This is the second of a three-part series examining the function and structure of Red Sox ownership and governance. Part 1, on Thursday, investigated the role of Red Sox owners in running the organization.
It started as a regionally defined sports undertaking. But in recent years, the owners of the Red Sox have broadened their ambitions to encompass global sports business ventures, and now there are those who wonder whether what began as the purchase of the Red Sox is in danger of becoming as bloated and ungovernable and financially unsustainable as the Roman Empire.
When John Henry, Tom Werner and Larry Lucchino acquired the Red Sox, their purchase was somewhat narrowly focused. The triumvirate -- in concert with fellow investors Les Otten, the New York Times Company and other limited partners -- created a sports investment company, then called New England Sports Ventures (NESV), to purchase a controlling stake in both the Red Sox and NESN in 2001, gaining operational control of the team and network in early 2002.
At the time, the interests were small enough, narrowly defined enough and closely aligned enough that it made sense for Lucchino to have involvement in both of the subsidiaries of NESV. At that stage, Lucchino, Henry and Werner were all involved as a regular matter of course in NESN affairs.
Expansion started subtly, with the creation of Fenway Sports Management (then known as Fenway Sports Group) in 2004, a sports marketing and consulting arm of NESV. However, in 2007, the owners took a bolder step to diversify their investments, in no small part because baseball's revenue-sharing structure represented a significant financial burden that limited profitability.
And so, Sox owners decided to use their brand to expand into new territories, starting with the purchase of a 50 percent stake in Roush Racing (subsequently renamed Roush Fenway Racing) and expanding into aggressive investment in other sports undertakings.
Roush served as a prelude to the addition in October 2010 of an even more ambitious and bold purchase: Liverpool Football Club, acquired for a reported £300 million ($476 million) in October 2010. After the acquisition of Liverpool, NESV was rebranded as Fenway Sports Group, a signal of the growing ambitions of the operation.
"The name change occurred following the acquisition of Liverpool FC, which solidified the more global nature of the company's diversified holdings and set its course for more world-wide pursuits," pronounced the press release announcing the rebranding.
Now, there are five departments within FSG, each of which has its own CEO or president:
Red Sox (Larry Lucchino)
NESN (Sean McGrail)
Fenway Sports Management (Sam Kennedy)
Roush Fenway Racing (Steve Newmark)
Liverpool Football Club (Ian Ayre)
Operationally, there are varying degrees of involvement and delegation regarding the three key Red Sox figures. Just as is the case with the Red Sox, Henry carries the title of principal owner and Werner that of chairman, but Werner used the term "co-managing partners" to describe their involvement in the operations of Fenway Sports Group. Both portrayed equal involvement in the organization's sundry undertakings, with Henry stating that he and Werner are "involved in all FSG matters," according to Henry, though it is safe to say that they are not as intimately involved with the governance of, for instance, Liverpool, as they are with the Red Sox.
Henry notes that he's been to Liverpool "once in the last year." Werner says that he goes to Liverpool "a handful of times a year. That is operating as a stand-alone enterprise." That stands in contrast to the Sox, where both are regular attendees of games and frequently spend time meeting in the team's offices.
Lucchino has total day-to-day involvement in the Red Sox, limited involvement with NESN and no real participation in the other undertakings.
"They are separate entities," Lucchino said of the FSG subsidiaries. "NESN is separate from the Red Sox. Roush Fenway is a separate entity. Liverpool is a separate entity. These entities depend on operating teams. But there is an overlap at the ownership level. When you're talking about all of those entities, you're certainly implicating John and Tom. My primary focus has been and continues to be the Boston Red Sox and the sort of issues that affect our fans, our employees and our players."
Fenway Sports Management is profitable and rarely encounters scrutiny. Roush Fenway, according to Henry, is also profitable, and interestingly (given the contrast to Liverpool), rarely elicits any reaction or controversy.
