Monday, September 1, 2014

The Pirates Prove My Point

August 23rd, 2010 | 9 comments »

First, if you haven’t read it before, please read this post: click here.  It contains my thoughts on why MLB fans are always in search of more competitive balance and why mechanisms like a salary cap or hard slotting are not the answer.  It makes a number of the points that the Pirates have now helped me prove….

Today’s post is where I get to say, “I told you so!”  Thank you Pittsburgh Pirates.  Put simply, just because a team is in a smaller market and not winning does NOT mean that Major League Baseball needs a cap or hard slotting in the draft or anything else to improve competitive balance.  The current system is actually pretty great (see here for how MLB compares with the other pro sports in terms of competitive balance), and MLB as a whole is doing exceedingly well.  In fact, as it turns out, at least one of the “poorer” clubs isn’t doing so poorly after all.

The real thanks goes to the Associated Press, who obtained financial data for the Pirates from 2007, 2008 and 2009.  Not surpringly (at least not to me), it shows the Pirates have turned a profit.  While losing.

The Pirates eighteen-season losing streak is the longest in professional sports history.  In the years covered by the financial statements, the Pirates received just slightly less than half its income from MLB in the form of revenue sharing, national television revenue, MLB.com and MLB merchandise sales.  Meanwhile, their payroll lingered at the bottom in the Majors.  In fact, their 2010 payroll is only $2 million more than their 1992 payroll.   

Nevertheless, MLB officials say the Pirates are complying with revenue sharing rules.  I’m sure they probably are.  So, what’s wrong with the Pirates making money at being a perennial loser?

I’ve said it quite a few times…baseball is a business.  Owners face decisions about where best to allocate their resources, and the answer is not always club payroll.  Sometimes they have to placate investors.  Other times they have another business venture that produces a greater return for their dollar.  There are hundreds of reasons an owner might not choose to pour money into payroll, or into the club in general.  It’s his/her/its prerogative as the owner of a business. 

Perhaps the problem isn’t with the Pirates or even with baseball.  Maybe it’s simply a paradox created by the relationship between teams and fans.  Here’s what I’ve said before on this (and still whole-heartedly believe):

I’ve thought about it, and here’s an analogy that illustrates the problem.  If your favorite grocery store in town wasn’t giving you what you wanted in terms of stocking your favorite items or keeping the prices competitive, you would simply start shopping in another grocery store.  You could abandon the one you originally preferred with little thought or remorse.  You can’t do that in baseball though. 

I’ll use myself as an example.  I’m a Braves fan.  If the Braves were a club who spent less on payroll than they received in revenue sharing, I would be irritated.  But would I stop going to games or stop being a Braves fan?  Probably not.  See, there’s not another team in town, so I can’t just go watch another MLB team play on Saturday.  And even if there was, I have an emotional attachment to the Braves.  I remember going to games in the late 80s with my dad when the Braves were bottom-dwellers and no one was in the stands.  Then I remember the worst-to-first miracle and all of the postseason games I went to for 14 straight years.  I’ve lived all over the country, and I’ve rooted for several teams, but I’ve never felt about a team like I do about the Braves, because I don’t have the history with the others.  So, even if the Braves owners were spending less on payroll than they received in revenue sharing, I’d probably still be a Braves fan.  That’s why clubs like the Royals still have fans and can still increase in value every year.

I don’t think there is an answer, there’s only a problem we can’t solve as fans.  Baseball is a business, but it’s one we approach with emotion and history.  That’s why there are so many books and blogs and analysts.  Fans want a salary cap even though MLB players make a smaller percentage of league revenue than players in leagues with a salary cap.  Why?  It’s because you want your team to be competitive, because you’re not willing to switch allegiances to another team.  You want a payroll floor for the same reason. 

The problem isn’t with baseball, it’s with fans.  Baseball has seen eight different World Series champions in the last ten years, with fourteen different teams playing in the series.  So, almost half of all teams have made a World Series appearance just in the past decade.  By comparison, the NBA has only had five different champions in the past decade, and only eleven different teams played in the championship.  The NFL has had seven different Super Bowl champions, with fourteen different teams playing in the series.  Yet, MLB fans cry out about competitive imbalance far more than fans of the other leagues. 

