Category Archives: Business – General

Thoughts on the regulation of minor league football and basketball

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Several developments over the past month or so have prompted me to think about the National Collegiate Athletic Association‘s regulation of minor league football and basketball. Although it is an unincorporated association that includes many of the best universities in America, the NCAA has developed into a hulking and bloated bureaucracy that is the poster child for ineffective and misguided regulation.
One of the developments that triggered my thinking was the disclosure this past week that one of the best players on each of the University of Texas’ basketball, football and baseball teams had been declared academically ineligible for the spring semester. That’s not much of a return on the astounding $1.6 million a year that UT is currently spending on academic assistance for its athletes.
This UT academic problems come on the heels of the announcement last month that the NCAA — whose rules and regulations manual already resembles the Internal Revenue Code in terms of size and complexity — approved the first phase of a “landmark” academic reform package under which about 30 percent of Division I football teams (including UT’s) would lose scholarships if the reforms were to be implemented immediately. The demand for professors with expertise in developing basket-weaving curricula is going to increase at more than a few NCAA member institutions in response to this latest NCAA initiative.
Meanwhile, partly as a result of the NCAA’s strict regulation of compensation that can be paid to athletes in intercollegiate football and basketball (i.e., essentially scholarships), salaries for college coaches skyrocket at the same time as a black market for compensating college football and basketball players continues to run rampant, despite the NCAA and now the government‘s efforts to curtail it.
Finally, a college baseball game in Houston over the weekend between Rice and Texas A&M during the Minute Maid Classic Baseball Classic drew almost 20,000 fans. That’s right — a college baseball game, in February, drew almost 20,000 fans.
What are we to make of all of this?
Well, a bit of historical perspective helps. For all of its faults, Major League Baseball is the only one of the three major professional sports (football, basketball and baseball) that has capitalized and subsidized a thorough minor league development system. Oh, the NBA has its development league and the NFL has NFL Europe, but both of these ventures pale in comparison to the depth and success of baseball’s minor league system. As a result, it’s relatively rare for a baseball player to play in the Major Leagues without spending at least some time playing minor league baseball. In comparison, relatively few of the players in the NFL or the NBA ever play in NFL-Europe or the NBADL.
The reason for this is not that professional football and basketball players do not need to develop their skills in a minor league. Rather, the reason is that professional football and basketball simply rely on a ready-made minor league systems to develop most of their players — that is, intercollegiate football and basketball.
This odd arrangement arose partly as a result of how professional sports developed in America over the past century. On one hand, professional baseball was already well-established in the late 19th century when intercollegiate football and basketball started taking root. Thus, MLB developed its minor league system as a necessary means to develop its players decades before intercollegiate baseball became popular on college campuses. Intercollegiate baseball has only become a source of player development for professional baseball over the past couple of decades or so, and it is still rare for a college baseball player to go straight from playing college baseball to playing in the Major Leagues.
On the other hand, despite the popularity of the NFL and the NBA today, the success of of those professional sports is still relatively recent in comparison with MLB’s business success over the past century. Until the 1960’s in regard to football, and the 1980’s in regard to basketball, neither professional sport was particularly vibrant financially or as popular with the public as their intercollegiate counterparts. Thus, until relatively recently, neither the NFL nor the NBA has been in a financial position to capitalize a minor league system of player development similar to MLB’s minor league system.
However, now that the NFL and the NBA owners have the financial wherewithal to subsidize viable minor league systems, they have little economic incentive to do so. Inasmuch as the NCAA and its member institutions have transformed intercollegiate football and basketball into a free minor league system for the NFL and the NBA, the owners of professional football and basketball teams have gladly accepted the NCAA member institutions’ generosity.
The arrangement has been extraordinary successful for professional football and basketball owners, who have seen the value of their clubs skyrocket over the past two decades. A substantial part of that increase in value is attributable to avoiding the cost of developing a minor league system, as well as taking advantage of liberal public financing arrangements for the construction of new stadiums and areanas. That latter point is a subject for another day.
