Back in July, I wrote about why I thought Major League Baseball was the healthiest of the four major professional sports leagues in the U.S. I stand by what I said, and now I’m debating the health of all four leagues with Russell Scibetti over on The Business of Sports. We took on baseball first and will be moving to the NBA next. Stop by and get involved in the debate!
Category: Competitive Balance
I literally stopped what I was working on when I saw a Google alert pop up in my Inbox that read “Major League Baseball: A broken sport in need of fixing.”
As much as I analyze, and sometimes criticize Major League Baseball, I do not believe it is “broken.” In fact, I stand by a piece I wrote a couple of months ago, proclaiming MLB to be the healthiest of the sports leagues. Chief amongst the reasons for this proclamation is the fact that is the only sport I believe is not in danger of a strike/lockout at the end of the current collective bargaining agreement. And despite all the arguments for a salary cap, I remain firmly against one.
I never do this, but I think I’ll pick apart this article that arrived in my Inbox this afternoon piece by piece. I’m on board in the beginning…
In this writer’s opinion, the revenue sharing system in Major League Baseball is a good concept, but has still not been implemented correctly.
I agree. You can see my piece in The Hardball Times on how the leaked financials showed revenue sharing needs some work.
I believe that teams that generate substantially higher revenues should have to contribute significantly more into the revenue sharing pool than they do.
How much more? Oh, probably anywhere from about 200-400% more.
Sound insane to you? If it does then your mentality is probably part of the overall problem and not the solution to the colossal mess we have in Major League Baseball right now.
And now he’s lost me. Revenue sharing should be increased by 200-400%? I don’t think so. While the leaked financials did illustrate that revenue sharing is necessary, they also showed that teams may be relying on that money to cover operating expenses while pocketing revenue. Not to mention that owners of clubs in larger markets pay significantly more for their club, and deserve to reap some benefit with that. In 2002, three teams were sold and bought. The Red Sox, who are obviously in a large market, sold for $380m (taking on about $40m in debt). The New York Mets, another large market team, sold for $391m. The Marlins, the poster child for small market teams, sold for $158m. Ever heard you get what you pay for?
If you want to call this counterbalancing solution “socialism” then …so be it.
Hell, call it whatever you want to.
I call it restoring a competitive balance in Major League Baseball, which has been hijacked, primarily, by a virtual cabal of corporate entities that operate within the framework of the broken system that MLB has implemented.
I don’t know where to start, but I’ll stick with that last paragraph at this point. Obviously the author is insinuating there is no competitive balance in balance. Untrue. I’ve shown this chart before to demonstrate how the leagues compare from 2000-2009:
|Percentage of Teams Participating in Playoffs||Number of Different Participants||Number of Different Champions|
|MLB||27% (8 of 30 teams)||23 of 30||8|
|NFL||38% (12 of 32 teams)||29 of 32||7|
|NBA||53% (16 of 30 teams)||29 of 30||5|
|NHL||53% (16 of 30 teams)||30 of 30||7|
The biggest difference? I’d argue it’s the playoff format. Baseball allows in the least number of teams. The NBA and NHL let in more than half their teams. So, at the beginning of the season, you have a better than 50% chance of making the playoffs. Does this mean the NBA or NHL is more balanced competitively than MLB. Nope. In fact, as you can see above, MLB has had the highest number in terms of different champions during this time period. No competitive balance, huh?
To put it bluntly, MLB, the Players Association Union and the New York Yankees are all greed mongering power players that are in collusion, have ruined the game of baseball, and have threatened the very fabric of professional sports in the process.
Thank God that the NFL, NBA, and NHL have all implemented some form of salary cap that has prevented their sports from becoming the ridiculous and idiotic mockery that MLB has become.
I feel that MLB is probably the closest thing to Professional Wrestling that has ever existed in the history of organized sports, and I even hesitate to call MLB a real sport anymore because the results of the games and seasons are nearly as predictable as hokey wrestling matches, where the conclusions are all scripted and ultimately predetermined.
I hate the Yankees too, but not because I think they’ve ruined the sport. I think most of us just wish we had an ownership group like they do – one that cares about fielding a winning team and isn’t just in the ownership game as a tax shelter or for some other corporate reason that leaves them less inclined to pour their profits back into baseball.
Oh, and the other leagues aren’t a “ridiculous and idiotic mockery” when they reject contracts that fit within the rules of the CBA ? How about when they launch a labor website where they take shots at their own players? Or maybe when they a player air his Decision and subsequent smoke-filled rise from the floor with his new teammates on national tv? Puh-lease.
The New York Yankees (the team with the highest payroll in the league by an incredibly wide margin) have made it to the playoffs 15 out of the last 16 years, while the Pittsburgh Pirates and Kansas City Royals (teams with traditionally the lowest payrolls in the league) have failed to make the playoffs for that same 16 year period …and beyond.
Perhaps even more frighteningly, this trend, or gap between the haves and the have-nots of the league seems to be expanding …with no end anywhere in sight.
So, to all you skeptics of the notion that money cannot buy success, …do the simple and undeniable math.
Ask yourselves, honestly, why does one team succeed and sit in the lofty penthouse of the league while others fail miserably and wallow in the smelly outhouse of obscurity?
What’s the common denominator here?
This isn’t a brain teaser or rocket science, …it’s good old fashioned common sense.
It isn’t too hard to figure out that The New York Yankees willfully and shamefully buy their success.
All of it.
And Major League Baseball allows this to happen because of their greed for the financial revenue that the New York Yankees bring in regularly to the league.
