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

• MLB figures determined by 2 x 2001’s revenue minus revenue sharing payments

Once everything is said and done between the comparisons, the estimate that Forbes gives is $1.5 billion higher than MLB’s estimate. The two estimates are fairly close when looking at the low revenue franchises, but not with the high revenue clubs. This fact is not startling because it takes a franchise about $70 million a year to field a team. The only opportunity for owners to make revenue is by exceed the $70 million total.

Take this example. If franchise X is able to gross $100 million, the owner would have roughly $30 million in flexible income to put in his pocket or dump back into the team. Now, if franchise Y is able to take in $200 million, the franchise owner now has $130 million to play around with at his discretion. With MLB’s formula of valuing franchises, Y would be valued at twice the amount of X. However in reality, franchise Y would have the capability to be worth more than four times as much as X.

Another fault with MLB and Bud Selig’s formula is that it takes figures from only the current year. It does not calculate past or future calculations. As a result, the calculations ignore the major spikes in revenue that flow into a franchise because of recently completed stadiums or stadiums that have been planned but are yet to be completed. In Forbes’ estimates of the Philadelphia and San Diego franchises, they took into account that each team will be playing in a brand new ballpark in 2004. It took into account the looming revenue increases the clubs are about to realize. On the other hand, Forbes also accounted for teams like San Francisco and Seattle that can expect to see their revenue growth begin to decrease as the uniqueness of their new ballparks wear off in the coming years.

The major point behind the Forbes’ findings is that an independent expert analyst with absolutely no stake in the result of the findings came to the conclusion that Major League Baseball’s operating profits for 2001 were $300 million more than the amount reported by Bud Selig. Also, the findings indicated that Major League Baseball franchises are a collectively $1.5 billion under priced when compared to the suggested price according to Selig and MLB.

The Current Collective Bargaining Agreement

As mentioned earlier, Bud Selig picked a panel consisting of four experts and twelve owners to study MLB’s economic system and to make recommendations based on what they found to improve it. The Blue Ribbon Panel’s main concern: a deterioration of competitive balance to the point that even on opening day, most small MLB market teams have no reasonable shot at post-season play. In response, three main issues were pointed out by the panel. First, it suggested that Major League Baseball improve its revenue sharing plan by increasing the tax percentage on net local revenue from 20% up into the range of 40% to 50%. Second, the panel called for the reintroduction of the luxury tax on payrolls that exceed $84 million to be taxed at 50%. Third, the panel recommended a few key changes in the draft structure. These were the main suggestions that the blue ribbon panel presented to Commissioner Selig and Major League Baseball.

The Blue Ribbon Panel on Baseball Economics in 2001 provided the backbone of the most recent Collective Bargaining Agreement in 2002 which runs through 2006, which was reached between MLB owners and the Players’ Association. The 2002 CBA was the first since 1972 to not have a lockout or a strike declared. Each side was fearful about the ramifications another strike would create short-term, let alone what the costs of a strike would be for the game in the long run.

It was no small feat that both sides of the negotiations were able to avoid a strike. The leading structural problem in baseball right now is the irritable ownership. In a way, the “fight to the death” labor negotiation was a three-way battle: big market owners versus small market owners versus the players. The following sections provide a brief history of the labor negotiations that took place during 2002.

Owners’ Proposals

The owners made their opening proposal on January 9, 2002, and an essentially similar proposal on February 26, 2002. It increased revenue sharing from the current 20% to 50% after local expenses, and imposed a tax of 50% on the portion of payrolls above $98 million. The shared revenue would be distributed equally among all teams, except for $100 million to be placed in a fund to be distributed at the commissioner's discretion. The owners estimate that this would provide $253 million to redistribute to other teams.

The owners' next proposal, made on August 13, 2002, set the threshold for a luxury tax at $100 million, phased in over the first three years to start at $115 million in the first year. The discretionary fund would be reduced to $85 million. Estimated shared revenue would be $298 million. The owners also proposed a minimum payroll of $45 million. This would force one team to raise salaries above the 2002 level if the floor includes benefits as part of payroll, or six teams if benefits are not counted.

