There’s been a lot of debate over MLB’s new Collective Bargaining Agreement involving whether or not it is more beneficial to small markets or bigger markets. One of the focal points of this debate has centered on the amateur draft and the fact that set limits have been imposed on organizations who were willing to go “over slot” and pay above what a particular draft slot’s inherent value might be, but the changes to the CBA cut both ways. While it’s true that big market teams like the Phillies and the Yankees signed lots of talent that should have probably gone higher in the draft order, small market teams were often just as guilty of going over slot as their big market counterparts. In the end it appears it will still (as it always has) come down to who selects the best players.
The real issue when considering competitive balance is revenue. Some teams make a lot more of it than others by nature of their location, their fan base, and access to media outlets. I’ve always been puzzled by the notion of competitive balance at the micro-economic level. Isn’t the nature of competition such that the better organization and the better team should win? I understand that parity is good for the game, but if we really wanted it to be fair wouldn’t we have to rig a system where every team wins the World Series in a set order once every thirty years? How do measures that “level the playing field” not detract from inherent competitive advantages that are earned and deserved? Isn’t survival of the fittest a free market principle? Big markets should have an advantage, they have more people in them, and they pay higher prices.
If on the other hand you look at Baseball on the macro-economic level, as a single sprawling coast to coast business, then things begin to look a little different. You could argue that the scarcity of a brand in multiple smaller markets offers room for growth that makes up for whatever an already profit maximized big market may bring to the table. Competitive balance also makes for more interesting games which makes it essentially a quality control measure. No one enjoys watching the Yankees perennially steamroll the rest of the league (except Yankee fans of course).
Revenue sharing was first instituted in 1996 to help combat growing revenue disparities among MLB franchises. Based on 2012 revenues, $400 million will change hands from the big MLB markets to the small in order to level the playing field. The money is distributed on a sliding scale, which means that teams near the bottom of revenue generated, will receive significantly more than the $27 million average that would be distributed if that money were spread evenly across the bottom 15 teams. Ideally revenue sharing allows small market teams more flexibility in retaining home grown stars that they’ve poured development dollars into.
But revenue sharing hasn’t always worked the way it was intended to. Back in 2009 Maury Brown published an eye opening look at just how much money revenue sharing brought to small markets. He showed, for instance, that the Marlins received $20,946,573 and $21,030,000 in 2002 and 2003, while the Mets paid out -17,366,067 and -21,473,000 on those same years respectively. In 2008 and 2009 the Marlins received $47,982,000 and $43,973,000 respectively. Now consider this for a moment, the Marlins in 2008 had a team payroll of $27,003,450.00 which means the Marlins in 2008 pocketed over 20 million in revenue sharing dollars after payroll expenses. Doesn’t seem fair does it?
The new CBA will change revenue sharing in the coming years to address this very issue. The union requested a new rule that connects revenue-sharing money to big league payroll. In a report by Jason Stark of ESPN in November of 2011, he explained that teams receiving revenue-sharing money are now required to reflect a 40-man roster payroll 25 percent larger than the amount they’re receiving. So, if a team’s revenue-sharing check is for $40 million, their big league payroll needs to be at least $50 million. Also, by the end of this labor deal (2016), teams in the 15 largest markets will no longer receive revenue-sharing money, no matter how low their revenue may be. The 15 teams that will be ineligible for revenue sharing by 2016 are the Yankees, Mets, Dodgers, Angels, Cubs, White Sox, Phillies, Red Sox, Rangers, Braves, Nationals, Blue Jays, Astros, Giants and A’s.
The problem for many, particularly those on the Player’s Association end, is that MLB continues to register record profits while payrolls have failed to keep pace. Between local network outlets and national media contracts (a deal with Fox was recently valued at $12.4 billion over eight years to be divided across all 30 MLB teams) the sport is seeing unprecedented growth. Maury Brown reported in April of 2011 that gross MLB revenues have jumped from $1.4 billion in 1995 to $7 billion in 2010, a 400% increase. When accounting for inflation, the league still sees a phenomenal 254% increase, and yet many teams have failed to invest these profits proportionately into added payroll. Revenue sharing was supposed to address that problem but it clearly has not.
