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February 7, 2011

The Payoff Pitch

Whose Money Is It, Anyway?

by Neil deMause

A little over a week ago, Yankees president and designated apoplectic pit bull Randy Levine decided to divert attention from his team's pitching woes by going after a new target: Rangers owner Chuck Greenberg. Five days earlier, the Texas honcho had asserted that it was his team's efforts to sign Cliff Lee that had stalled the Yankees long enough for the Phillies to enter the picture with their ultimately winning bid. Levine, hearing these as fighting words, lashed out by calling Greenberg a welfare case:

"If he really wants to impress us then he can get the Rangers off of welfare and show how they can be revenue-sharing payers, rather than recipients for three years in row, without financing from Major League Baseball," Levine said Friday. "That would really be something."

Now, there are a couple of ways to react to this. On the one hand, you could chalk it up to the kind of class-warfare-from-above that the Yankees have always specialized in. (As Bill Veeck wrote nearly a half-century ago after one of his frequent battles with Del Webb, "Whenever I offered any plan that would give the other teams a fighting chance against them, the Yankees always cried socialism, the first refuge of scoundrels.") Or, as a bunch of my email correspondents did, you could boggle at the irony of a team that just received the largest taxpayer stadium subsidy in history griping about how their competitors are a bunch of freeloaders.

That said, the case of Levine v. Greenberg does raise some interesting issues about MLB's ever-evolving system of revenue sharing. For most fans who think about it much beyond "that thing that I have to read about every time there's a threatened strike or lockout," there are two diametrically opposed views of revenue sharing:

  1. As a way for poor teams to get a free ride on the profits of their more successful peers, collecting money they don't deserve without having to do the hard work of spending and trying to win ballgames.
  2. As a way to level the playing field so that every team can have an equal shot of making the playoffs.

We saw the first one in action last summer, when everyone was flipping out about leaked documents that showed the Marlins and Pirates were turning a profit solely from revenue-sharing payments; the latter shows up in the occasional protests that small-market fans stage against the Yankees' outsized payrolls. Both, on the surface, seem like reasonable CliffsNotes versions of revenue sharing. But they're both dead wrong.

First off, the notion of which team revenues "belong" to is a notably slippery one: Since the early days of organized ball, teams have cut the visiting squads in on ticket receipts, on the sensible enough principle that nobody is going to show up to see the home team pitch to themselves. The exact formula has varied over the years—it was squabbles over a 1952 proposal to also share TV revenues that prompted Veeck's "refuge of scoundrels" anecdote—but in the grand scheme of things, baseball has always been in the business of revenue distribution. Everything after that has been just haggling over the details.

As for leveling the playing field in terms of distribution of talent, all evidence is that the impact of revenue sharing has been fairly minimal. Instead, the two big-ticket items were the introduction of the amateur draft in the 1960s (which prevented a Branch Rickey from simply signing up all the available talent, as the dynasties of earlier eras had done) and the rise of national TV deals in the 1970s. According to the informative (if less than creatively titled) book Free Agency and Competitive Balance in Baseball, by 1980 national TV revenues exceeded local TV revenues for the first time in baseball history. And because national TV revenues have always been shared among all the teams, what followed was the Golden Age of Baseball Parity, in which 11 different teams won the World Series in the course of 12 years, and baseball's Gini coefficient (a statistical measure of inequality) fell to all-time lows. What Bill Veeck could not accomplish, Joe Garagiola had.

What ended the Golden Age was the rise of local cable deals. The Yankees' $500 million contract with MSG in 1988 begat the YES Network, and the Red Sox' purchase development of NESN, and so on. As the share of revenue that was shared via the national TV contract dropped, teams without tens of millions of cable-ready fans couldn't compete, and we soon enough had entered the Gilded Age of Baseball Disparity, which, the occasional Marlins championship banner notwithstanding, we're still in.

