EXECUTIVE SUMMARY
The focus of this study is on Major League Baseball. It examines the problems that are present in the operating business aspect throughout the entire league. Of the four major sports leagues in the United States, baseball has the most questions surrounding its league. Major League Baseball is a very troubled industry that faces numerous chronic problems that threatens the future of the league. Some of these major problems include: effects of the antitrust exemption, competitive balance issues, profitability of franchises including Forbes magazine’s take on the issue, the Collective Bargaining Agreement, new stadium financing issues, and Commissioner Bud Selig. These problems all can be traced back to a single common reason: monopoly. Since 1922, Major League Baseball has benefited due to an assumed exclusion from our nation’s antitrust laws. MLB is the only top-tier professional baseball league throughout the United States.
A practice called “sabermetrics” exists for franchises that are in rough shape financially to compete with teams like the Red Sox and Yankees. First used by the Oakland Athletics, sabermetrics is a statistical theory that is used to evaluate baseball players. Oakland has been one of the most successful franchises on the field over the past five years because of this approach despite having a miniscule payroll.
Emphasis is put on the Milwaukee Brewers organization. An in-depth look at the entire organization is done with sabermetric principles. Also, statistical projections for the upcoming 2004 season are made for players competing for the Milwaukee Brewers roster as well as for the top 25 prospects in the Milwaukee Brewers farm system.
INTRODUCTION OF MAJOR LEAGUE BASEBALL
In the baseball movie “Field of Dreams” the voice says ‘If you build it, he will come.’ Early in the film this refers to constructing a baseball diamond in the middle of acres of valuable cornfields in order to allow players in the after-life to return to earth and (re)play the good old game of baseball. By the end of the film, hundreds of fans are seen heading in droves to the cornfield diamond to watch these players play ball. “If you build it, they will come.”
“Field of Dreams” is a portrayal of the powerful hold that baseball has on the United States of America – an activity said to be the national pastime. While there is obviously more to the film than this particular “field of dreams,” it is based on the preposition that if you put on a game of baseball, Americans will part with their own, hard earned cash to watch it. To further illustrate this point, no matter what happens in regard to the game’s organizational structure and production, there will always be Americans that will watch and follow baseball. Americans love baseball. “If you build it, they will come.”
Over the past decades of baseball in America, Major League Baseball (MLB) in particular, has been involved in controversy after controversy. Today, baseball faces perhaps what is its most important problem – the growing divide between the game itself and its fans. According to a USA Today / CNN / Gallup poll conducted during June 2003, the results were not promising for America’s pastime. The poll results stated that 33% of sports fans say they are following baseball less closely than they did three years ago, and 39% believe the game is in a state of crisis or has major problems.
It can be very easy to be lulled into the thinking that everything is fine with baseball. The numerous experiences that everyone seems to remember are still accumulating in everyone’s mind, more vivid than ever. With Mark McGwire and Sammy Sosa relentlessly chasing the homerun record in 1998, Barry Bonds breaking numerous batting records in 2001, the Cubs and Red Sox just five outs from facing off against each other in the 2003 World Series; it is moments like these that can still seize the serious as well as the casual fans alike. But the more important issue behind those highlights - the foundation of the game - is falling apart faster than ever before.
The actual business of baseball stands in stark comparison to the game’s nostalgic appearance as America’s national pastime. Major League Baseball is a very troubled industry that faces numerous chronic problems that threaten the future of the league. Some of these major problems include: ongoing labor tension, competitive balance issues, transfer of game telecasts to cable, rising ticket prices, and MLB Commissioner Bud Selig’s leadership. While all of these issues are taking place, there is the threat of contraction, current franchises are requesting public funding for new stadiums all while more than capable host cities are practically begging for teams. The heart of baseball’s fan-base is also aging while MLB is doing very little to make the game more attractive to a much younger fan base.
The Source of the Problem in Major League Baseball
These problems all can be traced back, in some part, to a single common reason: monopoly. Since 1922, Major League Baseball has benefited due to an assumed exclusion from our nation’s antitrust laws. MLB is the only top-tier professional baseball league throughout the United States. As a result, each franchise is assigned to an exclusive market territory. In general, monopolies have market power which is in turn used to achieve higher returns, abuse resources, and above all take advantage of consumers. Major League Baseball is not exempt from these accusations (http://slate.msn.com/, Greenberg).
The antitrust exemption is actually an irony. Owners and players prove day after day that they consider baseball, above all, a business instead of just a game. But the exemption arrives from our own national government's naive insistence that baseball is just a game. Alone among all other professional sports in America, baseball enjoys its immunity from antitrust prosecution because neither Congress nor the Supreme Court has been willing to overturn an ancient decision that baseball is merely an amusement, not a commercial enterprise.
The controversial antitrust exemption dates to the early years of organized ball. In January 1903, the rival American and National Leagues joined to form the beginning of Major League Baseball. The two leagues included a "reserve clause" in their contracts. The National League had been using this technique for the past 25 years. The “reserve clause” in essence tied the athletes to the teams that had first signed them to a contract. The players were able to be sold or traded by team management; however, they couldn't simply sign with new teams on their own after their contracts expired (http://www.zmag.org/zmag/articles/barzimb.htm).
In 1914, the new Federal League made an attempt to lure ballplayers away from Major League Baseball with the attraction of higher salaries and no reserve clauses. Only a few athletes made the jump to the new league, however, and in 1915 the Federal League sued MLB for cornering the players' market—a violation, it seemed, of the Sherman Antitrust Act. The two parties soon reached a settlement that terminated the upstart league while compensating its owners. Each owner accepted the buyout except the owners of the Baltimore Terrapins, who were offered only a sliver of the settlement money. They rejected the $50,000 settlement offer and further pursued their antitrust claims at the Supreme Court. In the 1922 decision in Federal Baseball Club of Baltimore v. National League, the court ruled against the Terrapin owners. Justice Oliver Wendell Holmes wrote that "personal effort, not related to production, is not a subject of commerce" and that baseball therefore wasn't subject to federal regulation (Federal Baseball Club v. National League, 292 U.S. 200 (1922)).
In the Federal Baseball decision, it pointed out that baseball exhibitions are “purely state affairs” and as a result did not constitute interstate commerce. The fact that teams had to travel across state boundaries to play the games was a “mere incident, not the essential thing.” (Federal Baseball Club v. National League, 292 U.S. 200 (1922)). It should also be pointed out that the idea of what interstate commerce meant at the time and what it is understood to stand for now are very different, with it being much narrower today. The idea back then was that if a good was produced within a state, it was intrastate commerce and the production activities of the company weren’t subject to the Sherman and Clayton Acts.
Judge Holmes' ruling was keeping in line with other lower-court rulings from the era that stressed baseball's status as just a game. Over time, however, the ruling came to be widely regarded as flawed, as the Constitution's "commerce clause" was increasingly used as grounds for the government to regulate a range of dealings that had once been deemed off-limits to the feds. The court itself decreed, in other contexts, that exhibitions which crossed state lines were subject to federal control. Yet it had in effect rendered Major League Baseball exempt from antitrust law (http://slate.msn.com/, Greenberg).
