DRI-300 for week of 5-25-14: The Key Figure in the Evolution of Economics in Sports: Bill Veeck, Jr.

An Access Advertising EconBrief:

The Key Figure in the Evolution of Economics in Sports: Bill Veeck, Jr.

Last week, we overturned the conventional thinking on sports and economics by showing key examples of the economic principles guiding the business operation of baseball teams in baseball’s first century of operation. Now we come to a watershed in the economic history of sports – the career of Bill Veeck, Jr. This self-described hustler took the economics of baseball business to a higher level. His life altered the course of baseball and sports in America irrevocably.

The Career of Bill Veeck

William Veeck, Sr., was a Chicago sportswriter who expressed his opinions about the management of the Chicago Cubs forcefully in his newspaper column. Cubs’ owner William Wrigley, Jr., took Veeck, Sr., at his word and offered him the title of team president. Bill, Jr. spent his boyhood at the ballpark as popcorn vendor and clubhouse boy. It is said that 13-year-old Bill originated the plan to plant ivy on the walls of Wrigley Field. Upon William’s death in 1933, Bill left KenyonCollege and took over the position of Treasurer.

In 1942, Bill and former Cubs player Charley Grimm scraped up and borrowed money to buy the minor-league Milwaukee Brewers. Milwaukee was the laboratory in which Veeck developed and tested his theories for owning and running a baseball team. Later, these were applied in absentia by Grimm and others. Veeck joined the Army during World War II and spent the war in Europe as part of an artillery battalion. A recoiling artillery piece crushed his leg, necessitating the amputation of first his foot, then the leg above the knee. Ultimately, Veeck would undergo 36 operations on the leg. He was fitted for a wooden leg, which he equipped with a hold that served as an ashtray for his ever-present cigarette.

Veeck never paused to cry over his misfortune. In 1946, he got up an owner’s group using innovative financial arrangements and purchased the Cleveland Indians major-league franchise. The Indians had mostly occupied the second division of the American League since their World Series championship in 1920. They divided their games between tiny LeaguePark (capacity under 20,000 people) and (on Sundays and special occasions) spacious Municipal Stadium (capacity: 78,000+).

Veeck made Municipal Stadium the team’s permanent home, thereby tripling the team’s revenue potential at a stroke. Of course, he then had to fill all the empty seats surrounding the team sitting in the dugout, so Veeck applied the razzle-dazzle marketing techniques he had pioneered in Milwaukee. Cleveland’s attendance rose to 1.4 million in 1946 and 1.6 million in 1947. Veeck also established a permanent radio broadcast for all of Cleveland’s games, both home and on the road. The rights to broadcast those games gave him another source of revenue.

In 1947, Veeck broke the color line in the American League by acquiring power-hitting black outfielder Larry Doby. In 1948, Veeck defied the advice of baseball experts by buying the contract of the premier pitcher in the Negro Leagues since the 1920s, Satchel Paige. Paige’s reputed age was 42, making him probably the oldest rookie in major-league baseball history. He has already overcome serious arm trouble and was universally considered to be well beyond his most productive years as a pitcher. But Veeck added him to a staff that already included Bob Feller, Bob Lemon and Gene Bearden. Paige made a valuable contribution as a spot starting pitcher and reliever and the Indians’ pitching staff was the best in baseball that year. Veeck had earlier announced the trade of player-manager Lou Boudreau to the St. Louis Browns. The fans protested the trade of the popular Boudreau so strenuously that Veeck reversed his earlier decision and instead gave Boudreau a two-year contract. Boudreau reacted by hitting .355, winning the American League’s Most Valuable Player award. He led the Indians to their first pennant in 28 years. (Cleveland tied the Boston Red Sox during the regular season and won a single-game playoff, 8-3, with Bearden pitching and Boudreau hitting two home runs.) In the World Series, Cleveland triumphed in six games.

For the season, the Indians attracted 2.6 million fans, which stood as a major-league attendance record for 14 years. Even today, almost 70 years later in a country whose population has nearly doubled since then, this would be excellent attendance. In 1948, night baseball games has been around for only a decade and Veeck’s achievement began the transformation of baseball into the country’s leading family pastime. 1948 was the apex of Bill Veeck’s career as a baseball-team owner.

Veeck did not stick around Cleveland long enough to reap extensive rewards from his astuteness. In order to pay the freight on a divorce in 1950, Veeck sold his interest in the team. The next year, he bought the worst team in baseball, the St. Louis Browns. Veeck set out to improve the team’s financial fortunes by doing something that major-league baseball ownership frowned on – competing economically with the other major-league franchise in town, the powerful St. Louis Cardinals.

