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Baseball Economics Roundtable - May 2007 PDF Print E-mail
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Articles & Opinion
Written by Various Authors   
Wednesday, 02 May 2007 17:00

A Biz of Baseball ExclusiveBaseball is awash with revenues these days. From lucrative television deals at the national and local level, to MLBAM's steady stream of money, to satellite radio deals, naming rights, and new or redeveloped stadiums going online, owners are bathing in the green stuff.

With that, however, are the questions about where the money is flowing, and how to place value on the revenues that are coming in.

The Biz of Baseball decided it would be good early on in the 2007 MLB season to have a roundtable discussion with some of those that follow baseball economics closely. To that end, we've assembled the following panel:

 We'll be talking five different topics:

  • The latest CBA
  • How regional sports networks impact MLB's economic landscape
  • The value of marquee players and the value of club brand
  • Comments on whether MLB should implement a player payroll floor
  • The panelist picks a topic of their liking

Select Read More to read the Baseball Economics Roundtable for 2007

The current CBA works to address some inadequacies with the prior agreement as it pertains to revenue sharing. What are your thoughts on the agreement?

Zimbalist: The new CBA has some strong points and some weak points. If I had my druthers, the fixed component of revenue sharing would be the basis for all sharing, instead of just over a third. It would also be based upon a more objective standard of a team’s potential revenue, not its recent and projected revenue experience. Among other things, the present system still penalizes a team for past success and the larger variable component, although at lower and more uniform rates, penalizes a team for future success. Further, as it stands now, a top-half team’s revenue sharing obligation can go up because the revenue of other top-half teams rises. There are lots of other issues, but, in short, I see the present CBA as an improvement on the previous ones, though it is far from perfect.

Baseball Prospectus Annual Brown: Given the political realities of how the agreement came together, it's a step in the right direction, especially in terms of lowering the marginal tax rate to 31 percent. It's still difficult to grasp that large markets such as Philadelphia or Washington, DC can pull in revenue-sharing, but as I said, tying market size to the system seemed to be an area that was just politically too difficult to reach during collective bargaining.

The addition of a fixed rate component is certainly an interesting and positive step forward and will be interesting to analyze over the life of the agreement. The system also was adjusted to deal with some of the cliff issues within the prior agreement, which created scenarios in which a club that was just above the median after revenue-sharing could actually wind up with less net revenue than a club that was just below the median. There are certainly inadequacies within in it, however. Those at the top of the revenue making scale can be impacted in terms of their percentage of their obligation based on how the revenues of the other high-revenue making clubs grow. It's not perfect, but it's a step in the right direction over the prior agreement (I get into the current CBA in greater detail in the 2007 Baseball Prospectus Annual). Given that MLB is pulling in record revenues, it seems that labor peace won the day over any haggling that might have occurred in the trenches over revenue-sharing. Things certainly might have played out differently if the economics of MLB were in a more depressed state.

Gennaro: From the reports I’ve seen, it appears to be a step in the right direction. The reduction in the marginal tax rate means that there is more of an incentive for teams to invest in revenue growth. However, I’m an advocate of determining revenue sharing payees/payors based on revenue opportunity, rather than actual revenues. Using actual revenues commingles the important structural factors that determine a team’s revenue opportunity (market size, corporate base, etc.) with management capability and results. I think revenue sharing considerations should exclude the latter. Also, I would like to see future revenue sharing provisions include a “bonus payment” for a team’s on-field performance. For example, let’s say the Pirates were to receive $20 million, based on the revenue sharing formula, I would also like to see them be eligible for a bonus of say, $1.5 million for every win they achieve over some minimum (e.g., 80 wins) and capped at some maximum level of wins (e.g., 90 wins). The benefit of this approach is that it would also raise the Pirates’ marginal revenue from winning, providing them with a greater incentive to invest in winning, through the free agent market, or investments in player development, etc.

Silver: Needless to say, I was shocked that a deal got done so quickly, so quietly, and so professionally. My guess—and I’ve heard just a little bit of gossip to support this—is that each side was worried that the other was going to play hardball. The owners were worried that the players felt like they’d lost the last round of negotiations, and that they’d point to all the money the game was making and demand a larger share of the pie. The players were worried that the owners would cite the NHL as a precedent, and that they held the performance-enhancing drugs scandal against the players as a sort of lever in case the negotiations went into the court of public opinion.