The Federal Baseball ruling went unchallenged for 25 years until the Supreme Court had a chance to revisit its decision in 1953, when it heard arguments in Toolson v. New York Yankees. The case concerned George Toolson, a ballplayer whom the Yankees had reassigned from their minor-league Newark franchise to another team. Toolson sued, claiming that the reserve clause in his contract violated antitrust laws. But the high court stood by its 1922 decision. It stated that if Congress had disagreed with the earlier ruling, it would, or should have introduced new laws in the interim. "We think," the court wrote in an unsigned 7-2 opinion, "that if there are evils in this field which now warrant application of it to the antitrust laws, it should be by legislation" (Lowenfish and Lupien, p. 106).
Congress, however, again failed to act on behalf of the matter, and as a result ballplayers remained shackled to the franchise they belonged to in which they had no say. Then, in 1969, the St. Louis Cardinals traded their star outfielder Curt Flood to the Philadelphia Phillies, again without his consent. Flood did not want to move his family or walk out on his business interests in St. Louis. He appealed the trade to Commissioner Bowie Kuhn stating, "After twelve years in the Major Leagues, I do not feel I am a piece of property to be bought and sold irrespective of my wishes." Kuhn sided with the Cardinals ownership and upheld the trade. Flood retired rather than play for the Phillies.
Flood's case reached the Supreme Court in 1972. Harry Blackmun, a newcomer to the Court, wrote the opinion in Flood v. Kuhn, in which the court upheld Flood's trade by a vote of 5-3. Blackmun’s decision will be scrutinized for many years to come. Blackmun acknowledged that ever since the Federal Baseball decision, the court had routinely interpreted the commerce clause to expand the government's sphere of influence. Blackmun also pointed out that no other major sport was protected from antitrust laws. And yet, in spite of his own accumulated evidence, he maintained that the Federal Baseball precedent should stand because of the judicial custom of ‘stare decisis’, or a respect for precedent (Flood vs. Kuhn et al., 407 U.S. 258 (1972)).
Surprisingly, shortly after Flood, baseball players were awarded the right to free agency and ended the 100-year tyranny of the reserve clause. The avenue of redress wasn't litigation but collective bargaining, through which the players' union had recently secured the right to arbitration. In 1975, pitcher Andy Messersmith's contract with the Los Angeles Dodgers expired, and although the Dodgers and Major League Baseball insisted the Dodgers alone had the option to re-sign him, Messersmith claimed otherwise. The parties took the case before an arbitrator hired by the owners, Peter Seitz, who ruled for Messersmith. Seitz was immediately fired. The owners lost an appeal in federal court, and thereafter players enjoyed a limited right to free agency (http://slate.msn.com/, Greenberg).
In October 1998, in a long overdue effort to finally fix the labor problem, President Clinton signed into law the so-called Curt Flood Act, which stated that baseball's antitrust exemption didn't apply to player employment issues after all. But with the players faring well through collective bargaining, and with free agency embedded in baseball's practices, the point was now moot. On the other hand, however, the 1998 act explicitly left untouched such issues as team relocation, minor-league play, the employment of umpires, broadcasting agreements, and league expansion—suggesting that the exemption did in fact apply in these areas.
As a result of these controversial rulings in the higher courts, it is obvious that others differ in the law’s interpretation, resulting in uncertainty about whether the country’s antitrust laws apply to MLB. If they do consider MLB to be exempt, it is also unclear just how far the exempt status extends into the league.
- posted by Hot Rod @ 9:53 PM 6 comments
The Realistic Effect of Baseball’s Supposed Antitrust Exemption
The most rational way to determine whether or not Major League Baseball should continue to enjoy its antitrust exclusion is to consider the implications that would occur to the game and to its consumers of either doing away with or officially allowing the exemption to continue. Listed below are some important topics and how the practical meaning of the assumed exemption has been handled to date and what would theoretically happen if it were abolished.
Minor Leagues and Amateur Draft
A result of the assumed exemption is that Major League Baseball has been allowed to pursue restricting labor market practices when dealing with its minor leagues. MLB has a draft of amateur players from the U.S., Canada, and Puerto Rico every June. The worst MLB teams pick first and so on. After a player is selected, he can sign with his team for $850/month plus a corresponding signing bonus, depending on how high he was drafted. Once signed, the player is locked to the franchise for four years before another franchise can sign him. If the player is put on the team’s major league 40-man roster, he is required to play seven years in the team’s system before he has an opportunity to choose a different organization.
It is clear that these limitations are obvious examples of restraints on trade. First, the player is unable to entertain competing bids at the draft. Second, he can’t receive contract offers from other franchises for up to seven years after the player is drafted. Third, the player’s salary is determined according to a scale that is set by the owners. “Since there is no labor union of minor league players, there has been no collective bargaining wherein a player’s representative bargained away free labor market rights in exchange for other benefits,” like there is in the major leagues (May the Best Team Win, Zimbalist).
However, if the antitrust exemption was revoked, it would give any minor leaguer the opportunity to sue Major League Baseball. It is not clear that anyone would do so because these players are, after all, very young and are focused on making it to the big leagues as soon as possible. There also is no guarantee that a minor leaguer would even win his case in court.
The most significant point here is that it would allow a judicial review of MLB’s procedures and guidelines. The minor league system most likely would still survive with these changes. Affiliated teams may lose their relationship with the major league parent club and be forced to create an independent minor league(s). If ballplayers were not “owned” by MLB teams, it is to be expected that competitive balance would improve on the big league level. For the draft, teams would select players from the minor leagues instead of out of high school or college. The players would be further along in the developmental process and their prospective talent level would also be more predictable.
Franchise Relocation
Pretend that you are an owner of a house and were told by politicians that you were restricted to selling your home to someone who is from out of town. Or more to the point, pretend owning a corporation in a state that has high labor costs with even higher taxes and you were told that you couldn’t move the operations to a more appealing state. Perhaps it seems as though someone is interfering with your desire to dispose of your resources at your discretion and that you are not being able to take advantage of a free market. This is, in essence, what happens in Major League Baseball.
In the NFL (football), NBA (basketball), and NHL (hockey), which are all the equivalent of Major League Baseball for their respective sport, there are no presumed antitrust exemptions. In each of the three leagues the relocation guidelines have transformed into one where the majority of ownership proposals to relocate are negotiated between the owner and the MLB commissioner. The owner more often than naught is able to move the team by paying a relocation fee in the order of tens of millions dollars. The problem with Major League Baseball operating as a monopoly is that the league creates non-traditional markets for franchises looking to relocate. This means that the city instead of the franchise owner will be forced to pay the hefty relocation fee.
A prime example of a city that gets burned by MLB creating non-traditional markets is Washington, D.C. The city is considered a major asset of baseball even though no team is currently playing there. Since the city is a potential host, MLB is basically acting as if the city belongs to them. The reason is because Washington could be leveraged against other, smaller cities to get more lucrative deals for a franchise. This is a primary result of MLB creating markets for teams. If there was a competing league with MLB, there would undoubtedly be at least one, possibly two franchises in the nation’s capital and eighth leading media market.
On the other hand, it is important to point out that the league has not thought twice on occasions to threaten a team from relocating to a new city. The major reason behind this political move was to extort much larger public funding from the franchises’ current host cities in order to build new stadiums. In the past, MLB owners have threatened to move the Milwaukee Brewers to North Carolina and the San Francisco Giants to Tampa Bay before new stadium deals were set into motion.
In the end, if Major League Baseball was not allowed to operate as a ruling monopoly, there would not be very many, if any, of these demands for franchises to hold their current host cities ransom for a huge pay day so they can build a new stadium. Also, there wouldn’t be cities like Washington and major media markets like North Carolina, Oregon, and Virginia that don’t have a professional baseball team.
