NEW YORK (Fortune Magazine) -- Sunday, May 6, 2007. Seventh-inning-stretch time at Yankee Stadium in the Bronx. The Yankees boasted a 3-0 lead, but to many New York fans the entire season was already in peril. The team's high-priced pitching staff had been decimated by injuries and ineffectiveness, and the Yanks had fallen 5 1D 2 games behind their resurgent rivals, the Boston Red Sox.
Then, as loudspeakers blared the final few bars of "Take Me Out to the Ball Game," Yankees public address man Bob Sheppard cut in and asked fans to direct their attention to the owner's box behind home plate. When fans looked up, what they saw was arguably the best pitcher in the history of baseball, microphone in hand. "Well, they came and got me out of Texas," ageless wonder Roger Clemens told the roaring crowd just hours after signing a $28 million contract to help save the Yankees' season. "I can tell you it's a privilege to be back." Watching the scene unfold on television, one Yankees part-owner was concerned.
Not about Clemens or his contract - but about who wasn't there. "In the past that would have been a George moment," this limited partner says of the Yankees' demanding, combustible, and usually larger-than-life principal owner, George Steinbrenner. "It was a big moment, the kind where you'd expect George to hold center stage. The fact that he wasn't there tells you what you need to know."
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Where is George? It's the question on the lips of many New York Yankees fans this year, as the most renowned franchise in American sports stumbles through a season that could wind up as its most disappointing in 50 years. A team loaded with All-Stars and future Hall of Famers, the Yankees were seven games behind the first-place Boston Red Sox at the end of July. Yet through nearly every one of this season's painful losses, the once-garrulous Steinbrenner - "the Boss," as he's known to friends and foes - has remained strangely silent.
Steinbrenner's silence is so out of step with what we know of the man that the baseball world is now buzzing with rumors that the Boss's health - mental and physical - is failing. (Through his spokesman, Steinbrenner declined to be interviewed.) Sportswriters openly question who's really pulling the strings in Yankeeland, and some baseball insiders and Yankees minority owners tell Fortune they believe 77-year-old Steinbrenner's diminished presence foreshadows the team's eventual sale. The topic of a sale "comes up all the time" in conversations with the other Yankees limited partners, says one Yanks minority owner, Edward Rosenthal, a retired steel executive. Adds another Yankees limited partner: "If I were handicapping it, I think we're looking at a sale of the team within three or four years." The questions about the future come at a crucial time - and not just because manager Joe Torre and general manager Brian Cashman have to figure out how to rescue the season. The highest paid roster in baseball hasn't won a World Series since 2000, and is still rolling the dice on older, high-priced free agents. And those players have failed to produce.
Off the field, Steinbrenner lost his chief lieutenant - son-in-law Steve Swindal - when Swindal's wife, Jennifer, filed for divorce in March. The team is building a new, $1.2 billion ballpark across the street from Yankee Stadium - a somewhat risky venture given skyrocketing construction costs, but one that comes with a potentially huge payoff, as our examination of some little-known Yankees financial data will show. To top it all off, Fortune has learned that the Yankees' cable channel, the YES Network, which airs Yankees and New Jersey Nets games, is up for sale. The top-rated regional sports network in the country, YES could fetch $3 billion.
The fate of the Yankees is no provincial concern. For Major League Baseball, the Yankees are a moneymaking machine. Not only do they pay more than $100 million a year in revenue sharing and MLB payroll taxes to baseball's 29 other teams, they also rain cash on any rival they visit.
The Yankees drew an average of 38,000 fans to their away games last year, the most of any team and 10,000 more than the MLB average. Yankee star power also helps MLB negotiate rich TV deals, and it's no coincidence that baseball's resurgence coincided with the most recent Yankee glory era, which started in 1996. Says one National League team president: "The Yankees' competitiveness is important to everyone." No one has been more crucial to that competitiveness than George Michael Steinbrenner III. Combining the dealmaking flair of Donald Trump with the showmanship of P.T. Barnum, he has shelled out astounding sums to put top performers in pinstripes - from Reggie Jackson, who helped the team win two World Series in the 1970s, to Alex Rodriguez, who's leading the majors in homers and RBIs. (Of course, there have been more than a few flops along the way. Remember Hideki Irabu? And what happened to $40-million-man Carl Pavano?)