The bottom line is that MLB players share less in the league revenue than the other leagues (without a salary cap) and the championship series has seen just as many, or more, teams compete in the last decade as the other leagues.  I think revenue sharing and the luxury tax have been a part of improving competitive balance over the past decade, as has the Wild Card.  Remember that competitive balance is not perfect balance. 

So, what do you think about the information that has come to light with regards to the Pirates?  Are you mad?  Do you think MLB should find a way to keep owners of losing teams from making money?  Is revenue sharing a mistake?

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9 Responses to “The Pirates Prove My Point”

  1. Mitch

    “I remember going to games in the late 80s with my dad when the Braves were bottom-dwellers and no one was in the stands.”

    OK, while you may not have yet been willing to give up on the Braves, others clearly were. Perhaps your emotional attachment to the grocery store is akin to those fans who quit going to games, but others feel more strongly about supporting a local merchant and continue to patronize the store out of some sense of nostalgia. Perhaps the grocery store isn’t the best example (it’s largely selling commodity products), but what about a favorite restaurant that removes your favorite dish from the menu? Really, you’re arguing that fans have an attachment to a particular brand, and that is not at all unique to sports.

  2. jordy

    first of all, i am thrilled that these teams’ information is out there. it gives a lot of color to how these teams operate and where they generate revenue. whoever is leaking this stuff is a patriot and crusader. the marlins and MLB hunting them down makes them look like real schmucks.

    yankee fan here, so i absolutely have no problem with teams making a profit, including losing teams. i would think pirate fans would like to actually see the value proposition that the team offers their fans. fans are bright enough to understand that there is an opportunity cost to every dollar spent on players that won’t make a difference in the standings. the marlins president said it best when he said the team could have miguel cabrera or a new stadium. only one of those two things is sustainable enough to generate revenue to field competitive teams over the long-term.

    do pirate fans really want any of the players that they gave up anyway? half a season of matt capps on the pirates would NOT have yielded wilson ramos in return, and flipping dotel got significant value in mcdonald. jose bautista maybe, but his numbers would not look anything like his numbers in toronto. the pirates don’t have any hitter that offers the sort of protection that vernon wells and lyle overbay do. i don’t think any of these moves are objectionable. plus, that money probably went to bonuses for their new draft picks. patience. hasn’t moneyball taught us anything? money spent unwisely is essentially flushed down the toilet. See, e.g., 2010 chicago cubs or 2010 new york mets.

    baseball is american-style capitalism: no income or spending caps, a progressive system of taxation where the rich pay a portion of their revenues to subsidize the poor, and a pool of community resources that are shared equally. salary caps and other draconian measures to control salary cause labor unrest, animosity amongst teams (imagine CC sabathia in 2008 as lebron james in 2010. if every team is willing to pay you the maximum amount of money, it leads to grandiose announcements on ESPN. this is america! money talks!), and locks in superiority of large-market teams (the lakers and knicks have the biggest media markets, and their payroll expenses will be comparable to most teams in the league with payrolls near the cap).

    if it ain’t broke, don’t fix it.

  3. Larry@IIATMS

    Kristi, long time no time. I hope you are well.

    It’s time to rejoin our debate on money and competitive balance. But I’ll start slowly.

    Yes, baseball is a capitalist business. Yes, the Pirates are entitled to make the largest profit they can make. Yes, the Pirates can fairly determine that the best way they can make a profit is to put a sub-par team on the field at the lowest possible cost, draw a relatively modest number of fans to the ballpark, and reap a large percentage of their revenue from revenue sharing and national sources.

    Except that baseball is not an ordinary capitalist business. The primary product sold by baseball to its customers is a form of competition, and we attend our home team’s baseball games in part based on the quality of the home team’s opponent. If the Pirates are going to play sub-par baseball year after year, it drags down the potential level of competition and the potential value of the sport. All of this is easily verified: just go to StubHub and compare the market value of the Pirates as the visiting team to, say, the value of your beloved Braves as a visiting team.

    If the Pirates are not contributing their share (1/30th) to the value of baseball as a whole, then good capitalist principles should demand that the Pirates be paid a smaller share of baseball’s revenues than, say, the Braves. In this regard, think about the deal that’s kept the Big 12 college sports conference together — the University of Texas is going to get a larger share of conference revenues than, say, the University of Kansas.