The owners adjusted the tax proposal on August 16, 2002, to match the union's proposal, imposing higher taxes on teams which repeatedly cross the threshold. The threshold would be $102 million in 2003, with a cost-of-living adjustment if the difference between the highest and lowest payrolls decreased. The tax rate would be 37.5% the first time a team goes over the threshold, then 42.5%, 47.5%, and 50%. This would still affect seven teams based on 2002 payrolls. The rate of revenue sharing would be 37%; estimated shared revenue would be $282 million, which apparently indicates some change in the formula.

On August 25, 2002, the owners made minor changes, lowering the revenue sharing percentage from 37% to 36%, and raising the tax threshold to $107 million in 2003 and a fixed $111 million in future years, but removing the cost-of-living adjustment. The tax rates would be 35%, 40%, 45%, and 50%, depending on the number of times the team went over the threshold. The tax would still affect seven teams based on 2002 payrolls. Estimated shared revenue would be $263M.

High revenue sharing, such as the 50% in the earlier proposals, would cause a severe reduction in salaries. It would also cause a major redistribution of revenue; the Yankees have by far the largest TV contract and also have high ticket revenue, so they would lose a lot of revenue.

This plan also limits arbitration slightly. Players would require three full years of service to be eligible; currently, the top 17% by service of two-year players are eligible. In addition, a team could release a player after exchanging arbitration figures, rather than being forced to go ahead with arbitration or negotiate a contract after offering it. This is not a major concession, as the team could have released the player before offering arbitration if it expected to lose money in the arbitration.

The owners promised not to impose a lockout during the season; this is not as meaningful as it sounds, since a lockout during the season would be unlikely. Spring training loses money, while profits increase as the season goes on, with the playoffs the most profitable part of the season. A strike or lockout would occur when it would cost the other side as much as possible; thus every previous lockout has been during the off-season, and every strike has been during the season.

Players’ Union Proposals

On August 16, 2002, the union announced a strike date of August 30, 2002. This date gave some time for both sides to continue negotiations without immediately threatening the playoffs.

The union made its first formal proposal on March 13, 2002. It would increase revenue sharing from the current 20% to 22.5%, with no salary cap or tax. The union's plan would distribute the shared revenue according to the current formula, which gave more to lower revenue teams. In addition, there was no discretionary fund. As a result, the union claimed that $165 million would be available to distribute to low-revenue teams. This proposal was probably close to the status quo. The old labor agreement had no tax in 2001, and that agreement remained in effect until a new agreement was reached.

The union's next proposal, made on or about August 14, 2002, accepted a luxury tax on payrolls over $137 million, with a 10% tax in the first year, 25% in the second, and 35% in the third. The $137 million limit would have affected only one team in 2002, with the Yankees' payroll for tax purposes figured at $171 million. The union also proposed an additional $40 million be given to low-revenue teams from MLB's central fund. This would increase shared revenue to $228 million.

It is important to note that the union's proposal would have no tax in 2006, the fourth year. This is important because an expired labor agreement remains in effect until a new agreement is reached. That worked to the union's advantage in 2002.

The union's next plan, on August 16, 2002, phased in the tax rule. Initially, a team would pay 15% tax the first time it went over the threshold, 25% the second time, and 30% the third time. The limits would be $130 million, $140 million, and $150 million for three years. The $130 million limit would have affected two teams in 2002. The 15% rate would mean that a team would have only a weak incentive to stay under the limit if it was trying to make a one-year push, but a stronger incentive not to be over the limit every year. Estimated shared revenue would be $235 million.

The last plan, proposed on August 25, 2002, is essentially similar. The tax limits would be $125 million, $135 million, and $145 million; $125 million would still have affected two teams. The rates would increase with time and with repeated excesses over the cap; 15% in 2003, 20% or 25% in 2004, and 20%, 30%, or 40% in 2005. There would still be no tax in 2006. Increased revenue sharing would be phased in, up to 33.3% in 2006, which would share $242 million. The union claimed that it had always intended to have a phase-in of increased revenue sharing; the owners disputed this claim.

The union opposed a salary floor; while it is true that the floor would raise salaries slightly, the union opposed the floor on principle because it also opposes a cap.

Evaluating the deal

The agreement from 2002 was the product of compromise from both sides. The final compromise on the issue of revenue sharing was much closer to the owners’ proposition. About $255 million will be redistributed at full execution. The final compromise on the luxury tax issue, however, was much closer to the players’ union. The tax threshold rose from $117 million to $136.5 million while the tax rates vary depending on the number of times the threshold had been crossed. Listed below is a table that displays the consequences of breaching the payroll threshold that were agreed upon.