And so perhaps each side was very pleasantly surprised when they found out that the other side was going to be reasonable. Of course, there are other things that helped motivate the quick settlement. I think both sides learned from 1994 and 2002 that doing your negotiating the media is pretty much a lose-lose scenario. I think the damage from collusion has finally scabbed over (though not healed up completely). And you have some fresh blood on each side, with people like Fehr probably being involved in the negotiations more by proxy.

In any event, the fact that they were able to broker a deal with a minimum of collateral damage is remarkable, and speaks to some of the ways in which the game has matured. At the same time, I wonder if they didn’t roll the clock too far back in terms of revenue sharing, as the orgy of free agent spending this winter would seem to attest.

Noll: The new agreement cures a huge perversity in the revenue-sharing system that was created by the old CBA. Under the old agreement, teams in low-revenue markets were rewarded financially for making their teams weaker. The new agreement eliminated these anomalies, but in doing so it introduced a great deal of complexity. Financially complex rules typically create unintended loopholes as well as the potential for disagreement about their interpretation. Most likely, the next CBA will have a simpler formula.

Fort: Let’s do the big picture first. Since both players and owners share the goal of maximizing league profits, the CBA is really about dividing up the economic outcome in MLB. Since, in my opinion, really nothing changed between the owners and players in the new CBA, they apparently think life is good, economically speaking.

On the specifics of revenue sharing, the only change I see is that the sharing rate is reduced to 31%. The same target transfer of around $326 million will be funded come out of revenue growth at a lower tax rate. But transferring the same amount of money by lowering tax rates means more money is kept by each team as revenues grow. And as long as revenues grow disproportionately, this is a blow to any move toward maintaining the current level of competitive balance and surely cannot increase competitive balance.

But then nobody ever puts forth a reasoned criterion for judging competitive balance in the first place. So there never are discussions of just what the level of balance needs to be, either during the regular season or during the playoffs. All we hear from the league is that “balance is better” by whatever their chosen measurement happens to be at the time. And all we hear from critics is that there should be more balance. But the alteration in revenue sharing in the current agreement speaks volumes on what the players and owners think about competitive balance relative to what we hear from fan advocates in the press.

Bradbury: There are some provisions designed to reduce the disincentive for winning created by revenue sharing. By cutting the percentage of local revenues shared, small-market teams get to keep more of their own local revenue and can expect fewer handouts.

Supposedly, the CBA includes closer scrutiny of what revenue-sharing recipients can do with the money. I’ve yet to hear exactly what new mechanism is in place. I’m not sure how well MLB can police what these teams choose to do, but I do know that there is some discord among the owners regarding this issue. I think social pressure among owners and changing the tax rates are bigger factors.

Another change in the CBA that will also help weaker franchises is awarding teams compensation picks when drafted players do not sign. The reverse-order draft is supposed to give losing teams a leg up. Because drafted players could previously choose to go to college or to re-enter the draft the following year, draftees had tremendous bargaining power. Clubs do not want to waste a high first-round pick on a player they cannot sign, so small-budget teams had been going after lesser players who are easier to sign. Now, a team that fails to sign its first-round pick is compensated with a similar pick in the following year’s draft. This shifts some bargaining power to teams, with draftees knowing that teams will have a comparable pick in the following draft.

Overall, I am just happy the agreement was reached without a work-stoppage. The owners and players know the stakes involved, so I’m not much bothered by what they come up with.

How do regional sports networks (RSNs) impact MLB’s economic landscape now, and how will they in the future?

Diamond Dollars Gennaro: Team-owned RSNs are dramatically changing the economics of the game, beginning with raising the financial stakes of winning or losing for an MLB team. Unlike a traditional fixed rights fee arrangement with a Fox-Sports type affiliate, by having a stake in a RSN, a team re-connects its broadcast revenues to its on-field performance. Beyond the revenue implications, the RSN is an asset whose value rises and falls, in part, based on the team’s on-field results. In five years, the Yankees have created an asset—the YES Network—valued at nearly $2 billion today. The network is an important part of their economic equation and figures prominently in their willingness to aggressively spend payroll dollars in an effort to win. Besides the direct financial implications, RSNs are a team marketer’s dream as they provide a unique vehicle to build the team brand through team-related programming. It’s also no coincidence that the highest revenue teams are typically the ones with RSNs, as the broadcast rights for these teams are an asset substantial enough to form the basis of a stand alone network.