In comparison, the NCAA member institutions’ acceptance of minor league professional status has not been nearly as successful. Yes, the top tier of intercollegiate football and basketball programs have had been successful financially, but the athletic programs of most NCAA member institutions struggle financially.
Moreover, almost every NCAA member institution compromises academic integrity at least to some extent in order to attract the best players possible to play on the institution’s football and basketball teams. As a result, respected academics such as UT Chancellor Mark Yudof regularly have to endure troubling scandals (in Yudof’s case, as president of the University of Minnesota) that underscore the tension between the business of minor league professional sports and the academic integrity of NCAA member institutions. The NCAA member institutions’ reaction to these conflicts has generally been to increase regulation with usually unsatisfactory results.
So, what is the solution to this mess? Well, it’s doubtful that more regulation of college football and basketball is the answer. Rather, my sense is that the model for reform is right in the front of the noses of the NCAA member institutions — i.e., college baseball.
Due to MLB’s well-structured minor league system of player development, a baseball player emerging from high school has a choice: Do I accept a moderate compensation level to play professional ball in the minor leagues in the hope of developing to the point of being a highly-paid MLB player? Or do I hedge the risk of not developing sufficiently to play at the MLB level by accepting a subsidized college education while developing my skills playing intercollegiate baseball?
This simple choice is the key difference between intercollegiate football and basketball, on one hand, and intercollegiate baseball on the other. Except for the relatively few high school basketball players who are sufficiently developed to be able to play professional basketball in the NBA or Europe immediately after high school, high school football and basketball players’ only realistic choice for developing the skills to play at the highest professional level is college football or basketball.
Consequently, each year, the NCAA member institutions fall over themselves trying to accomodate a large pool of talented football and basketball players who have little or no interest in collegiate academics. Rather than placing the cost and risk of these players’ development on the professional football and basketball clubs, the NCAA member institutions continue to incur the huge cost of subsidizing development of these players while engaging in the charade that these professional players are really “student-athletes.”
In comparison, most top college baseball teams are generally comprised of two types of players — a few professional-caliber players combined with a greater number of well-motivated student-athletes. That is an attractive blend of players, and the tremendous increase in popularity of college baseball over the past decade reflects the entertaining competition that results from such a player mix. Heck, the college baseball system is structured so well that even a small academic institution can win the National Championship in college baseball.
Nevertheless, transforming the current minor league system in college football and basketball into the college baseball model is going to take fundamental reforms within the NCAA. Primarily, it’s going to require the courage and resilience of the presidents of the NCAA member institutions, who need to stand up and quit being played as patsies by the NFL and NBA owners who prefer to foist the risk of funding and administering minor league systems on to the NCAA member institutions.
Moreover, such a transformation of college football and basketball from entrenched minor league systems will be risky. The quality of play in college football and basketball will suffer a bit, even though the competition likely would not. In time, such a transformation would force both the NFL and the NBA to expand their minor league systems to develop the skills of the pool of physically-gifted athletes who prefer to develop their skills as minor league professionals rather than as college students. Competition from such true minor league football and basketball teams might result in a decrease in popularity of college football and basketball.
However, such a transformation would remove most of the galling incentives to compromise academic integrity and to engage in the black market for compensating players that are rife under the current system. Likewise, once viable professional minor leagues in football and basketball exist, football and basketball players will have the same choice coming out of high school that has generated the well-motivated mix of players that has made college baseball such an entertaining intercollegiate sport over the past decade.
Now that type of choice — rather than the choice of which basket-weaving course to take in order to remain eligible — is the kind of choice that NCAA member institutions should be encouraging.

