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

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

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