Noll: RSNs have been around a long time, and local baseball on over-the-air TV has been an endangered species since pay-TV penetration passed 50 percent almost three decades ago. An interesting issue is the effect of pay-TV RSNs (e.g., Fox Sports Network) on revenue disparities between big and small markets. My expectation is that, taking into account revenue sharing, the ratio of net revenues of the wealthiest and poorest teams has diminished, thereby making teams in smaller markets more viable financially.

The most interesting issue surrounding RSNs is the legality of the bundles of RSN telecasts that leagues are putting together as out-of-market national packages. This practice is legally tenuous. Some courts already have concluded that the antitrust exemption for pooling television rights into league packages does not apply to pay-TV, and Congress has held hearings on their legitimacy. If these packages are made illegal, teams will be allowed to sell national pay-TV rights for their games. The likely effect would be to give fans access to many more games, to increase competition in televised sports, to increase disparities among teams in broadcast income, and to reduce total broadcast income for the sport as a whole.

Silver: Any team that doesn’t have its own RSN is leaving money on the table. It’s simply a more efficient way to mine the profits of your broadcasting rights. Undoubtedly, there are a few inefficiencies in play for the time being, since some teams have RSNs while others do not. But I suspect that within a decade, we’ll be talking about 27 or 28 teams having RSNs, and it will become something that’s as standard a practice as building luxury boxes or investing in your farm system.

Zimbalist: Since the late 1980s RSNs have been a powerful force boosting team revenues, particularly those in the larger markets. When the team owners also own the RSNs, it can be a source of an extraordinary revenue advantage.

Bradbury: As much as MLB would like to have a national viewing audience like the NFL, baseball fans want to watch their local teams. MLB has been quick to allow these loyal fans to see their favorite teams play with Extra Innings and via the internet.

There was a lot of dialogue about the potential exclusive arrangement with DirecTV, but MLB won as the cable companies gave in to MLB’s demands. This should tell you something about the value of the local broadcast rights. MLB played hardball, because it knew what its product is worth.

Regional Sports Networks are profitable; there is no doubt about it. As Ted Turner learned, the more people you give a taste of the game, the more they’ll consume it. It’s a lesson that baseball learned with radio as well. By giving fans with geographic ties more opportunities to watch, the fan base grows. Oh yeah, and more importantly the RSN generates quite a bit of revenue on its own. Very nice!

Brown: RSNs are creating more disparity in terms of local revenues between the clubs, and given the ease with which clubs might be sheltering those revenues from the revenue-sharing system, they play a large part in creating the haves and have-nots. Not every owner is going to be in a position to acquire an RSN due to limited content or saturation of content by an existing RSN in a given market. Plainly put, there are only a limited number of YES Networks and NESNs to go around.

Beyond that, they create issues in terms of what is now deemed a "local" territory by way of television household reach, and the ability to tap into what is deemed local through the likes of the Extra Innings deal recently reached. Another good example of how RSNs impact MLB in the overall is how Peter Angelos leveraged television reach by way of the Orioles broadcast area during the Expos relocation to Washington, DC. Through that, he was able to gain a foothold into an even larger regional area via the creation of MASN.

Going forward, RSNs are going to become more of an issue as the revenues for YES and NESN continue to escalate, and those on the outside of the RSN bubble clamor for more shared revenues.

Fort: Two things about Regional Sports Networks seem important to me. First, RSNs generate local revenue rather than national revenue and inequality in the growth of local TV revenue is the major source of the imbalance in potential revenues across teams. Second, the level of competitiveness among RSNs determines the price and quantity of games seen by fans.

So, on the first count, RSNs impact MLB’s economic landscape on the competitive balance dimension. But that’s handled through the local part of revenue sharing just discussed. So, really, on this count, the impact of RSNs on MLB’s economic landscape is up to the owners and players through collective bargaining. And as long as both parties to collective bargaining have the same goal of maximizing league profit, then RSNs will be managed to do so. Indeed, we see precisely how that plays out in the new CBA revenue sharing rates. 

On the second count, technology is such that the idea of an RSN as a geographic organization is just plain wrong. It doesn’t matter where the RSN is located, what matters is its level of competition. And right now that appears to be nil. This suggests fans are paying close to their maximum willingness to pay for the games they do receive. And price discrimination through repackaging for special package offerings on cable and satellite make it clear that the market power of RSNs is being exercised. Of course, MLB is not oblivious to this and is making its own package deals available as well. The upshot seems to me, though, that fans will pay just about the most they are willing to pay, rather than a competitively determined return over and above the actual costs of providing TV games.