What to do with Big Oil’s profits?

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You’ve to to hand it to the New York Times. Not many publications have the imagination (or is it bias?) to portray Big Oil’s current passing along of profits to its investors as a problem for the industry.

The same old Enron story

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Following on this earlier post regarding the new Enron documentary Smartest Guys in the Room, the Houston Press’ Joe Leydon is breathless in praising the documentary:

Please don’t misunderstand: Alex Gibney has no great beef with capitalism. Indeed, many of his best friends back in Summit, New Jersey, are investment bankers. But when Gibney looks at the prodigious rise and precipitous fall of Enron in Enron: The Smartest Guys in the Room, the remarkable documentary that premiered January 22 at the Sundance Film Festival, the award-winning filmmaker sees the collateral damage of an economic system dangerously out of whack. And when he looks at Ken Lay and Jeff Skilling, the former Enron executives now charged with perpetrating egregious fraud and deception during their stewardship of the now-bankrupt company, Gibney sees the lead players in a worst-case scenario that eventually could undermine capitalism itself.

My goodness. I haven’t seen the Enron documentary yet, so I will reserve comment on it until I do. However, it is staggering that presumably bright people such as Mr. Leydon write such drivel in a film review without even seeking so much as a comment from an objective business or legal commentator regarding the film’s portrayal of Enron. I mean, how many “Sherron Watkins good/Enron bad” stories are we going to have to endure before the mainstream media (“MSM”) or moviemakers move on to some of the really important issues raised by the Enron saga? At this point, does anyone even recall that Ms. Watkins’ famous memo to Ken Lay essentially depicted Enron’s now infamous accounting problems related to Andrew Fastow‘s off-balance sheet partnerships as a manageable public relations problem?
To understand this phenomena, it is helpful to take some time and review Professor Ribstein’s recent post and his interesting law review article — Wall Street and Vine: Hollywood’s View of Business — on how business is portrayed in film. Here is the abstract and the conclusion of Professor Ribstein’s article:

American films have long presented a negative view of business. This article is the first comprehensive and in-depth analysis of filmmakers’ attitude toward business. It shows that it is not business that filmmakers dislike, but rather the control of firms by profit-maximizing capitalists. The article argues that this dislike stems from filmmakers’ resentment of capitalists’ constraints on their artistic vision. Filmmakers’ portrayal of business is significant because films have persuasive power that tips the political balance toward business regulation.
Generations of filmgoers have sat in darkened theatres regaled by larger-than-life images of the evils of capital. This consistent message is not mere happenstance. Films are made by people who work for and have particular attitudes about business firms. Moreover, the fantasy about business that audiences see presented in films has real world political effects in government regulation of business. The trial lawyer as hero becomes the trial lawyer as vice-presidential candidate. Filmmakers? attitude toward business may change as the medium evolves. In the meantime, the best way to counteract films? misleading message about business is to let business speak for itself.

So, while moviemakers and the MSM continue to trot out stories on the Enron morality play, they ignore the harder but more compelling stories — the sad case of Jamie Olis, the federal government blithely depriving thousands of innocent people jobs by pursuing a questionable prosecution of Arthur Andersen, the “Justice” Department sledgehammering businesspeople into pleading guilty to dubious criminal charges out of fear of receiving of what amounts to a life sentence if they risk asserting their Constitutional right to a trial, how Enron’s corporate governance system contributed to the company’s collapse. The list of fascinating issues goes on and on.
As Professor Ribstein notes, depth does not sell well in Hollywood, at least in regard to portrayal of business in films. But maybe, just maybe, a Pulitizer Prize is waiting for an enterprising reporter who is willing to go beyond the simple story of Enron and examine the complex issues that are really at the core of the fascinating Enron tale.

Carly Fiorina’s Seven Deadly Sins

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The best summary I have seen to date of why Carly Fiorina failed at Hewlett Packard is contained in this Rich Karlgaard op-ed today in the Wall Street Journal ($). Karlgaard, who is publisher of Forbes and author of Life 2.0 (Crown Business, 2004), notes Ms. Fiorina’s seven basic failures in managing HP:

1. Acting like a rock star. . . In the U.S., only entrepreneurs get to act as rock stars. Hired guns do not. . . We love our entrepreneur rock stars so much we let their sins slide. Carly was excoriated for a boneheaded move — giving Compaq shareholders 37% of HP’s profitable printer division in a swap for Compaq’s flagging PC business. Founder-CEOs are allowed to get away with far worse. . . Jobs’s first bold act after reassuming Apple’s reins in 1996 was to buy NeXT Software at an inflated $400 million and kill the company. Because he owned NeXT, Apple’s purchase made him rich. Yet Apple shareholders forgave Jobs because, well, he’s a rock star. And he has made good on that faith.
2. Failing to see the cheap revolution. . . . Dell is on the right side of the cheap revolution divide. It sells powerful servers for under $5,000 and keeps overhead low in Round Rock, Texas, where the average three-bedroom house sells for $200,000. HP sells servers for tens of thousands and keeps high overhead in Palo Alto, Calif., where the average three-bedroom sells for $1,500,000.
3. Failing to see the consumer revolution. A huge shift has occurred in the last five years. The coolest tech products now go straight into the consumer market. . . Carly has ineffectively maneuvered HP into this consumer field.
4. Obsession with size over flexibility. . . we need to go deeper and challenge the very premise of these mergers: that large scale is a requirement of success in the global economy. By merging with Compaq, Carly clearly believed this. But maybe the opposite is true — that speed and flexibility now trump scale.
5. Letting talent go. . . Aside from chasing away shareholder capital, she chased away talent, from Michael Capellas on down. For high-IQ tech companies, talent loss may be the greater sin. The most dynamic — Microsoft and Oracle during the ’80s and ’90s, and Google now — have always been obsessed with recruiting and keeping talent.
6. Not tolerating strength in others. . . the good [CEO’s] tolerate strength in others; the bad ones don’t. Gates has Steve Ballmer. Michael Dell has Kevin Rollins. Larry Ellison has Jeff Henley. Carly had no one like that.
7. Lack of focus. We conclude with Peter Drucker’s other great insight: Effective CEOs pick two tasks and devote their energies there. When those tasks are done, they don’t go to #3. They make a new list. One overlooked trick to maintaining focus, Drucker told me, is to cut travel. “Make your reports come to see you. Use technology, it’s cheaper than traveling. I don’t know anybody who can work while traveling. Do you?” Carly, globe-hopping in her Gulfstream, worked 100-hour weeks. But she was focused on too many tasks. Which is no focus at all.

Read the entire op-ed, and then think about how HP’s corporate governance promotes inflexible and ill-conceived management decisions such as those made by Ms. Fiorina. Professor Bainbridge also has some interesting observations on the big picture meaning of the HP Board’s action in terminating Ms. Fiorina’s employment.
On an anecdotal note, I am friends with several former Compaq executives who now work for HP in Houston. In discussing HP’s problems several months ago with one of my friends who is an HP sales exective, I asked him to sum up why he thought that HP was having so many problems integrating its various units into a cohesive whole. My friend’s reply was quick and authoritative:

“Because we are such a pain in the ass to deal with.”

By the way, my friend noted that he had passed that exact thought along personally to Ms. Fiorina on several occasions.

Kremlin tightens grip on oil and gas reserves

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In a trend that has been developing over the past year in connection with the Russian government’s handling of Russian oil giant OAO Yukos, the Russian government announced Thursday that foreign-owned oil and gas companies will not allowed to bid at auctions this year for permits to develop several big Russian oilfields unless the companies have at least a 51% Russian-owned affiliate participate in the auctions. The new restrictions will further undermine Western investor confidence toward investing capital in the Russian oil and gas industry, which is already undergoing a sharp decline in growth.
Double-digit increases in prodution over the past several years has made Russian production one of the primary sources of additional supply that has offset rising demand from China and developing countries. However, production has now fallen for four straight months and it is widely expected that there will be an abrupt slowing in growth later this year.
The Kremlin’s additional restrictions on foreign investors also rebuffs the Bush Administration’s efforts to increase cooperation between Western oil and gas companies and the Russia government in the energy sector. The Administration held a summit conference earlier this month in which such business matters were discussed, but it appears that the Administration’s lobbying has gone over like a lead balloon with the Putin regime.
Meanwhile, in updating the Yukos case, U.S. Bankruptcy Judge Letitia Clark will hear arguments next Wednesday in Houston on a motion to dismiss the Yukos chapter 11 case that is currently pending in Houston.

On Philip Johnson

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Wall Street Journal architecture critic Ada Louise Huxtable writes this interesting op-ed ($) on the late Philip Johnson‘s career, in which she makes this interesting observation:

His fame made him the “signature architect” for corporate headquarters and commercial developers. The AT&T Building’s much-publicized “Chippendale” top put him on the cover of Time magazine, cradling the model in his arms. But his nimble intelligence and excellent eye failed to produce more than a pictorial pastiche that was flat and one-dimensional or a shallow sendup of the past. What was meant to be monumental was merely big and flaccid.
Whatever Philip Johnson’s legacy turns out to be, it will not rest on his buildings. His dedication to the art that was central to his existence, his proselytizing zeal for new work that pushes concept and practice beyond existing limits, his driving belief in architecture as the defining art of the present and the past, did much to re-establish a sense of the importance of the way we build in an age that worships the beauty of the bottom line. In his own way, perhaps he did change the world.