Can money buy you a winning team? Probably. Can it buy a championship? Not necessarily. Can you win without being the biggest spender? Absolutely. Who have the Yankees been battling it out for the division lead with all season? The Tampa Bay Rays, who rank 21 out of 30 in terms of payroll. It’s not the first time they’ve done it either. What about the Red Sox and Mets, the league’s #2 and #5 payrolls? They’re already mathematically eliminated. Meanwhile, you’ve got the Rangers and Padres, at #27 and #29 respectively, very much in the playoff hunt.
And if you want to know why the Pirates aren’t improving, I point you again to my piece in The Hardball Times on the leaked financials and what they taught us.
Why not just triple, or quadruple, the luxury tax and solve most of the problems with the lack of parity and stop the rapid erosion of competition within the sport?
In this suggested equation, none of the revenue would be lost for the sport and the competitive nature of the game would be greatly restored.
This would change nothing. The Yankees would simply continue to factor the competitive balance tax into their budget.
Lastly, I realize that are still many people in complete denial about the very premise of this article (that there is, indeed, a broken system that has led to an environment of gross inequality within the sport).
The people who argue against this premise usually are quick to refer to the Tampa Bay Rays as an example that some teams “don’t need to spend money to win” in MLB.
This is complete and utter nonsense.
First of all, the Tampa Bay Rays are an anomaly that came about in a perfect storm of player development as a result of years of losing.
An anomaly? Really? In 2008, the Rays contended for the championship in the World Series. In 2009, they had their second straight winning season. In 2010, they’re in a heated battle for the division title against the Yankees. One year might be an anomaly. Three years is not.
Unfortunately for the Rays, they will lose Carl Crawford (arguably, their best player) to free agency in the off season; they will lose their closer Rapheal Soriano (one of the smarter trades they accomplished, acquiring him before he attained superstar status), and they will lose Evan Longoria and David Price (their other two franchise players) as soon as their contracts expire and they become eligible for free agency.
And to all the skeptic of this reality, these are not scenarios that are based on speculation, …these are cold hard facts:
The Rays simply don’t have the economic resources to retain these players for the amount of money that the free agent market will ultimately demand.
First, Soriano wasn’t some unknown they took a chance on who surprised everyone with a great year. I’m a Braves fan and was devastated to lose him. He was already lights out, and the Rays paid the not so paltry sum of $7 million for him, along with trading the Braves a reliever.
As for the Rays not having the economic resources…untrue. They showed net income of over $11 million in 2007 and over $4 million in 2008. They’ve also shown a willingness to increase payroll. That’s where the real problem with revenue sharing lies. The Rays have increased payroll (they’re at double their 2007 payroll in 2010) and scouting and development costs, have put a winning product on the field, and have suffered decreased net income as a result of the current revenue sharing system.
That’s where the work needs to be done. And it will not be done by increasing revenue sharing by 200-400%. It will be done by revamping the system to one that rewards teams for putting their money back into the game instead of pocketing it all. It will be done by creating incentives and rewards for people who act more like the Yankees and commit to putting a winning product on the field, whether it’s through signing free agents or improving scouting and developing.
Baseball is not broken.
While the word “lockout” is being increasingly used in discussions about the NBA and NFL, and the NHL Players Association is still searching for an executive director, Major League Baseball is enjoying one of the most prosperous and competitive eras in its history. Owners and players seem to be getting along, attendance is good, and division races are hot. Here’s a look at five reasons (in no particular order) why baseball is the most healthy professional sports league in 2010:
The words “strike” and “lockout” are as far from the collective minds of baseball owners, players and fans as they’ve ever been. There is no doubt in my mind, or that of anyone else who is familiar with the situation, that the owners and players will come to an agreement before the current collective bargaining agreement expires in December 2011. Both sides have indicated that discussions will begin following the 2010 season, and neither side has announced any extreme or unreasonable demands. Meanwhile, the NFL and NFL Players Association are airing their arguments over competing websites and appear to be making no discernable progress towards a new agreement to replace their current agreement expiring in March 2011. The NBA isn’t fairing much better, and the NHL Players Association still hasn’t appointed an executive director, although they have extended their current collective bargaining agreement through the 2011-2012 season.
Baseball doesn’t need a salary cap for greater parity amongst teams. The only league without a salary cap, Major League Baseball has as much balance as any of the other leagues. Although direct comparisons are a little tough because the playoff formats differ, I’ve put together a handy chart to demonstrate how the leagues compare from 2000-2009:
|Percentage of Teams Participating in Playoffs||Number of Different Participants||Number of Different Champions|
|MLB||27% (8 of 30 teams)||23 of 30||8|
|NFL||38% (12 of 32 teams)||29 of 32||7|
|NBA||53% (16 of 30 teams)||29 of 30||5|
|NHL||53% (16 of 30 teams)||30 of 30||7|
Each time the owners and players prepare to negotiate a new agreement, we all wonder if baseball will finally get a salary cap like the other professional sports leagues. I, for one, am relieved to hear there will be no push for a salary cap this time. (If you’re interested in my case against a salary cap in baseball, see here.) In an interview with Sarah Spain back in October, Bud Selig indicated that there is no need for a salary cap in MLB, because the league already has more parity than ever before. He went on to point out that he’ll be looking to tweak the revenue sharing system with the new agreement in 2011, but I don’t think that will come as a surprise to the Players Association or anyone else.
MLB survived the economic issues of 2009 with very little impact on attendance. MLB attendance suffered a 6% decline in 2009, but that number is a bit deceiving. The two new ballparks in New York, each of which is smaller than its predecessor, have been estimated to account for approximately 30% of the decline last season. Even at a 6% decline, the 2009 attendance was the fifth highest in MLB history, following seasons that saw the first (2007) and second (2008) highest attendance marks. When put into perspective, MLB weathered the economic downturn of 2009 with very little impact to the overall league picture.