Veeck’s high-powered marketing efforts included hiring a midget, three-foot eight-inch-tall Eddie Gaedel, to appear in an official game. (Gaedel drew a walk in his only plate appearance.) Another notable Veeck promotion was “Grandstand Managers’ Day.” The Browns’ manager took the day off while a team employee held up placards holding strategic actions such as “Bunt,” “Take,” “Squeeze,” “Hit and Run,” etc. The fans’ applause was the selecting factor in choosing among strategies. (The Browns won, 5-3.) Veeck succeeded in upgrading both the team and attendance, but was unsuccessful in running the Cardinals out of town. He sold the Browns in 1952 and made an abortive attempt to acquire the Philadelphia Athletics before taking a sabbatical from the game for several years.

In 1959, Veeck put together another innovative financial package to acquire a majority interest in the Chicago White Sox from its longtime owners, the Comiskey family. Here his business and financial innovation peaked. Once more, a Veeck team broke attendance records as White Sox attendance reached a historic high of 1.4 million, rising to 1.6 million the following year. Once more, Veeck put a pennant-winning team on the field, as the White Sox bested the powerful Yankees during the regular season before succumbing to the Los Angeles Dodgers in the World Series.

And once more, Veeck couldn’t stand prosperity. He sold the White Sox in 1961 and left baseball, taking over ownership of Suffolk Downs racetrack. He wrote the first of three books, a bestseller entitled Veeck As In Wreck, in which he outlined his personal philosophy of business and life (he described himself as a “hustler”) and criticized the owners and administrators of major-league baseball for their lack of innovation, disregard of fan well-being and unwillingness to contemplate change. At the end of the book, he predicted his return to baseball.

That prediction was fulfilled in 1975 with his re-purchase of the White Sox. This came at the precise moment when the advent of player free agency was changing the game in ways Veeck himself had supported; he, fellow owner and former player Hank Greenburg and future Hall of Fame player Jackie Robinson were the only three people in the industry to testify in favor of free agency. Ironically, it doomed Veeck’s tenure as owner since he was poorly placed to compete for the best baseball talent with major-league baseball’s richest owners.

Veeck’s marketing and management methods enjoyed some success in this, his last hurrah as a baseball owner, but not enough to earn him the riches we have come to associate with sports ownership. Once again, he sold out after a few years and spent his declining years in Chicago as a Cubs fan. He died of lung cancer in 1986.

In 1991, Bill Veeck became one of a few owners elected to baseball’s Hall of Fame. Two sets of innovations accounted for this salute. The better-known are the long list of tactics and gimmicks that changed the practice of sports marketing forever. Less well known but even more significant are the financial innovations introduced by Bill Veeck.

Bill Veeck’s Marketing Innovations

Beginning with his first venture as a baseball-team owner, the minor-league Milwaukee Brewers, Bill Veeck unloaded a torrent of marketing measures on his fans. Rather than viewing these as mere tactics, we should regard them as a coherent overall strategy. Prior to Veeck, baseball owners would unveil the occasional marketing gimmick, usually designed to profit from a special occasion or circumstance. But Veeck had a consistent, discernible method behind the marketing madness that became his trademark. He followed a two-pronged plan: (1) Turn the baseball fans within his geographic area into regular, hard-core customers; and (2) Mold baseball’s public image into that of a family pastime analogous to the role then occupied by the motion picture.

In order to accomplish these twin objectives, Veeck needed to achieve several subordinate objectives. The first of these was to get fans out to the ballpark. Veeck was not a rich man; in order to gain ownership of a baseball team, he needed to do it on the cheap. This required not only that he enlist co-owners but also that they go after less successful teams available at low prices. This meant that Veeck was always working out of a hole, having to build up a fan base from scratch. If ever there was a man for that job, he was the one.

In Milwaukee, Veeck perfected the concept of the gimmick giveaway. In order to promote baseball to families, Veeck faced the problem of attracting women to what had previously been a male pastime. He approached the issue aggressively by offering orchids to all women who attended the game on Orchid Night. During World War II, scarcity and rationing were the order of the day, so Veeck offered nylon stockings to female fans. A lucky fan won three pigeons at a subsequent Brewers game; another later won a 200-lb. cake of ice. (This took place prior to home refrigeration.) Later in the season, a fan was the beneficiary of a horse.

Weddings and birthdays are venerable special-occasion opportunities for businesses, but Veeck took this concept to new heights (or, some sniffed, depths). He staged weddings at home plate. On Manager Charley Grimm’s birthday, he sent a cake from which emerged a badly needed left-handed pitcher.