- posted by Hot Rod @ 9:36 PM 0 comments
Contraction
Cities have not always been willing to concede hundreds of millions of dollars for a new publicly funded stadium. Miami residents refused after Marlins’ owner Wayne Huizenga’s “fire sale” of the team after winning the World Series in 1997. As a result, MLB came up with a new strategy. Commissioner Bud Selig sent an ominous letter to Miami politician J. Alex Villalobos stating, “Unless public stadium funding was secured, the Marlins would be a prime candidate for contraction or relocation. Bluntly, the Marlins cannot and will not survive in South Florida without a new stadium.” The advantage in this situation for MLB is that it could quite possibly put the burden for change on the citizens of the Miami area instead of the team owner (May the Best Team Win, Zimbalist).
A similar situation occurred during the 2001 – 2002 off-season in Minneapolis – St. Paul with the Minnesota Twins. Major League Baseball and Twins’ owner Carl Pohlad wanted to contract the team prior to the 2002 season. The Metropolitan Sports Facility Commission (MSFC), which owns the Metrodome where the Twins play their home games, sued MLB and the Twins to force the franchise to honor its lease contract which the club had signed earlier in 2001 to play the 2002 season in the Metrodome. The MSFC won various decisions in local and state courts that subjected the Twins franchise to play the season at home in downtown Minneapolis instead of being relocated or contracted, for the time being.
The MSFC’s case against MLB and the Twins did not rely on the game’s antitrust status. However, in future cases other entities from other cities could come up with antitrust cases against Major League Baseball in order to prevent the elimination of a franchise. With Major League Baseball currently acting primarily as a monopoly, the sport should not be allowed to restrict production in the event of increasing the profits for the franchise owners, which are increasing at 17 percent per year. For instance, if the antitrust exemption was determined in some form to apply to all areas of its industry, then MLB would be shielded from such antitrust confrontations from a proposed contraction.
Municipal Ownership Restrictions
A logical explanation to fix the rift that seems to be widening between cities and franchise owners would be to allow public ownership. It makes sense for a city to hold an asset stake because of how much funding a city invests for a team to succeed. For example, if a city recently invested $300 million in the local franchise for a new stadium and the value of the team increased by $200 million, then the city would realize a portion of the increased value depending on how big a stake the city had in ownership with the team. By allowing public ownership, the key is the city itself would now decide legally on its own if it wanted to keep the baseball team or not.
Unfortunately, Major League Baseball does not allow this sort of ownership in the Major Leagues. MLB teams must be privately owned. During the 1980’s, then-owner Joan Kroc of the San Diego Padres attempt to give her stake in the team over to the city of San Diego, but it wasn’t allowed by the league. This was a prime example of a restriction in trade in the market for buying and selling franchises (May the Best Team Win, Zimbalist).
As mentioned, the antitrust exemption that Major League Baseball currently operates under is a topic that is extremely important to the overall good of the game. It has the power to affect the baseball industry’s function in a wide variety of areas.
Competitive Balance Issues in Major League Baseball
By measuring the competitive balance in Major League Baseball, it showed there was a gradual long term trend toward balance in baseball up until the mid-1990’s. Some factors that can be attributed to this balance include the introduction of the reverse order draft in 1965, free agency in 1977, and the overall compression of talent in MLB.
Since 1995, the commissioner of MLB has produced two reports that appear to be very clear about the sound relationship between team payroll and team winning percentage. During the years of 1995 through 2001, there have been a mere four teams that have made it out of the bottom half of team payrolls to make a playoff appearance. Of those four teams, they collectively won a total of 5 out of 224 playoff games. This meant that the top payroll teams had a combined winning percentage of 0.978.
Twenty of MLB’s twenty-six baseball teams made it to the first round of the playoffs known as the League Championship Series from the years 1980 through 1986. However, from 1995 through 2001, only eleven of the league’s thirty teams made it to the League Championship Series. Through the first seven year stint, 77% of the teams made at least one playoff appearance compared to the second seven year stint when the league had more teams but less playoff participants. Only 37% of the teams made an appearance from1995 through 2001. Not one team outside of the top quartile of payroll percentage won a single World Series game. Only the San Diego Padres reached the World Series and failed to win a game in 1998.
The relationship between escalating payroll and team winning percentage can be examined by conducting a simple regression analysis. The table below illustrates the results from the following equation: Win % = α + β Payroll + e. Using the data from the table, it illustrates there was a significant relationship between payroll and performance only three times from 1985 – 1992 at a 5% significance level. On the other hand, from 1993 – 2001, payroll and performance were directly related every year during the time span.
Table1 | ||||||||
MAJOR LEAGUE BASEBALL: | ||||||||
TEAM PAYROLL AND PERFORMANCE COMPARISON, | ||||||||
1980 - 2001 | ||||||||
α | β | |||||||
Year | (t-stat) | (t-stat) | r² | n (teams) | ||||
1980 | 0.484 | 3.24E-09 | 0.006 | 26 | ||||
[11.1] | [.38] | |||||||
1981 | 0.464 | 5.66E-09 | 0.002 | 26 | ||||
[9.06] | [.73] | |||||||
1982 | 0.489 | 1.46E-09 | 0.005 | 26 | ||||
[13.31] | [.34] | |||||||
1983 | 0.491 | 9.87E-10 | 0.003 | 26 | ||||
[12.82] | [.26] | |||||||
1984 | 0.418 | 7.48E-09 | * | 0.166 | 26 | |||
[10.77] | [2.18] | |||||||
1985 | 0.362 | 1.30E-08 | 0.149 | 26 | ||||
[5.26] | [2.05] | |||||||
1986 | 0.46 | 3.41E-09 | 0.290 | 26 | ||||
[9.29] | [.84] | |||||||
1987 | 0.466 | 3.02E-09 | 0.220 | 26 | ||||
[9.65] | [.74] | |||||||
1988 | 0.393 | 9.37E-09 | * | 0.181 | 26 | |||
[8.12] | [2.31] | |||||||
1989 | 0.389 | 7.89E-09 | * | 0.232 | 26 | |||
[9.10] | [2.69] | |||||||
1990 | 0.46 | 2.30E-09 | 0.028 | 26 | ||||
[9.46] | [.84] | |||||||
1991 | 0.42 | 3.14E-09 | 0.151 | 26 | ||||
[10.44] | [2.07] | |||||||
1992 | 0.47 | 9.45E-10 | 0.020 | 26 | ||||
[10.72] | [.70] | |||||||
1993 | 0.398 | 3.17E-09 | * | 0.195 | 28 | |||
[9.29] | [2.51] | |||||||
1994 | 0.386 | 3.53E-09 | * | 0.203 | 28 | |||
[8.39] | [2.57] | |||||||
1995 | 0.382 | 9.45E-09 | ** | 0.319 | 28 | |||
[10.71] | [3.49] | |||||||
1996 | 0.397 | 3.07E-09 | ** | 0.396 | 28 | |||
[14.93] | [4.13] | |||||||
1997 | 0.392 | 2.72E-09 | ** | 0.450 | 28 | |||
[15.65] | [4.61] | |||||||
1998 | 0.355 | 3.43E-09 | ** | 0.554 | 30 | |||
[13.42] | [5.89] | |||||||
1999 | 0.389 | 2.26E-09 | ** | 0.475 | 30 | |||
[15.93] | [5.03] | |||||||
2000 | 0.426 | 1.36E-09 | ** | 0.284 | 30 | |||
[17.67] | [3.33] | |||||||
2001 | 0.408 | 1.37E-09 | ** | 0.211 | 30 | |||
[11.52] | [2.74] | |||||||
* | Two-tailed test, significant @ 5% level | |||||||
** | Two-tailed test, significant @ 1% level | |||||||
- posted by Hot Rod @ 8:49 PM 0 comments
Even though there is an obvious relationship between a team’s win percentage and its payroll, it doesn’t mean that payroll alone determines the performance of a given team. The concern about the correlation between team payroll and performance is not that teams with higher payrolls will be guaranteed success or teams with cheaper payrolls will be guaranteed to fail, but the probability that such results will occur.