MLB had record revenue in 2009. Piggy-backing on the last point, MLB had record revenue in 2009 of $6.6 billion. Meanwhile, the NFL came in at $6.5 billion, the NBA at $3.2 billion and the NHL at $2.4 billion. In one of the worst economies of baseball’s history, it produced record revenue.
MLB Advanced Media is a cash cow. I’ve wanted to write something nice and long about this for awhile, but I’ll have to settle for this brief blurb for now. MLBAM is the reason baseball is pulling away from the other leagues in terms of revenue. The numbers are few and far between, and the most recent ones I have are from 2007, but I’m confident that MLBAM is what has, and what will continue to, set baseball apart from the other leagues. Under the MLBAM umbrella is MLB.com, MLB Extra Innings, MLB’s deal with XM Radio, and MLB Network.
As of 2007, MLB.com saw 8-10 million unique visitors every single day. It provided games to over 500,000 live package subscribers and approximately 27 million of 80 million tickets were purchased online. In addition, MLB struck a 5-year deal with Stub Hub to be the official reselling outlet, which allows MLB to essentially profit twice from the same ticket. Revenue has grown from $36 million in 2001 to $450 million in 2007, and is projected to increase by 30% each year. MLBAM doesn’t just control content for MLB, it also provides live feed for other sporting events like the NCAA basketball tournament and the French Open in tennis. MLBAM streams more than 12,000 live events per year, more than any other web producer in the world.
XM Radio will bring in $650 million over its eleven-year contract with MLB. DirecTV very nearly reached a $700 million, seven-year exclusive contract with MLB for Extra Innings (which offers live, out-of-market games to subscribers for a yearly access fee), but eventually settled for a non-exclusive contract and a shared 1/3 interest in MLB Network with Comcast, Time Warner and Cox Communications. MLB Network was expected to generate $201 million in 2009, including $151 million in subscriber fees and $50 million in advertising revenue. It’s projected to be worth over $1 billion by 2015.
An interesting note is that MLB Network is in approximately 50 million homes, earning around $0.24 per subscriber per month. By comparison, ESPN is in hundreds of millions of homes worldwide earning approximately $3.65 per subscriber in the US. Bottom-line: MLB Network has plenty of room for growth and every reason to believe it will continue to grow.
I had the pleasure of being interviewed by Joe Shuta on his show Leading Off, which airs on Wednesday nights on WFBG in Altoona, Pennsylvania. You can click on the link below for the audio (it doesn’t actually download, it’ll take you to a third party site and begin playing the audio).
Here are some of the topics we covered:
- Does baseball need a hard salary cap?
- Can all of the clubs in baseball afford to compete?
- Should Jose Canseco be applauded or shunned for his revelations about steroids in baseball?
- Does baseball need more instant replay?
- Why are sports so important in America?
- What has been the impact of the economy in America on the national pasttime?
- And for fun…would I keep a foul ball or give it to a kid?
- Much, much more!
For those who don’t know, you can now find me on SportsMoney on Forbes.com! I’ll still be writing here, and mostly about different topics, but check out my SportsMoney posts as well:
The Tebow Effect (I know it’s hard to believe, but I do watch other sports sometimes!)
Last week, I engaged in one of the best debates I’ve ever had on whether Major League Baseball should have a salary cap. This is going to require a little jumping around, but if you’re at all interested in this issue, it’s all worth the read!
Here is what you need to read – be sure you read the comments as well! I have comments posted to both of Larry’s first two articles and will soon comment on the third. There are some great thoughts from everyone involved!
Start here: Thinking Cap – Part 1 by Larry at It’s All About The Money
Then go here: Why MLB Does Not Need a Salary Cap by yours truly here at It’s a Swing and a Miss
Then back to Larry: Thinking Cap – Part 2 by Larry at It’s All About The Money
And Larry again: Thinking Cap – Part 3 by Larry at It’s All About The Money
Then come back here later this week (hopefully tomorrow) for my article on what the great equalizer really is…hint: it’s not a salary cap, salary floor or slotting in the first-year draft.
First off, thanks to Pete Toms over at Biz of Baseball for posting a summary of Rob Manfred’s speech at Harvard regarding the upcoming collective bargaining negotiations. I had somehow missed this and am so glad I caught it!
Before I tell you why I’m against hard slotting in the MLB draft and what my alternative suggestion might be, I’d like to make an observation. When I’m preparing to write something like this, I do a lot of research. I hate being corrected or proved wrong – maybe that’s the lawyer in me. Regardless, I came across something interesting. What’s even more interesting is that I still find it interesting, despite it being something I already knew! Anyhow, I digress, back to what’s so darn interesting. Do you know how many articles and blogs there are about NBA and NFL draft slotting? Not many. Do you know how many there are about MLB and whether or not there should be a slotting system? More than I can count! NBA and NFL players make big bucks, and there are certainly some dynasty-type teams in both leagues…so why do MLB fans care SO much more about issues like this? Well, because it’s the national pasttime, and we all want a piece of it, I guess. Anyone who follows sports even a little knows there are FAR more analysts and bloggers in baseball than the other sports, but I still continue to find it fascinating. What can I say, I’m easily amused.
Back to the issue at hand: slotting in the MLB first-year players draft. If you read my salary cap post, you can probably guess that I’m not a fan of hard slotting. It agitates that old free market economy concept I love so much. Even so, I’ve come up with an alternative I’m still mulling over. Before I get to that though, let’s review the NBA and NFL system and discuss why MLB does not have hard slotting at this point.