In an interview with the Biz of Baseball, David Samson addressed how marquee players and brand can impact the bottom line. At the time, we asked Samson about retaining talent on a limited budget, specifically in retaining Dontrelle Willis.

Samson said, “We’re going to go out there and compete, and we went people to know that they should be cheering for the front of the jersey. And now’s an important time for people to support the Marlins, because without season ticket support or attendance, it’s hard to convince politicians that it really matters.”

The quote begs the question: What is the value of marquee players, the value of team brand and how do each of these impact the bottom line?

Noll: Only owners and league officials believe that people pay to see the jersey instead of the players. Field some great players, draw 3+ million; field a de facto minor league team, draw 700,000. The contribution of marquee players to revenues in the sport continues to grow, although the post-strike revenue-sharing rules have slowed salary growth among the best players.

The Baseball Economist Bradbury: It is hard to convince politicians to dole out welfare to sports franchises. There is no economic justification for a public subsidy to professional sports teams. But even on philosophical grounds, I cannot support taxing citizens to do this. David Sampson runs a good franchise. I wish he would concentrate on marketing the phenomenal product his organization has put on the field, rather than use it as a weapon.

Where are the Marlins going to move? They are in a top-10 MSA that is growing. San Antonio just laughed when Jeffrey Loria threatened to move the team there. Unless the Marlins can convince some city to give them a sweetheart deal—something I don’t see happening— the Marlins threat to move is not credible. If he pulls this off, he should start demanding that supermodels pay for the privilege of sleeping with him.

I don’t think the Marlins fans are too concerned about marquee players. Miguel Cabrera and Dontrelle Willis are two of the best players in the game. They have an exciting group of young players who have the potential become All-Stars. As a baseball fan, I think the Marlins have one of the most likable line-ups in the league. One thing we know is that fans want to see a winner, and even the Marlins fans have responded to winning. I think it’s one of the reasons the Marlins have put a lot of effort into putting a good team on the field on a tiny budget.

The main reason that fans have turned against the Marlins is the behavior of the owner. Look at the experience of the Charlotte Hornets in the NBA. The Hornets sold out their arena for a decade—North Carolina is basketball crazy. When owner George Shinn demanded a new facility and threatened to leave, fans stopped supporting the team. When you tell your fans love me or else, they’ll abandon you in a hurry.

Gennaro: I’ve done enough work in this area within baseball—consumer research, focus groups, etc.—to be convinced that each MLB team is a unique brand, with its own “equities”, that have been shaped by many factors, including the team’s on-field performance, their ballpark, fans perceptions of ownership, and the way fans relate to the players. A strong team brand goes hand-in-hand with high fan loyalty and is a strong financial asset, which can cushion attendance declines when the team is playing poorly and offers some extra pricing power when the team is performing well. The amount of focus teams place on “building the brand” often depends on a trade-off between marketing spending to shape the image of the team in the mind of its fans, versus spending dollars on promos to put fans in seats. On the topic of marquee players, there is strong evidence that a team’s high-profile fan favorites can “personalize” the team brand and deepen the emotional connection with its fans—a connection that endures long after the player has moved on.

Silver: I like the work that Vince did on marquee players. Intuitively, I thought his numbers passed the sniff test. Analytically, there wasn’t quite as much empirical backing as I might have liked, but this is something that’s nearly impossible to study empirically; the data set simply isn’t robust enough to account for the attendance effects of individual players. 

In any event, I suspect that Vince is right that the marquee player effect is relatively small, and confined to a relatively few number of players. And ultimately, I think the marquee player question is subsumed in the concept of brand. Brand, among other things, is about managing expectations. It’s about making a certain promise to your consumers and living up to that promise, and it’s when teams tend to break those promises that they get themselves in trouble. What the Seligs did in Milwaukee, for example – promising competitive payrolls in order to get Miller Park built and then reneging on that promise – was very damaging for a couple of years, and I suspect that Brewer attendance would not have recovered to the extent that it has if the Seligs hadn’t sold the club. I did a lot of consulting work in Milwaukee at about the time the Brewers hit rock bottom, and people took all of this very personally.

Anyway, I’m running in circles here, but I suspect that once you get beyond perhaps a dozen or so players – guys in the Derek Jeter, David Ortiz class – fans are less concerned about the name on the back of the uniform as they are having players who can catch, throw and hit. If the Cubs fail to re-sign Carlos Zambrano, that could be problematic for them, but only to the extent that they don’t sign someone of comparable worth to replace him -- if they lost Zambrano but brought in Roy Halladay, nobody would bat an eyelash. To that extent, team payrolls are perhaps a little bit sticky downward; fans may be quicker to punish you for selecting a lower point on the wins-revenue curve than they are to reward you for picking a higher one.