A major factor that contributes to such huge payroll disparities is the local revenue that teams are able to keep for themselves. According to Table 2, the average local revenue between the top and bottom quartiles is $47.7 million in 1995. In 2001, gap widened to $115.6 million. As a result of this growing figure, payroll inequality followed. In 1995, the top payroll was only $58.2 million and the lowest was $13.1 million, a gap of $45.1 million. In 2001, the top payroll was up to $120.9 million and the bottom was only $17.1 million, a much larger difference of $103.8 million.
Table 2
AVERAGE LOCAL REVENUE BY REVENUE QUARTILE, 1995-2001
Millions of dollars
Quartile | 1995 | 1997 | 1999 | 2001 |
1 | 69.1 | 99.5 | 121.3 | 154.0 |
2 | 46.1 | 55.2 | 83.9 | 106.0 |
3 | 31.4 | 40.0 | 52.0 | 73.1 |
4 | 21.4 | 26.6 | 28.0 | 38.4 |
Another reason adding to fiscal disparities between teams is the franchise value itself. The rapidly rising price tag of a franchise has essentially limited only the wealthiest of individuals or businesses to own a team. These businesses that own a team also operate other businesses that have ties to the baseball operation itself. These include concessionaires, stadium management companies, real estate firms, consulting groups, financial entities, and transportation companies.
In 2001, the Angels, Braves, Blue Jays, Cubs, Dodgers, Indians, and Rangers all were owned by media companies or media entrepreneurs. Several other teams, the Yankees, Red Sox, and Phillies, either owned media companies outright or had joint ventures with them. In these instances, the owners of baseball teams do not treat their teams as stand-alone profit centers. Each team is a part of the larger corporate machine or investment portfolio which is used to maximize the long-term profits of the larger entity.
An additional factor causing imbalance is the role of the amateur draft. While the revenue disparities increased, teams have been using different budgets on their player development budgets throughout their minor league teams. Teams like the Yankees spent over $20 million on their player development system, while smaller market teams like the Athletics spent only $6 million. Since the amateur draft only includes players who are U.S. residents, Canadians, and Puerto Ricans, all other foreign players come to the U.S. as free agents. This allows teams with higher payrolls to attract the higher quality players by offering them much more lucrative signing bonuses than a team who needs to keep a tight budget, further misbalancing the level playing field.
American-born players noticed the record setting signing bonuses that their foreign counterparts were receiving and also began demanding the equivalent in bonuses depending on where they were drafted. With the risk that smaller market teams might not be able to sign top players and risk losing their picks if the player doesn’t sign, organizations began to target prospects that were regarded as more signable. As a result, the higher revenue teams, although lower in the reverse drafting order, began to get better domestic as well as foreign born talent.
Profitability in Major League Baseball
Before MLB Commissioner Bud Selig testified before Congress on December 6, 2001, Major League Baseball released the most in-depth summary of each team’s finances to the public known to date. Since each baseball organization is privately owned, under no circumstances do the clubs have to disclose any type of financial information to outside parties. That is why this releasing of financial data was so unprecedented.
During his visit to Congress, Selig stated that Major League Baseball as a whole lost $519 million in 2001, despite revenues of more than $3.5 billion. This claim was greeted with skepticism by outside observers. These outsiders pointed out that the values of franchises have not lost value but appreciated instead. During this section, the financial disclosures of each team will be reviewed in depth.
Gate Earnings
Gate receipts are easy to calculate as well as complicated for third party corporations to manipulate. These earnings are one form of revenue that must be estimated by multiplying attendance and average ticket price. Measuring these two numbers can be misleading at times.
Attendance figures can be different from team to team due to each team’s strategic choice of pricing tickets. Teams can make tickets cheaper in order to fill the stadium, or those who play in smaller stadiums that generally sell out can raise ticket prices and get more revenue from fewer paying fans.
The average ticket price calculation is also different from team to team. The figure assumes that each seat in the ballpark is sold at face value. However, all baseball clubs sell a portion of their tickets either through “family nights,” discounted group packages, or other unique promotions.
Table 3
GATE EARNINGS PER TEAM
Team | Reg. Season Game Receipts | Home Attendance | Revenue per Ticket | Average Ticket Price | Difference |
Yankees | $98,000,000 | 3,264,907 | $30.02 | $28.90 | $1.12 |
Boston | 89,743,000 | 2,593,084 | 34.61 | 36.08 | (1.47) |
Seattle | 76,570,000 | 3,507,326 | 21.83 | 22.87 | (1.04) |
Mets | 73,971,000 | 2,658,330 | 27.83 | 26.53 | 1.30 |
Cleveland | 69,470,000 | 3,175,523 | 21.88 | 22.33 | (0.45) |
San Francisco | 67,173,000 | 3,311,958 | 20.28 | 23.38 | (3.10) |
St. Louis | 67,084,000 | 3,109,578 | 21.57 | 21.66 | (0.09) |
Atlanta | 62,141,000 | 2,736,451 | 22.71 | 22.05 | 0.66 |
Colorado | 54,015,000 | 3,121,560 | 17.30 | 16.50 | 0.80 |
Baltimore | 53,216,000 | 2,976,939 | 17.88 | 19.78 | (1.90) |
Cubs | 51,189,000 | 2,779,465 | 18.42 | 20.41 | (1.99) |
Los Angeles | 50,764,000 | 3,017,143 | 16.83 | 15.43 | 1.40 |
Texas | 50,664,000 | 2,831,021 | 17.90 | 19.81 | (1.91) |
Houston | 49,161,000 | 2,904,277 | 16.93 | 20.03 | (3.10) |
Pittsburg | 48,610,000 | 2,402,890 | 20.23 | 21.48 | (1.25) |
Arizona | 46,509,000 | 2,736,451 | 17.00 | 17.09 | (0.09) |
Milwaukee | 46,021,000 | 2,811,041 | 16.37 | 18.12 | (1.75) |
Detroit | 42,299,000 | 1,878,862 | 22.51 | 23.90 | (1.39) |
San Diego | 34,381,000 | 2,378,128 | 14.46 | 14.09 | 0.37 |
Cincinnati | 32,102,000 | 1,879,757 | 17.08 | 15.40 | 1.68 |
White Sox | 30,898,000 | 1,766,172 | 17.49 | 19.19 | (1.70) |
Philadelphia | 30,435,000 | 1,782,054 | 17.08 | 14.63 | 2.45 |
Anaheim | 30,208,000 | 2,000,919 | 15.10 | 13.36 | 1.74 |
Toronto | 25,363,000 | 1,915,438 | 13.24 | 18.04 | (4.80) |
Oakland | 24,992,000 | 2,133,277 | 11.72 | 13.96 | (2.24) |
Kansas City | 19,520,000 | 1,536,371 | 12.71 | 12.61 | 0.10 |
Tampa Bay | 18,193,000 | 1,298,365 | 14.01 | 18.41 | (4.40) |
Minnesota | 17,605,000 | 1,782,926 | 9.87 | 9.55 | 0.32 |
Florida | 16,756,000 | 1,261,226 | 13.29 | 14.37 | (1.08) |
Montreal | 6,405,000 | 642,945 | 9.96 | 9.70 | 0.26 |
Sources:
Receipts: MLB financial disclosures
Attendance: STATS, Inc.