To set the stage for those who are unfamiliar with the NBA and NFL systems, here is a (super) brief overview. The NBA does not have signing bonuses. Instead, they have salary slotting. A player receives a set salary based solely on the slot where he is drafted. Period. It’s that cut and dry.
In the NFL, signing bonuses exist but are becoming less common. Any signing bonus paid to a player up-front is pro-rated over the life of his contract in terms of the team’s salary cap calculations If the player is cut before the end of his contract, the entire sum of signing bonus that remains is calculated into the upcoming season’s salary cap. So, there is an emerging trend of little to no signing bonus and more guaranteed contract years (in the past when signing bonuses were larger, contracts were not guaranteed and a player who was cut was not owed the remainder of his contract, nor was it calculated into the salary cap calculations).
Now to why hard slotting is absent from MLB. First, the NBA and NFL systems will not work in MLB. The biggest reason is because of the minor league system in baseball. A drafted player is not expected to perform at the big league level immediately, nor is he receiving much in the way of salary in those early years in the minors (with the exception of the very top picks).
Which leads me to what I hear most people say: shouldn’t the MLBPA support the idea of hard slotting? I hate to pick on anyone, but one of the first articles I found was by Jeff Fletcher at MLB Fanhouse. Here’s the pertinent part of his article:
I can’t figure out why baseball still doesn’t have a NBA-style bonus structure.
I mean, I know why. It’s because the players’ union has not allowed the owners to implement one in collective bargaining. One of these days the major league players in the union are going to realize: “Hey, all that money going to amateur kids could be going to us!”
I’m not here to blame Jeff Fletcher. He holds the same misguided belief I once had about why there is no hard slotting in MLB. Think about it…why would the MLBPA not want hard slotting? Like Jeff says, huge bonuses to unproven guys is money not being spent on MLB players. (As a side note for those who don’t know, the MLBPA does NOT represent the interests of minor league players.) So, why wouldn’t MLBPA be begging for hard slotting?
Keep it simple, stupid. The MLBPA loves seeing kids like Strasburg get giant bonuses. Why? Well, it makes it a heck of a lot easier to get more money for their players! If some unproven kid going to minor league ball is worth some enormous bonus, what is a proven and successful major leaguer worth? An ungodly amount, that’s how much. Player X is a right-handed reliever who was 17-4 last year with a 2.20 ERA. He just watched Player Y get a $7 million signing bonus from his club straight out of college. What can the club possibly say when Player X comes in for salary negotiations and wants $9 million next year? All Player X has to do is point out the $7 million given to the kid who might never make it to the Majors. The club now has no ground to stand on and better start drawing up the contract!
Bottom line: the MLBPA is not going to support hard slotting, because it will have the upward effect of depressing salaries in the bigs. Don’t even argue with me that it might not – the point is the mere possibility that it will. The MLBPA isn’t taking that chance.
Personally, I don’t support hard slotting. I have the same reasoning as my argument against a salary cap – why does this have to be about restricting a person’s ability to make money? When I was looking for my first attorney gig, there was a range of “signing bonus” money firms gave out for moving and bar expenses. Do I think the American Bar Association should come in and set the signing bonus? Of course not. I should be able to factor that into my decision. So should ballplayers. If they say they want to play for Team X or that they will only sign for $5 million or they’ll go play college ball, fine. That’s their right as an available employee.
Does signability affect the draft? Absolutely. Have I pointed out before when a player like Jeff Francoeur says he wants to play for the Braves or he’ll go play college ball? Yep! Does it keep the draft from being perfectly fair? Sure it does. But if the Nationals can come up with $15 million ($7.5 million signing bonus and the rest in pro-rated salary over 4 years) to sign the top pick, then clearly signing bonuses aren’t keeping clubs from getting their dream pick. So the Yankees pay first round money to guys they get in the fifth round, so what? If the guy was really first round material, he would have gone first round and gotten the money from someone else. Let the Yankees throw their money around to unproven players.
I can hear you screaming about fairness and the evil empire (aka, the Yankees), so I’ll offer an alternative that I could stomach. The MLBPA won’t support my alternative idea, but I’m throwing it out to appease the rest of you. The MLBPA might not be good at compromising, but I am!
I say MLB and the MLBPA sit down and set a threshold amount that can be spent by each club on signing bonuses for each year of the upcoming CBA. So, let’s just say for sake of having an example, each club can spend $15 million on signing bonuses for the 2010 draft. They can divide it up any way they choose between the rounds, but cannot exceed the maximum total amount. This still limits the amount a player is going to receive, but there’s some flexibility. If he’s really worth it, a team will spend a huge chunk of their allotted amount on him. In a hard slotting system, he’s got no chance.
The system is still flawed, because inevitably the teams will simply sign the player to a contract like Strasburg’s where he receives large sums over the next few years as salary. Then you have to go to a system like the NBA where there are no signing bonuses and only slotted salaries. Now I have a problem again. My free-market sensibilities cannot handle slotted salaries. Same reason I’m against a salary cap. Hey, at least I’m consistent!
So, even I have a hard time defending my alternative. It’s the best I’ve come up with if we simply must have some change. However, I’m ultimately not in favor. I don’t really believe that clubs are that greatly affected by the lack of hard slotting in the draft. Don’t believe me? Consider what I found in an article by the Pittsburgh Tribune-Review. The Pirates only signed 23 of their 50 picks in the 2009 draft, which John Grupp notes is the lowest number of signings amongst MLB clubs. However, the Pirates GM, Neal Huntington, revealed their strategy: they used large signing bonuses to get top high school pitching talent that slipped in the draft. He seems to think they were successful in their strategy. The Pirates spent $8.08 million on their top ten picks, which ranked sixth among all thirty clubs. What does that tell me? The Pirates might not be the richest club (not even close, actually), but they had a strategy and used what they did have to get what they wanted. I didn’t hear any remorse about the 37 guys they didn’t sign. I’m guessing they weren’t worth the money they wanted.