    Perversely, the Pirates are not being paid a smaller percentage of baseball’s shared revenues. Instead, they are being paid a larger share. So the Pirates have a disincentive to improve. This is bad for fans of the Pirates, and bad for baseball.

    From the standpoint of economics (which I know to be one of your preferred standpoints), I think this is pretty basic stuff.

    So, let’s reassess our original position. Yes, the Pirates can and should operate their business to maximize profits, and it may be the case that the Pirates can best maximize profits by putting a cheap, losing team on the field year after year. But the other 29 teams in baseball are ALSO each entitled to maximize their profitability, and the sport of baseball as a whole (putting principles of antitrust to one side for the moment) is ALSO entitled to organize the sport to maximize the collective profitability of all teams. The collective needs of the sport are going to clash periodically with the individual business goals of any single team … which is one of the reasons why you and I focus more attention on the business of baseball than, say, the business of smelting.

    But let’s shift perspective from the Pirates to the Yankees. Our principles of capitalism and free enterprise apply every bit as much to the Yankees as they do to the Pirates. The Yankees are entitled to make the largest profit they can make, and if they determine that they can make the largest profit by outspending the other teams in baseball for the best available players, so be it.

    The Yankees are also required under the CBA to pay very large amounts of money into the revenue sharing system. From a capitalist standpoint, the Yankees are going to want to see a return on its revenue sharing payments. This return is NOT going to come from the satisfaction of noting that the Pirates, the Marlins and the other recipients of revenue sharing are making healthy profits. Nope. The Yankees MAY be willing to make its revenue sharing payments if the payments are being used to raise the level of competition in baseball generally (since higher competition may equal higher value for the sport in general).

    So now we have to revisit what we said about the Pirates. If the Pirates want to continue to receive revenue sharing (and of all the statements I’ve made here, THIS statement is the only one we can feel certain about), then they cannot operate their team purely on the basis of the profit motive. They have to operate their team to make a smaller profit, and to field a more competitive team, than they would do if no revenue sharing was in place. This is where I have my sharpest disagreement with you. When you talk about the Pirates’ “prerogative as a business”, you’re missing the point that the Pirates owe obligations to baseball as a collective of individual businesses. You’re missing the point that the Pirates are collecting more than 1/30th of shared baseball revenues, and are producing less than 1/30th of baseball’s collective value.

    Ultimately, the arguments in defense of the Pirates are NOT those that you are raising. The main argument in favor of the Pirates is that it benefits baseball to have teams (even lousy teams) in small markets, and that small market teams deserve to be subsidized by big market teams based on nothing more than the relative sizes of the markets involved. But this argument has nothing to do with the profit motive of the individual teams involved, and everything to do with the collective needs of the sport and all of the teams involved.

    Yeah, I know. “Collective” is not a good capitalist term. It smacks of socialism. Deal with it. ;^)

  4. jordy

    I really don’t think we can or should put aside antitrust issues at all in this debate. Part of the reason the Yankees make so much money is their access to the largest media market in the country sheltered from competition from other MLB teams. If the Pirates had the option of moving to New York and setting up shop there, I’m sure they would. There should be some price for that protection, no? Maybe not treble damages, but certainly something? And on the flip side, what is the return that the rich in this country get on their taxes paid? Why are the Yankees entitled to both insulation from competition AND a return on “investment” for taxes paid to support the system?

    “The primary product sold by baseball to its customers is a form of competition, and we attend our home team’s baseball games in part based on the quality of the home team’s opponent.”

    This argument is true on some level. I would really like to buy into this argument more. However, the teams themselves have really just begun to start variable pricing, and I’ve yet to see any evidence the basis for increased or decreased prices is competitive product on the field as opposed to size of the opponent’s market (and presumably, their universe of fans). At present, the Tampa Bay Rays are tied for the best record in baseball. Are tickets to their road games being sold for more than the Cubs and Red Sox, clearly inferior teams? Haven’t checked, but my guess is no. Based on a very casual glance at the San Francisco Giants ticket price list (the team clearly the closest to true market pricing) I see tickets to see the Cubs on Aug 9-12 are uniformly higher than tickets to see the Reds a mere two weeks later, covering the same days of the week. Why?

