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June 4, 2009

The Biz Beat

21st Century Labor Issues

by Shawn Hoffman

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Did Sonia Sotomayor save baseball? Not exactly, but she did make a lot of people happy by effectively ending the strike of 1994-95. This past week, with Sotomayor being nominated to the Supreme Court, we've been able to relive that spring, and it's been a pretty good reminder of how far baseball has come. The last two CBAs have been signed without a work stoppage, and the current one was finished before the old one had even expired.

That's not to say there aren't some divisive issues nowadays. None of them are likely to cause a work stoppage in 2012 (knock on wood), but they will still need to be dealt with. Here are a few that will be battlegrounds in the next round of negotiations, as well as some that could become issues a bit further into the future:

Revenue Sharing

Pretty much from here on out, this is going to be the 10,000-pound gorilla in the room. Some revenue sharing is certainly necessary, given the American market's demand for competition. (European soccer leagues hardly share any revenue, and the same teams win every year. That wouldn't work here, but fans there go crazy when their team finishes eleventh instead of fourteenth.) The Pirates would have a difficult time competing with the Cubs, while also running a profitable business, without some sort of income redistribution system. And the way the league is structured, the Yankees and Red Sox wouldn't be able to exist without the other 28 teams.

At the same time, it's critical that league policies, including revenue sharing, don't significantly alter franchise values. The Zumsteg Plan, put forward by Derek in 2002 and rightly famed in these parts, would completely change the sport's economic landscape. That might sound like a good idea to some, but if MLB were to change the rules so drastically on the fly, it would make major league teams a much riskier asset class, driving down franchise values across the board.

The question is, what is MLB's primary fiduciary responsibility? To maximize total revenue and profit? If that's the goal, large-market teams would own incredibly disproportionate shares of both. To drive value for its shareholders? The shareholders all have divergent interests. To create competition for the fans? That sounds nice, but it's the owners that have taken on all of the financial risk.

Perhaps this becomes a big tug of war between the payers and the payees, but there's probably a better way. Without getting into the mind-numbing details (we'll leave that for another week), there are probably ways to tie the "split-pool" part of the equation more to national revenues, such as broadcast rights, licensing, and the like. By unequally sharing more from this pot, it allows for two important incentives: 1) by keeping the "straight-pool" tax somewhat low, teams are encouraged to invest and grow local revenues; 2) if it is set up so that the more national revenue there is, the lower the "straight-pool" tax, it also incentivizes large-market teams to help grow national revenues.

Payroll Limits

I'll keep this short, since I've touched on it a couple of times already. Some owners will be looking for a salary cap, and others might be looking to increase the luxury-tax rate, or to lower the thresholds. If small-market teams are smart, they'll use the former as a bargaining chip (possibly to help win the latter), but leave it as that. Caps don't work in leagues with disproportionate revenue totals, as the NHL's Phoenix Coyotes will probably attest.

Draft Bonus Caps

This is an interesting one. There are plenty of small-market teams that would probably like to have enforceable slot payments in the draft-in other words, the first pick gets whatever the Commissioner says he gets, as does the 500th pick. This would certainly lower costs, and it would stop the Yankees and Red Sox from spending big money on players that fall due to signability issues.

Most smart small-market teams should be rooting against this, however, because there's a relatively small amount of money that goes into the draft-the average team spent just over $6 million last year, and no team spent more than $11.1 million (Kansas City), which was a major league record. On the free-agent market, that's Carlos Silva. Considering how important the draft is, that's a major inefficiency, which means there's still a significant opportunity for small-market teams to gain an edge here.

Now, for the 5-10 years out division:

Digital Broadcasting Rights

What if, in ten years, you're watching baseball on your television, but via the internet instead of your cable box? Will this be counted as digital revenue, and therefore be collected by MLB Advanced Media, which is equally owned by the thirty teams, or will it remain part of the teams' normal television broadcasting rights?

This isn't a huge issue today, because local games aren't shown on MLB.tv, and hardly anybody has an internet-enabled, web-optimized television. At some point in the not-too-distant-future, both of those problems will likely be eliminated. The Red Sox are already clamoring for the local digital rights to be de-centralized, but MLB hasn't budged. As we've covered, there's money being left on the table with the current setup, but not enough to start a civil war over. In five years, however, that may no longer be the case.

Subsidiary Revenue Sharing

MLB players take in about half of the thirty teams' total revenue-a bit higher if you include minor league and foreign operations-but MLB has become much more reliant on subsidiaries for revenue growth. At some point in the next CBA period, if not sooner, MLB Advanced Media and MLB Network will pass $1 billion in combined revenue. That's a significant chunk of money, and the players are more or less cut out.

At some point, if those subsidiaries become too large to ignore, the Players Association might demand a share of the revenue since, after all, none of it would be possible without the players. You can bet the union will make a stink once the subsidiaries are nine-figure profitable, and this could require some major changes in how these companies are operated.

Extended Playoffs

This should be the first lesson taught in any sports management class: when growth slows, add more playoff rounds. It works.

Yes, there would be some outrage if baseball went to a sixteen-team playoff. They'd probably have to peel Bob Costas off of the floor, but it would increase national television revenue, boost league-wide attendance in August and September, and level the playing field that much more for small-market teams. Sure, you might have a 78-win team win the World Series, but is that really so different from the 83-78 Cardinals in '06, or the '87 Twins, a team that was outscored during the regular season?

The dirty little secret is that most people (especially those in the media, it seems) truly believe that the team that plays best for three weeks in October is the team that deserves to win the championship. The Yankees have been the best team in baseball four or five times since their last title, and nobody cares. For MLB's purposes, this is fantastic. The more teams they can fit into the playoffs without fans getting turned off by the playoffs' inherent randomness, the better. It became too tempting in 1969, and again in 1994, so don't be surprised if it happens once again in the next ten years.