If you ask me (which you’ve basically done by choosing to read this), the real problem is in terms of international signings. Not all clubs can afford to play that game, which I think is a far bigger problem than signing bonuses. More to come in the future on what I think should be done there.
I’ll close with another random tidbit I find interesting. The large majority of my followers on Twitter and on this website are Yankees fans. We’re here talking competitive balance, revenue sharing, the competitive balance tax, salary caps and draft slotting, and my biggest contingent of followers are Yankees fans. Some of them even support all or some of these concepts! I find it endlessly intriguing. Yankees fans: watch for my post later this week about my weekend in Boston at the Red Sox-Yankees series!
Today, I was referenced in an article on It’s About the Money by my new friend, Larry. I stopped by to give it a read and before I knew it, I had a comment that was too long to post. So, here I am with a full article as my commentary on Larry’s article. So, please go read his excellent article first and then come back for my response. [The links are hard to see on some computers, so be sure to roll your mouse over the words "Larry's article" in order to get there.]
Simply put, I do NOT favor a salary cap in baseball. I actually think baseball is fairly well balanced on the whole if you look at a number of years. Is it perfect? Nope. Are the Yankees able to do things that drive me crazy? Yes. Do I wish my hometown team spent more on payroll? Yes. Do I believe in limiting the amount of money someone can make? Absolutely not.
Baseball is a business…period. Fans get too caught up in the nostalgia and love of the game and can’t seem to wrap their minds around this fact, myself included. Fill in the blank: what if your boss came in today and said that no [fill in your job title] could make more than x amount per year? You’d be outraged, right?
Consider this: even without a cap, MLB players keep the lowest percentage of league revenues of any professional sports players. In 2008 (the most recent numbers I have), here’s the percentage of revenues the players in each league kept:
Maybe now you understand why the players are so against a salary cap. There’s no salary cap and they’re already the worst paid professional sports players!
I used to favor a payroll floor, because I thought the bigger issue was clubs who spend such a ridiculously low percentage of their revenue on payroll. However, I’ve decided that’s not really necessary either. It does drive me crazy that some clubs receive more in revenue sharing than they spend on payroll, which means they’re not even dipping into their own revenue for payroll. It also drives me crazy that clubs are able to divert revenue through related-party transactions with television/radio stations or concession companies that have common ownership.
All that being said, if you look at baseball as a simple business, you can’t really justify forcing owners to spend a specified amount on payroll. If they don’t spend on payroll, and they field a losing team, presumably they will lose out on revenue from ticket sales, merchandise sales, and after years of fielding a losing team they will lose their fan base entirely. Except that rarely ever happens in baseball.
Time for an example. The last time the Royals were in the postseason was 1985. For TWENTY FIVE years their fans have stuck by them despite the fact that they haven’t made it to the postseason. In fact, they haven’t had a winning record since 2003. Yet, the team is worth $314 million according to Forbes. They even increased their value by 4% from ’08 to ’09, despite the fact that their ’09 record was an abyssmal 65-97 and they play in a frills-free 1973 stadium.
The moral of the story is that you can make money in baseball without fielding a winning team and without building a new stadium. So, now back to my original point, why would an owner put more money into payroll if they can still make money and increase the value of their franchise without having to do so? I would imagine you can now see why I might have favored a payroll floor.
The more I think on it though, the less I can support the floor. Baseball is a business. What other industry forces the businesses within it to spend a specified amount on salaries? If you, as a fan, do not like what your club is doing in terms of payroll, then stop buying tickets, stop buying merchandise, stop supporting them. The problem is that baseball fans think they have a right to a winning team in their city.
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.
So, in conclusion, I don’t think a salary cap or a payroll floor is the answer. 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. I do think competitive balance could stand some more improvement in baseball, but I would do it through an international draft and perhaps different scheduling, but not through a salary cap or payroll floor. That being said, I think Larry wrote an excellent article and made some good points, and I thank him for including me in the article!
I’ve spent the past four years studying, writing and guest lecturing on revenue sharing and internal taxation in Major League Baseball. Accordingly, I’m fascinated by the debate raging in the media between Randy Levine, President of the Yankees, and Mark Attanasio, the owner of the Brewers. What really caught my eye though was the confusion between revenue sharing and the competitive balance tax. As I’ve guest lectured on these topics over the past four years, I’ve found that even your most avid baseball fan doesn’t generally know or understand the difference.
So, before I explain the difference, let me set the stage for you…
It all started with this comment to USA Today by Mark Attanasio, owner of the Milwaukee Brewers:
“We’re struggling to sign Prince Fielder, and the Yankees infield is making more than our team.”
Enter Randy Levine, President of the Yankees, who said this to ESPNNewYork.com:
“I’m sorry that my friend Mark continues to whine about his running the Brewers. We play by all the rules and there doesn’t seem to be any complaints when teams such as the Brewers receive hundreds of millions of dollars that they get from us in revenue sharing the last few years. Take some of that money that you get from us and use that to sign your players.”
“The question that should be asked is: Where has the hundreds of millions of dollars in revenue sharing gone?”
Ok, I’m on board so far. It’s the same old David versus the Yankees story as always in baseball. The real problem comes in how the story has been framed by many media outlets.