Today, ballparks offer a veritable international buffet of food choices. But prior to Bill Veeck, the “peanuts and Cracker Jack” of the song “Take Me Out to the Ball Game” comprehensively summarized the menu choices open to the fans. Veeck began the transition toward a wide range of snacks by introducing hot dogs, hamburgers and beer.

By the time Veeck arrived in Cleveland, he had learned how to attract fans. Now he had to master the art of keeping them. The most characteristic and revealing of all Bill Veeck’s marketing measures was Fan Appreciation Night. Veeck considered himself at one with his fans. He responded to critics who claimed his actions were in bad taste by claiming that his tastes were aligned with those of his fans – what appealed to him would also appeal to them. Veeck encouraged fans to bring their families to the ballpark by subtly suggesting that Indians fans were part of one great big extended family, with himself as patriarch.

Veeck came to Chicago after spending a few years away from the game. With his emotional and creative batteries recharged, Veeck unleashed a succession of new innovations that continued to revolutionize baseball marketing. The White Sox were the first team to print player names on the back of their home uniforms, a practice now followed by almost all major-league teams. Veeck provided fireworks displays on special occasions like July 4th. He also considered a White Sox home run a special occasion, because he pioneered the exploding scoreboard, which detonated an explosive firework when a home-team player cleared the fences. (In retaliation, Yankees’ manager Casey Stengel had his players light sparklers and parade outside the visitors’ dugout when Mickey Mantle homered against the Sox.) Actually, Veeck had a point because the White Sox won games with pitching, defense and base running; their power-hitting was the worst in the American League. More prosaically, Veeck also introduced electronic scoreboards to replace manually manipulated ones.

The second round of Veeck’s doubleheader as White Sox owner was his last hurrah as an owner. His health and stamina were waning, but he still found the energy to stage a Bicentennial Day at the park in 1976 and personally play the role of the peg-legged fifer in a Revolutionary War tableau. He added more innovations that have since become standard in the major leagues, such as a box containing fresh baseballs rising from underground behind home plate to replenish the umpire’s supply; and an electric blower to blow dirt off home plate. Veeck twice reactivated veteran coach Minnie Minoso long enough to allow the 50-plus Minoso to become the first ballplayer to play during five different decades.

Bill Veeck’s Financial Innovations

Bill Veeck was the greatest marketing genius in the history of American sports. Yet his financial innovations had an even greater impact on the sports and daily lives of Americans.

Veeck turned the Milwaukee Brewers into a successful minor-league franchise that won three America Association pennants in five years. He booked a $275,000 profit on his sale of the team and returned after World War II with this stake. But in order to afford a major-league franchise, Veeck still had to employ creative finance.

Veeck formed a common-stock debenture partnership to buy the Cleveland Indians. Each member put up a comparatively modest share of financial capital. The remainder of the purchase price was borrowed; the borrowing formed the debenture. The team itself was the lender, so that the partners could take (otherwise taxable) income from the team in the form of (non-taxable) repayment of the loans. This combination of leverage and tax avoidance greatly increased the return on investment. As economist James Quirk documented exhaustively, sports had heretofore offered rather mediocre rates of return, particularly for small- and middle-market-sized franchises. Veeck’s technique supplied part of the pattern for future franchise ownership: leverage and tax avoidance within a corporate framework.

In 1959, Bill Veeck supplied the lever that turned the world of professional sports on its axis. He reasoned that professional athletes are an asset to team owners in the same way as are (say) plant and equipment are to other business owners. Their physical talents and abilities deteriorate over time in the same way as machines wear out. So why shouldn’t team owners be able to claim a depreciation allowance on players as business owners do on capital assets? Of course, owners don’t own players in the same way as businesses do plant and equipment; it is the contracts (or, more precisely, contractual right to services) that the team owners own. But the principle is the same… isn’t it?

Veeck convinced the Internal Revenue Service that it was. This paved the way for what is now known as the “Roster Depreciation Allowance.” Upon purchase of a sports team, the purchaser can deduct the full purchase price as a business expense – under the heading of depreciation – over a 15-year period. Owners commonly keep two sets of books, one for business purposes that omits the deduction and one for public and IRS inspection including the deduction. It is interesting to note that, while businesses usually strive to turn the best possible profit-face toward the public, sports businesses are now so dependent on public subsidies that they minimize the public perception of their profit to exaggerate their need for the subsidies.