  5. Larry@IIATMS

    Jordy, take a look at the Forbes’ valuations of the Islanders franchise in hockey and the Nets franchise in basketball. They are not valued highly, not nearly as highly as the Rangers and Knicks. So perhaps the Pirates would move to NY if they could, but they would not be guaranteed 1/3 of the NY market. Not by a long shot.

    Also remember that the ownership of some teams had to pay a premium to buy a team in a big market (Cubs, Red Sox), while other owners (Marlins) bought into MLB at a discount because they bought small market teams. It would not be fair to ownership to require revenue sharing payments to be sized so as to effectively equalize the value of every franchise.

    All this being said, I agree that the Yankees should have to pay something for the rights to the NY market. That’s just another way of saying what I DID say above, which is that it’s good for baseball for large market teams to subsidize small market teams. But note that the Yankees DO subsidize small market teams in ways other than revenue sharing. For example, something like 25% of all sales of MLB-licensed clothing items are Yankees items, but the proceeds of these sales are divided equally among all 30 teams.

    Agreed, demand for tickets is not based solely on the level of competition posed by the visiting squad. If you look it up, the statistics on road attendance make no sense. The Rays have the second-worst road attendance in baseball, which is odd given that they’re a really good team and they play so often in sold-out Boston and nearly sold-out New York. And why would Houston have the second-best road attendance in baseball in terms of overall numbers and third-best in terms of percentage attendance?

    On the other hand, I live in Los Angeles, and the Dodgers built their 2010 marketing campaign around the Yankees’ visit to Chavez Ravine. You could not buy a Yankees ticket at the Dodger box office; the only way to get a Yankees ticket (outside of sources like StubHub, which were selling Yankees tickets at big premiums) was by buying a season ticket plan. So … I think that at least sometimes, the competition offered by the visiting team is important to the home team.

    Maybe it’s the case that the GENERAL level of competition is more important than the level of competition posed by any particular team. I don’t know about you, but I tend to plan my visits to the ballpark primarily around dates and times that are convenient to me, and secondarily around seeing a strong visiting team. But perhaps the general level of competition fosters a general desire on my part to get out to loge Section 157, Row 1 (isn’t StubHub great?), more often.

    To be perfectly honest, the idea that MLB is selling “competition” is a truism that is not often questioned, but could be questioned. I’ve read this somewhere else, but … arguably all we fans require is some uncertainty in outcome. I’m not likely to attend many Yankees games if I know that the Yankees can’t lose. But I’m also very much hoping the Yankees will win, so arguably my preference is for the Yankees’ expected win percentage to be above 50%. So, what would I like best? A 60% expected win percentage? 75%? 90%? If all I need for uncertainty is a 10% chance that the Yankees will lose, that means that I’ll show up at the ballpark with cash in hand if the Yankees finish the season with no more than 146 wins. And how much competitive balance would baseball require for the Yankees to lose at least 16 games a year? Not much.

  6. jordy

    The buy-in cost is a good argument that is absolutely true. I agree it would be unfair for revenue sharing money to equalize fully the disparities in market size. At the same time, there is no guarantee of a stable status quo. Years later, I’m still figuring out what I think about the deal MLB struck with Peter Angelos and what it means for a future Oakland A’s-to-San Jose move (or, for that matter, an expansion team or relocation anywhere). I’d love to know whatever happened with Dupuy’s assertion that broadcast rights were being reexamined with a “use it or lose it” approach to some questionable areas of team’s broadcast regions.

    As far as the Islanders and Nets comparisons, I’m not certain those examples are best here. Both of those teams are geographically excluded from playing their home games in New York County, which I think goes a long way to giving them a chance at the lion’s share of money to be made in the market. If the Nets and Isles were permitted to move to, say, midtown Manhattan, they’d be in much better position. Forgetting the fact that NFL teams do not own their television rights, I think comparing the Jets and Giants is a better example. Historically their territory was different, but now they play in the same area in the same region. Both teams are equally equipped to compete for the region’s wealth. The Forbes values for those two teams are very close.

  7. jordy

    Actually I have no idea what the deal is with NFL rights to broadcast games, other than they are centrally negotiated. My amateur assumption is that NFL TV money is distributed evenly to all teams.

  8. Larry@IIATMS

    Kristi and Jordy (and others), you’re invited to join the discussion over at http://itsaboutthemoney.net/archives/2010/08/27/revenue-sharing-is-dead/.

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