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September 13, 2005

Pirates of the Allegheny

Making Money, If Not Wins

by Steve Conzett and Wilbur Miller

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From 1998 through 2004, the Pirates had MLB's lowest average player salary at $988,076, with the MLB median over that period being $2,006,468. This spending has produced the fourth-worst winning percentage in MLB...and $14 million a year in profit.

Dr. Andrew Zimbalist, the Robert A. Woods Professor of Economics at Smith College in Massachusetts, is a noted authority on the economics of sports, and in particular has commented frequently on the economics of major league baseball. He sat down with us to provide his take on the Pirates.

Zimbalist sees the team, despite its lack of success on the field, as a reasonably healthy business from a financial standpoint, one that has the potential to become stronger in the future. He pointed out that MLB has been undergoing a renaissance in recent years, with the sport making significant economic gains. He described the Pirates as having a very valuable asset in PNC Park, and said that, although their market is not large, their fans have responded well when they've been thrown a few "crumbs," making it likely that the franchise would receive much better support if it put good teams on the field.

Zimbalist found Pirates owner Kevin McClatchy's claim that the team is unable to fund higher payrolls to be "uncompelling." He noted that the team is clearing approximately $14 million per year, a figure he regarded as quite healthy. He rejected the notion that the Pirates' debt sets a limit on their payroll, pointing out that ownership has produced a poor product and has fostered bad public relations in Pittsburgh. Their profits show that they could spend more on the product, but have chosen not to do so. MLB's EBITDA debt limit--which has not yet taken effect--also is not an obstacle, as the team is comfortably within the limit. Since 1998, he franchise's debt as a percentage of its value (as estimated by Forbes Magazine) has dropped from 62% to 37%. (These percentages are probably somewhat misleading, however, because most of the debt does not have to be repaid as long as the team remains in Pittsburgh.)

Although he did not have specific figures at hand for the Pirates, Zimbalist said that the figures he does have contain no evidence that, contrary to their claims, any teams are spending revenue-sharing funds on player development. In the case of the Pirates, the owners have chosen to "pocket" the money. The fact that some of the funds are being used to pay down debt does not change this; if the owners are using the money to reduce their own debts, they're still effectively pocketing it because they're increasing the profit they will eventually realize from selling the team. This creates a "welfare" system in which a team such as the Pirates has little incentive to improve its product.

The Pirates' stated plan--to improve gradually, while increasing spending only as attendance increases-- has little merit. Zimbalist referred to the plan as merely "PR." Instead, a team's approach to the player market largely should be independent of its debt. Taking the free-agent market as an example, a team's willingness to sign a particular player at a particular salary should be a function of the degree to which the signing should improve the team and therefore increase its revenues. Setting a payroll ceiling without examining the available talent and the degree to which it might impact revenue makes little sense.

Zimbalist said that McClatchy has been arguing for ever more increased revenue sharing within MLB, but has insufficient support for change. In fact, there may be more support for moving to a new system of revenue sharing. On the whole, although they may wish to do some tweaking, the owners are basically satisfied with the current economic system in which they operate. There is little if any willingness to wage the sort of war with the union that would be required to implement more fundamental changes, such as a payroll cap.

Zimbalist had no specific information on a possible sale of the Pirates. He did say, however, that an owner often gets an ego boost from owning a pro sports franchise. If the fans and other owners come to have a poor opinion of him, he may no longer find it desirable to own a team for that reason.

(Zimbalist's latest book, coauthored with Stefan Szymanski, is entitled, National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer. He has another book, In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig, slated for publication in early 2006.)

--

Steve Conzett is a consultant and has been a Pirate fan since Roberto Clemente signed a ball for him at Wrigley Field. He can be reached here.

Wilbur Miller is an attorney by trade and a suffering Pirate fan by accident of geography. He can be reached here.

Related Content:  Economics

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