NESN and Liverpool on the other hand have both become flashpoints for different reasons. And so, it is worth delving a bit deeper into the function of both.
NESN AND THE BASEBALL OPERATIONS QUESTION
Perhaps no single anecdote from "Francona: The Red Sox Years" received more attention than the narrative recounting a study commissioned to take stock of declining NESN ratings that concluded, in part, that the Red Sox needed players who were sex symbols to prop up interest in the team. The $300 million spent on the additions of Adrian Gonzalez and Carl Crawford -- moves that failed to deliver the results for which the Sox had hoped -- was characterized as a reaction to the study.
The subject is a sensitive one. Red Sox owners object strenuously to the idea that they put the proverbial cart before the horse, prioritizing ratings and profits over the more straightforward goal of winning. They also object to the idea that personnel decisions are dictated by TV ratings concerns.
The marketing survey, according to multiple industry sources, was a NESN initiative, rather than one by Lucchino or the Sox organization. It was unusual for members of the baseball operations department -- Theo Epstein and Terry Francona -- to be involved, but such meetings, suggested Werner, occur no more than once or so per year, and, the Sox chairman added, under no circumstances does NESN have influence over personnel decisions inside the Red Sox.
Day-to-day management of NESN under McGrail is separate from the operation of the Red Sox. It is partly for that reason that numerous members of the organization bristle at the suggestion that NESN's marketing strategy had anything to do with the decision to commit roughly $300 million to Gonzalez and Crawford.
"NESN does not dictate baseball policy," said Lucchino. "Nor should it."
"I don't know how often I can say it's ridiculous. It doesn't seem to matter whether I say it once or say it 10 times. The most important thing, when you're in a baseball season, is to win on the field. When you win on the field, everything takes care of itself," added Werner. "Obviously, when the team is playing well, all of the ratings improve.
"I've never been in a conversation where I said, 'The NESN ratings are lousy so you have to do X and you have to do Y.' That's just not the way it works. [Red Sox GM Ben Cherington's] job and [Sox manager] John Farrell's job is to put a winning product on the field. Our focus is on that. If we're successful on the field, the ratings will take care of themselves."
Werner suggested that meetings involving both baseball operations staff members and NESN executives have rarely transpired ("just a handful of times") during the 12-season tenure of the current Red Sox ownership group. There will be meetings between NESN executives and Lucchino's staff in order to coordinate, for instance, communiques about charitable initiatives or sales drives.
If there is a question about the time when a game might be scheduled (the makeup of a rainout, for instance), Werner said, that, too, will be subject to discussion between NESN and Red Sox executives. But that, said the team chairman, represents the extent of baseball operations discussions between the two subsidiaries.
"NESN might want a game replayed in the evening because the ratings are higher and Larry will say, the team needs to getaway earlier, so there's dialogue," said Werner. "But there's never a straight-line connection between NESN executives saying to a baseball executive, 'Please do this.' "
LIVERPOOL AND THE FINANCIAL QUESTION
The purchase of Liverpool in October 2010 proved a head-turner in both magnitude and ambition. NESV (soon to become Fenway Sports Group) committed a reported £300 million ($476 million) to acquire a franchise with a proud history that had fallen on bleak times, both competitively and financially.
The initial investment was enormous. The subsequent cost of ownership has remained considerable. The evidence that there will be positive returns remains questionable.
The financial cost for FSG -- detailed as a matter of public record -- has been significant. Liverpool (like all English Premier League clubs) releases annual financial statements detailing the club's profits and losses. In the most recent report, released in March, Liverpool announced that it endured losses of £40.5 million ($61.6 million) between July 2011 and May 2012. During the previous 12 months, the club announced losses of £49.3 million ($74.4 million).
Meanwhile, the club's home at Anfield requires a substantial renovation that will cost more hundreds of millions of dollars. Put all of these elements together and it's not hard to avoid wondering how Liverpool can avoid becoming a financial black hole that threatens to swallow the operating revenues of other FSG operations, including the Red Sox.