As students of economics, what do we make of the Roster Depreciation Allowance and Bill Veeck’s financial impact on professional sports? There is no doubt that player abilities do depreciate over time. Insofar as human capital is analogous to non-human capital, this means that we can conceptually assign a role to player depreciation in baseball and in sports generally.

The operative word in the previous sentence is “conceptually.” In practice, there is no perfect formula for calculating depreciation in business generally because no system of real-world cost accounting can correspond to the theoretically correct economic conception of “cost.” That caveat goes double – or triple or quadruple – when applied to player depreciation. A sports team consists of players whose abilities are declining – along with other players whose abilities are increasing. The rates of increase and decrease vary for each player. There is no way to “mark to market” all these changes in any objective way; we cannot even attempt such a task without spending inordinate amounts of time and money. So, instead, we use a great big blunt instrument like the “Roster Depreciation Allowance” and pretend that we are solving the problem. But have we made things better than they would be without any depreciation allowance at all – or worse? A priori, we cannot even know.

The ideal solution would be to simply allow businesses that prefer the depreciation accounting tool to use it. If they prosper, it must be because that form of accounting improves their operations on net balance. If not, the accounting method will fall into disuse. Alas, that is not what happens. Depreciation allowances like the Roster Depreciation Allowance are used in order to legally avoid taxes. And this is the clue to the solution to the problem.

The political left wing angrily claims that sports-team owners are avoiding taxes that the rest of us are somehow paying. The right wing claims that more and more lavish depreciation allowances will usher in more productivity and prosperity. Both sides are missing the point. The problem is not depreciation per se. The problem is taxes. Because both left and right now support big government, both take taxation for granted. Framing the issue in terms of an age-old punchline, both sides agree on what government is and are now arguing only about the price. Yet if taxation did not exist, the motivation for employing any uneconomic form of depreciation would be absent.

Bill Veeck could be said to have ushered in the modern era of public subsidies for sports teams, even though he would undoubtedly have thoroughly disapproved of those subsidies. His impact was not only accidental but also superficial, as we just showed. Somehow, it seems not only ironic but also fitting that Veeck himself apparently did not benefit from IRS approval of the Roster Depreciation Allowance. In order to qualify for it, 80% ownership in the team was a necessary precondition. Veeck himself advertised his 54% stake in the White Sox, going so far as to invite reporters to enjoy “54% of a cup of coffee” with him. Veeck was hugely unpopular with his fellow owners, never more than with Charles Comiskey of the White Sox, whose family had owned the team since the 19th century before Veeck’s group acquired a majority interest. Comiskey refused to allow Veeck to obtain the additional shares necessary to qualify for the tax benefit.

Using Economics to Improve the Team on the Field: the Last Link in the Chain

In baseball’s first century, team owners routinely used economic logic in the operation of the business end of baseball, which in turn often affected the performance of the team on the field. Since team performance is the most important element representing the “product” that fans buy when they support a sports franchise, fans were affected by the actions of team owners. Usually, these effects were adverse. This was true even though the interests of team owners and fans were ultimately aligned by the principle of voluntary exchange; if the owner’s product does not please fans, they will reject it and the owner will go broke.

Bill Veeck recognized the alignment of interests between fan and owner. He sought to serve the interests of the fan while serving his own. He strove to increase the quality of the produce fans received in every conceivable way by concentrating particularly on the non-performance aspects of the sports experience. He gave the fans numerous kinds of “fringe benefits” associated with game attendance. He made attendance a family oriented, family-friendly experience. He created a psychological bond between team and fans. He did all these things while increasing his stadium capacities, creating radio broadcast rights as a revenue source and using leverage and tax avoidance to improve his rate of return on investment.

That does not mean that Veeck ignored the necessity of putting a winning team on the field. Quite the contrary; Veeck’s teams always improved competitive performance markedly. The Milwaukee Brewers won three league pennants during his ownership. The Cleveland Indians won their first World Series Championship in 28 years within three years of his arrival. The Chicago White Sox won their first America League pennant in 40 years in his first year of ownership. Even the hapless St. Louis Browns improved their play under his stewardship.

Veeck was a student of baseball. He was not a slave to traditional methods and was perfectly willing to admit mistakes and change course when circumstances seemed to dictate it. In certain areas, his operations were a forerunner of today’s economic theory of baseball. But it cannot be said that Bill Veeck cracked the code of applying economic logic to the problem of improving team performance on the field.

From a purely business standpoint, this was his only failure as a baseball-team owner. Considering the magnitude of his achievements, we can hardly hold this limited failure against him. It was over a decade after his death when that code finally was cracked and economics finally assumed its full and rightful status in the field of professional sports. That episode will constitute the final installment in our ongoing history.