Fort: I read this quote as focusing on the politically determined part of an owner’s bottom line. Fan support impacts revenues directly at the gate, on attendance-related revenue like concessions and parking, on TV, and through merchandise purchases. But fan support also impacts the politically determined part of revenues, that is, subsides through venue construction and lease terms. To the extent that marquee players engender that support through better fortunes for the team, so be it. But Samson is quite correct that general brand name identification—we used to call that fan loyalty, by the way—is related to political support for the team as well. So, it seems to me that marquee players and brand identification are important to both the “business” side of revenues and the “political” side of revenues.

Zimbalist: Theoretically, team brand value is difference between the team's market value and the discounted present value of its future profits. A player's marquee value would be approached similarly, the difference between his salary and his estimated MRP.

Brown: Measuring the value of marquee players is an interesting study that may lend itself to those at the top of the “star player” scale, but across the league it becomes extremely difficult to quantify. Certainly both Nate and Vince have touched on this in Baseball Between the Numbers (Alex Rodriguez) and Diamond Dollars (Babe Ruth).

We can certainly place soft revenues around other players. The most notable player currently would most likely be Daisuke Matsuzaka, where sponsorship, ad revenues, and tourism dollars will impact, not only the Red Sox, but other clubs as well.

But, as mentioned, these are the exceptions. Past the biggest stars in MLB, it becomes more difficult to value a player’s name. If someone can tell me how much Wade Boggs made the Devil Rays in 1999 based on pure name recognition alone, we’d be getting somewhere.

As for placing a value of fan loyalty based on brand recognition, you get into a somewhat similar situation. In the case of clubs such as the Yankees, Red Sox, and Cubs, there is ample evidence that brand loyalty alone can provide steady revenues to buffer losing seasons. Certainly, the Cubs being able to hitch your wagon to the “Lovable Losers” mantra and milking revenues from it is something that doesn’t apply to say, the Royals—it becomes more difficult to measure the further away from the marquee clubs you get.

Much of brand loyalty comes from the history of a club, and therefore, those that have been in existence the longest will have the best chance of taking advantage of brand loyalty. Samson doesn’t have this ability given the short time the club has been in existence. The Yankees can leverage the memorable history of Joe DiMaggio or Mickey Mantle. As time marches on, these newer clubs will create (or hinder) their own brand loyalty based the history they create, and often times, the fan experience of the ballparks they play in.

The latest Forbes franchise valuations for MLB shows that the some of the highest profit making is coming from clubs that have some of the lowest player payrolls in MLB. Is a player payroll floor needed to fully address possible high levels of profit taking from those that also receive revenue-sharing?

Baseball and Billiions Zimbalist: With over $30 million per team coming from MLB’s central fund and some of the bottom teams receiving over $30 million in revenue sharing, a low payroll virtually guarantees teams on baseball’s welfare system a healthy profit. I favor a revenue sharing system that has the proper incentives, rather than one with administrative rules.

Bradbury: I think a salary floor is a bad idea. Yes, it limits the amount of revenue sharing an owner can keep, but paying players isn’t necessarily the best way to manage your franchise, especially for a low-revenue team. There are several clubs winning without spending much money on player salaries. From 2000-2005 the Twins, Marlins, White Sox, and Athletics spent, on average, 32 percent less than the league-average payroll and went to the playoffs ten times and won two World Series. These teams aren’t just sitting home collecting revenue sharing; they generate revenue by putting good teams on the field with low labor costs. The incentives for generating revenue through winning are high enough to limit the “welfare queen” strategy.

It is true that there is a positive relationship between market size and winning, but the disparity between the best and worst franchises is not pure product of financial determinism. Predicting player performance is difficult; therefore, attempting to buy a championship through free agency is expensive and risky. Some teams have exceptional scouting departments that give them an edge. The bigger story though, is that the reserve rules allow teams to pay players far below their actual worth during their first six years in the league. Why not put resources into relatively cheap management/scouting personnel and cast your lot with a huge pot of prospects? Some become stars while others wash out, but no matter what, they didn’t cost you much. Also, the difference between good and bad players is small, so that even teams that can’t hire the best can remain competitive.

