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Home Pete Toms LWIB: MLB Revenue-Sharing is Bad, Plus Tidbits

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Pete Toms Article Archive
Written by Pete Toms   
Monday, 07 March 2011 15:13

Last Week in Bizball by Pete Toms

This week in “Last Week in BizBall, revenue sharing is bad, plus tidbits.

REVENUE SHARING IS BAD

Last year, the “leaked financial docs” was a big story amongst us baseball biz watchers. And rightfully so. The leaked financial statements of 6 clubs (their veracity never challenged by MLB) confirmed what had been widely assumed for years. That is, revenue sharing payees’ Marlins and Pirates are profitable and the reason they are profitable is revenue sharing. This led to speculation amongst the punditry of whether the large revenue “payor” franchises would insist on a future decrease in league-wide revenue sharing. After all, the Marlins and Pirates ostensibly are in receipt of revenue sharing dollars to improve the on-field performance of their franchises. The “leaked financial docs” made it difficult for both those clubs to argue that they were using the entirety of their revenue sharing proceeds to improve their ball clubs. At the time I was one of a minority writing that the “leaked financial docs” was pretty much a non-story. While us pundits and journalists now had the “smoking gun”, certainly none of this was a surprise to any MLB owner, club president, CFO, or at the senior levels of the PA. My conclusion that this was a non-story was also informed by the public silence amongst MLB owners and front office personnel on the subject. I don’t recall anybody speaking out against the current revenue-sharing structure, particularly notable because this story afforded the perfect opportunity for “payors” to discredit the system.

But six months later, I think I got it wrong. LWIB, Red Sox owner John Henry made public that he was fined $500,000 in 09 for speaking out against revenue sharing in an interview with the Boston Globe. In that interview Mr. Henry said, “Over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseball's highest operating profits. Who, except these teams, can think this is a good idea? LWIB, Mr. Henry said, "The large markets aren't allowed to give their opinions," "I made statements which turned out to be true, or at least there were various documents that were leaked after that. But anyway, the large clubs are not allowed to talk about it." Hindsight being 20-20, I’ve changed my opinion. The public silence from “payors” to the “leaked financial docs” was not a sign of tacit acceptance but instead evidence of commissioner Selig’s ability to muzzle the owners. After different comments earlier this year comparing revenue sharing to socialism/communism and challenging Rangers owner Chuck Greenberg to “get off welfare”, Yankees owner Hank Steinbrenner has also been silenced on the subject by Selig. This being a year when the CBA is set for expiration, MLB forbids owners from speaking publicly about such matters. So, the more things change….despite a decline in the amount of dollars redistributed via revenue sharing last year over 09 (approx $400 million versus approx $433 million), the large revenue owners evidently still believe the system is unfair to them.

I don’t know what amount of revenue sharing would appease the large revenue franchises and I don’t care. I’m sick of revenue sharing and have been for years. MLB would be more entertaining without it. Sadly, there has never been less reward/incentive to win games in MLB than there is today. Where is the fun in that? A long, long time ago, maximizing profits in MLB was simple, win more games. sell more tickets, beer and hot dogs. Not so much today. Win more games, sell more tickets, beer, hot dogs, sushi AND put about a third of those in a pot to share with your competitors. Plus, more and more local revenue is generated from guaranteed, long- term local TV rights deals with RSNs. That revenue is the same amount whether a club wins 62 or 102 games. Plus, MLB has centralized more and more revenue, again unrelated to club on field performance. Along with the traditional national TV contracts, increasingly lucrative digital rights are also centralized at BAM along with secondary ticketing. MLB owners each receive an equal share in the profits generated by the MLB Network cable TV channel. The value in franchise ownership is more and more frequently associated with the property development rights surrounding the ballpark, again entirely unrelated to winning.

And I don’t believe that revenue sharing is key to improving competitive balance. Before I get to why I dislike mediocrity (woops, parity, woops competitive balance) in MLB , there is no evidence that revenue sharing has resulted in more competitive balance. (The illusion of greater competitive balance in MLB is a result of the expanded playoffs and realignment) Revenue sharing is about limiting labour costs, not “hope“ for small revenue franchises. In November 09, Stanford economist Roger Noll told the Biz of Baseball:

The only way to have equally balanced teams is to ban trades and sales of players and to have periodic drafts of managers, coaches and directors of player personnel. The methods that leagues use to create balance have been shown to have little or no effect on the distribution of quality among teams. The logic behind it is that it is not in the interests of owners as well as players to have balanced competition. If all teams were of the same strength, total league revenues would go up if the best player in KC were traded for the worst player in NYC. In a regime of salary caps and no free agency, the KC owner will be richer if he sells his underpaid star to NY.

