In case you’ve missed the news, Major League Baseball is awash with cash. The game is healthier financially today than it has ever been before. You were probably aware of that. You might not be aware of the implications: namely, that all this extra money is a very pleasant development for small-market teams.
Let’s start with the facts, all of which come to us courtesy of my friend and colleague at Baseball Prospectus, Maury Brown, who also runs the bizofbaseball website (along with the rest of the business of sports network).
The combined revenue of all 30 MLB teams last season was $6.075 billion. By comparison, the NFL was at $6.3 billion, and several projections are forecasting that MLB will overtake the NFL in revenue in 2008. Furthermore, as Maury points out, the MLB Network hits the airwaves in a year, and as baseball has already very sensibly worked out contracts with the major cable and satellite providers to ensure most of the country will have access (unlike, say, the NFL Network), there’s likely to be a further bump in revenue over the next few years.
Baseball, unlike football, has the unique advantage of providing daily content. My brother Roukan can sit in front of the TV for three hours watching coverage of the NFL draft combine, but the majority of us would rather rearrange the lint in our pockets than watch the NFL Network in the off-season or on a Wednesday evening. If MLB does it right, if they have wall-to-wall highlights and in-game break-ins for four hours every evening for six months, they’re going to have a weekday audience the NFL can only dream of.
Even with the new network, it’s hard to imagine that MLB revenues can continue to go up at the same breakneck pace they have over the course of this decade. In 2003, MLB’s revenue was $3.7 billion, meaning revenue has gone up 64% in the last four years. Revenues have gone up so fast, in fact, that payrolls simply haven’t been able to keep up.
At the beginning of the decade, payrolls represented around 60% of MLB revenue, peaking in 2003 at 63%. But while revenue has gone up 64% since then, player salaries have only increased by somewhere between 35 and 40%. Last season, player salaries as a proportion of revenue were somewhere between 51 and 55 percent (MLB, shockingly, is reluctant to give out exact figures.)
This figure is actually the lowest of the four major sports, which is fascinating given that the MLBPA, alone among the sports unions, has refused to accept any kind of hard salary cap. The players’ union has always argued in favor of an unfettered and free market, which they have every right to do. But when teams have the freedom to spend whatever they want, they also have the freedom to not spend that money.
In the NFL, when revenue goes up, the salary cap goes up accordingly. And while football teams aren’t forced to spend up to the salary cap, the cap gives every team a figure to shoot for, and inevitably all but a few teams use up every inch of space they have. This guarantees that unexpected windfalls (like the exorbitant amount of money DirecTV was willing to pay to keep the NFL Sunday Ticket package exclusive) trickle down to the players immediately. By contrast, while MLB teams have been willing to share some of their new-found fortune with their players, they’ve kept a far greater share for themselves.
There are a lot of reasons for this, but an underplayed one is that just as teams are getting smarter about baseball analysis, they’re getting smarter about economic decisions. Almost all teams now understand the concept of replacement level, and have an understanding that talent in baseball is not distributed on a bell curve – for every star player there are maybe 10 average ones, and it makes no sense to spend big cash on an average player given that you have so many alternatives if you don’t sign him. Understanding those alternatives is the key to leverage, and over the past few off-seasons that leverage has started to swing towards the teams. Once upon a time, Scott Boras got Darren Dreifort a 5 years, $55 million deal. Later on he got Chan Ho Park 5 years, $70 million. This year, he got Kyle Lohse one year, $4.25 million.
(As an aside, how is it that Lohse got one year and Carlos Silva got 4/$48? Gun to my head, I’d rather have Lohse in 2008 than Silva. PECOTA has them in a dead heat – Lohse with a 4.81 ERA, Silva at 4.82.)
It’s not just that revenues have gone up faster than salaries. What should matter to Royals fans is that the bulk of those increased revenues have come in the form of shared revenue, the kind that gets distributed equally to all 30 teams. MLB Advanced Media, the corporation that baseball created to run their MLB.com website, is already considered one of the great internet investments of the decade, in any industry – MLB.com is by far the best web presence of the four major sports. The live games on the computer are fantastic enough; I remember my eyes almost popping out of my head the day I learned, over six years ago, that you could search for video clips of, say, every Mike Sweeney double off a left-handed pitcher that year. (Joe Posnanski had a fantastic column on this back in 2001, which I’d link to except the Star makes it very difficult to access archived columns.)
