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August 15, 2002

The Zumsteg Plan

Revenue Sharing the Right Way

by Derek Zumsteg

Baseball has an obligation to do revenue sharing the right way.

According to Mike Jones' market-size research, Kansas City is the smallest market with a major-league team. Jones pegs it as the 39th-largest market in the country, based largely on information from Nielsen. Using the latest data from the Census Bureau (which operates one of the most data-intensive sites you'll ever find at www.census.gov), there were about 1,756,000 people in the Kansas City Metropolitan Statistical Area in 1999, as compared to New York's 20,197,000.

K.C. has one team. New York has two. Forbes estimates that the two New York teams took in $384 million in revenue last year. Kansas City? $85MM. If the total revenue pool of a city is divided evenly by the teams in it (This may not be the case. I've seen it argued that instead of splitting a market, adding a second team only causes the first team's revenues to drop by .8, which is attributed to increased interest in baseball, rivalries, and so forth), a third team in New York would make $125MM. That's a cool $40MM more every year.

What about the District of Columbia? You could move there, playing in RFK Stadium if you had to. There's a population base of 4,740,000 just in D.C. Doing some quick guessing here--attendance won't be that good in RFK, so you'll have to keep ticket prices down--$45MM in gate revenues, $20MM in local media, a conservative $20MM in other revenue like concessions, and look--you're already at Kansas City's revenues without a new stadium and figuring you'll have to cut ticket prices to see two million in attendance.

Well, you can't actually do this. New York, no matter how large it is, already has an American League team, while Peter Angelos claims that D.C. is Orioles territory (and the fact that Baltimore is included in the D.C. MSA along with scenic Hagerstown is a point in his favor). You're stuck in Kansas City.

Small-market owners should be compensated for being unable to move their teams to more lucrative territories. Perhaps their presence across the country is required for the greater good of the national pastime. New York is a money-making machine, and other lucrative markets could support a team, or additional teams, but can't get them.

At the same time, revenue sharing based on payroll or revenue is wrong. If teams want to invest in their product, to put a good team on the field, to try and bring a pennant home, why should they be punished? If a team builds its fan base in limited circumstances, why should it ever have to give money to a lazy and stupid team playing a much larger market? The Indians gave money to the Phillies last year, and that's not just pathetic, it's wrong: There are 2,910,000 people in Cleveland and 5,999,000 in Philly. What kind of a stupid system rewards the Phillies for their ability to alienate their fans?

It is in the best interests of baseball to reward teams that grow their revenues, and punish those who do not. How do teams do at making the most of what they have? Let's look at the MSAs in which teams operate, how big their population base is (and to be simple, it's going to be population/teams), and using the Forbes revenue numbers, how much money did they get from the average citizen?


Team                    MSA size     Adj MSA      Revenues  R/capita  
Milwaukee Brewers      1,648,199   1,648,199  $108,000,000    $65.53  
Colorado Rockies       2,417,908   2,417,908  $129,000,000    $53.35  
Cleveland Indians      2,910,616   2,910,616  $150,000,000    $51.54  
Kansas City Royals     1,755,899   1,755,899   $85,000,000    $48.41  
Seattle Mariners       3,465,760   3,465,760  $166,000,000    $47.90  
St. Louis Cardinals    2,569,029   2,569,029  $123,000,000    $47.88  
Pittsburgh Pirates     2,331,336   2,331,336  $108,000,000    $46.33  
Cincinnati Reds        1,960,995   1,960,995   $87,000,000    $44.37  
Arizona Diamondbacks   3,013,696   3,013,696  $127,000,000    $42.14  
Atlanta Braves         3,857,097   3,857,097  $160,000,000    $41.48  
San Francisco Giants   6,873,645   3,436,823  $142,000,000    $41.32  
Tampa Bay Devil Rays   2,278,169   2,278,169   $92,000,000    $40.38  
San Diego Padres       2,820,844   2,820,844   $92,000,000    $32.61  
Chicago Cubs           8,885,919   4,442,960  $131,000,000    $29.48  
Houston Astros         4,493,741   4,493,741  $125,000,000    $27.82  
Texas Rangers          4,909,523   4,909,523  $134,000,000    $27.29  
Boston Red Sox         5,667,225   5,667,225  $152,000,000    $26.82  
Oakland Athletics      6,873,645   3,436,823   $90,000,000    $26.19  
Minnesota Twins        2,872,109   2,872,109   $75,000,000    $26.11  
Chicago White Sox      8,885,919   4,442,960  $101,000,000    $22.73  
Florida Marlins        3,711,102   3,711,102   $81,000,000    $21.83  
New York Yankees      20,196,649  10,098,325  $215,000,000    $21.29  
Detroit Tigers         5,469,312   5,469,312  $114,000,000    $20.84  
Montreal Expos         3,326,510   3,326,510   $63,000,000    $18.94  
Toronto Blue Jays      4,881,400   4,881,400   $91,000,000    $18.64  
Baltimore Orioles      7,359,044   7,359,044  $133,000,000    $18.07  
Los Angeles Dodgers   16,036,587   8,018,294  $143,000,000    $17.83  
New York Mets         20,196,649  10,098,325  $169,000,000    $16.74  
Philadelphia Phillies  5,999,034   5,999,034   $94,000,000    $15.67  
Anaheim Angels        16,036,587   8,018,294  $103,000,000    $12.85  

