NEW YORK'S Lincoln Dupree defends against San Jose’s Barry Wagner.

With numbers like these, it should come as no surprise that Arena Football values have expanded faster than an offensive lineman’s waistline at the training buffet. According to AFL CFO Joe Vrankin, nine years ago a savvy investor could have snapped up a franchise for $285,000. The two most recent sales have rung up about $12 million (for rocker Jon Bon Jovi’s Philadelphia Soul) and approximately $17 million (the franchise fee for the new team in Austin, Texas). The AFL is planning to expand into Nashville and Washington, D.C., in 2005, and Jacksonville, Fla., in 2006. Other candidates include Boston, Cleveland, Miami, the Pacific Northwest and St. Louis.

PHILADELPHIA QUARTERBACK Nick Browder passes against New Orleans. The Arena Football League fields 19 teams.

Corey J. Chisnell, senior vice president of Baltimore-based investment banking firm Moag & Co., recently brokered the Bon Jovi deal in Philadelphia. “We’re very bullish on the AFL,” he says. “We think there’s a tremendous upside, and you’re not going to see a tremendous upside going forward in traditional sports.”

Greedy Owners, Spoiled Players
AFL Commissioner David Baker, a former college basketball player who stands 6 feet, 9 inches, and surpassed 300 pounds more than a few lunches ago, credits the league’s success to one thing: the fans. In an era when fans read about sports heroes in the police blotter as often as in the box scores, Baker has instilled in his players, owners and staff an almost religious reverence for AFL supporters. “During the ’80s and ’90s we learned from people like Peter Drucker and Tom Peters that if you focus on serving the customer, you are not only going to increase your revenue but ensure the long-term stability of your business,” he explains. “That was true of everything except for sports. Sports had lost its way with greedy owners and spoiled players.”

Baker insists that AFL players and cheerleaders sign autographs after every game, that teams perform community service, and that everyone in his growing empire adhere to a fans’ bill of rights. And while it costs a family of four an average of $156 to attend a major league baseball game, according to Chicago-based Team Marketing Report, AFL tickets cost as little as $5 each. “Fans are looking for something, from an entertainment perspective, to be inspired by,” says Baker. “Our goal is to create the most loyal fans in sports. It’s not just about taking their money, but also a little bit of their heart.” Baker’s ideas might just be working. In a 2003 poll conducted by ESPN, AFL fans proved exceedingly brand-loyal to AFL sponsors.

The Next Mogul?
Even with its booming popularity, the AFL remains an uncertain investment. Casey Wasserman’s experience is a case in point. The grandson of the late Lew Wasserman, overlord of MCA studios and the man famously dubbed “The Last Mogul” by author Dennis McDougal, Casey paid about $5 million for the franchise rights to the Los Angeles Avengers in 1998. He admits that he has yet to make a profit on the team.

Wasserman graduated from UCLA with a bachelor’s degree in political science and, at 24, became the youngest person to ever own a professional sports franchise. He sees the experience as the world’s most expensive grad school education. “I was more passionate about sports than anything else, and I wanted something where I could get in and roll up my sleeves, make mistakes and have success,” he says. “I wanted something that involved me building it, not something that was already well oiled.”

Wasserman has certainly paid for plenty of oil. He confesses that he was prepared to lose money on the Avengers. “We lose money, but the losses have been reduced dramatically each year,” he says. “But we are not prepared to sacrifice our image either on the field or off it to save a few hundred thousand dollars. We are not going to become the [Tampa Bay] Devil Rays, who won the World Series and dumped their players.”

Franchise revenue comes almost completely from ticket sales and local advertising, with a modicum of cash flow from areas such as merchandise, concessions and parking, Wasserman explains. While owners like Wasserman do benefit from a league-imposed salary cap, which limits player compensation to $1.7 million per franchise per year, owners do not have the benefit of sharing television rights fees, as in other sports.

VALUE JUDGEMENT Arena football, the indoor version of America’s most popular ball game, is proving to be all the rage with fans looking for an alternative to sports scandals and $350 tickets. With a unique value proposition and relatively low entry costs, this nascent sport is also garnering attention from investors with a passion for football and the patience to nurture a largely untested opportunity to profitability.