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

Related Content:  Revenue

14 comments have been left for this article. (Click to hide comments)

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Richie

Very good and interesting article. Thank you!

Jun 04, 2009 10:28 AM
rating: 2
 
eighteen

The Pirates can't compete with St. Louis, much less the Cubs, nor run a profitable business, even with an income redistribution system. That's the flip side of revenue sharing - subsidizing stupidity and incompetence.

Jun 04, 2009 10:51 AM
rating: 0
 
Aaron/YYZ

Or even worse, allowing the abomination that is the Florida Marlins payroll situation (vs their Revenue Sharing share)

Jun 04, 2009 15:44 PM
rating: 1
 
Dr. Dave

"[W]hat is MLB's primary fiduciary responsibility? To maximize total revenue and profit? [...] To create competition for the fans? That sounds nice, but it's the owners that have taken on all of the financial risk."

Not quite. MLB is publicly subsidized in at least two important ways: stadium deals, and the anti-trust exemption. (I may be forgetting others.) Without those, the owners would face significantly more financial risk than they do today, with higher costs and lower revenues in general. That makes the public -- including non-fans -- a shareholder.

Jun 04, 2009 10:54 AM
rating: 5
 
Shawn Hoffman

Dave -- this is a good point. The difference is that the owners are making investments in the teams themselves, whereas when the public finances a stadium, they're investing in the facility, not the team (and hypothetically the multiplier that the facility brings to the region -- Neil deMause just started shaking his head). Could a city / state demand some changes to MLB's system in order to finance a new building? Sure, but MLB would never go for it.

Jun 04, 2009 12:59 PM
rating: 2
 
smdavis

While baseball does enjoy an anti-trust exemption from past rulings, it's certainly not clear that their case is airtight should a new challenge arise today: http://www.usatoday.com/sports/baseball/stories/2001-12-05-antitrust-explanation.htm

It's also worth noting that the anti-trust exemption was based on a judgment that baseball was not interstate commerce, but "exhibitions" that were exempt from federal regulation (like anti-trust acts). As this was a court ruling, not a law, the exemption came with no obligations on MLB.

An anti-trust exemption may be a boon to MLB, but it forces on MLB no more obligation to look out for the public welfare than any other business.

Jun 04, 2009 13:05 PM
rating: 0
 
Shawn Hoffman

The ATE is basically dead. MLB doesn't really have any special protections that the other sports leagues don't have as well, which wasn't true fifty years ago.

Jun 04, 2009 13:29 PM
rating: 0
 
Matt Kory

"Sure, you might have a 78-win team win the World Series, but is that really so different from the 83-78 Cardinals in '06, or the '87 Twins, a team that was outscored during the regular season?"

You just cited two of the worst World Series participants, so would it be worse than that? Not if it happens twice in a 25 year span. But if we're talking about doubling the size of the playoffs the its likely to happen much more frequently. So, to answer your question, if it happens every year then absolutely yes.

Jun 04, 2009 11:09 AM
rating: 3
 
mafrth77

Excellent. I don't think that the players union will make a stink about getting a piece of the subsidiary revenue. in the other league where the players are gauranteed a certain percentage of revenue it is usually part of the salary cap structure, and I don't the players association will go down that road .

Jun 04, 2009 12:48 PM
rating: 0
 
jrbdmb

Any expansion of the MLB playoffs would have to include the discussion of shortening the regular season (perhaps back to 152 games). Otherwise MLB would face inevitable weather-related snafus in either mid-March Opening Day games or mid-November World Series games.

Flash ahead to Game 6 of the 2017 World Series, November 14 in Minneapolis' Target Field: *average* low 26 degrees.

Jun 04, 2009 13:10 PM
rating: 2
 
Michael Bodell
(89)

Well, or something I'd like, but owners and players may not, which is more doubleheaders. Some of them even scheduled!

I'd like to see a playoff system where each round is made longer by not allowing any off days during the series. Round 1 is 7 games played in 7 days with an off day before starting round 2 which is 9 game in 9 days. If a series ends early then you get more off days. For travel you can have a day game on the get away day. It really doesn't take that long to travel across the country. And this would make the roster more important as you can't as easily rely on just 2 starting pitchers.

I know this is not realistic though for the playoffs, but scheduled doubleheaders would allow more games in less time, which is good for everyone (except the players).

Jun 04, 2009 18:52 PM
rating: 0
 
orlandoca7

Shawn -- Your articles on the business side are always interesting. You didn't include PED testing as a top issue in future negotiations. Do you see that pretty much settled now? I can envision tension on issues such as whether to use blood tests, with the union resisting that one, obviously.

Last question: Are the rules governing international scouting/recruitment under the collective bargaining umbrella?

Jun 04, 2009 19:19 PM
rating: 0
 
Shawn Hoffman

I don't think either side will go to war over PEDs. I don't think MLB will ever ask for blood testing, nor do I think the players would even take it seriously if they did.

International contracts are part of the CBA, but scouting practices aren't. Teams aren't allowed to sign players under 16, and the players have to go through some background checks, but there aren't many other restrictions.

Jun 04, 2009 19:54 PM
rating: 0
 
Nick Gutierrez
(435)

The problem with adding more playoff rounds is weather. World Series games are already being played right up to the end of October. Adding another round pushes that into the first and probably second weeks of November. Starting the season earlier would lead the same problem, except in March instead of November. The only way to do this would be to cut the season down to around 140-150 games, but I doubt the owners would want to lose out on the gate revenue.

Jun 07, 2009 11:38 AM
rating: 0
 
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