Average Ticket Price: Team Marketing Report 2001 “Fan Cost Index” survey
According to the chart, there were four teams whose revenue per ticket was lower than the organization’s own predictions by 10% - San Francisco, Houston, Toronto, and Tampa Bay. On the other hand - three teams, Cincinnati, Philadelphia, and Anaheim – all managed to earn higher revenue per ticket price by more than 10%. By having miscalculations of this degree, a team’s profitability can be thrown off balance by more than $5 million.
- posted by Hot Rod @ 8:46 PM 0 comments
Local Media Revenue
Even though this topic was touched on earlier, it makes sense to look at it from the issue of profitability as well as the competitive balance issue. The figures that went into the calculations represent revenue that a team acquires through local television, cable television, and radio contracts. It is no secret that local media revenue is directly affected by the size of a team’s local market.
As mentioned earlier, several teams are operated by huge media companies. This fact raises concern for financial analysts because an individual who owns both the baseball and local media organization has the opportunity to charge the television outlet far less than what the market is set at for the team’s media rights. By applying this business strategy, it lets the team owners cry poverty when discussions about labor contracts arrive. This practice also falsely exaggerates the media organization’s profits.
Take the Chicago Cubs for instance. According to the numbers, Bud Selig testified that in 2001 the Chicago White Sox local media revenue was $30.1 million and the Chicago Cubs was only $23.6 million. Remember, the Cubs are owned by the Tribune Corporation, a nationwide media corporation. According to television ratings, the Cubs are more popular than the White Sox in Chicago. The 2001 TV ratings for the Cubs were 6.8 on over-the-air broadcasting and 3.8 on cable while the White Sox were only 3.6 and 1.9, respectively. This figure doesn’t even take into account that superstation WGN airs Cubs games in over 55 million homes across the country.
This is where a red flag is raised. The Cubs are owned by the Tribune Corporation, which also owns the media company WGN superstation. The Tribune Corporation transfers revenue away from the Cubs and correspondingly lowers the costs of WGN. According to Broadcasting and Cable, the industry’s authoritative source, the Cubs’ local media earnings were $59 million. If the Cubs had reported this figure instead of $23.6 million, then their reported $1.8 million loss would have become a $33.6 million profit for 2001 (McAvoy).
As a whole, it can be assumed over $100 million in revenue each year is hidden from Major League Baseball that is recognized in related-party transactions. If this revenue would be properly reported, it would be a step in the right direction in proving that Major League Baseball has been being honest about its financial disclosures.
Several reasons exist why teams would want to keep their reported revenues at a minimum. First, Major League Baseball has imposed a 20% tax on a team’s net local revenue since the inception of the league’s revenue sharing system in 1996. So, for every dollar that is not reported in the teams’ books, a savings of 20 cents occurs. Given that WGN doesn’t have to pay any tax to the broadcasting industry, it makes perfect sense for it parent company, Tribune, to have the profits be recorded on that of WGN’s financial statements.
Second, all baseball teams, at one point or another, look to the surrounding public community in order to gain support for improving their facilities. The Cubs made such a ploy in 2002 to build higher left field bleachers so fans on the rooftops of apartments across the street would not be able to view a game without purchasing a ticket. The general feeling by teams is that the more impoverished they appear to the public, the more likely the local fans will be willing to open up their wallets and help the team out financially.
The third instance occurs whenever the time comes for the owners and players union to negotiate with each other over a new collective bargaining agreement. The owners’ side of the negotiation is always attempting to find new ways to justify limitations in the labor market which in turn will collectively lower players’ salaries. One of their claims to justify this is to make it seem as if franchises have been continually losing money year after year.
Fourth, since MLB has an antitrust exemption Congress has occasionally made the league testify in terms of why it should continue to validate its special treatment. Commissioner Selig made the case for Major League Baseball as an industry that since it has not been profitable; there is no possible way that it could be abusing its monopolistic control (Baseball and Billions, Zimbalist).
National Media Revenue
National media revenue counts as income that each franchise earned through its participation through the FOX and ESPN television network contracts. All 30 teams receive the same amount due to the revenue sharing plan, except the two most recent expansion teams, Arizona and Tampa Bay. The expansion teams netted $18,479,000 as part of their expansion fee for entering the league. The other 28 teams received $24,401,000. Only roughly $720 million out $3.548 billion in total revenue is considered to be from national sources.
Other Revenue
Other revenue consists of concessions, parking, advertising inside stadiums, luxury boxes, and club seats. The table below illustrates why each franchise is in such a hurry to build new, profitable ballparks for their teams.
Table 4
OTHER SOURCES OF INCOME PER TEAM
Team | Other Local Operating Revenue | Stadium Opened (Renovated) | Stadium Owned By |
San Francisco | $61,524,000 | 2000 | Team |
Seattle | 56,211,000 | 1999 | Government |
N.Y. Yankees | 47,057,000 | 1923 (1976) | Government |
Cleveland | 45,295,000 | 1994 | Government |
Los Angeles | 41,100,000 | 1962 | Team |
N.Y. Mets | 38,162,000 | 1964 | Government |
Atlanta | 37,692,000 | 1997 | Team |
Milwaukee | 37,010,000 | 2001 | Gov’t: 64%, Team: 36% |
Houston | 36,826,000 | 2000 | Government |
Colorado | 35,197,000 | 1995 | Government |
Texas | 34,561,000 | 1994 | Government |
Arizona | 32,970,000 | 1998 | Government |
Chicago Cubs | 30,642,000 | 1914 | Team |
Baltimore | 29,691,000 | 1992 | Government |
Boston | 29,485,000 | 1912 | Team |
Tampa Bay | 28,633,000 | 1998 | Government |
St. Louis | 27,581,000 | 1966 | Team |
Pittsburg | 26,598,000 | 2001 | Government |
Chicago White Sox | 26,291,000 | 1991 | Government |
Anaheim | 26,195,000 | 1966 (1997-99) | Government |
Detroit | 21,018,000 | 2000 | Government |
Toronto | 14,255,000 | 1989 | Private |
Oakland | 13,932,000 | 1968 (1996) | Government |
Kansas City | 13,270,000 | 1973 | Government |
San Diego | 8,504,000 | 1969 (1997) | Government |
Philadelphia | 7,739,000 | 1971 | Government |
Minnesota | 6,987,000 | 1982 | Government |
Cincinnati | 6,523,000 | 1970 (2001) | Government |
Florida | 4,037,000 | 1993 | Ex-Owner |
Montreal | 2,829,000 | 1976 | Government |
Sources: MLB financial disclosures; Munsey & Suppes Ballparks site (http://www.ballparks.com/)
The top 15 teams are included in one of these categories: the team either owns its stadium, plays in a stadium that is no less than ten years old, or calls its home in New York City. Both New York teams are currently attempting to receive funding for new facilities despite the fact that the Yankees were second and the Mets were sixth on the list.