The perennial losers like Kansas City and Milwaukee are in small markets, but they also have been horribly managed. Are they at a disadvantage? Yes, but it’s not as big as the small-market owners make it out to be. From 1995-2004, differences in market size explained only about 40 percent of the gap in wins between the Yankees and the Brewers.

Furthermore, the potential remedies for market-size disparities are worse than any of the solution—more revenue sharing (remember the “welfare queen” problem?). The financial disadvantage that some teams face is similar to the disadvantage the Rockies face playing in an extreme altitude. We don’t have 30 localities with identical demographic characteristics to host teams. The disparity exists, but we’ve seen that it’s not too big for teams to overcome. It is part of the game, and may even add some drama. I sure enjoyed watching the Marlins beat the Yankees in 2003. If some teams put as much effort into their development as they do belly-aching, they might have a few playoff appearances to show for it.

Silver: I recently did a piece at Baseball Prospectus that looked at the overall stock of talent within each organization, rating each club from 1 to 30 based on the amount of long-term talent that they’ve compiled. Three of the teams at the top of the list were the Twins, Indians, and Devil Rays, all of which have been accused at one point or another of “profit taking”.

The problem is not that the teams at the bottom are spending too little – it’s that the teams at the top are spending too much. Neil deMause, building on some work I’d done for Baseball Between the Numbers found that probably only 3-4 teams derived a larger marginal gain in revenues than they paid out in payroll, and the fact that there’s such a strong inverse correlation in the Forbes data between payroll and operating income would tend to confirm that. Baseball teams, especially those toward the top of the revenue heap, are remarkably bad at marginal economics. They have the luxury of being sloppy because they’re making too much money.

Gennaro: I’m uncomfortable with player payroll as the sole yardstick of whether a team is re-investing revenue sharing dollars. The teams with the lowest payroll are often the teams with the lowest revenue opportunity. These teams will ultimately fail or succeed based on the strength of their player development system, not their willingness to escalate payroll. Forcing payroll investment may create more Gil Meche-type signings. I would rather see some dual measure that includes investment in player development as an alternative investment option.

Brown: I’m uncomfortable with the way some clubs appear to be using revenue-sharing as welfare—and as I’ve written on this topic, some fans think that reason is good enough to implement a player payroll floor.

However, I don’t see the need for a player payroll floor.

With more clubs getting player contracts under control, the free agent pool has been thinning, and with that, we’ve seen the supply and demand of them increase. That has sent player salaries upward at rates that many low-to-mid level revenue making clubs cannot keep up with.

With the change, the ability to develop players from within becomes a higher priority, and with that, forcing investment of those revenues directly at the MLB player level is counterintuitive.

Clubs need to be able to invest in player development—be that scouting, academies outside the US, et al. While some clubs continue to take advantage of the revenue-sharing system, implementing a player payroll floor would have unintended consequences and further upset competitive balance.

Noll: The theory behind a floor on salary expenditures is that if a team is forced to spend money, it will bite the bullet and field a decent team. There are two major problems with this theory. One is that the only cause of weak teams is low salary budgets. Another cause is bad management. Forcing teams to spend more will cause poorly managed teams to overpay their players even more than they do now. In addition, teams can improve themselves by spending more on player development and evaluation, as exemplified by Minnesota and Oakland. Why should these teams be punished financially when they now can field above-average teams with below-average budgets? One should be very careful about implementing central planning in any sport because it inevitably reduces the efficiency of team management.

Sports Economics Fort: First, Forbes only guesses at profits using some data that can be roughly verified, team revenues, and some data that can’t be verified, team costs. But even if one takes the Forbes guesses at face value, it is also true that some of the highest profit making is coming from clubs that have some of the highest player payrolls. So I don’t see why there should be any conclusions at all drawn on the profit statements from Forbes.

The intent of the observation about the Forbes data seems to be that if smaller-revenue owners spent their net revenue sharing proceeds on talent, then profit margins would be smaller. And that somehow these margins are “too high” given the intent of revenue sharing. But there is no way to know this from the Forbes data, even if it is correct, since fans will pay more for higher quality even though payrolls went up.

But let’s talk directly about the rationale behind a payroll floor and not worry about the Forbes data. Enough people already think that smaller-owners are violating the intent of revenue sharing so let’s just take it as given.

In my opinion, there’s no need for a payroll floor in order to meet the league’s goals for two reasons. First, unless MLB’s choice of the equal 31% sharing rule has truly perverse impacts on the return to investing in talent, then all teams will put all of their revenue sharing proceeds back into team quality of their own accord. Second, even if this isn’t true, MLB could always choose to focus just on the competitive balance tax and remove any need for a payroll floor in the first place.