Supposedly, the current revenue-sharing system—which, thanks to the politics of labor negotiations, currently consists of a maddeningly complex combination of two different kinds of taxes on team income, plus an additional "luxury tax" that was designed specifically to keep the Yankees' spending in check—is a counter to this, theoretically allowing the sparrows to fly with the eagles. (Or the Pirates with the Cardinals, though the metaphor would work better if pirates could fly.) But as I pointed out here when baseball's last collective bargaining agreement was signed four winters ago, simply moving money around isn't enough to move talent around, because top players are still worth far more to big-market teams than small-market ones, regardless of who has more total revenue. What's important, rather, is the marginal revenue that a new signing will bring in:

Even if an influx of talent would result in the Yankees and the Royals putting the same number of new fannies in the seats, those seats are worth two to three times as much in New York as in Kansas City, and that's before even accounting for the increased value of eyeballs attracted to the team's cable broadcasts.

This discrepancy in teams' marginal revenue potential goes a long way toward explaining why the top-revenue teams hog all the big names at free-agent time. It's not so much that the Yankees have more money than the Twins—without knowing their actual bank balances, I'd wager that banking mogul Carl Pohlad could outspend failed shipping magnate George Steinbrenner if they both busted open their piggy banks. It's that players are worth more to the Yankees than the Twins, solely by virtue of the fact that the Yankees play in such a high-marginal-revenue environment.

The new plan does very little to change this. Let's say a ten-win player will bring in $20 million a year more for the Yankees, against $10 million a year for the Royals. Under the old system, the Yanks should be willing to pay him $12.2 million a year (61% of $20 million that's left after revenue sharing), the Royals $5.3 million (53% of $10 million). Under the new system, the Yanks should be willing to pay $13.4 million a year, the Royals $7.1 million. While the gap is reduced slightly thanks to the tax rate changes, a player who was worth about twice as much to a high-revenue team under the old plan remains about twice as valuable under the new one.

Roger Noll, the Stanford economist who has been around baseball long enough to have testified against Bud Selig's tax reporting in his purchase of the Seattle Pilots, says that complaints that revenue sharing just helps small-market owners get rich off their wealthier competitors are missing the point entirely. "What [the 2006 revision of revenue sharing] was supposed to accomplish was blunt some of the financial incentive to field a bad team if you're in a weak market," he says. And in that respect, he believes, it's been at least a partial success, the persistence of perpetual cellar-dwellers like the Royals and the Pirates notwithstanding. (As Noll remarks, "It's hard to disentangle incompetence from not trying.")

As for last summer's Leakgate revelations that revenue-sharing money was going into small-market owners' pockets, Noll is baffled that it generated so much outrage. "Why that was a news story buffaloes me," says Noll. First of all, the fact that the Marlins and their ilk were turning a profit thanks to revenue-sharing checks shouldn't have been news to anyone who reads Forbes magazine—something I noted at the time as well. "And secondly, the whole point of revenue sharing is to make certain that with reasonable effort, a team in a small market is profitable. So... whuh?"

Moreover, he says, the idea that revenue-sharing recipients should be spending their money instead of pocketing it defies economic good sense. "If the Pittsburgh Pirates, with their $8 million profit or whatever it was, went out and spent that on players, the main effect would be to drive up the price of players, not to cause Pittsburgh to be a better team. And if Pittsburgh raises the cost to the Yankees, the Yankees will just spend more. Pittsburgh is never going to outbid the Yankees for players."

Revenue sharing, in other words, is a mess, and will continue to be until baseball finds some way to return to the 1980s, when the lion's share of revenues passed through the central league offices. (One potential resolution could come via the eventual displacement of local cable by webcasts, something I plan on exploring further in a future column.) Not that any of that will likely stop the Yankees from continuing to gripe about lousy teams getting rich off "their" money as always—though for Levine to apply it to a team that just went to the World Series was, let's just say, breaking new ground. Who says that socialism kills innovation?

Neil deMause is an author of Baseball Prospectus. 
Click here to see Neil's other articles. You can contact Neil by clicking here

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