Just as important, George played the press like a virtuoso. He realized early on that stoking controversy in the sports section could pay big dividends at the box office. At times he seemed willing to say almost anything to get his team on the back page of the tabloids or even the front page - whether it was second-guessing his manager's pitching moves or critiquing his star shortstop's overactive social life. The Boss's winning combination of bluster and bucks helped drive attendance from just over one million in 1973, his first season as owner, to four million last year. And the team, which George bought from CBS for a mere $10 million, is now worth at least $1 billion - a 100-fold gain.
Questioned about Steinbrenner's health, Yankees officials insist the Boss is still going strong. They claim his withdrawal is intentional - that he wants the attention on the team rather than himself. They also want to put to rest any speculation that the team might be sold. Indeed, selling YES could well be part of a long-term plan to keep the Yankees in the hands of the Steinbrenner family. A windfall from YES, of which the Yanks own 36%, would provide a cushion to pay off any future estate taxes (though sources say George has already moved a lot of his Yankees equity to his four kids). It would also give the family capital to sign expensive free agents, pay draft picks, and otherwise run the business. "The reason they're cashing out is in very large part so they'll have enough cash to continue to own the team," says one source familiar with the plans to sell YES. "Right now the Yankees hardly make money because their payroll is so excessive." Two Yankees sources tell Fortune the team hasn't paid out profits to limited partners in nearly ten years. (Yankees chief operating officer Lonn Trost responds through a spokesman that "there have been distributions in the past, and the expectation is there will be more in the future.")
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As far as profits go, one could argue that YES, not the team, is the true gem of the Yankees' business empire. Baseball franchises' earnings have always been skimpier than their well known brands might suggest - in part because of their lofty pay rolls. The Yankees launched the network in 2002 - along with financial partners Goldman Sachs and former Nets owner Ray Chambers - as an attempt to better monetize the Yankees' brand. And it has delivered beyond all expectations. Sources close to the team and network believe YES could fetch $3 billion to $3.5 billion, which would mean it's worth about three times as much as the Yankees franchise itself. (Possible bidders: Cablevision, Comcast, Verizon, and News Corp.) Publicly Yankees and YES officials remain noncommittal about selling the network. "Absolutely not," Yankees president Randy Levine replies when asked if YES is for sale - though not before acknowledging some "testing of the market." Gerry Cardinale, a Goldman managing director and YES board member, elaborates: "We're testing the waters with a limited universe of quality buyers. We would consider selling only if we receive a full and fair price." One source tells us to expect a deal before the end of the summer.
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While the sale of YES would provide a welcome cash infusion, it would do nothing to resolve the Yankees leadership issue.
The Yankees are organized as a limited partnership. Apart from Steinbrenner family members, the Yankees have 23 limited partners, who together own a little under half the team. The roster boasts some business all-stars, including Chicago financier Lester Crown, Allen & Co. chairman and former Coca-Cola president Donald Keough, former PaineWebber CEO Donald Marron, former Capital Cities--ABC CEO Thomas Murphy, Broadway producer James Nederlander, and mutual fund legend Michael Price.
But the limited partners exercise almost no influence over the fate of the team. One of their former brethren, the late John McMullen, once quipped that "there is nothing more limited than being a limited partner in the Yankees." The current limiteds share his sentiment but view themselves more as privileged fans than profit-hungry investors. "That's okay," one says after complaining that the financial statements the team provides are short on detail. "I knew what I was getting into." So control of the Yankees has always been firmly in George's hands. Until recently his son-in-law Steve Swindal functioned as his No. 2 (official title: chairman of Yankee Global Enterprises) and for many years was widely assumed to be his successor. Well regarded inside and outside the organization, Swindal had a hand in nearly every off-the-field decision, from YES to the building of the new stadium. But after Swindal's wife filed for divorce in March, Swindal was forced out.
With Swindal gone, the role of chief lieutenant seems to have fallen to Harold "Hal" Steinbrenner, 38, George's youngest son.
Hal represented the Yanks at the MLB owners' meeting in May, according to an executive with another club. Associates describe Hal, who runs the family's hotel business, as bright, capable, and driven - much like his father. "Hal is probably more like George than any of his other children," says one Yankees limited partner, who, like many of the current and former Yankees insiders interviewed for this story, wished to remain anonymous. "He's a very strong businessperson," adds John Swart, a Florida real estate developer who worked with Hal on a hotel project. "If Hal says he'll get something done, you know he will."
