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August 26, 2010

Squawking Baseball

Despite The Screams, Revenue Sharing Isn't Broken

by Shawn Hoffman

Major League Baseball teams—and all private businesses, for that matter—tend to go pretty far out of their way to keep their financial results under lock and key. And that makes plenty of sense, especially when times are good—having healthy financials usually makes it more difficult to take a hard line during labor negotiations, let alone trying to pry hundreds of millions of dollars from local governments.

Well, so much for that. Thanks to a pretty massive leak, six teams—the Pirates, Marlins, Rays, Angels, Mariners, and Rangers—had much of their recent financial data made public on Deadspin this week. And as it turns out, these teams are making money—especially those that haven’t spent a ton on payroll. Maury Brown (who has been dominating this story, as usual) has a pretty good rundown of the key numbers.

There’s been a lot written about this already, with a lot of predictable headlines about owners pocketing cash and not doing everything they can to put a winning team on the field. But it’s MLB’s revenue sharing program has taken the biggest hits, since it’s clearly enabled low-payroll teams to post really solid net income numbers, even in down years.

But here’s the thing: in a lot of ways, these numbers actually prove that revenue sharing is working.

You have to consider why revenue sharing actually exists in the first place. Ten years ago, teams were hemorrhaging money, and very few had the resources to be consistently competitive over a period of years. Anybody want to argue that that’s still the case? Or that we’re worse off now?

Let’s run through a few points:

There is not a single revenue sharing payee listed (i.e. a team that received money from other clubs) that would have been profitable without the program.

A lot of people have suggested that payees should be banned from taking profits. This totally misses the point. MLB teams are "for-profit" companies, meaning that being profitable is a good thing.

Repeat: Being profitable is a good thing.

The fact that the Marlins and Pirates have been profitable, even in down years, should be considered a positive outcome for MLB, and it would have been impossible without revenue sharing. Yes, the Marlins obviously abused the system. But that’s old news, and it’s already been remedied—the union forced them to raise their payroll last winter, and they’re pretty much back in line with “normal” small market teams.

Other than the Marlins, small market teams seem to have acted appropriately.

The other teams have simply done what they should. The Pirates have taken a lot of heat over the past few days, but would the 2007 or 2008 Pirates have been competitive had they spent an extra $15 million on payroll each year? Of course not. Instead, they’ve used that money on the draft, international signings, and desperately needed capital expenditures (particularly in the Dominican Republic), all of which Cam Bonifay and Dave Littlefield routinely ignored, in favor of ridiculous (but media-appeasing, at the time) contracts for Kevin Young, Jason Kendall, Pat Meares, Derek Bell, et al.

The cap-ex numbers–-which net income doesn’t factor in, aside from depreciation—are the most important. The Pirates’ new regime nearly doubled these investments in 2008 (their first year on the job), and have kept them at this new level (around $7-8 million) since. The Rays also have spent a significant amount in this area, including $12.5 million in 2007—which, by itself, more than offset the team’s $11.1 million net income that year.

Revenue sharing has allowed small market teams to increase payroll when they are competitive.

If you haven’t read Steve Slowinski’s excellent breakdown of the Rays’ numbers, you absolutely should. Essentially, the Rays made a pretty good amount of money in 2007, were right around breakeven in their 2008 AL championship season, and have probably lost a bit in the past two years.

This is likely the pattern the Pirates would take as well, if/when they’re ever in a position to be competitive. The team had net incomes of around $15 million in both 2007 and 2008, with end-of-season payrolls near $50 million. So we can assume that with 1.6-1.7 million in attendance, their breakeven payroll is somewhere around $65 million. Obviously they’re going to be far below that this year, but if the team ever starts winning, they’ll likely have $65 million in their rearview mirror very quickly. (For comparison’s sake, the Rays have gone from $24 million to $72 million in just three years.) Even if attendance grows significantly, the Pirates could still be at or below breakeven if their payroll shoots up rapidly, particularly for the first couple seasons.

The Marlins’ strategy was penny-wise and pound-foolish. By abusing the system, they hurt themselves.