When MLBAM was created, Bud Selig had the vision to insist that all 30 teams agree to share equally in the company and that all revenue would be shared alike. At the time there was some talk that this decision might one day prove to be as wise as the NFL’s decision back in the 1960s to share all TV revenue equally. Some day in the distant future, you know, 20 or 30 years later. Instead it took about five. Last year MLBAM’s revenue clocked in at around $400 million, and while not all of that was profit, in 2007 each team received close to $3 million in dividends alone. By comparison, in 2003 MLBAM’s revenue was $91 million; in 2001, it was $36 million.
MLBAM has even branched out into non-baseball content, hosting concerts and whatnot. The company purchased Tickets.com, and as anyone who has ever paid $23 ticket convenience fees on a $12 ticket from Ticketmaster knows, cutting out the middleman on ticket sales is incredibly lucrative.
Then there are the national TV contracts; between TBS, ESPN, and Fox, MLB earns about $660 million a year, or about $22 million per team. As recently as 2000, the total revenue from Fox, NBC, and ESPN was (assuming all my numbers are correct) $283 million per year. That’s an extra $12.6 million per team per year.
I don’t have access to information on every revenue stream the teams are swimming in. But just from the information at hand, we know that every team in baseball was cut a check for over $25 million last season before the first ticket was sold. In other words, over the last two years the Marlins (with a combined payroll of $45 millon the last two seasons) would have been profitable if they had shut the stadium down, blacked out local TV and radio, and played in an undisclosed underground bunker somewhere.
Suffice it to say that 1) teams are significantly more profitable than they used to be; 2) small-market teams have seen their revenues rise, on a percentage basis, even more than large-market teams; 3) the players are not seeing most of that extra money.
What this means, in essence, is that the Royals can afford a MUCH larger payroll than they could have even two or three years ago. According to this database, in 2003 the Royals nearly won the division with a payroll of barely 40 million dollars. Two years later the payroll had actually dropped to just under $37 million; at that point not even David Glass could keep a straight face about losing money, claiming that the Royals would break even or, possibly, make a profit of under a million dollars.
(As a general rule of thumb, whenever an owner talks about how much money he’s making or losing in a given year, tack on an additional $10 million in profit. If he claims he lost 5 million dollars, he’s probably about 5 million in the black. Unless and until said owner is willing to open up his books, claims of profit or loss are a pure fiction. Never forget Paul Beeston’s famous statement: “I can turn a $4 million profit into a $2 million loss and get every national accounting firm to agree with me.” It’s instructive to note that as Sam Mellinger points out, recently the Mariners had to file financial data with the state, and that data showed a $17.86 million profit last year – with a payroll of over $106 million.)
David Glass has received a lot of attention for being willing to increase payroll, which hit $67 million last season. Fair enough – I’m happy Glass is willing to reinvest his profits in his team. But don’t get the impression that the Royals are just about tapped out – far from it. They may not be able to compete with the Yankees and Red Sox in terms of payroll, but they can come a lot closer than they used to.
As revenues between the teams have compressed, you would expect that payrolls would compress as well. You’d be right. Let’s compare the fifth-highest and fifth-lowest payrolls (eliminating the outliers on both sides) in baseball going back to 2000. (Many thanks to poster Brett for his help in formatting these tables - assuming they finally look okay.)
Year Big Spender Payroll Little Spender Payroll %
1999 Boston $71.7 Oakland $24.2 196% 2000 Boston $81.2 Chicago
$31.2 160% 2001 Cleveland $92.7 Florida $35.6 160% 2002 Los
$94.9 San Diego $41.4 129% 2003 Texas $103.5 Cleveland $48.6 113% 2004 Philadelphia $93.2 Washington $41.2 126% 2005 Philadelphia $95.5 Cleveland $41.5 130% 2006 New
$101.1 Kansas City $47.3 114% 2007 Chicago
$108.7 Arizona $52.1 109%
Since 1999, the ratio between the big spenders and the little spenders has dropped nearly in half. In 1999, the Yankees had a payroll more than five times the Royals, and no less than 13 teams had payrolls that were more than triple
Maybe the Royals will continue to linger at the bottom of baseball’s standings. But if they do, at least they can’t blame the game’s economics anymore. And that, my friends, is a beautiful thing.