Table 10

LUXURY TAX THRESHOLDS AND BREACH RATES, 2003 – 2006

Source: Sports Business Daily, September 4, 2002, p. 8.

The recent agreement will produce a few modest changes in the economics of baseball. Over the four years of the contract, almost $1 billion will be transferred from the top to the bottom franchises. This will help level the competitive playing field by stunting growth from the top of the league rather than lifting the bottom of the league upward. Major League Baseball will stand to generate about $15 billion in revenue over the four year period. The new plan will redistribute only 7% of that revenue, so the shift in competitive balance that is being sought with the new deal will be quite minor. A summary of the 2002-2006 Collective Bargaining Agreement can be found in the appendix.

Factors also exist that are outside of the labor agreement that will help keep salaries from escalating at record proportions, which in turn will help the low revenue clubs. The downward turn of the economy, the stock market’s ups and downs, and the difficult financial misfortunes of several franchise owners in all probability provide a more dominant deterrent to salary growth than anything in the recent agreement. Also, the introduction of better educated, business-minded executives into teams’ front offices as well as more importance being put on the use of statistical analysis to judge player talent will help curb salary growth. As a result of the recent economic hardships the past few years, insurance companies are making it almost impossible to insure the long-term contracts that players used to sign.

Over the course of each new collective bargaining agreement, two themes seem to jump out: owner disagreement and distrust between the players and owners. In 2002, Commissioner Selig imposed a gag order on the owners and threatened to fine them up to $1 million if they spoke to the public about the collective bargaining agreement or the game’s economics.

For example, there was one owner who wished to remain anonymous of a medium market franchise who told the Illinois Daily Herald in July 2002:

You think this is funny but this is how Bud (Selig) operates. He tells 30 owners 30 different things and then slaps a gag order on us and threatens us with a $1M fine so that the players don’t find out we all hate what’s going on. We’re supposed to be unified? That’s laughable. Lift the gag order again, and you’ll see how unified. Now, on top of everything else in Montreal, the (former Expos) minority owners have filed racketeering charges against Bud and (Marlins managing general partner) Jeff Loria, and if the books of every team are exposed during that legal fight, you can say goodbye to Bud and any deal with the players. This is more dangerous than you can imagine. Bud is playing with fire here and we’re all getting burned. I’m convinced Bud got his contract extension by threatening 10 of us, making promises to the other 10, and loaning money to the last 10. This thing is on the track headed for disaster, and Bud is right there in the front of the train conducting the whole operation.

As stated before and implied from the above excerpt, the owners group can be characterized into a three-headed monster. The big-revenue owners always want less revenue sharing, no luxury tax, and accommodation with the players. Next are the low revenue owners who want more revenue sharing, a high luxury tax, and a tough stance toward the players’ association. Stuck in the middle are the owners that want various combinations in between both extremes. Furthermore, each owner has strategies that differ, as well as personalities and philosophies that create even more separation amongst the owners.

Issues Behind New Stadium Financing

Over the past fifteen years, nineteen baseball-only stadiums have been built for MLB franchises, the most recent being San Diego and Philadelphia in 2004. During the span of 1976 through 1988 not one stadium was built. It cost roughly $5.2 billion total, about $307 million a piece, to have all nineteen facilities built. Of the 5.2 billion, about two-thirds of it, $3.43 billion, came from local public funds.

The Process of Acquiring a New Ballpark

The majority of stadium plans have similarities between them when going through the required political routine. The process begins when a franchise owner publicly states that he or she needs a new ballpark in order to keep the franchise competitive. If the owner doesn’t get the new park, he or she will be forced to move the team if the local community is unable to come up with public financing for a new stadium. As soon as the public becomes aware of the franchise owner’s “cry for help,” it then becomes rather simple to find supporters from the local community. These businesses include contractors, construction companies, construction unions, architectural firms, investment banks, lawyers, and other groups that expect to reap the benefits of having a new stadium erected.

After the owner has created supporters for his new park, attention is then turned to the local government in order to gain their support. During this step, a marketing research firm is normally hired to conduct a study to determine the impact a new stadium would have on the community. The reports these firms generate use an improper method based on impractical assumptions. These reports tend to conclude that hundreds of millions of dollars and thousands of new jobs would be created with such a project. More on this topic later.