I’ve said this many times before: most baseball owners make far more money from capital gains than operating income. The Marlins certainly did “well” for themselves in the short run by running impossibly low payrolls. But if they had continued on that path for the long term, it would have been nearly impossible to field a consistently competitive team, which is by far the best way to increase a franchise's value.

(And on a side note, this is not at all a commentary on the Marlins getting a publicly funded stadium—this is purely an evaluation of the current revenue sharing plan. If you want to judge the team’s actions or the state/county government’s actions with regards to the new stadium, try to separate the two issues in the comments.)

This isn’t to say the current system is perfect. But for those screaming for extreme solutions, such as payees sacrificing all net income, or scrapping the system altogether, that’s just nonsense. The language in the CBA that says payees need to spend their revenue sharing money on building a competitive team has never been enforceable, since no team—other than perhaps the 2006 Marlins—has ever received more revenue sharing dollars than they’ve paid out in payroll, draft and international bonuses, and minor-league operations. It is purposely vague, because a majority of owners wanted it to be vague.

So for all of the current system’s actual intents and purposes, it is working: small market teams are in a far better position to compete than they were 10 years ago, and all 30 teams are at least capable of being profitable (and most are). The system isn’t going to be overhauled, and shouldn’t be. Baseball is unquestionably far better off now than it was when the system was first put in place. It could certainly use some tweaks (suggestions welcome in the comments), but that’s it.

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

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

BP Comment Quick Links

IAPiratesFan

Signing Jason Kendall long term made sense when the Pirates did it. Check out Kendall's first five seasons in the Majors and then go look at Joe Mauer's first five seasons. The Pirates made the only logical choice when they signed him to that long term contract. With any luck, Joe Mauer's career won't end up just like Kendall's.

Aug 26, 2010 00:30 AM
rating: 7
 
patrickc

Thanks for the great work Shawn.

Aug 26, 2010 04:28 AM
rating: 1
 
CRP13

In many ways, this article directly conflicts with http://sportsillustrated.cnn.com/2010/writers/joe_sheehan/08/25/pirates.finances/index.html>Sheehan's article on SI the other day.

I'm so conflicted!

Aug 26, 2010 07:08 AM
rating: 0
 
baserip4

I don't think it conflicts. Sheehan has proposed an alternative revenue sharing model in which he attempts to address some of the inefficiencies associated with the current system. I think he's underselling the "incentive to improve, to compete, to win", but that's mostly an argument over the slope of the marginal revenue curve vs. the slope of diminished revenue sharing. Sean is essentially drawing his curves a bit differently.

Aug 26, 2010 09:12 AM
rating: 0
 
CRP13

If small market teams are routinely posting profits disproportionate to their successes (and say what you will, this is exactly what the Pirates have done for years) then MLB should strongly consider moving their product to larger markets.

I'm sure San Antonio, Charlotte, Portland, Las Vegas, and Indianapolis would love to have a major league team, and some larger cities (Houston, Phoenix, Dallas, Philadelphia) could easily support a second team to increase revenues in those markets where there are even more profits to be made.

The apologies for dying markets turning unearned profits are starting to fall on deaf ears.

Aug 26, 2010 07:13 AM
rating: -1
 
nixgreg

That's nonsense. First of all, it's the owner's prerogative to move a team, not MLB's. It would be impossible for MLB to force a team to move, not to mention devastating to established fanbases (despite the team being terrible, I'm sure Pittsburgh residents don't want them gone - ask Cleveland Brown or Quebec Nordique fans about that). Third, the answer to small market woes isn't moving teams to smaller markets... as all of those "solutions" are. That might lead to a bump in attendance the first year, but it's short-sighted. The reason - generally - a team has an MLB franchise is because it's one of the 30 or so biggest metro areas in the country. Less people does not equal more support, not to mention the many problems that go with trying to get public support for building a stadium, as all of those cities would need. And finally, if you look at those metro areas that might possibly support two teams, the DBacks and Rangers have both recently scraped the edges of bankruptcy and financial ruin, the Astros are probably the worst organization in the league going forward, and have even more problems than the Pirates, and Philadelphia is so close to NYC/Baltimore/DC, and so deeply entrenched in Phillies love, that another team would ultimately fail miserably.