In an interview with Fortune, the usually press-shy Hal is forthcoming - to a point. He declines to put a label on his stepped-up role with the Yankees: "That's a decision for George." Ever the diplomat, Hal is quick to tout the contributions of older brother Henry (known as Hank) on the baseball operations side as well as mention the involvement of his sisters, Jennifer and Jessica, and Jessica's husband, Felix Lopez. Nevertheless, Hal acknowledges that his Yankees responsibilities did expand after Swindal's exit. "When he left, of course there was a void," says Hal, who has an MBA from the University of Florida. "Let there be no doubt that I will fill that void enthusiastically." Hal wasn't always so keen on following in his dad's footsteps.
Oh sure, there were some great memories made over the years. "The one that sticks out was 1977," Hal says, referring to the Yankees' first World Series championship under his father. "I remember going down to the dugout and getting my picture taken with my dad and [then-manager] Billy Martin. I think Billy was actually holding me." Martin (who died in 1989) was hired and fired four times by Steinbrenner and knew better than anyone how difficult a boss George could be. Hal would find out for himself years later. Hal worked full-time for the team in the '90s, and by many accounts, including Hal's own, his stint was rocky. "George was a pretty challenging boss to work for right out of college and graduate school," Hal says. "I don't think that's much of a surprise to anybody."
One reason Swindal became the heir apparent in the first place is that neither Hal nor Hank, who raises thoroughbreds in Ocala, Fla., wanted the job. "Hank has no interest," says limited partner Rosenthal. "As for Hal, I don't think he would take that big a responsibility. I've been to many meetings with Hal, and I don't think I've ever heard him open his mouth." Hal's ambivalence may well run deeper than the typical father-son chafing. "He just never struck me as being very happy," another Yankees limited partner says of Hal's first go-round with the team. "I always got the sense that Hal was someone who wanted to chart his own course in life." That, of course, would be nearly impossible to do from the Yankee Stadium owner's box.
Hal, who lives in Florida, acknowledges some concern that his increased role will take him away from his family. "But what I've discovered," he says, "is that, one, we've got a lot of good field commanders, and two, with technology being what it is, there are a lot of different ways to communicate and run a company even if you're not actually there."
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His father's health, which has become the focus of much speculation but little certainty, is a topic Hal will not address. Yankees president Levine says he talks to Steinbrenner "ten times a day" and insists the Boss is still making the important decisions. Daniel McCarthy, a Yankees limited partner and a longtime Steinbrenner friend, says Steinbrenner seemed "100% sharp" when he saw him in the spring. Howard Rubenstein, George's affable PR man, also vouches for his well-being.
Thing is, those assurances don't jibe with what other well-placed sources say --reluctantly - about the Boss's health.
A baseball executive - someone who has seen Steinbrenner this year and talks with Yankees officials - describes him as "inconsistently lucid." A New York businessman who knows Steinbrenner reports that "George is very sick." An owner of another team says that the Yankees ownership picture won't become clear until Steinbrenner steps aside or dies.
On the subject of holding on to the team, Hal is emphatic.
"There's no thought of selling the team," he says. "It's been in the family for 35 years, and it's going to stay that way." While Hal certainly sounds sincere, it's impossible not to wonder whether he's echoing the wishes of an ailing father rather than offering his own views. And if Hal is shading the truth so as not to hurt his dad, who could really blame him?
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Whatever Hal says now, the lure of a huge windfall could change the family's thinking later. "A billion dollars is a billion dollars," says one moneyman with ties to the Yanks. "Look at the Bancrofts. Everybody said there's no way that family is going to sell Dow Jones [publisher of the Wall Street Journal]. Then someone comes along and offers 65% more than it's trading for." Were the Yankees to be auctioned off, the pricetag for the team alone could easily soar past $1 billion - considering the global reach of the Yankees brand, the benchmark that will be set by the upcoming sale of the Chicago Cubs (for a sum that could approach $1 billion), the untapped revenue sources (a Yankees hotel or restaurant chain?), and the fact that many if not most of Wall Street's heavy-hitters are Yankees fans (or have children who are). "My golden retriever could sell the Yankees," jokes one sports banker. "It would be the greatest bidding war in the history of bidding wars." J.P. Morgan managing director Richard Walden, one of the investment bankers helping sell the Cubs, says the Yankees would fetch "at least" $1.5 billion, adding, "I actually think three years from now that will look conservative." He may well be right, and the new stadium is one reason why.