When the stadium plan is ready to be voted upon, the result is usually extremely close. If the final vote was not close, that would indicate that supporters of the new stadium did an awful job of predicting the public’s enthusiasm toward supporting the plan. For example, if a proposal that included $100 million in public funds was accepted with 60% of the vote, then the stadium backers did a poor job of estimating the public’s willingness to support financially. The proponents could have been able to ask for $150 million and still win the referendum with only 51% of the vote. In essence, it cost the owner $50 million out of his or her own pockets when the public would have been perfectly willing to pay the amount.

Impact of New Stadiums

Now back to the research reports. It is not uncommon for different firms to disagree on certain points in this particular research, but they do agree on one main position. Each economic analysis about the impact of a new ballpark found no positive effect on productivity or employment. Even though baseball has a large following in terms of fans, it does not hide the fact that baseball itself is a very small business. In a medium-sized market such as St. Louis, the franchise would represent only 0.3% of the local economic activity. In an even larger city like New York, a franchise will contribute only 0.03% of the market’s output. Franchises also tend to have only 70 to 130 meaningful employees that work in the front office on a day-to-day basis. Besides the small size of a franchise, what is known as the “substitution effect,” and the negative effect that franchises have on local budgets also prevent economic development in markets.

The substitution effect is actually quite simple. Most consumers operate on primarily an inflexible budget when it comes to leisure activity. When a major sports team comes to town, the money that a family spends to go to a game is essentially money that is not spent at a local movie theater, golf course, restaurant, etc. The net effect of spending in the local market then becomes zero.

One major exception exists to this theory. Franchise officials have claimed to attract in some cases as many as one-third of its fans from outside the major metropolitan area. Other teams have estimated that only 5% to 20% of its fans are from out of town. The point to remember here is what actually is defined in the market or city limits. A stricter definition of urban limits results in a smaller radius around the ballpark which suggests a larger percentage of fans come from outside the area. A combined metropolitan area that includes several counties would imply that a smaller percentage is from outside the area. As a result, the smaller the region selected for the study, the larger the amount of “new spending” there will be.

Evidence also exists that points out that the fans who do come from out of state do not come because of the game itself; but because they are in the area for other reasons, whether for business, to see family, or for other various reasons. If these people did not attend the ballgame, they would in all probability spend their money on something else located within the area. That way their expenses in and around the ballpark would substitute for other local spending.

The impact of a potential new stadium also has a major influence on the local budgets. As the cost to build new ballparks have become more and more expensive, the contributions that local government have given for construction costs have continued to hold steady near 70%, meaning more and more funds to build these gigantic attractions. According to a study by authors James Quirk and Rodney Fort, host cities have provided each team with an average operating subsidy of $7 million per year. The authors also pointed out that in none of these twenty-five cases between 1978 and 1992 did the city earn a positive net operating income from the new facility. It can also be speculated that the average subsidy has risen much higher than $7 million per year due to the fast rising costs of the most recent ballparks (Pay Dirt: The Business of Professional Team Sports, Quirk and Fort.)

Another major factor in concern with the budgetary impact of a new facility is the opportunity cost itself. If the construction cost is primarily funded by the host city, which in most cases it is, the city and its market must raise the money by either raising taxes or reducing municipal services, or a combination of both. Spending on such a construction project thereby limits the local government’s spending in other, possibly more important areas.

Winning Trumps All

Perhaps the most important factor should be pointed out that it is not guaranteed that a new ballpark facility will automatically generate more revenue for a franchise. A new stadium will only represent the potential for new revenue. For a franchise to take advantage of the potential revenue, the team’s front office must do an impressive job of selling tickets, advertising, and concessions, amongst other areas to take advantage of the new atmosphere of the ballpark.

If the franchise is to reap the benefits of a new facility, it will depend mostly on whether the team has improved its on-field play. Generally, a star player like a Barry Bonds can attract more fans to the park due to his personal achievements as well as being able to improve the quality of the team. If the additional fans that a star player can attract are willing to spend more of their own cash for higher priced tickets as well as food, then the incremental value that has been created by the new star player was worth it. With the new ballpark, a franchise now has the opportunity to go out and acquire more “star players” to help drive up revenue for the team.