(I got the data for Toronto and Montreal from Canada's 2001 numbers for their respective "Census Metropolitan Area," and obviously, that was from the Canadians and not the U.S. Census Bureau. Yes, Toronto and Montreal are really that large.)

Check that out. Anyone who thought the Brewers were going to be the best team at bilking their populace, raise their hands. Liars. Put those hands down.

There's a lot of interesting notes to be made here, but particularly, the Phillies suck. Check out the highest $/people: there's a lot of teams up there that don't have new stadiums but do a really good job making their teams a regional event. Root causes for the revenue numbers can be found in Doug Pappas' Behind the Numbers series, so I'll skip that myself. Average $/capita is $32.40, but the median is just $27.50.

Sorry, didn't mean to digress, but that table was so cool I couldn't pass up sharing. The goal here is to reward teams that have success, and to share revenue from the most lucrative markets to the least. Any formula shouldn't be dependent on team accounting, so here's how I'm going to figure this:

  • Figure out how many more teams a market can handle until it's got about 4,000,000 people/team, which is the Atlanta-Cleveland area. MSA/4,000,000.
  • Subtract the number of teams in the market to get the number of additional franchises it would support. This can be a fractional number, that's fine.

Now, here's the good stuff: figure each franchise should be making $23 per capita. Only 10 teams are below that, it's a nice low number and if anything it's generous to the guys we're about to hit up for money. Multiply $23 by the number of people in the market; that's how much they should be taking in. Now, if their markets had the optimal number of teams, they'd make 4,000,000 people * $23 = $92,000,000. The difference is the free money they're getting for being in their cozy, lucrative markets. We take half of that, for a total of $367MM.


			   TIM        TIM   Add. Teams       Proj Curr.  Would make w/
Team                  Possible  Currently  Supportable          Revenue     add. teams  Contribution 
New York Yankees          5.05          2         3.05  $232,261,463.50    $92,000,000   $70,130,732  
New York Mets             5.05          2         3.05  $232,261,463.50    $92,000,000   $70,130,732  
Los Angeles Dodgers       4.01          2         2.01  $184,420,750.50    $92,000,000   $46,210,375  
Anaheim Angels            4.01          2         2.01  $184,420,750.50    $92,000,000   $46,210,375  
Baltimore Orioles         1.84          1         0.84  $169,258,012.00    $92,000,000   $38,629,006  
Philadelphia Phillies     1.50          1         0.50  $137,977,782.00    $92,000,000   $22,988,891  
Boston Red Sox            1.42          1         0.42  $130,346,175.00    $92,000,000   $19,173,088  
Detroit Tigers            1.37          1         0.37  $125,794,176.00    $92,000,000   $16,897,088  
Texas Rangers             1.23          1         0.23  $112,919,029.00    $92,000,000   $10,459,515  
Toronto Blue Jays         1.22          1         0.22  $112,272,200.00    $92,000,000   $10,136,100  
Houston Astros            1.12          1         0.12  $103,356,043.00    $92,000,000    $5,678,022  
Chicago Cubs              2.22          2         0.22  $102,188,068.50    $92,000,000    $5,094,034  
Chicago White Sox         2.22          2         0.22  $102,188,068.50    $92,000,000    $5,094,034  
TOTAL                                                                                   $366,831,991  