So, why wouldn't the expansion of FSG interests -- particularly Liverpool -- represent a financial compromise of the potential investment in the Red Sox? Henry, in an email, responded at length to the query:
"Let me begin by saying the answer is simply and categorically this: Fenway Sports Group expansion has never and will never take place at the expense of the Boston Red Sox. There are a number of reasons for this, but the primary reason is that FSG exists to compete on the field. Everything we do off the field is designed to positively impact what happens on the field. We're competitive and are driven to win that third ring.
"Each separate entity -- and they are separate -- the New England Sports Network, Liverpool Football Club, Fenway Park, FSG real estate investments, Roush Fenway Racing and Fenway Sports Management each finance themselves.
"Now it's absolutely true that of the entities, only the LFC is not presently profitable. But there were many years the Red Sox weren't profitable and yet that didn't stop us from having extremely high payrolls in those years. Nor did spending $280,000,000 on Fenway Park adversely impact Sox payrolls. To the contrary, we gained additional revenues. At LFC we have only just begun there to build revenues. It has a global fan base and a global commercial appeal.
"Fenway Sports Group is very strong financially. If you look at who the partners are individually you'll see people who not only have financial resources but people who are remarkably financially astute.
"If one entity -- whether it is the Sox or LFC -- loses money in a particular year, where do the resources necessary to compete annually come from that year? FSG has significant borrowing capacity. But more importantly we have cash flow from all of the other entities. There has not been a year in which FSG as a whole had an operating loss. And there hasn't been a year in which we've paid a dividend (although we are slated for our first later this year).
"We've invested and reinvested for 11 years -- happily. Money, and this will be scoffed at by those who don't know us, doesn't provide great stimulation for the partners of FSG unless it's going to provide more wins on the field. There is no question about that internally.
"Further, not once have I ever been a part of a conversation or seen an email advocating moving monies from one entity to another. If FSG moves $50,000,000 to LFC as it once did, that comes from FSG. If you want to be cynical and say that has to come indirectly from somewhere, then logically you would look at the most profitable part of FSG and that's certainly not the Red Sox.
"Let me reiterate that each operating unit finances itself. Just as the improvements at Fenway financed themselves, renovations at Anfield will finance themselves. If the Red Sox or Liverpool had been forced to build brand new stadiums that might not have been the case.
"Look, all this financial talk misses the greater point and that is that we are and have always been committed to winning. There is no excuse for the kind of year the Red Sox had last year. Our resolve and commitment to winning isn't being tested by the poor results of late. What is being tested is our capability to respond to the adversity we've had. We are going to do that and the results will speak for themselves."
THE OVERALL IMPACT OF FSG INTERESTS ON THE RED SOX
Time is zero-sum. Waking hours spent managing one business interest cannot be invested in another. And so, from the standpoint of offering leadership to the Red Sox, it seems fair to wonder whether the proliferating FSG interests have impaired the ability of the Sox owners to govern their baseball team.
And make no mistake: There are individuals who work closely with Henry and Werner who harbor significant reservations about FSG's expanding pursuits. Henry acknowledged as much when he made the eyebrow-raising admission this spring that some of the team's limited partners "are not OK [with FSG's involvement with Liverpool] because they read the same stuff that you write … [But] last year's [Red Sox] losses weren't the result of Liverpool."
Henry and Werner acknowledge that their time commitments to other parts of FSG have grown. Yet they note that the compromises to accommodate those management needs have been made not with the Sox but elsewhere, meaning that they are as invested in the governance of the baseball team as they have been through the years. (Because Lucchino's job is specifically as the president and CEO of the Red Sox, there have been no suggestions of his inattention to the Red Sox.)
"John said something once that resonated with me: There isn't an owner in baseball who doesn't have some other enterprises that he's involved with. [Patriots owner] Robert Kraft is involved with a paper company and the Revolution and all sorts of other stuff," said Werner. "As FSG has grown, I can just tell you my own personal involvement in FSG has become more time-consuming, and my involvement in producing and creating television shows has diminished. This thing that you have to focus on just one business, I don't think there's one major league owner who isn't also involved in some other business that throws off enough revenue to work in baseball."