If the revenue potential is realized by the franchise, the new ballpark will make available a considerable revenue enhancement for the team that will likely last for more than a few years. On the other hand, the management and front office-types could decide to stand pat and do nothing in terms of improving the quality of the team. If management expects revenue to magically fall into their pockets without improving the quality of the team, they would be likely to experience exactly what happened to the Detroit, Milwaukee, and Pittsburg franchises after their first year in their new facilities. During the clubs’ first year, fans were drawn more to the facility by curiosity than by the winning style of play their teams didn’t exhibit. During year two, fans had already seen their new ballparks and felt as if they had no reason to keep coming back to it.

The Bud Selig Legacy

Granted, Bud Selig’s tenure as commissioner of Major League Baseball has been controversial. Since he currently is the commissioner, that indicates that he has the most power over what route the game has taken in the past and will take in the future during his watch. It is definitely worth discussing what Bud Selig has done for the overall good of the game. There have been a number of major changes that have taken place under his leadership.

Bud Selig was named “interim” commissioner on September 9, 1992. Since 1992, three World Series winning franchises were not even part of the league when Selig took over the reigns, the Diamondbacks once and the Marlins twice. Other major, positive occurrences include sixteen new stadiums being built, the creation of the League Divisional Series, and huge amounts of revenue sharing between teams. On the other hand, some negativity can be pointed out during Selig’s tenure. No player ever imagined signing a contract for $252 million, that being Alex Rodriguez. Never had a World Series been cancelled due to labor contract negotiations as it was in 1994. The concept of contracting teams was never thought of either.

Over the years, Selig has tended to take the majority of the credit for all of the modernization that has taken place on the baseball field itself. Even though he accepts the credit, the majority of it should be given to others such as the members of the Blue Ribbon Economic Panel formed to study the game in 1999. The position of MLB commissioner is actually rather similar to that of the President of the United States. If major events take place during your tenure, it will go down as being on your record, whether the eventual outcome was positive or negative. Even Bud Selig’s adversaries have admitted that he is immune to criticism from radical change in the game. If this were the case, none of these changes would have taken place.

The overall feeling from fans is that the wild card concept, though hated at first, has come to allow more fans of teams to be interested in the chase to make the playoffs. Interleague play was always something that fans had wanted to see, like the Cubs and White Sox playing each other, or the New York cross-town rivalry between the Mets and Yankees. Interleague games provide a jolt of energy to fans at certain times throughout a very long season. Expanding by an extra round in the playoffs has also seemed to be good for the overall game even though the current system may not reward the better teams as much as it should.

Selig also toyed with the schedules for each team, created an unbalanced schedule for teams instead of playing one uniform schedule. With this new schedule, teams in the same division play each other more often resulting in a true divisional champion. With the old schedule, teams would be playing teams from other divisions that they weren’t competing with in their own division. The unbalanced schedule as a result created more games between heated rivalries, such as the Boston Red Sox and New York Yankees. The downfall with the new schedule and rotating interleague games is there is no equity whatsoever in the schedules of the teams battling for the wild card. This also indicates that some teams in a division will play harder opponents on their schedule whereas another team in the division will play a much weaker schedule.

It is abundantly clear that fans of the game enjoyed these changes and have showed their support by opening up their wallets at the games. Even though the freshness of interleague games appear to be running thin, roughly 20% more fans paid in attendance to see interleague games compared to all other games during the 2003 season. Even though average ticket prices continue to skyrocket, it is important to point out that more fans are flowing through the gates than at any other point in history. Selig is also responsible for having created new, state-of-the-art facilities for fans to watch games at, including not so sound investments in Cincinnati, Pittsburg, and Milwaukee.

Bud Selig can also be credited for reaching out to countries all over the world in order to help globalize the game more so than at any other time in history. Selig doesn’t deserve all the credit for this revolution, however. The players’ union has been pushing hard for the globalization of the game for many years. The players’ union also had as much at stake as Selig did in terms of creating a World Cup for baseball. Over the past decade, it was the superstar players from Japan that had forced their own way to America, not Commissioner Selig pleading with them and extending an invitation to come play overseas. It is becoming clearer and clearer that the future of baseball is tied straightforwardly with the success of globalizing the game throughout the entire world.