MLB and the owners don't have much choice beyond going forward where they are and, with a few exceptions, if you look at most franchises they are moving forward toward contention, or coming off an extremely recent cycle of contention.

Aug 26, 2010 07:43 AM
rating: 4
 
Ira

The problem is that the "small market" teams aren't really in small markets. Miami is an immense market. Pittsburgh, while a diminishing market, is still larger than St Louis, (no ones vision of a small market).

Much as I favor expansion into South/Central Texas, none of the "small market" teams play in markets smaller than the places you propose to move them too.

Personally, I think that Revenue sharing is still broken, because it was touted as "levelling the playing field" instead of what it actually is, which is "taking money from the players and giving it to owners who don't wish to compete". The following teams spent less than one third of the NY Yankees payroll this year: Toronto, Washington, Cleveland, Arizona, Florida, Oakland, Texas, San Diego, and Pittsburgh. 2 of those are playoff teams, 3 are around the .500 mark, and 3 are last place teams. as far as their actual market size, Texas is the number 4 market in the country (DFW), Miami is number 7, Phoenix is number 12, Oakland has half of number 13, San Diego 17, Pittsburgh 22, Cleveland 26. (incidentally, half of the San Francisco/Oakland market would be about the same as Cincinnatti, at 24). Greater Toronto is about 5.5 million, putting it about the same as Miami.

The problem here is that many of these teams aren't tapping their market effectively. Texas has trouble competing with the ever-present football, and has ownership issues (now resolved, thank god!), Miami and Oakland have stadium issues, and the rest either aren't very good or weren't expected to be very good this year (yes, San Diego was expected to be dreadful). The cyclical nature of sport says that those teams which are bad will be good again, and those teams which are good with small payrolls will have to increase that payroll to stay good.

But all this is not the issue. The point is that what should be happening is that teams in the top 10 large markets. actual large markets like NY, LA, Chicago, Dallas, Philadelphia, Houston, Miami, Toronto, Washington, and Atlanta should give money to the teams in actual small markets like Milwaukee, Kansas City, Cleveland, Cincinnati, Pittsburgh, San Fancisco/Oakland, Denver, Baltimore, and Tampa. What you say, Miami has to PAY revenue sharing? yep. that's because there are 5.5 million people in Miami and only 1.5 million in Milwaukee.

Move from Miami? god no. never. its too big. And move to San Antonio? San Antonio is between Cleveland and Kansas City. Throw in Austin and you have a place which deserves a team. but not from Miami.

The place MLB should really get out of? Milwaukee. move them to Riverside and put them in the AL West, then move the Rangers to the NL Central.....


Aug 26, 2010 08:30 AM
rating: 6
 
CRP13

I was looking at urban population, not metro population. My bad.

My point is still valid - the problem may not be the owner or the team, it may be the city.

Aug 26, 2010 08:45 AM
rating: 0
 
jayman4

I disagree. Being a Padres fan, I have looked at spending and payroll pretty deeply. One of my most striking findings, to me, was that when I did a comparison of "market value" (basically DMA population x HH income) to payroll spending, I found a .90 correlation:

http://stokes-analysis.blogspot.com/2010/02/mlb-payroll.html

This says to me that the markets are all investing in payrolls, as a function of the market size, very similarly. Either the owners are colluding (quite possible) or that each franchise is responding to their choice set in efficient ways. If it was inefficient, I would expect to see a lot less correlation (some spending high, some spending low).

As follow on, not sure why no one likes the idea of: throw all baseball revenue into a pot (would need auditing, etc), argue with MLBPA about what % goes to owners and what % goes to the owners. Once that is settled, the amount of that goes to players is the split evenly over all 30 teams and MLB uses revenue sharing to allow all the franchises to afford it.

Tweaks are needed:
1. keep incentives for each franchise to win/be more profitable (so keep some portion of "controllable" revenue going to each franchise)

2. some sort of balancing between big/small market owners because the small market teams gain, so big market owners deserve some sort of compensation; but, this is an area where I would let the rich dudes sort it out

3. some flexibility/accountability that the money allocated to players actually gets spent on players. can see a year when a team does not want to spend more, so the "unspent payroll" can go into a quasi-escrow, and they either spend it in later years or have to give to MLBPA.