Updating the Yukos case — Yukos shareholder sues Russian Government

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Group Menatep Ltd. is the offshore entity under which jailed Russian billionaire Mikhail Khodorkovsky and several of his associates hold the controlling stake in Russian oil company and American debtor-in-possession OAO Yukos. Here are the previous posts on the fascinating Yukos case.
Yesterday, Group Menatep asserted a tidy $28.3 billion damage claim against the Russian government for its handling of Yukos under the European Energy Charter Treaty, a 1994 treaty that, among other things, protects investors against unfair treatment and expropriation of assets without fair compensation.
This new litigation front arises just a week before U.S. Bankruptcy Judge Letitia Clark in Houston is scheduled to hear arguments on a motion to dismiss Yukos’ chapter 11 case in Houston. The availability of another legal forum in which Yukos’ owners can assert their claim for compensation from the Russian government may actually work to undermine Yukos’ opposition to dismissal of its chapter 11 case in the American civil justice system.

News flash: Carly Fiorina steps down at HP

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Carly Fiorina has stepped down as Hewlett-Packard‘s chairman and chief executive officer, effective immediately.
Here’s why.
Here are previous posts on HP’s saga over the past year.
By the way, HP shares are surging in early trading.

Look who’s interested in Temple-Inland

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Austin-based Temple-Inland Inc. — the big lumber and financial services company — announced yesterday that one of Carl Icahn‘s investor vehicles — Icahn Partners Masters Fund LP — had requested government approval to buy as much as $1 billion of the company’s stock. The company’s stock price was up a cool 16% on the news. Here are several posts on what Mr. Icahn has been up to over the past year. Here is the Bloomberg News article on the development.

Landry’s makes Vegas play

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As predicted in this prior post, Houston-based Landry’s Restaurants Inc. announced yesterday that it is buying the Golden Nugget hotel-casino in downtown Las Vegas. The acquisition comes on the heels of a Landry’s junk bond offering last year amid speculation that the company was finalizing a strategy to attempt to add the potentially lucrative — but highly competitive — gambling business into its casual restaurant business.
Built almost 60 years ago, the Golden Nugget is the largest and probably the best of the 14 casinos in the troubled downtown area of Las Vegas, which has faded in recent years as numerous mega-casinos have been built in the Strip area of Vegas. The Nugget has just over 1,900 hotel rooms and employs over 2,500 employees.
Landry’s will pay Poster Financial Group Inc., the owners of the Golden Nugget, almost $300 million for the casino, including $140 million in cash and the assumption of approximately $155 million in debt.
Nevertheless, Landry’s may be picking up a bargain. Timothy Poster and Thomas Breitling — who were the founders of travel Web site Travelscape.com (later sold to Expedia) — are the owners of Poster Financial Group, which bought the Golden Nugget properties in downtown Vegas and Laughlin, Nevada from MGM Mirage Inc. in mid-2003 for $215 million. Poster Financial later later sold the Laughlin property for $31 million, but their operation of the Golden Nugget Las Vegas has not gone smoothly, as their dubious strategy of catering to high rollers resulted in a substantial drop in the casino’s “cash flow,” as the Vegas types say. Messrs. Poster and Breitling also decided to take part in the Fox reality television show, “The Casino,” which turned out to be a real turkey and was not good public relations for the casino. In short, it appears that Messrs. Poster and Breitling have had their fill of the gaming business for the time being.
The market responded favorably to the announcement, as Landry’s shares were up 12% to $31.95 on volume of 2.5 million shares yesterday afternoon on the New York Stock Exchange. Average daily volume in Landry’s shares is normally a tad over 300,000 shares.
Landry ‘s is a national restaurant company that owns and operates 300 restaurants, including Joe’s Crab Shack, Rainforest Cafe and Landry’s Seafood House. Landry’s CEO Tilman Fertitta, who founded the company and controls about a quarter of the company’s outstanding stock, is the cousin of the Fertitta family that runs Station Casinos Inc. Landry’s had about $1.1 billion in revenue during its most recently audited fiscal year and currently employs more than 30,000 people.