Scott Boras isn’t happy about it. According to Boras, most teams have lower payrolls heading into the 2013 season than the highest payroll those teams had from 2000-2012. “Only five teams have higher payrolls,” Boras told Murray Chass in a Jan 2013 article. “Everybody else is below even though revenue is up 200 percent and franchise values are up 300, 400 percent. What we’re seeing is not many teams are spending on payrolls despite the fact that their profits are extraordinary. You’d expect teams to have their highest payrolls, but they don’t.” Boras offered these examples:
In spite of revenue sharing, record profits, and media deals sprouting up left and right, Major League teams have failed to invest in players, according to Scott Boras. Is this in fact the case?
Wendy Thurm of Fangraphs recently did a nice analysis of payroll fluctuations. Below are two graphics that she employed.
In the first graph you can see that revenue has indeed outpaced payroll, however, the second graphic is interesting because the year to year percentage changes in both MLB revenue and payrolls do not always reflect a similar trajectory. From 2003 to 2005 revenue rose steadily then remained relatively high while payroll dropped precipitously. Then from 2005 to 2006 payroll showed a 20% spike. From 2007 to 2008 payroll and revenue were both declining on a parallel course reflecting the economic downturn, but from about 2009 on, payroll and revenue deviate, crisscross, then begin to slowly rise in unison from about 2011 to the present. In her well articulated piece, Thurm makes the argument that while many teams have cut back (even in the wake of record profits), others have used this money to dramatically increase their payrolls. She cites teams like the Nationals and Detroit as examples. Personally I don’t see it so much. While I can see the argument derived from the second graph where payroll and revenue seem to follow parallel trajectories, there are two major deviations on that graph where payroll was far below revenue, and there are also teams like the Marlins that continually appear to invest a far smaller percentage relative to revenue growth.
Teams like the Mets on the other hand, which were one of Boras’ culprits, have cut back repeatedly over the past 4 years while media proceeds have risen. The Mets received an estimated 60 million last year for their share of MLB’s national media dollars, their SNY network continues to appreciate and continues to generate revenue, they play in NY, and yet the team’s payroll ranked 19th out of 30 teams.
The odd conclusion here is that for some teams, the market dynamic isn’t responding the way it’s supposed to. Many small market teams are making out like bandits while teams like the Mets aren’t faring well at all. The Mets should not be losing money, they should not have had trouble managing their debt and they should be awash in cash as they reside in the biggest baseball market in the world, but the Wilpons were so damaged by losses through their association with Madoff and the depreciation of their real estate holdings, and they accumulated such a massive debt load from their new stadium, they reached a point where they were unable to invest in payroll on a level commensurate with the rest of Major League baseball. In retrospect, the lack of any semblance of prudent economic foresight demonstrated by Met ownership is truly astonishing. To add to their problems the Mets’ massive market wasn’t (still isn’t) helping them at the gate, as fans simply stopped showing up. Revenue continued to spiral down and here we are looking at a crappy on-field product, empty stands and a seemingly perpetual limited budget.
Eventually the Wilpons may be pressed into boosting payroll if they are to get themselves off of Boras’ list. No matter how much media money they manage to procur, if they keep losing money at the gate my guess is they’ll eventually have to sell the team. Sure, maybe the small marketers will herald a Met turnaround generated via their resurgent farm system, but barring that, the Wilpons are going to have to splurge. The striking thing about Boras’ list is that with the exception of the Rays and the Braves, every team on it has had a losing record over the period of time referenced on the chart. Clearly, teams that cut salary don’t fare well. The Mets simply can not keep pace with the rest of the league if during a time of plenty they continue to impose restrictions. At some point they’re going to have to invest if they’re to bring the fans back, even if it means betting the house.