in 2004 to 558,901 last season.

Still, the Indians' average attendance of just more than 8,000 per game ranked fourth in the 14-team International League, which had a leaguewide average attendance of 6,900 last year. The International League ranked near the top in attendance of major league-affiliated minor leagues.

Officials for the Indians and Minor League Baseball are taking steps to shore up their finances. A new agreement this year linking Major League Baseball and its franchises to minor league affiliates through the Internet is seen as a potential financial booster for minor league teams.

The Indians' new Web site will offer live pitch-by-pitch coverage and audio of each game, live streaming video for home games and select away games, and improved ticket purchasing capabilities, among other features. The improvements also give the Indians greater cross-promotion possibilities with Major League Baseball and with their parent team, the Pittsburgh Pirates, said Chris Herndon, Indians director of marketing.

The enhanced revenue opportunities, said industry observers, are coming at just the right time.

Roughly half of all minor league teams affiliated with Major League Baseball clubs lost money last year, despite a record aggregate attendance mark, said Mike Moore, president of Florida-based Minor League Baseball, the governing body for minor league franchises. In the late 1990s, Moore said, two-thirds of affiliated minor league teams were profitable.

The losses have piled up, Moore said, despite an improved relationship with the majors and increased marketing budgets designed to increase ticket and merchandise sales revenue. Moore said many teams are struggling to cap expenses.

The Indians, who enter their second year as the Pirates' farm team, have seen profits shrink from $1.4 million in 1999 to $961,525 last year, as operating expenses climbed from $4.7 million to $6.43 million during the same time.

The Indians, however, are not plagued by the debt problems saddled on teams forced to buy their stadium or that have recently had an ownership change. Ownership groups eager to get into professional sports are paying exponentially higher prices for teams, which means more owners are heavily indebted.

As recently as 2000, AAA franchises were being acquired for as little as $10 million. Team values increased rapidly over the last four years, with the Class A Lexington Legends selling last year along with their home park for $24 million.

"The Indians' debt load is very low compared to many in this industry," said Andrew Berger, a stock analyst and editor of Walker's Manual, which publishes studies on top unlisted public companies and those traded in the pink sheets. "Financially, right now anyway, they're in a pretty strong position. But with expenses rising in almost every category in this sector, every operation faces challenges."

While the Indians don't have debt problems, they are in an unusually crowded sports market for a successful minor league franchise. Minor league teams, for instance, in Louisville and the Ohio cities of Dayton and Columbus have far fewer competitors for sports fans and corporate entertainment dollars than the Indians have.

"The Indians contend with the Pacers at the beginning of the season, then the Indiana Fever, and the Colts later in the season," said Milt Thompson, president of local sports marketing consultancy Grand Slam Cos. and an Indians board member the last 10 years. "Then we have three of the world's largest auto races, a professional tennis tournament and any number of other top sports championships that come to town during the Indians' season. When you look at it in that light, it makes the Indians' record of achievement pretty amazing."

As a whole, minor league baseball is a money maker, ringing up more than $45 million in profit in 2005. But the Indians are one of only 16 teams accounting for 60 percent of the profits, according to Minor League Baseball.

"Life is very good for those teams at the top, while the have-nots are getting killed," said Mike Veeck, president of New Jersey-based Goldklang Group, which operates six minor league teams.

"I'm still bullish on this business, but there are some teams that are in real trouble," said Veeck, the son of legendary baseball owner Bill Veeck. One of Veeck's financial partners is actor Bill Murray.

Thompson said even successful owners must carefully consider if increased expenses will boost revenue in the long run. The Indians have resisted the urge to raise ticket prices, standing pat this year, and only implemented small increases over the last five years.

"People in this market expect-even demand-affordable family entertainment," Indians Chairman Max Schumacher told shareholders at their February meeting. "And that's what we try to deliver."

Indians' ticket prices range from $7 to $12, one of the cheapest for any sporting event in Indianapolis.

But that commitment to low ticket prices puts pressure on the Indians financially, with Schumacher keeping tight control on the team's purse strings. Thompson said the Indians have spent money when necessary.

"You have to make these games an event, especially in a competitive market like Indianapolis," Thompson said.

The Indians' advertising and promotions budget increased from $923,791 in 1999 to $1.33 million last year. The Indians have not been shy about capital improvements, including a $1.1 million electronic scoreboard installed in 2004 and another $300,000 this year for suite upgrades and other improvements.

Indians General Manager Cal Burleson predicts another profitable year, but said it could have been even better financially-at least in the short-term.

"We would probably be looking forward to a higher profit in 2006 if we had raised ticket prices, but we are long-term oriented and are dedicated to providing our fans with the best baseball experience we possibly can," Burleson said. "That includes keeping prices affordable."

Even the most profitable minor league team would have difficulty maintaining profitability if Major League Baseball didn't cover player payroll for affiliated teams. Still, Major League Baseball has increased its cut of revenue, raising what it takes from minor league ticket sales from 4.5 percent to 5 percent last year. That will jump to 5.5 percent in 2007, and Minor League Baseball officials said higher percentages will follow in future years.

The Indians are also saddled with ticket taxes to pay for Conseco Fieldhouse and the Indianapolis Colts' new retractable roof stadium.

"All this adds up," Schumacher said, "and puts more pressure on us financially."
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