The issue of a payroll floor arises as follows. Revenue sharing is just a form of tax—all owners pay 31% of local revenues into the tax pot. Now, suppose MLB just burned the collected 31%. The equally proportionate take from all teams would have no impact at all on relative ability to spend on talent! The price of talent would fall but teams would hire roughly the same amount. So I would not expect competitive balance to change if tax receipts were taken out of owners’ operations considerations.

But the league has decided to redistribute these tax revenues in equal shares, but not equal amounts, back to all owners. Smaller-revenue owners thus get back more than they put in. Larger-revenue owners get back less than they put in. Now, the question becomes, “What do we expect owners to do with their revenue sharing proceeds?” And there are two possibilities.

Scenario 1: If the return on investment in baseball talent has fallen, not the price but the return, then owners will take their revenue sharing proceeds and spend it outside of baseball. But this would be just as true for larger-revenue owners as for smaller-revenue owners. And remember that this action would not change the level of competitive balance in baseball.

Scenario 2: If the return on investment in baseball talent has remained the same or increased, then owners will take their revenue sharing proceeds and put that money back into talent purchases. After all, baseball talent drew that spending before the tax and if the return hasn’t changed, or rises, the same would be true after the tax. Now, after-tax revenues are lower for larger-revenue owners than their pre-tax revenues and after-tax revenues are higher for smaller-revenue owners than their pre-tax revenues. So, the return on baseball talent leads to lower spending by higher-revenue owners and higher spending by smaller-revenue owners so that after-sharing competitive balance would be expected to improve.

So which is more likely, Scenario 1 or Scenario 2? If the latter, as I think should be the case since MLB wouldn’t choose a path that lowers the return to talent investment, then there is no need for a payroll floor. After-tax payrolls will see all net revenue sharing proceeds spent on all of the teams in MLB, larger- and smaller-revenue alike.

And here’s another reason for skepticism about the need for a floor. Without any other mechanisms, the competitive balance (luxury) tax currently operational in MLB, carefully chosen, can take care of both the over-investment in talent issue that might confront a league and the issue of obtaining the level of competitive balance that maximizes league profits. The competitive balance tax lowers the marginal value of talent to larger-revenue owners. They buy less talent and competition among players then reduces the price of talent. Smaller-revenue owners buy the talent that is released as the price of talent falls. And it all happens without any spending requirements at all. Indeed, MLB has taken luxury tax revenues completely out of the operations picture by spending it on “growing the game” here and abroad.

Thus, at least from the perspective of getting the league’s view of its profit-maximizing result, there is no need for any requirement of a payroll floor under revenue sharing because they could accomplish the same goals just with a luxury tax that doesn’t require any payroll floor either.

And in the off chance that some sort of unforeseen contingency might lead an owner to bleed a team, the Commissioner has explicit power to levy revenue sanctions. Admittedly, whether the incentive to do so is strong is questionable but, under the preceding logic, the need for such an exercise of power would be infrequent at most.

Thus, at least from the perspective of getting the league’s view of its profit-maximizing result, there is no need for any requirement of a payroll floor under revenue sharing because they could accomplish the same goals just with a luxury tax that doesn’t require any payroll floor either.

And in the off chance that some sort of unforeseen contingency might lead an owner to bleed a team, the Commissioner has explicit power to levy revenue sanctions.  Admittedly, whether the incentive to do so is strong is questionable but, under the preceding logic, the need for such an exercise of power would be infrequent at most.

Lastly, pick a topic that has yet to be covered that faces MLB or clubs from an economics perspective, and expand on it.

Brown:  I’m surprised at the emotional responses that relate to the decline of the number of African-Americans in MLB; none of which seem to take into account the economics of the situation. On one hand there are articles that claim MLB to be racist on some level, while some writers wish to claim the decline is a myth—both of which are incorrect.

With picks in the draft coming in the reverse order of finish in the standings, and large bonuses attached to high draft picks, the clubs that have lower revenues to work from often times wind up with these selections. With the lower revenues, the extra stress of scouting talent that will turn into a quality player becomes greater for these clubs than a club with more revenues to work from.

The ability to acquire quality international players outside of the draft process is economically more effective. Quality players can be procured less expensively, and with that we now see all MLB clubs with development academies in Dominican Republic, and a third of the clubs have academies in Venezuela.