Another of the sports economists, Andrew Zimbalist (who has consulted for both the MLBPA and MLB) wrote in his 2003 book, May the Best Team Win, Baseball Economics and Public Policy:

While owners have claimed that they want more revenue sharing and a luxury tax on high payrolls in order to level the playing field, it is apparent that they are also seeking to control the growth in player salaries. Higher revenue sharing taxes lower the net marginal revenue product of players, and, other things equal, lower their salaries.

SELECT READ MORE TO SEE MORE ON MLB REVENUE SHARING, PLUS TIDBITS

 

And why should parity, ok mediocrity, amongst teams be orchestrated by MLB? While polls consistently conclude that competitive imbalance in MLB is perceived as a problem amongst fans, some academics think there is no evidence to support those findings. Another of the sports economists, Dave Berri, wrote in 07:

 

….the link between competitive balance and attendance has been extensively studied…..

And what does this literature indicate? Competitive balance does impact demand, but it doesn’t appear to be very “important.” At least, dramatic changes in balance do not seem to have a very dramatic impact on league attendance. Given this result, I am not sure the “optimal level of balance” is something leagues should actively seek…

And aren’t great teams, dynasties, more fun for fans than the annual overturn in the crop of mediocre teams qualifying for the postseason? Yankees lover or Yankees hater (the only two types of MLB fans), their run of four WS championships from 96-00 was an important factor in bringing fans back to MLB post 94. And isn’t business booming in the EPL, where both payroll and competitive disparities dwarf those in MLB?

Maybe I’m just disgruntled because the team I root for hasn’t competed in the postseason since 93. And ultimately I think the cause of that is corporate ownership that has concluded (no doubt rightfully) that the prudent approach to owning an MLB franchise is a cautious one. They understand that the central fund revenues are always there, in a down year revenue sharing will prop you up and even if you lose a little money on paper, you control a lot (162 games) of cheap programming for your cable TV sports channels. Maybe if you had to win to make money Rogers Communications Inc. would field a better baseball team. I suspect the Red Sox might be more profitable if they spent less but John Henry is more concerned with winning than profiting. Winning = profits? Not necessarily in this era. Look at the “leaked financial docs”.

TIDBITS

  • LWIB, Ben Badler at Baseball America reviewed the 2010 year in the international free agent market. Ben’s discussions with MLB international scouting directors led him to conclude that while there were no elite talents in last year’s free agent crop, there was an abundance of “mid-level” talent signed. The Jays awarded the highest bonus at $2.8 million (the fourth highest ever to an intl free agent), to Venezuelan RH Adonys Cardona. Rounding out the Top 5 signing bonuses were the Pirates ($2.6 million for RH Luis Heredia Mexico), Astros ($2.6 million for OF Ariel Ovando DR), Mariners ($2.2 million for OF Phillips Castillo DR) and A’s ($2.2 million for 3B Renato Nunez Venezuala). Excluding the burgeoning market for Cuban players, clubs doled out about $73 million in signing bonuses. Dominican players received approximately $44 million of that total, while Venezuelan players received approximately $20 million. Ben also tells us that clubs are recruiting more aggressively in Colombia.
  • The Padres recently purchased the Triple A franchise formerly located in Portland. All along the Padres plan was to eventually locate the club in the SD suburb of Escondido once a new ballpark was constructed. In the interim, the club is situated in Tucson. In order to finance the construction of the ballpark, Escondido is following the same plan that many, many other municipalities have used. That is, establishing a “redevelopment agency” (aka entertainment district) which would raise funds for the construction backed by future tax revenues generated from the development (aka Tax Increment Financing). CA governor Jerry Brown might outlaw such redevelopment agencies in his state (see Neil DeMause). LWIB, Josh Leventhal reported for Baseball America that if Escondido’s financing plan for the ballpark is scuttled by the state government, the Padres might be forced to put their Triple A franchise back on the market.
  • How would you like to watch as much of this baseball season as you possibly can, live in NYC (though I don’t know if you’d have time to leave your apartment), blog every day about it, plus vlog (a verb that I was previously unfamiliar with) and tweet and… LWIB, The Hollywood Reporter (HT Fang’s Bites) reported on a joint venture between MLB.com and Endemol to produce a web series starring the winner of the contest to be “The Biggest Geek” (my term, not theirs). Seriously, this is a great opportunity for the contest winner to launch a career as a baseball pundit/blogger/vlogger. It might also be an interesting experiment. How immersed, and for how long, can you be in a baseball season before it drives you nuts?


Pete Toms is senior writer for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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