Gabe Lacques, who wrote the USA Today piece, wrote this in his article:
“According to the Biz of Baseball, the Yankees have accounted for $175 million – or 92% – of all revenue-sharing payments since revenue sharing was instituted.”
Andrew Marchand, who wrote the ESPNNewYork.com story, similarly stated:
“In the initial seven years of the luxury tax, the Yankees have paid teams nearly $175 million in revenue sharing, according to the BizofBaseball.com. That is 92 percent of the total revenue sharing that has been doled out.”
Enter confusion, stage right. Revenue sharing and the luxury tax (which, by the way, was renamed the “competitive balance tax” in the 2002 CBA, which covered 2003-2006) are two completely separate concepts. Aside from the Yankees having to pay both, they have very little in common.
Revenue sharing was first approved by the owners in 1994 and included in the 1996-2000 Collective Bargaining Agreement, presumably as an alternative to a salary cap, which was ruled out by the MLBPA. Revenue sharing is based on a club’s Net Local Revenue for a given year. Understanding what Net Local Revenue is takes the reading of no less than five definitions in the CBA, but I’m going to provide you the overly simplified version. Net Local Revenue is Local Revenue (gross revenue from all revenue areas like ticket sales, concessions, etc. minus Central Revenue, which is national television and radio, etc.) minus Actual Stadium Expense (which is exactly what it sounds like, the actual monies paid out by a club for its stadium).
The 1996-2000 CBA phased in revenue sharing with the use of three different plans:
Split Pool Plan: each club put in 20% of their Net Local Revenue. Those monies were then divided 75/25, with 75% being split evenly amongst all clubs and 25% being split only between those clubs with a Net Local Revenue below the mean for all clubs. The 25% was not split evenly between those clubs below the mean, but based on their distance from the mean.
Straight Pool Plan: each club put in 39% of their Net Local Revenue and it was split evenly with all clubs.
Hybrid Plan: evaluated the result each club would have under each of the above plans and then assigned the plan that was better for that club as a payor/payee. So, if the Yankees would pay out less under the Split Pool Plan, they were assigned that plan. If the Royals would receive more under the Straight Pool Plan, they were assigned that plan.
Then, to make it even more confusing, the plan was implemented on a percentage basis:
1996: 60% Hybrid Plan
1997: 60% Hybrid Plan
1998: 80% Split Pool Plan
1999: 85% Split Pool Plan
2000: 100% Split Pool Plan
So, in 1996, a club received or paid 60% of the total result under the Hybrid Plan. The result was that $50 million was moved around in 1996. By 2002, that number would be $169 million.
In 2002, revenue sharing was simplified under the next CBA. The Straight Pool Plan was in effect for the length of the CBA at a rate of 34%. So, each club put in 34% of their Net Local Revenue each year, and then the pool was divided evenly between all of the clubs. A Central Fund component was added, which called for 41.066% of the total amount transferred from payor clubs to payee clubs to be pulled from baseball’s Central Fund and divided between payee clubs whose average Net Local Revenue over the past three years fell below the average for all clubs over that same time period. The amount distributed was to be deduced from distributions to be made to payor clubs at the end of the season. There’s a very specific mathematical formula for this in the CBA, but I won’t go into it here.
I know you’ve all heard the grumblings about teams receiving more in revenue sharing than the spend (*cough* Marlins *cough*). An example I use in my lectures is the 2005 Florida Marlins. Payroll was cut by nearly 75% to a league-leading low of $14,998,500, more than $20 million below the next lowest payroll. Meanwhile, their cut of revenue sharing was reported to be $31 million, leaving them $16 million for other “baseball-related” activities. That’s the only parameter given in the CBA for spending revenue sharing dollars, by the way: that it be used for “baseball-related activities.”
The 2006 CBA contained a revenue sharing provision very similar to the 2002 CBA. The percentage was decreased from 34% to 31% because of increased revenues league-wide. The Central Fund Component was changed as well. Under the current CBA, the stated goal is to transfer the same amount of money as would be transferred under a 48% straight pool plan. Thus, the Central Fund Component’s tranfer value is equal to the number that when added to the Base Plan’s transfer value equals the result under a 48% straight pool plan. To determine each club’s amount paid in or received, you multiply the net transfer value of the Central Fund Component by the club’s Performance Factors. Performance Factors are found in Attachment 26 to the CBA, which assigns negative factors to payee clubs and positive factors to payor clubs. Thus, the Central Fund Component still has the effect of redistributing wealth from higher revenue clubs to lower revenue clubs in relation to their relative wealth or lack thereof.
Time for another example I use in my lectures. The Royals revenue sharing receipts doubled from 2002-2007, but payroll only rose by 6%. Meanwhile, the team value has risen from $96m to $282m. Just food for thought.
Need dessert to go with that? Consider this quote by Mr. Attanasio:
“We do get a piece of revenue sharing, and we appreciate it, and we need it, and we use it. We put it to use. It’s a matter of record that we use our revenue sharing dollars pretty much every year in our budget.”
First off, I’m bothered by the use of “pretty much,” which makes me wonder why not always? Second, when he says it’s a matter of record, don’t be fooled into thinking it’s a matter of public record. It’s not. Every club in MLB guards its numbers very closely, and you will never see the Brewers budget and be able to ascertain for yourself just where that revenue sharing money is going.
As if that weren’t enough, another issue with revenue sharing is the Net Local Revenue calculation, which is easily manipulated. Picture this…Club A’s owner is also the owner of ABC, Corp., which provides concession services. Club A hires ABC, Corp to provide concessions at its ballpark. Club A’s owner overpays ABC, Corp in order to decrease Club A’s Net Local Revenue number, thus increasing Club A’s share of revenue sharing distributions.