(TIM: Teams In Market)

We've passed the hat, and there's $367 million in it. To distribute it, we pass it in exactly the opposite way: if you're in a MSA of under four million people, you get the difference in population * $23. Teams drawing cash, and the amounts:


						    Amount
Team                     MSA size    Adj MSA   under 3.65m   Amt Collected  
Milwaukee Brewers       1,648,199  1,648,199  2,001,801.00  $46,041,423.00  
Kansas City Royals      1,755,899  1,755,899  1,894,101.00  $43,564,323.00  
Cincinnati Reds         1,960,995  1,960,995  1,689,005.00  $38,847,115.00  
Tampa Bay Devil Rays    2,278,169  2,278,169  1,371,831.00  $31,552,113.00  
Pittsburgh Pirates      2,331,336  2,331,336  1,318,664.00  $30,329,272.00  
Colorado Rockies        2,417,908  2,417,908  1,232,092.00  $28,338,116.00  
St. Louis Cardinals     2,569,029  2,569,029  1,080,971.00  $24,862,333.00  
San Diego Padres        2,820,844  2,820,844    829,156.00  $19,070,588.00  
Minnesota Twins         2,872,109  2,872,109    777,891.00  $17,891,493.00  
Cleveland Indians       2,910,616  2,910,616    739,384.00  $17,005,832.00  
Arizona Diamondbacks    3,013,696  3,013,696    636,304.00  $14,634,992.00  
Montreal Expos          3,326,510  3,326,510    323,490.00   $7,440,270.00  
San Francisco Giants    6,873,645  3,436,823    213,177.50   $4,903,082.50  
Oakland Athletics       6,873,645  3,436,823    213,177.50   $4,903,082.50  
Seattle Mariners        3,465,760  3,465,760    184,240.00   $4,237,520.00  
TOTAL                                                      $333,621,555.00

For a total of $333.6 million and change. In my plan, the $30MM surplus goes to me as a fee for working this out, but you can tweak the thresholds or value/capita to make them work out. I think you want to exempt Toronto from paying in, because they get screwed on the exchange rate, but you might even factor that in for their $/capita expected.

Does it work? The Yankees have to contribute $70MM for the privilege of operating the only AL team in the nation's most populous market, instead of the $26MM they paid last year. What's more, the Mets take it in the shorts equally but it hurts more, because they're so bad at making the most of their luxury. Steinbrenner should laugh himself silly. Cleveland, where they built a baseball-mad town out of nothing, gets $25MM for their good work.

Here's how the revenues look, post-plan:


									     Revenue
Team                    Revenues      Contribution       Collected     after Sharing  
Seattle Mariners      $166,000,000                   $4,237,520.00   $170,237,520.00  
Cleveland Indians     $150,000,000                  $17,005,832.00   $167,005,832.00  
Atlanta Braves        $160,000,000                                   $160,000,000.00  
Colorado Rockies      $129,000,000                  $28,338,116.00   $157,338,116.00  
Milwaukee Brewers     $108,000,000                  $46,041,423.00   $154,041,423.00  
St. Louis Cardinals   $123,000,000                  $24,862,333.00   $147,862,333.00  
San Francisco Giants  $142,000,000                   $4,903,082.50   $146,903,082.50  
New York Yankees      $215,000,000  $70,130,732.75                   $144,869,268.25  
Arizona Diamondbacks  $127,000,000                  $14,634,992.00   $141,634,992.00  
Pittsburgh Pirates    $108,000,000                  $30,329,272.00   $138,329,272.00  
Boston Red Sox        $152,000,000  $19,173,088.50                   $132,826,912.50  
Kansas City Royals     $85,000,000                  $43,564,323.00   $128,564,323.00  
Chicago Cubs          $131,000,000   $5,094,034.25                   $125,905,965.75  
Cincinnati Reds        $87,000,000                  $38,847,115.00   $125,847,115.00  
Tampa Bay Devil Rays   $92,000,000                  $31,552,113.00   $123,552,113.00  
Texas Rangers         $134,000,000  $10,459,515.50                   $123,540,485.50  
Houston Astros        $125,000,000   $5,678,022.50                   $119,321,978.50  
San Diego Padres       $92,000,000                  $19,070,588.00   $111,070,588.00  
New York Mets         $169,000,000  $70,130,732.75                    $98,869,268.25  
Detroit Tigers        $114,000,000  $16,897,088.00                    $97,102,912.00  
Los Angeles Dodgers   $143,000,000  $46,210,375.00                    $96,789,624.75  
Chicago White Sox     $101,000,000   $5,094,034.00                    $95,905,965.75  
Oakland Athletics      $90,000,000                   $4,903,082.50    $94,903,082.50  
Baltimore Orioles     $133,000,000  $38,629,006.00                    $94,370,994.00  
Minnesota Twins        $75,000,000                  $17,891,493.00    $92,891,493.00  
Florida Marlins        $81,000,000                                    $81,000,000.00  
Toronto Blue Jays      $91,000,000  $10,136,100.00                    $80,863,900.00  
Philadelphia Phillies  $94,000,000  $22,988,891.00                    $71,011,109.00  
Montreal Expos         $63,000,000                   $7,440,270.00    $70,440,270.00  
Anaheim Angels        $103,000,000  $46,210,375.25                    $56,789,624.75  

Would you look at that nice, smooth progression? Now you've got a revenue curve that pretty well mirrors the franchise's money-making savvy.

Sure, I hear some of you crying, "What about the Phillies? They took $11MM in revenue sharing money last year, and now they're going to have to pay $23MM? They'll go bankrupt!"

Oh, boo hoo. If an ownership group is granted a license to print money and they decide to print low-denomination Mexican pesos, that's their own fault. They should be replaced, and this plan forces franchises that can't even meet the minimum expectations of profitability to get their act together. Alienating your fans? Better go beg for forgiveness. Signed on to a 30-year television deal that doesn't pay anything? Tough. If they're forced into bankruptcy, there are any number of buyers out there.

Any revenue-sharing plan also requires open books, to prevent the kind of revenue hiding in which the Braves and Cubs engage, but without having MLB negotiate all parking/concessions/leases/etc. to ensure the team is paid fair value and that revenue is paid to the team, my method is the most revenue-hiding-proof yet proposed. Because the numbers used are independent of how much money a team claims to have made, a team's contributions or grants don't go up or down if they manage to form a holding company to handle parking rights.

Bud Selig should love this: not only is it fair, but his franchise will take in enough revenue to be in the top tier of baseball teams. The Yankees make enough money that they're still going be competitive, but now they're just barely in the top ten in total revenue. Owners should love it: it doesn't punish them for spending on their teams, it doesn't punish them for working to maximize revenue. It's proportional, so it's just, and if you expand or allow another team to move close, it's almost a relief.

It could pass muster: both Chicago teams pay less here than they did last year, the Astros a little more, and from the Rangers on down teams get harder hit, but the Rangers only pay $2MM more, and the Red Sox are only paying $4 million more. This is way lower than they'd give away under a 50% revenue sharing agreement. In fact, only six teams get hit really hard, and if they kick and scream, there's still 24 teams who benefit one way or another from this. That, my friends, is enough to get it passed.

For the players, this is the greatest plan ever: there's no drag on payroll at all. If the Yankees want to go buy their pennant, hey, no one's stopping them. They won't be able to do it for long with their reduced revenues, but not many people are going to complain about that.

This plan rewards teams that do a good job making money, and it punishes those who do not. Small-market teams make money at the expense of the large-market teams who enjoy the economic benefit of keeping them at arm's length. It's sensible, and offers a reasonable starting point for negotiation.

It has no chance.

Derek Zumsteg is an author of Baseball Prospectus. You can contact him by clicking here.

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