Not everything that Bud Selig has done has resulted in a positive outcome. There is no doubt that fans remember the strike in 1994 that canceled the World Series. Many fans refuse to forget that fact and blame Selig himself for it. Even though it was the players who went out on strike, it was the owners who forced it upon them. Many things in the game have changed since that strike. It is to be believed that Selig may have learned from this huge mistake when the 2002 labor negotiations were taking place. He can be credited for coming to a resolution and thus avoiding a strike further crippling the game’s status.

It is fairly obvious that Bud Selig is not one of the most popular figures in baseball. It really doesn’t matter what the average fan thinks of him because all that matters is that the 30 team owners approve of him. During the summer of 2003, players were polled by USA Today and Gallup on the job Selig has done so far in his tenure. According to the poll, 63% of the players rated Selig’s performance as either bad or very bad. Selig’s confidants even admit that there is far more fan complaining about the commissioner than there is concerning the commissioners in the other major sports.

It shouldn’t matter if the commissioner wants to live in his hometown where he has spent his entire life. Now that with the use of computers and cell phones, it should be ok that Bud Selig spends his time in Milwaukee and not New York or Washington, D.C. But the problem with him residing in Milwaukee is much deeper than where he collects his mail. During the past 11 years, Bud Selig has maintained his ownership stake in the Milwaukee Brewers franchise all while attempting to lead all 30 of Major League Baseball’s franchises. As of this past January, Selig finally recognized that this controversial situation wasn’t good for baseball and that he intended to sell his share of the team.

His motives appeared to be geared toward providing a direct benefit to his Brewers with the many changes that he had proposed, ranging from revenue sharing, realignment, and contraction. His opponents feel as if there have been too many instances that would benefit the Brewers for it to all be merely a coincidence. There is nothing that Selig can do to stop the appearance of a conflict of interest from disappearing until he finds a willing buyer for the Brewers and sells his stake in the team. Even when he does sell the team, he will always be viewed as a guy who sees the world with a Milwaukee-based bias.

It has been these views that have benefited small market clubs during his tenure as commissioner. There is nothing wrong with viewing payroll discrepancies as a major problem in the game. But it isn’t alright to pronounce that 20 of 30 teams have no chance of winning the World Series before these teams break for training camp in the spring. It’s also not alright to continually be crying to the public about the deprived state of his league’s competitive balance and finances.

When the commissioner feels the only solution to his league-wide problems is a structure that rewards teams that spend less money instead of a system where investing funds at a wiser and more creative rate into a product which in turn would bring fans out to dump more of their money back into the game, is terrible. Selig also felt it was the right decision to announce, just two days after the World Series had finished in 2001, that he planned to eliminate two teams from the league.

It is apparent that Commissioner Bud Selig is a very complicated person. He has gotten some very good things done for the league, but it is apparent that many of these good events have been overshadowed due to his Milwaukee bias. The opposite of expansion was contraction. The opposite of the globalization of the game has been the Montreal Expos who are still without a permanent host city. The opposite of the new ballpark renaissance has been the relatively empty stadiums in Pittsburg, Detroit, and Milwaukee. The opposite of his campaign to control payroll discretions has been suspicions by his adversaries that not every possible control mechanism was legal. Being Commission of Major League Baseball is definitely not easy and is a rather thankless job in the grand scheme of baseball.

Possible Solutions to Fix America’s Pastime

Even though there are some major, glaring weaknesses with the way Major League Baseball is being operated, it would be by no means unable to remedy these problems that currently plague it. The idea of change throughout the league is a rather difficult concept to come to terms with that some high-ranking officials in Major League Baseball have to accomplish. Below are a few suggestions regarding stadium issues, taxation, broadcasting contracts, as well as the antitrust regulations that would make the game better off.

Stadium Solutions

Any average citizen in a city which is currently vying for a new professional sports team has the right to question what the positives of a new team would bring to the community. Our national government feels they have the same rights, but they shouldn’t. There is no reason by any means for the government to financially support a tug-of-war between cities looking to host a MLB team. If an overall gain is realized if a team was to move from one city to another for whatever reason, then the new city should have the right to be awarded the team without officials from Major League Baseball or the federal government interfering or blocking it from happening.

League officials should be promoting the idea of franchise expansion in order for all major markets that are financially practical to have a team. With this idea, there would be teams in Portland, Virginia, and Washington, D.C. Since no guidelines exist that would promote expansion, the national government needs to address the issue of federal funding for new stadium construction. Even though new stadiums might create positive outcomes for the community, it might validate a small portion of public funding even though the majority of the benefits will be realized by the privately held franchise owner.

