Friday, March 14, 2008

Reason #10: The Money.

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.)



YearBig SpenderPayrollLittle SpenderPayroll%
Diff.

1999Boston$71.7Oakland$24.2196%
2000Boston$81.2Chicago
(AL)
$31.2160%
2001Cleveland$92.7Florida$35.6160%
2002Los
Angeles
$94.9San Diego$41.4129%
2003Texas$103.5Cleveland$48.6113%
2004Philadelphia$93.2Washington$41.2126%
2005Philadelphia$95.5Cleveland$41.5130%
2006New
York (NL)
$101.1Kansas City$47.3114%
2007Chicago
AL
$108.7Arizona$52.1109%

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 Kansas City’s. Last season, even though the Royals only moved from 27th to 22nd overall, no team tripled the Royals’ payroll, and only two (the Yankees and Red Sox) were even twice as high.

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.

12 comments:

NYRoyal said...

"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."

Rany, we're not anywhere near economic parity yet. We are far from it. As you pointed out, the 5th highest payroll is still double that of the 5th lowest. That is a huge, massive disparity.

You spoke of MLB revenues which are shared equally and that these are increasing, which has helped and will continue to help small market teams. This is true. But there are other factors pushing strongly in the other direction.

First, there's the demographics. The largest markets are growing, while the smallest markets are either shrinking or growing at a much slower pace. Second, one of the fastest growing sources of revenue for major league teams is Regional Sports Networks (RSN's). As you know, these are regional cable channels which allow teams to broadcast their own games and rake in all of the revenues from it, bypassing the middle man (like FSN). This is a massive revenue stream which is only potentially available to large and medium market teams. RSN's in small markets simply could not survive.

Do you really think there are not and will not continue to be huge structural impediments to the success of small market teams? When large market teams can afford a payroll 2-3 times greater than the Royals, I don't think we are anywhere near a level playing field.

For the forseeable future, small market teams won't be able to re-sign many of the great players they develop. They will lose out on the bidding for top free agents. They will be able to sign fewer good free agents than large market teams.

It seemd like your post was saying that for the post part significant economic disparity will soon be gone. I don't think that is even close to correct. The facts simply don't support such a contention.

Anonymous said...

Economic parity will never happen in baseball.

That said, this blog is fucking amazing.

jvanhorn said...

Yeah, well since the Royals aren't so desperate for money anymore, maybe somebody should tell them to quit blacking out games in their home territory--especially Arkansas and Oklahoma. I had a Royals person tell me that the reason they blacked out those games was because they couldn't give the games away. They had to make the cable companies pay because they needed this revenue.

Well, guess what, I don't know of a single cable company in Oklahoma or Arkansas that signed on to pay to show Royals game to a small, and getting smaller, fan base in those two states. Of course, that doesn't stop the Cardinals from being more than happy to beam all 162 games down there. Guess who has the most fans? As a guy told me. I live in the Royals home territory which basically means everyone in America can see them but me. What a stupid way to ran a business--go out of your way to run off your fans. How about this the Royals have just put a AA team in Arkansas. One of the joys of watching AA baseball is to follow the players as they move up and make the big team and watch them play for the Royals. Well, once they leave Arkansa they might as well take a rocket ship to Mars. All Royals games are blacked out in Arkansas. You'll never see those players again except when they play--the Cardinals! If there was ever a team that needed to reach out and welcome any and all fans into the family it is the Royals--instead they go out of their way to poke them in the eye with a stick.

Kyle Davidson said...

Rany -

great article.

One question. Wouldn't the money that's being spread to all 30 teams also increase the pockets of the large market teams? Since the revenue is equal in these situations, it does nothing to level any playing fields. It increases the ammount all teams have to spend, on an even basis. Just because the Yankees don't immediately dump it into a crappy Juan Pierre type contract, doesn't mean they lose any ground.

The small market team definitely benefit in the short term by an influx of immediate funds, but the large market teams are reaping the exact same benefits as well.

Aaron said...

Example:

Royals spent $50M, Yankees spent $100M before this. Now with $50M more for both teams, the Yankees can spend $150M and the Royals $100M. What will happen over the next few years as contracts come up for renewal is that the players will start getting their share of that. Also teams with more to spend will outbid for star players' services. We already saw that this year with Torii Hunter. Granted, I think it was awesome that the Royals didn't sign that train wreck waiting to happen and saddled us with a bad contract for 5 years. But the Angels just said KC + 10M and the deal was done. Torii even said recently that he liked the KC offer, but couldn't refuse same deal more money.

Aaron said...

Heh... Didn't finish my thought from above.

As the players get a bigger share of the newly found revenue, the small teams will fall back again to their former position because they can only spend $100M and not the $250M needed to stay competitive with the huge city teams like NY, LA, and Boston (assuming they spend their money smartly of course).

Anonymous said...

jvanhorn, thanks for bringing up a point that bugs the shit out of me. I live in extreme Western Nebraska, just 20 miles or so from the Colorado border. I have absolutely NO networks that carry Royals games, yet I get almost every Rockies game on Fox Sports Rocky Mountain (which is the Fox Sports network I'm stuck with, and even if I wanted to pay to watch games on MLB.com or MLB extra innings, Royals games would be blacked out because for some inexplicable reason, I'm in the Royals "home territory." MLB and the Royals need to take a serious look at their terribly old and outdated blackout policies and regions and get this stuff straightened out.

NYRoyal said...

Just a quick note about blackouts. The Royals don't make that decision. That is a MLB decision. And yes, the wide blackout areas are completely stupid. People in Iowa can't see Royals, Twins, Brewers, Cubs, White Sox or Cardinals games. The size of blackout areas make absolutely no sense. But the blame goes to MLB, not the individual teams.

jvanhorn said...

Well if that is true about MLB being to blame, explain to me how I can be in Arkansas, which is BOTH St. Louis Cardinals and Kansas City Royals home territory [according to MLB]. I get all 162 Cardinal games and zero Kansas City Royals games. That doesn't make any kind of sense. I just don't see how that can be true--or if it is explain the above.

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