The majority of all franchises play in ballparks that are owned by local government. The reason behind this is thanks in part to owners threatening to move or even contract their franchises in order to get local taxpayers to publicly finance the majority or all of the cost of a potential new stadium. One of the more recent examples of teams that are near the top of local revenue that have built new ballparks includes the Seattle Mariners who received $372 million in public funds to help build Safeco Field in 1999. More about the stadium issue later on.
Most teams have suspicious looking numbers that do not necessarily add up to the expected revenue totals of other teams. When Bud Selig went before Congress in 2001, he repeatedly said that all financial data was given to auditors so that the financial figures could be studied properly.
When Major League Baseball first released financial figures for its teams in 1985, it was found that the St. Louis Cardinals were hiding revenue by sheltering it in a connected business. The Cardinals were found to have allocated around $2 million in concession and parking revenue off of their books by assigning it to a related business and keeping it from being taxed my MLB.
After the Florida Marlins won the World Series in 1997, economist Andrew Zimbalist was brought in as an independent source to review the Marlins’ books. Franchise owner Wayne Huizenga told the Miami community that he had lost $34 million that year and that he would need the public to fund a new stadium in order to keep his team in Miami. Huizenga also happens to own Pro Player Stadium where the team plays. He authorized roughly $38 million of revenue from luxury suites, club seating, parking, concessions, advertising, and the naming rights to the stadium rather than to the Florida Marlins financial statements. If this revenue had been accounted for on the Marlins’ books, the franchise would have recognized a $4 million profit. Instead, the team claimed to be burdened with debt and had a fire sale of all of its best baseball talent when it had actually turned a profit.
Player Salaries
Current MLB Commissioner Bud Selig previously owned the Milwaukee Brewers for over 30 years publicly complaining that small market teams cannot compete with the high rollers in baseball, such as both New York and Chicago teams, Los Angeles, and Boston. The table below indicates that several teams are allocating as much as three times as some of the other franchises on players’ salaries.
Having one of the highest payrolls in the game does not guarantee success by making it to the postseason. Only one team out of the top three in payroll, the Yankees, made the playoffs in 2001. In contrast, the Athletics had the second highest winning percentage with the 26th ranked payroll. The term “small market” is usually considered to mean the same as “low revenue.” According to Doug Pappas of http://www.baseballprospectus.com/, “a team’s revenue, and the payroll it can support, is more a function of the team’s recent success than of the size of its market. As the population data shows, metropolitan Minneapolis is larger than Cleveland. Miami is larger than Seattle. Philadelphia is larger than Phoenix and St. Louis combined.” (http://www.baseballprospectus.com/news).
In today’s business world, baseball players’ salaries are seen more of in terms of investments. If a franchise spends its budget wise and accordingly, the ball club wins a higher percentage of games, which means more fans attend games and public interest rises. With the added interest comes more lucrative contracts with the media which turns into more money for the owners. On the other hand if organizations do not spend their money wisely, fans will not want to come out to the park to see a losing team and will result in less money for the future.
The following table is a break down of payrolls for each team during the 2001 season.
Table 5
TEAM BY TEAM PLAYER PAYROLL
Team | Player Payroll | Adjusted Player Payroll | Winning Percentage | * Marginal $ / Marginal Win |
Boston | $118,471,000 | $118,471,000 | .509 | $3,115,000 |
N.Y. Yankees | 117,936,000 | 101,936,000 | .594 | 1,867,000 |
Los Angeles | 116,077,000 | 116,077,000 | .531 | 2,754,000 |
Cleveland | 102,491,000 | 100,491,000 | .562 | 2,061,000 |
Atlanta | 99,671,000 | 97,042,000 | .543 | 2,135,000 |
Arizona | 99,434,000 | 86,434,000 | .568 | 1,691,000 |
N.Y. Mets | 99,144,000 | 99,144,000 | .506 | 2,581,000 |
Texas | 92,793,000 | 92,793,000 | .451 | 3,262,000 |
Seattle | 83,946,000 | 76,409,000 | .716 | 941,000 |
Toronto | 83,801,000 | 83,801,000 | .494 | 2,253,000 |
St. Louis | 80,148,000 | 78,660,000 | .574 | 1,479,000 |
Baltimore | 79,783,000 | 79,783,000 | .391 | 4,530,000 |
Chicago Cubs | 78,091,000 | 78,091,000 | .543 | 1,653,483 |
San Francisco | 72,185,000 | 72,185,000 | .556 | 1,427,000 |
Houston | 71,577,000 | 71,058,000 | .574 | 1,308,000 |
Colorado | 69,983,000 | 69,983,000 | .451 | 2,329,000 |
Chi. White Sox | 66,721,000 | 66,721,000 | .512 | 1,564,000 |
Detroit | 57,184,000 | 57,184,000 | .407 | 2,549,000 |
Tampa Bay | 57,000,000 | 57,000,000 | .383 | 3,272,000 |
Pittsburg | 53,227,000 | 53,227,000 | .383 | 2,992,000 |
Anaheim | 52,239,000 | 52,239,000 | .463 | 1,486,000 |
Milwaukee | 51,164,000 | 51,164,000 | .420 | 1,963,000 |
Philadelphia | 49,384,000 | 49,384,000 | .531 | 972,000 |
San Diego | 46,089,000 | 46,089,000 | .488 | 1,086,000 |
Cincinnati | 45,410,000 | 45,410,000 | .407 | 1,870,000 |
Oakland | 43,821,000 | 41,135,000 | .630 | 526,000 |
Kansas City | 42,704,000 | 42,704,000 | 401 | 1,815,000 |
Florida | 42,084,000 | 42,084,000 | .469 | 1,062,000 |
Montreal | 37,676,000 | 37,676,000 | .420 | 1,269,000 |
Minnesota | 30,494,000 | 30,494,000 | .525 | 480,000 |
* Marginal salary per marginal win = (adjusted player payroll - $13,000,000) / ((winning percentage - .300) * 162)
The formula above takes a look at marginal dollars per marginal win. The cheapest possible team that an owner could assemble is roughly $13,000,000. A given team’s marginal spending per marginal win thus equals its payroll, minus postseason revenue and the $13,000,000 minimum, divided by win percentage minus 0.300, multiplied by 162 games (http://www.baseballprospectus.com/news).
In hindsight, the average franchise spent $1,943,000 per marginal win. The four teams that were the most efficient were the Minnesota Twins, Oakland A’s, Philadelphia Phillies, and Seattle Mariners. The Twins, A’s, and Phillies broke the trend and had winning seasons despite lower payrolls. The Mariners, who were one win shy of breaking baseball’s most winning record that year, did so with a win margin of $941,000 – about half the average. Conversely, there were four teams who paid over $3 million per win in 2001. Those teams included the Red Sox, Rangers, Tampa Bay, and Baltimore who paid over $4.5 million for each win.
- posted by Hot Rod @ 8:30 PM 0 comments
Franchise Expenses
Included in this category are salaries for managers, coaches, and scouts; signing bonuses for drafted players and foreign free agents; the minor league system; stadium expenses; front office payroll; and the operating costs for MLB’s main office in New York City. These categories all seem to be about the same from team to team, all except the cost to operate the respective stadiums. The table below however, shows that certain teams take a different approach and use more funds than others to achieve a smooth, functioning franchise.