While the racial diversity of MLB has grown, this unintended economic impact of the draft plays a large part in number of American born players coming into MLB, and with that, the level of African-Americans have declined to half of what it was ten years ago.

Gennaro: There is an interesting transformation taking place within MLB teams towards a more disciplined, analytical approach to making decisions. That’s not to say that an intuitive approach based on years of baseball experience doesn’t have value, but it’s a very different business than it was 20 years ago. Today, signing a free agent contract is often a $50+ million decision. Teams are faced with complex issues as diverse as where to invest scouting resources throughout the globe and how to deploy the internet to cultivate a relationship with fans, to mention just a few of the newer challenges. One impetus for the transformation is the sale of franchises, not just because new ownership brings new thinking, but also because the cost basis of these purchases are in a different league than a franchise that was bought even 10 years ago. With a $700 million cost for the Red Sox (including a stake in NESN), to an even potentially steeper price tag for the Cubs, new ownership groups need to find innovative ways to create financial value to justify their investment. Add to the higher cost basis a heavy load of debt service and it’s easy to see why teams are more inclined to take a more strategic approach to sourcing talent, take a global view of their brand, and are constantly seeking to develop related assets in which additional value can be created.

Noll: Baseball has not yet found an effective way to exploit business opportunities internationally.  The same can be said of other American pro sports, but baseball probably has the largest unrealized potential for international play.  In the immediate future, the greatest opportunity is for a genuine baseball World Cup among national teams, featuring mainly players from Major League Baseball.  But in a decade or so, rising incomes in Latin America and Asia could make “major leagues” (with some teams equivalent in quality to MLB) feasible there, in which case an international club championship, like the Champions League in European soccer, also would become attractive.  Does MLB have the entrepreneurial capability to take the lead on these issues?  Based on its feeble attempt at a baseball world championship in the spring of 2006, baseball seems in danger of missing these opportunities.

Baseball Between the Numbers Silver: I’ll be fascinated to see what MLB Advanced Media does in the area of mobile technology.  I was at a wedding recently where someone had rigged up a Slingbox to his Palm Piolt – we were all watching a football game during the reception.  Nobody wants to recreate the mistake of the ESPN Phone, but once the technology has advanced by another couple of years, and you’re able to transmit streaming video to mobile devices in a way that’s relatively cheap to everyone involved, it’s going to be a big hit with affluent consumers.

In fact, I almost wonder if the technology isn’t so good that it’s going to start to take away from the ballpark experience.  I’ve caught myself wondering a couple of times recently if I should go to a ballgame, when I can watch six or seven games at once using MLB Mosaic.  I’d rather watch a game in person than on TV, but if I can flip back and forth between a half-dozen games on TV, and track my favorite players and favorite teams in the meantime, that might be a different story.  Plus, the beer is a lot cheaper at 7-Eleven. 

Bradbury: Major League Baseball’s monopoly status is overblown. Fans and policy makers have little reason to be concerned about baseball’s market power. Sports leagues are unique markets that will almost always evolve to a single-seller. In the 1970s, economists began to take a closer look at competitive pressures and explored new models of monopoly.  What we have learned is that a little competitive pressure goes a long way, and I think the evidence is that MLB seems to be well-governed by market forces.

First, the antitrust exemption appears to be benign. MLB behaves no different than the other major sports leagues, which lack an exemption.  Second, early in its history MLB learned that trying to restrict quantity and raise prices, something that standard monopoly theory predicts, results in entry by competitors. Thus, MLB expands to provide the baseball fans want before competitive leagues spring up, and this is key to its existence.  And third, if MLB is a monopoly—it certainly has some market power—it is a price-discriminating monopolist, which harms society far less than a standard monopoly. If fans are willing to pay price for baseball that exceeds the cost of producing it, owners have every incentive to provide it.

Fort: Everything that confronts MLB and its member owners (clubs don’t do anything, owners do) has to do with profitability—how to get profits and how to grow them over time.  To me, the interesting problem confronting the league is its best response to the increase in substitutes available to fans.  MLB is following its tried and true approach of monopolizing the flow of value from talent in areas like the movement of games from over-the-air and cable to satellite.  It pursues the same approach to other media values through MLBAM, most notably recently the attempt to dictate terms in the fantasy baseball market.  These seem to represent an ever-increasing competitive challenge to all sports leagues.   Invariably, this type of competition seems to me to threaten their ability to make much of an abnormal return into the future.

(Andrew Zimbalist passed on this topic) 



Should MLB Force Jeffery Loria to Sell the Marlins?