To be sure, its $1.2 billion price tag is enormous - about $400 million more than the one the crosstown Mets are now building in Queens. The Yankees are footing the entire $800 million cost of construction. (New York State and New York City are kicking in the remaining $400 million in the form of land acquisition, infrastructure improvements, and tax breaks.) Yet as expensive as the new stadium will be, nearly everyone we interviewed believes it will ultimately prove a gold mine - one that will dramatically improve the Yankees' value, should the team be sold. "The cash flows coming out of the new building as compared with the old one are going to be ridiculous," says one Yankees source.
How ridiculous? A window opened into the normally secretive world of Yankees finance last year when, in conjunction with New York City's Industrial Development Agency, the team sold $940 million in tax-exempt municipal bonds to finance the stadium's construction. The bond prospectus provides a rare if partial look at the Yankees' stadium revenues.
From 1997 to 2005, growth in stadium revenue far outpaced the rise in attendance. Annual attendance rose 58%, from 2.6 million to 4.1 million, whereas ticket and luxury-suite revenue soared 202%, from $52 million in 1997 to $157 million in 2005. The new stadium will boast more than three times as many luxury boxes as the old, and as a result, ticket-and-suite revenues are projected to soar to $253 million when the new ballpark opens in 2009.
They will probably be much higher. The $253 million figure in the prospectus assumes attendance in 2009 of 3.4 million, which is the equivalent of 79% of the new stadium's 53,000- person capacity over 81 regular-season home games. Given that the Yankees sold 90% of their tickets last year, 88% in 2005, and are on pace for another 90% showing in 2007, it's hard to imagine ticket sales sagging when the new stadium opens. Also, the ticket-and-suite figures don't include two other sources of stadium revenue - concessions and sponsorships - that Levine expects will get a boost from the new ballpark. The Yankees' current concessionaire, Centerplate Inc., obtained 9.6% of its 2006 sales - the equivalent of $62 million - from its contract with the Yankees, according to SEC filings. Hal Steinbrenner tells Fortune that the Yankees are considering handling concessions on their own in the new stadium. Were the Yankees to go that route, the team could conceivably net $30 million annually on gross concession sales of $100 million, estimates former Yankees marketing director Joseph Perello.
As for sponsorships, Levine says the Yankees are not planning to sell traditional naming rights: "It's going to be called Yankee Stadium." Nevertheless, according to the bond prospectus, the team's lease with New York City (which will own the new stadium) stipulates that the Yankees keep "all cash and receivables" related to "naming rights" and "advertising" and specifically raises the possibility of the Yankees' selling naming rights "for parts of the stadium." In other words, fans may enter a building called Yankee Stadium but find themselves sitting in the Bank of America bleachers or purchasing snacks at the Pfizer food court. Perello, now a sports consultant, thinks the Yanks could collect $50 million to $75 million a year in sponsorship dough this way.
What will New York taxpayers get in return for all their Yankee largesse? Very little - unless you're a local pol with a hankering for hardball. The Yankees will pay a mere $10 a year in rent in the new ballpark, down from about $10 million in the old one. No, we didn't leave off some zeros; it's typical of the sweetheart deals cities make to keep teams in town. And this one comes with a cherry-on-top kicker: According to the prospectus, city officials get their own luxury box "for all regular-season team home games."
Of course, the Yankees are responsible for $51 million a year in debt service. Yet even that expense comes with a silver lining: It will help reduce the Yankees' revenue-sharing obligations. Baseball's 2002 collective-bargaining agreement permits teams to deduct stadium debt service and construction costs when calculating revenue sharing. Bottom line? Baseball's 29 other teams will effectively bear a third of the cost of the Yankees' new ballpark. "It's a classic tax shelter," one baseball insider says. "Not only do you get the benefit of added revenues, but you get a major revenue-sharing deduction as well."
A golden era for the Yankees' bottom line seems to be dawning just as the George Steinbrenner era is drawing to a close. Still, it's worth pondering whether Hal or any new owner will be able to maintain the fan interest engendered by his one-of-a-kind dad. Even during the Yanks' Mantle and Maris glory years, the team never drew more than two million fans. It wasn't until Steinbrenner turned every trade, every free agent signing, and every clubhouse squabble into a marketing event that the team became as successful at the box office as it was on the field. "He did want to be on the back page," Hal says of his father. "He always had a wonderful sense of how to promote things."
Note the past tense. It speaks volumes about the Yankees' future. 