Like Wasserman, prospective AFL owners must be prepared to weather losses, at least initially, says Moag & Co.’s Chisnell. As with most sports investments, profitability is elusive. “This is unlike any other business. You can’t go in thinking you are going to make a lot of money. Expect to fund losses the first couple of years,” he cautions. “This takes a patient investor who understands the landscape of sports.” Chisnell says Moag advises investors to expect expenses to outstrip cash flow, but that over time a team’s value will most likely increase. Over the past two or three decades, he adds, most sports franchises have outpaced the leading stock indices.

Commissioner Baker’s glasses are even rosier. He suggests that the minimum investment for a prospective owner is about $2 million. “And they should expect operating losses in year one, half those losses in year two, and to break even in year three,” he says, adding that AFL franchises in Colorado, Philadelphia and Columbus, Ohio, were profitable in their first year of operation. Colorado was buoyed by the presence of part-owner John Elway, the legendary Denver Broncos quarterback, while Philly successfully leveraged Bon Jovi’s star power.

Fans Come First
As important as deep pockets are, would-be owners must buy into the league’s fan-first mantra. A wannabe George Steinbrenner with plans to buy his way to a championship by selling $80 box seats will be summarily punted. “We’re competitors only on the field,” Wasserman says of his fellow owners, nine of whom also own NFL teams, including the Dallas Cowboys’ Jerry Jones and New Orleans Saints’ Tom Benson. “We are all partners in this.”

“This is unlike any other business. You can’t go in thinking you are going to make a lot of money. Expect to fund losses the first couple of years.”

Baker and the owners rigorously vet potential investors, and “if they don’t believe what we believe, it is better for them to invest in something else,” he states. “If a guy comes in with a check for $50 million, that will get our attention. But he still has to go through the process. We have a philosophy; it’s not just idealistic.”

The league’s philosophy will necessarily encompass paying the bills. Recent sports history is littered with well-meaning failures. The Extreme Football League, backed by the World Wrestling Federation and NBC, folded after just one season, suffering $70 million in losses. The Women’s United Soccer Association lasted three years. The United States Football League lived only three seasons, 1983-85, even with Donald Trump’s backing. The AFL is not immune, losing four teams in 2001. Franchises in Iowa, Nashville, Toronto, Milwaukee and Houston have folded or relocated.

According to experts, the AFL must maintain and grow its network
television coverage. While TV networks traditionally pay leagues a fee for the rights to broadcast games—NFL owners are currently sharing contracts worth more than $17 billion, for example—and hope to recoup the fee by selling advertising, NBC’s deal with the AFL is unique: There is no rights fee. Instead, the network and the league share advertising revenue. (NBC will broadcast the AFL championship game, ArenaBowl XVIII, live on June 27.)

“The AFL is at an inflection point, because the agreement with NBC runs out at the end of 2004,” notes Chisnell. The upswing in TV ratings has pleased both the network and the league, and Baker indicates that he and NBC are also talking about expanding to other outlets. Without a solid TV deal, however, the AFL “will sort of settle down into a minor league. They need this boost for growth,” Chisnell says.

The AFL’s continued expansion also rests on its stepchild relationship with the NFL, considered the General Motors of professional sports. Today the two leagues share nine owners and a referee development program. While Baker has no plans to convert the AFL into a minor league for its larger counterpart, a formal partnership or branding relationship could light a fuse for explosive growth. “That’s all they need. I think that would be huge,” says Chisnell about the impact of such a marriage. “That will take the casual fan from viewing it as a minor league sport to making it a viable entity associated with the NFL.”

Until that happens, owners like Wasserman continue to burn the midnight oil—and their cash reserves—to maintain a professional product on the field, bolster P&Ls, keep NBC happy, churn out marketing plans and, while they are at it, win a few football games. “Sports is unique in that the biggest part of the business you can’t control is the only part people see. You can do all the right things very thoughtfully and still go 0-16,” Wasserman concludes. “But that’s where you get the rush you don’t get selling donuts.”