The current problem with stadium funding is that the leases clubs are signing are way too favorable. They include little or even no sharing at all of revenue produced inside the park. Some teams do not even have to pay rent to occupy their stadiums. Regulation needs to be drawn up in order to stop providing federal funds which account for most, if not all of the cost for ballparks when the teams are privately owned. Congress needs to pass concrete laws stating that it will curb the issuance of tax-exempt bonds to finance new ballparks.

Tax Solutions

Franchise owners have been able to use their teams as tax shelters due in large part to Bud Selig’s case against the Internal Revenue Service. Owners are able to assume that up to 50% of the price tag they paid for the franchise can be written off as the value of the players’ contracts. This 50% amount is then able to be paid off over the next five years. Let’s say that an owner bought a team for $400 million today. Up to $200 million can be amortized between 2004 and 2009. Every year the owner would claim a $40 million pay-back charge that would make the book profits take a substantial hit. The owner could then take this “reported loss” and transfer it from the team’s books to his or her own personal tax returns, thus reducing their taxable income.

This business of sheltering funds for tax reporting purposes does not make much sense. First, the players, unlike normal machine equipment, do not depreciate with age. The majority of players reach their peak performance level during the middle of their careers. Through on the job training, players appreciate instead of depreciate for more than half of their time in baseball. Second, the players do not create an asset value for the franchise unless the revenue they generate is greater than their yearly salary. In this sense, a baseball player is no different than a factory worker when comparing depreciable assets. Third, a major league player can easily be replaced by calling up a minor league player to take his spot on the team. If players are to be considered depreciable, it aught to be the amount used up on developing the talent from the minor leagues that make it to the major leagues. By having a more balanced tax policy, it would eliminate the business of sheltering resources by franchise owners.

Broadcasting Solutions

The major issue with broadcasting baseball games is the movement from local and national broadcasting to cable and satellite broadcasting. This movement has resulted in fewer games being shown on free public television and increasing viewer costs. Cable companies are now packaging sports programming into their “expanded basic package,” causing viewers who aren’t sports fans to pay for the sports bundle anyway. The sports channels’ charge per subscriber is usually between $1.50 to $2.50 each month. Even though the sports teams profit heavily from this movement, it makes it difficult for their fans to justify paying more for their cable or satellite programming just to see their hometown team in action.

In 1961, the Sports Broadcasting Act allowed the packaging of games to national broadcasters for over-the-air free television. This practice involves individually owned teams joining together to create a television cartel that is able to sell national broadcasting rights. The SBA makes this cartel-like operation allowable for free television. However, it is illegal for this practice to occur for services that charge a premium, which include cable, satellite, or internet streaming.

If the assumed antitrust exemption is abolished in Major League Baseball, the league’s television deals with ESPN, worth $142 million per year, and DirecTV could be challenged on antitrust grounds. If these challenges are successful, the result would mean single teams or groups of only a few teams would be able to sell their games for national television. This would also mean there would be more games viewable at cheaper price rates.

The motivation is clear for teams to move toward cable contracts. Cable produces two streams of revenue: advertising and carriage fees. Regular broadcasting provides only the advertising stream. The apparent popularity of sports programming has guided teams to insist their games be carried on the “expanded basic plan” instead of the “premium tier plan” and to also increase the monthly surcharge for being carried on the “basic tier plan.”

If a team can pick between showing its games in a market of 5 million cable-equipped homes on a premium plan to 5% of the market for $10 per month or to all cable homes for only $2 per month, the choice is fairly apparent. The premium plan would net $2.5 million and the expanded basic plan would net $10 million. By having more households viewing games, it allows teams to charge higher prices for the rights to the sixty advertising slots available on average per game (Broadcasting and Cable, McAvoy.)

There is no clear answer to curb this migration from continuing. However, the Federal Communications Commission (FCC) must take added measures in promoting competition in the delivery of cable and satellite programming to the public. If each viewing market had at least two viable options for cable companies, then this bundling of games would reduce prices and might not cause as many problems. Since this currently is not the case, the suitable public policy is to make sure that several cable/satellite options are made available.

- posted by Hot Rod @ 8:20 PM