Table 6
TEAM BY TEAM EXPENSES, EXCLUDING PLAYER PAYROLL
Team | Non-player Expenses | Operating Revenue | Percentage |
Seattle Mariners | $84,222,000 | $202,434,000 | 41.6% |
New York Yankees | 83,413,000 | 242,208,000 | 34.4 |
San Francisco Giants | 79,110,000 | 170,295,000 | 46.5 |
New York Mets | 75,195,000 | 182,631,000 | 41.2 |
Los Angeles Dodgers | 72,873,000 | 143,607,000 | 50.7 |
Colorado Rockies | 65,245,000 | 131,813,000 | 49.5 |
Atlanta Braves | 61,540,000 | 146,851,000 | 41.9 |
Pittsburg Pirates | 58,463,000 | 108,706,000 | 53.8 |
Cleveland Indians | 57,870,000 | 162,242,000 | 35.7 |
Arizona Diamondbacks | 57,850,000 | 125,132,000 | 46.2 |
Texas Rangers | 57,806,000 | 134,910,000 | 42.8 |
Boston Red Sox | 55,799,000 | 176,982,000 | 31.5 |
Houston Astros | 54,266,000 | 124,629,000 | 43.5 |
Philadelphia Phillies | 52,996,000 | 81,515,000 | 65.0 |
Chicago White Sox | 50,648,000 | 111,682,000 | 45.4 |
St. Louis Cardinals | 50,442,000 | 132,459,000 | 38.1 |
San Diego Padres | 49,784,000 | 79,722,000 | 62.4 |
Detroit Tigers | 49,074,000 | 106,791,000 | 46.0 |
Anaheim Angels | 49,061,000 | 91,731,000 | 53.5 |
Milwaukee Brewers | 47,801,000 | 113,350,000 | 42.2 |
Toronto Blue Jays | 47,605,000 | 78,479,000 | 60.7 |
Baltimore Orioles | 47,059,000 | 128,302,000 | 36.7 |
Chicago Cubs | 46,886,000 | 129,774,000 | 36.1 |
Tampa Bay Devil Rays | 46,438,000 | 80,595,000 | 57.6 |
Florida Marlins | 46,204,000 | 60,547,000 | 76.3 |
Minnesota Twins | 44,305,000 | 56,266,000 | 78.7 |
Oakland Athletics | 38,761,000 | 75,469,000 | 51.4 |
Kansas City Royals | 37,126,000 | 63,696,000 | 58.3 |
Cincinnati Reds | 36,533,000 | 70,887,000 | 51.5 |
Montreal Expos | 35,014,000 | 34,171,000 | 102.5 |
AVERAGE | $54,646,300 | $118,262,533 | 46.2% |
Source: MLB financial disclosures
When a closer look is taken at some of the team’s reported figures, it makes sense that some of the better operated franchises spent more money on overhead than some of the perennial losers like the Expos. The better teams tend to spend more on their scouting programs and give the coaches higher salaries than other teams. The cheapest, most cost effective way to improve the product on field is to invest heavily into the club’s farm system. The easiest move a franchise can make is to have a top of the line executive front office.
From this list, the Oakland A’s seem to be the most puzzling. Only three teams spent less money on their respective front offices, however only the Mariners had a better record during 2001. Oakland does not appear to be neglecting any of the important areas of its organization. The farm system has been arguably regarded as the best in baseball for the past five years. Other franchises have seen Oakland’s blueprint for success and have been hiring away top assistants over the same five year time span and have been promoting them to improve other struggling clubs. All other front office employees in Oakland must be getting compensated fairly well compared to the rest of the league thanks in part to the inflated living costs in the Oakland – San Francisco Bay Area.
What is puzzling is that the average franchise spends about 50% more than the A’s did to accomplish significantly less in terms of wins. If all other 29 of the franchises were to reduce their non-player expenses to levels that of the Athletics, Major League Baseball could have saved over $500 million. If Oakland could find a way to make it work, why couldn’t all of the other franchises find a way to succeed? This is just one more factor that makes experts believe that Major League Baseball has been over estimating its vulnerability in terms of its lack of profitability.
In regard to signing bonuses, it seems that franchises tend to expense them, especially for amateurs. The proper treatment would be to prorate these bonuses over the expected useful life of a player’s contract. Expensing the bonuses artificially adds to present costs and lowers profits as a result. To make sure, some teams expense signing bonuses in the first year when the bonus itself is paid out over the lifetime of the contract.
Another report that was issued by Major League Baseball as a supplemental source to a blue ribbon panel on baseball economics showed that from 1995 through 2001 non-player expenses had actually risen faster than players’ salaries.
Table 7
THE GROWTH RATE OF NON-PLAYER EXPENSES, 1995 - 2001
1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 1995-2001 | |
Revenues | $1,385 | $1,775 | $2,067 | $2,479 | $2,761 | $3,324 | $3,548 | +2,163 |
% Increase | 28% | 16% | 12% | 11% | 20% | 7% | +156% | |
Player Salaries | $927 | $939 | $1,116 | $1,272 | $1,490 | $1,743 | $1,971 | +1,044 |
% Increase | 1% | 19% | 6% | 17% | 17% | 13% | +113% | |
Other Expenses | $784 | $1,033 | $1,127 | $1,345 | $1,497 | $1,666 | $1,809 | +1,025 |
% Increase | 32% | 9% | 19% | 11% | 12% | 9% | +134% | |
Claimed Operating Losses | ($326) | ($197) | ($176) | ($138) | ($226) | ($85) | ($232) |
Source: MLB Updated Supplement to The Report of the Independent Members of the Commissioner's Blue Ribbon Panel on Baseball Economics, December 2001.
According to the numbers above, Major League Baseball actually admitted that its yearly revenue has risen by an astonishingly 156% through the six years that this data had been collected. These numbers also indicate that the actual players have been receiving less than half of the $2.1 billion in new revenues whereas non-player expenses have increased by 134%.
The major question here is where is all of this extra revenue going? It is obvious that teams are not spending more on their minor league systems and haven’t increased salaries for various franchise employees. The cost of rent for teams to play in given ballparks hasn’t dramatically jumped either, nor have inflation rates. The only explanation is that it is filtering into the owners’ already rich pockets. Up until MLB’s commissioner decides to let someone who knows these answers explain them to the public, critics of Major League Baseball will continue to see the league’s cry of poverty as a hoax and an attempt to fleece local markets of even more funding.
Revenue Sharing
The concept of revenue sharing was first introduced to Major League Baseball for the 2001 season. The formula to determine what teams pay is 20% of its local receipts minus stadium taxes. Once all the amounts are totaled together, 75% of the pool is divided equally to all 30 teams, while the other 25% is split by teams with lower than average local revenues. Of those teams, the lowest revenue teams will receive the most.
According the Major League Baseball, the purpose behind revenue sharing is to “give small market teams a chance to compete.” Two main areas of concern exist with this thinking. First, it does not make franchise recipients try and compete. The owners can just pocket the income by treating it as financial support. The second concern deals with whether a “small market team” represents a “low revenue team” or “team that plays in a small metropolitan area.” The second definition is more fitting since a team’s revenue is mostly dependent on its on-field performance and marketing strategies. However, Major League Baseball elects to consider a “small market team” as a “low revenue team.”