Red Sox COO and Fenway Sports Management president Sam Kennedy, meanwhile, suggests that the growing number of interests merely underscores the necessity of having strong, competent leadership at the subsidiary level of the different enterprises. If Henry and Werner do well in the critical function of hiring strong presidents to run the different FSG operations, then concerns about the time and intellectual energy that they can commit to the individual teams and companies recedes.
"The good news, from a Red Sox perspective, is they have hopefully a competent front office running the team day-to-day, but the decision-making and the interaction on those big decisions has not changed," said Kennedy. "It would be disingenuous to say that [Henry and Werner] don't have more on their plate. They're both full-time on Fenway Sports Group and interacting and working with all of the Fenway Sports Group businesses. That's even more of a reason why they need to have competent presidents of each of the businesses that they hold accountable."
As for the financial implications of the other undertakings, though it would be naive to dismiss the possibility that some of the FSG holdings -- particularly Liverpool -- could develop into an albatross that would impact the Red Sox' budget at some point, for now, it's noteworthy that the three highest payrolls in Red Sox history have come in 2011, 2012 and 2013 -- the three years since FSG acquired Liverpool.
Overall, Werner insists that the non-Red Sox holdings of FSG have been "a net-positive. Every business has its own goals and objectives. It's a very healthy enterprise. We are punching above our weight in terms of the amount of money, each year, that we invest in player personnel."
Some of that represents what Werner characterizes as the health of FSG's overall holdings. At the same time, while Henry characterizes the Sox as being not profitable (as opposed to Liverpool, which is a net-negative in the ledger at this point), Werner notes that a large part of the Sox' ability to support robust payrolls derives from the success that Lucchino has had tapping internal revenue streams with the Sox.
In some respects, Werner suggests, the Sox have no business being in the kind of payroll position that they are. Yet the way in which Lucchino has run the business, he adds, has permitted the Sox to support payrolls that are disproportionate to the market size.
"We are in the New England market. And maybe people don't really understand that in terms of total households in the New England market, the Red Sox rank in the bottom third in baseball," said Werner. "Compare our market to the market in Texas or New York or Florida. I think people think of us, because we're such a high-revenue team, that Boston is a top-five market, but New England is a relatively small market. Yet because of the success that Larry and his group have had -- and this has been a collaboration -- because of that success year-in and year-out, the Red Sox have, I think the No. 2 payroll in baseball."
Ultimately, it seems inarguable that there is a considerable financial commitment to the Red Sox, one that matches or exceeds nearly every franchise in the league save for the financial behemoths of the Yankees and Dodgers. The issue, by and large, has been the relative inefficiency of the money that the team has spent on its ballclub in recent years, when the return on the team's considerable investments has netted three straight years (from 2010-12) without a postseason berth that culminated in the spectacular 69-93 humiliation of last year.
Werner suggests that criticism of the team's decision-making thus is grounds for fair game. But he dismisses the notion that the Sox have been focused on anything but winning, or that it has pursued marketing revenues at the expense of a good team.
"I don't mind a debate about did we spend our money wisely. But in some ways, it sort of comes to a criticism where, Oh my God, you're focusing on ticket sales rather than something else," said Werner. "Am I proud of the fact that the Red Sox and Larry's team have created this revenue? In some ways, [Francona's] book made it seem like that's not only irrelevant but a point to criticize, that maybe we're focused on revenue rather than winning. But the only way to win is to generate enough revenues to build an outstanding team.
"People can criticize some of the decisions that have been made, maybe our signing of Player X or Player Y wasn't good, but they shouldn't criticize our intentions."
Coming Saturday: Part 3 -- Owner involvement in baseball operations and the building of the Red Sox roster