Haven’t had enough yet? Another example…Club B’s owner also owns XYZ Media, Inc., which airs Club B’s games locally. Club B negotiates a contract with XYZ Media, Inc. where XYZ Media, Inc. underpays for its contract to air Club B’s games locally, thus lowering its Net Local Revenue number and increasing its share of revenue sharing distributions.
Oh, and if you’re still feeling bad for the Brewers and the other small market teams, consider this: in 2002 three teams were sold and bought. The Red Sox, who are obviously in a large market, sold for $380m (taking on about $40m in debt). The New York Mets, another large market team, sold for $391m. The Marlins, the poster child for small market teams, sold for $158m. Ever heard you get what you pay for?
After the infamous strike of 1994, the owners also managed to introduced the luxury tax after being defeated on the salary cap by the MLBPA. Most people think it was aimed directly at Steinbrenner and his seemingly endless wallet, and most people are right.
The only thing the luxury tax has in common with revenue sharing, aside from hitting the Yankees wallet the hardest, is that they made it way too complicated in the 1996 CBA. The luxury tax was only implemented under that CBA for 1997, 1998 and 1999. Thresholds were set and any team who exceed the threshold paid the tax:
1997: $51 million threshold (35% tax on amount over threshold)
1998: $55 million threshold (35% tax on amount over threshold)
1999: $58.9 million threshold (34% tax on amount over threshold)
Simple, right? Yep, so they had to make it a little more complex. Enter the “floating threshold” concept. At the end of each season, if the midpoint between the fifth and sixth highest payrolls was more than the threshold, then that became the new threshold. Then, the threshold for the next year would be adjusted based on that number.
Now even if you can grasp all that, the definition of Actual Club Payroll is sneaking in at stage left to really complicate matters. Actual Club Payroll is 1/28th (there were only 28 clubs then) of player benefit costs, player salaries and other amounts like bonuses and deferred compensation. Throw in that some players are only with the team for part of the year, or have a contract that doesn’t specify amounts for each individual year, and you really have a mess on your hands.
Requests can be made within MLB or by the MLBPA with regards to how the acquisition of a player might affect a club’s payroll total. This was meant to make the luxury tax figure into a club’s decision to sign a player. It was assumed most clubs would try to avoid the penalty. However, the floating threshold concept got in the way in the beginning. The very first year the tax was in effect, 13 clubs were over the midpoint between the fifth and sixth highest payroll and were hit with the tax.
Before I get into how the tax has evolved, I should clarify where the money goes. Under the 1996 CBA, the first $10m went to compensate for any issues with the revenus sharing plan (such as running short under the Hybrid Plan), the next $7m went to the 5 AL clubs and 5 NL clubs with the lowest Local Revenue, the next $3m went to the Industry Growth Fund (which funds training camps and other baseball development activities domestically and internationally), and the next $2.5m went to fund a reserve for any overpayments made into the system. In the end, $30.9m was collected under the 1996 CBA.
The 2002 CBA saw the luxury tax become the competitive balance tax and introduced a somewhat new system. Much higher thresholds were set for 2003-2006:
Increasing penalties for repeats offenders was also introduced, making it clear that the tax was meant as a deterrent and a penalty:
2002 First-Time Offenders: 17.5%
2003 First-Time Offenders: 22.5%
Second-Time Offenders: 30%
Third-Time Offenders: 40%
The distribution of funds also evolved, no longer providing for funding to low revenue clubs, thus distinguishing it entirely from revenue sharing. The first $5m would go to refund for any miscalculaations, then 50% would go to player benefits, 25% to the Industry Growth Fund, and 25% to developing baseball in countries without high school programs.
The 2006 CBA kept the basic model of the 2002 CBA with adjustments for thresholds and taxation amounts:
Penalties also increased:
First-Time Offenders: 22.5%
Second-Time Offenders: 30%
Third-Time Offenders: 40%
Distributions remain roughly the same and continued the trend towards funding player benefits with the tax money. The first $2.5m is set aside for refunds, then 75% for player benefits and 25% to the Industry Growth Fund. Thus, the tax is not distributed to low revenue clubs.
Now back to the statements by Mr. Lacques and Mr. Marchand. The Yankees have not paid 92% of the total amount of revenue sharing distributed. They have, however, paid 92% of the luxury/competitive balance tax over the years. They are the only club to have paid the tax each and every year since its inception.
If you want to understand more about these provisions and how they evolved, you can check out my article in the University of Denver Sports and Entertainment Law Journal here. I’m also covering all of this in my book, which is coming soon!
For love of the game,
The following is a post from June 27, 2007, originally appearing on Chop ‘n Change, about Scott Boras’ impact on baseball. Essentially, not much has changed since then. What has changed, however, is how I view player salaries. As such, I have added a couple of footnotes to revise my opinions. So, what do you think? Is Scott Boras the most influential man in baseball? Leave your comments!
Though it pains me to ask, I often wonder if Scott Boras is the most influential man in baseball. Not just today, but in the past couple of decades. Players like Alex Rodriquez have him to thank for their unprecedented, multi-million, multi-year contracts. Use the search terms “Scott Boras is Satan” on Yahoo! or Google and you’ll find a host of baseball fans equating Boras with the man down under. If he’s not the most influential man in baseball, he certainly is the most hated.