As illustrated in the table below, this is not the greatest way to calculate revenue sharing.
Table 8
2001 MAJOR LEAGUE BASEBALL REVENUE SHARING
Team | Local Revenue | Metropolitan Population | Per Capita Local Revenue | Revenue Sharing |
Milwaukee | $88,949,000 | 1,689,592 | $52.65 | $1,744,000 |
Seattle | 178,033,000 | 3,554,760 | 50.08 | (18,791,000) |
Cleveland | 137,841,000 | 2,945,831 | 46.79 | (11,373,000) |
Colorado | 107,412,000 | 2,581,506 | 41.60 | (6,029,000) |
St. Louis | 108,058,000 | 2,603,607 | 41.50 | (8,229,000) |
San Francisco | 145,894,000 | 3,519,861 | 41.45 | (6,308,000) |
Pittsburg | 84,305,000 | 2,358,695 | 35.74 | 1,782,000 |
Arizona | 106,653,000 | 3,251,876 | 32.80 | (4,432,000) |
Atlanta | 122,450,000 | 4,112,198 | 29.78 | (10,647,000) |
Boston | 152,581,000 | 5,819,100 | 26.22 | (16,438,000) |
Tampa Bay | 62,337,000 | 2,395,997 | 26.02 | 12,384,000 |
Cincinnati | 46,486,000 | 1,979,202 | 23.49 | 13,404,000 |
Chicago Cubs | 105,373,000 | 4,578,770 | 23.01 | (6,568,000) |
Kansas City | 39,295,000 | 1,776,062 | 22.12 | 15,997,000 |
Houston | 100,228,000 | 4,669,571 | 21.46 | (5,185,000) |
Texas | 110,509,000 | 5,221,801 | 21.16 | (8,744,000) |
N.Y. Yankees | 217,807,000 | 10,599,933 | 20.55 | (26,540,000) |
San Diego | 55,321,000 | 2,813,333 | 19.66 | 8,668,000 |
Chicago White Sox | 87,281,000 | 4,578,770 | 19.06 | (4,201,000) |
Detroit | 82,390,000 | 5,456,428 | 15.10 | 5,127,000 |
N.Y. Mets | 158,230,000 | 10,599,933 | 14.93 | (15,669,000) |
Los Angeles | 119,206,000 | 8,186,823 | 14.56 | (9,107,000) |
Oakland | 51,068,000 | 3,519,861 | 14.51 | 10,520,000 |
Baltimore | 103,901,000 | 7,608,070 | 13.66 | (6,807,000) |
Toronto | 54,078,000 | 4,763,200 | 11.35 | 9,830,000 |
Minnesota | 31,865,000 | 2,968,906 | 10.73 | 19,089,000 |
Florida | 36,146,000 | 3,876,380 | 9.32 | 18,561,000 |
Philadelphia | 57,114,000 | 6,188,463 | 9.23 | 11,752,000 |
Anaheim | 67,330,000 | 8,186,823 | 8.22 | 9,954,000 |
Montreal | 9,770,000 | 3,474,900 | 2.81 | 28,517,000 |
Average | $94,264,000 | 4,529,342 | $23.99 | - 0 - |
NOTE: Population figures adjusted to represent number of teams in a given market (ex: Anaheim and Los Angeles, or Oakland and San Francisco)
With Major League Baseball centering on the total revenue that franchises are able to generate, the league is in essence punishing the franchises that are being run efficiently in the smaller cities like St. Louis and Colorado, while at the same time rewarding the poorly run franchises in larger cities like Philadelphia and Anaheim.
Take St. Louis and Philadelphia for example. Both teams play in stadiums that are over 30 years old (Philadelphia moves into a new stadium in 2004.) St. Louis produced $50 million more in local revenue than Philadelphia despite the fact they play in a market that is more than half as small. As a result of the Cardinals being more efficient, they paid over $8 million in revenue sharing whereas the Phillies collected just about $12 million.
Major League Baseball is missing a major point here. The league has to understand that just like any other business sector, poorly run corporations should lose money. MLB franchises are no different; terribly run franchises aught to lose even more money. However, the Expos - dead last in attendance, local media contracts, and revenue – were run well enough so that there were eight teams that lost even more than the Expos did in 2001.
This whole situation could easily be fixed by computing market size into the revenue sharing formula.
Overall Profitability
When a franchise owner decides to sell the team, he or she does so by gaining a much larger sum of money than when he/she bought the franchise in the first place. The majority of owners receive tax breaks and capital gains when they sell the team. The evidence that appreciation in franchise values has skyrocketed over the past few decades is proof enough. It has been estimated that the annual rate of return to baseball franchise owner ship was 12.4% between 1960 and 2003. This rate is significantly higher than the rate of return to common stock ownership, 6.9% annually, for the same period (http://www.wsj.com/).
With all things considered, many experts find it difficult to accept the sky-is-falling analysis being presented by Major League Baseball. By rejecting this disastrous scenario, it does not mean that the game itself is free from economic problems. There is too much imbalance throughout the league and there may very well be in upwards of ten franchises that have persistent financial problems that are not caused by poor management.
In the end, it is almost impossible to say whether there is an authenticity to the financial numbers presented by Major League Baseball, or not. There just is not enough detail in the numbers. It is important to reiterate that all MLB franchises are privately owned. As a result, the level of reporting supplied by MLB is not nearly as comprehensive as financial statements that have been issued by publicly owned corporations like Microsoft or General Motors. It would be practically impossible to encourage MLB to make available more detailed information. In essence, what the league and Commissioner Selig said to Congress was that MLB had lost money, but they were unwilling to trust Congress with all of the details.
- posted by Hot Rod @ 8:22 PM 0 comments
Forbes’ Case Against Major League Baseball
Forbes magazine did a study based on the numbers of MLB’s finances for the 2001 year, the same numbers that have been discussed earlier. Forbes estimated that each franchise is roughly worth $286 million, which is about a 10% increase from the year before. Also, franchise owners have seen their value of the franchises increase in value by 12% each year. These two figures do not seem to represent an industry that repeatedly claims to be losing money year in and year out.
Listed below are the figures that Major League Baseball presented to Congress in 2001 and the figures that Forbes came up with as an independent auditor.
Table 9
FORBES’ ESTIMATED FRANCHISE WORTH VERSUS MLB’S FRANCHISE CALCULATIONS
Team | Franchise Value (MLB) (in millions) | Franchise Value (Forbes) (in millions) | Difference (in millions) |
New York Yankees | $457,876 | $730,000 | $272,124 |
New York Mets | 349,593 | 482,000 | 132,407 |
Los Angeles Dodgers | 278,107 | 435,000 | 156,893 |
Boston Red Sox | 337,526 | 426,000 | 88,474 |
Atlanta Braves | 283,055 | 424,000 | 140,945 |
Seattle Mariners | 386,077 | 373,000 | (13,077) |
Cleveland Indians | 311,230 | 360,000 | 48,770 |
Texas Rangers | 261,076 | 356,000 | 94,924 |
San Francisco Giants | 334,282 | 355,000 | 20,718 |
Colorado Rockies | 257,597 | 347,000 | 89,403 |
Houston Astros | 244,073 | 337,000 | 92,927 |
Baltimore Orioles | 251,257 | 319,000 |