As a fan, I’ve spent the past decade or so hating Scott Boras. I blamed everything that was wrong with the game on him and the players’ union. In reality, the pendulum has simply swung from one extreme to the other.1 Let me begin with a history lesson. In the beginning, the owners literally owned the players, in every literal sense of the term. Owners could unilaterally decide when to trade or sign a player and how much to raise his salary (subject to very little limitation). The reserve clause, in its inaugural form, allowed clubs to reserve only five players. However, it wasn’t long before the reserve clause was an integral part of every player contract. Owners convinced players that the reserve clause was essential to preserve what’s been called “competitive balance” in baseball. The idea of competitive balance was best stated by sports economist Simon Rottenberg, who said, “But in baseball no team can be successful unless its competitors also survive and prosper sufficiently so that the differences sin the quality of play among teams is not ‘too great’.” In fact, as late as the 1950s, baseball players testified in Congressional hearings that the reserve clause was vital to the preservation of baseball. And it wasn’t just any average player testifying, it was players like Ted Williams and Stan Musial.
The reserve clause, by its very nature, depressed player salaries, however. This made it only a matter of time before the players would become discontent with the system. Things came to a head in 1970 when Curt Flood challenged the reserve clause after being traded and refusing to report. There were cases before that, but I won’t belabor the point here (you can read my legal journal artice here if you’re really interested). Unfortunately, Curt Flood lost his case and the reserve clause remained intact until Andy Messersmith and Dave McNally asserted they had achieved free agency for the 1976 season. The short version of the story is that player contracts allowed owners to unilaterally renew the contract each year. Messersmit and McNally both avoided signing their contract for the 1975 season. Thus, at the end of the 1975 season they asserted that their owner could not renew them for the following season. The case proceeded to arbitration within MLB instead of to the Supreme Court as in Flood’s case. Peter Seitz eventually ruled that Messersmith and McNally were indeed free agents and the business of baseball (and the game) was changed forever.2 Fast forward to the present where Scott Boras represents free agents and negotiates for them multi-million dollar, often record-breaking, contracts. As fans, we hate him because at one point or another we’ve all (except maybe Yankee fans) lost a player we loved because Boras was demanding more money than our team could afford.3 We blame him for the inflated salaries in baseball and for making the game about money and not about playing out of team loyalty or for love of the game. Rob Dibble has said it before and I’ll say it again: “For Love of the Game” was just a movie. Yes, there are guys who seem to still value team loyalty or who appear to play for love of the game and not for money. For the Braves, these have been players like Andruw Jones, Chipper Jones and John Smoltz who have all given hometown discounts to the Braves in the past to facilitate their resigning. But in the end, we as fans need to realize that baseball players have a far more finite career than the average person, so it makes some sense that they make a lot more money than we do. When their career ends, either due to an injury or retirement, their earning capacity out in the real world may be very small. Sure, some of them go on to coaching and broadcasting careers, but that’s only a small percentage of the guys who have played the game. For those who retire young, they may not have any marketable skills out in the real world and may not have amassed very much during their playing years. For others, they began the game at such a young age that they lacked the ability to manage their money wisely (although I hear baseball has made strides in this area by providing education and counseling). There are a whole host of reasons why a baseball player would want to seek to maximize his earnings during his playing years, just like any other average person does in his career. Instead, we see the multi-million dollar contracts, or we lose our favorite player to another team because our team couldn’t afford him, and we have to find someone to blame. We blame the player, the union…and we blame Scott Boras. Though my gut feeling is to dislike the guy, I have to admit that he’s simply doing his job. He’s supposed to be a zealous advocate for his client, and his job is get his client the deal the client wants. If the client wants the most money he can get, Boras is the man for the job. He’s a sharp negotiator and great at his job. You really can’t blame him for that. Instead, blame the owners who negotiate with him. If no one would pay the big bucks, Boras wouldn’t be the infamous character he is. If the owners really thought he was a detriment to the game, they would all refuse to negotiate with him. Instead, they fork over the big bucks to one of his clients because they believe that player can make them, the owner, more cash. I guarantee you that in the long run the owner only spends what he thinks he’ll get back in revenue from increased ticket sales, advertising, apparel, etc. The whole system is unbalanced and sometimes simply unfair. But it’s the business of baseball as a whole that is to blame, not simply Scott Boras. In fact, if you read my legal journal article, you’ll see that Boras actually has some interesting ideas that clearly show his regard for the game. So, is Scott Boras the most influential man in baseball? Ever? No. This decade? Last decade? Some would certainly say so. Me, I think George Steinbrenner has a leg up on him, but I’ll leave it at that for now.4
For love of the game,
1 I no longer believe that the pendulum has swung to the other extreme (ie, I no longer believe players are overpaid in relation to team value and owner profits). More on this at another time.
2 This is obviously an overly-simplistic explanation. The creation of the MLBPA and the appointment of Marvin Miller to lead the group really drove the birth of free agency. Another interesting thing to note is that Peter Seitz was the deciding vote in the arbitration. Who cares, you ask? Peter Seitz representing the NBA player who defeated the NBA reserve clause. Makes you wonder how MLB ever let that happen.
3 Is that really true? I’m no longer inclined to think so. I don’t think it’s a matter of our team not being able to afford the player. Instead, I think owners make decisions about how to allocate their money – not just in terms of the team, but in terms of all of their business ventures. Will keeping the player increase their sales of tickets or boxes? Will his salary force the team to pay an additional amount in revenue sharing or luxury tax? Can the owner make more money using that money to improve land he owns around the stadium? I no longer believe that any team is “poor.” No owner has ever lost money when he sells his team. Instead, team values continue to soar, even for teams that claim they’re operating in the red. I won’t get into it here, but check the numbers. You’ll see.
4 I’ve changed my mind here too…I think it’s basically a tie!