Aug 26, 2010 10:50 AM
rating: 0
 
CRP13

I think perhaps I wasn't clear with my larger point. I really wasn't trying to seriously suggest that mlb force a team move. But by removing the owner's ability to make money by putting crap on the field, it will force that owner to take some sort of action if he wishes to turn a profit.

Either commit to winning to bring fans into a small market, or move to a larger.

Aug 26, 2010 08:40 AM
rating: 1
 
CRP13

What the hell am I being minused for? Because you disagree with me? Seriously, get a life!

Aug 27, 2010 10:00 AM
rating: -2
 
Randy Brown
(189)

As Shawn pointed out in the article, revenue sharing and public funding for stadiums are two separate issues. And if the revenue sharing allows the Pirates and Marlins to turn a profit disproportionate to their success, it isn't a big news story to me. I couldn't care much less about how the owners decide to pass money around amongst themselves.

Set aside revenue sharing altogether for a second. MLB distributes around $1.2B a year to the 30 teams. If MLB set aside 10-15% of that for a stadium fund, that would be $120-180M a year. Whenever a team wants a new stadium, they have to petition MLB for the stadium funds, not their local idiot politicians. Then eams have to kick in 25-50% of the funding themselves. A new stadium could be built every 3 years or so, entirely self-financed by MLB and their member clubs.

What bothers me isn't the revenue sharing, it's the public funding for stadiums. If nothing else comes of these financial statements being released, hopefully it will forever dispel the notion that teams need public financing of stadiums to "compete"...about 20 stadiums too late, but better late than never I guess.

Aug 26, 2010 08:06 AM
rating: 5
 
doncoffin
(422)

"...having healthy financials usually makes it more difficult to take a hard line during labor negotiations..."

Except that if an employer claims economic hardship in a collective bargaining situation, the employer *must open its books* to the union...

Aug 26, 2010 08:25 AM
rating: 0
 
Luke in MN

I don't have any dog in the fight of what to change about the current system (if anything), and I'm sure it could be that the best way to build franchise value is to build a consistent contender, but (1) winning games is zero sum and (2) there is a fair amount of inertia to which teams tend to win. There can only be so many consistent contenders.

Isn't it possible that for some franchises, like the Pirates, it's actually more profitable in the long run to stay at the very bottom of permissible payrolls? I have to wonder if the Rays, who've actually gotten less profitable while building an absolutely extraordinary ball club, are actually improving their franchise's value all that much (again, leaving new-stadium issues aside). If they're at best a modest economic success story while being a massive baseball success story, it's not very inspiring for other small clubs, is it?

Aug 26, 2010 08:35 AM
rating: 2
 
Paul Gardner

"Repeat: Being profitable is a good thing."
Seriously?
Are you looking at the same numbers I'm looking at?
The Pirates owners have always cried poor to their fans as a reason for trading off the likes of Jason Bay and etc. Meanwhile they are taking 20 mill. in pay PLUS $20 mill profit and in return the fans and MLB gets a minor league team, essentially.
I wouldn't take that deal.

Aug 26, 2010 08:40 AM
rating: -2
 
BP staff member Shawn Hoffman
BP staff

Paul,

I'm a life long Pirates fan. So are my parents. And their parents, and their parents. Seven years ago, they were in such crappy financial shape that they had to dump Aramis Ramirez for nothing... and that was with a losing team's payroll. The fact that they're doing well financially now is a very comforting thing, b/c if they are ever competitive, we know they'll have the money to spend.

Also, since Huntington/Coonelly took over, I can't think of a single thing that they've done that I wouldn't have done myself, in terms of general strategy (if not always in execution).

Aug 26, 2010 10:46 AM
 
Christopher Miller
(88)

This is flat wrong. They had a $20 million operating surplus that was distributed to the partners (who had loaned the money to the franchise in the first place, during the Ramirez dumping days). This isn't 20+20, it's a case of earning a profit to pay off prior debts--just like earning a surplus to pay off your student loans.

Aug 26, 2010 13:12 PM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

Regarding the $20m "payout," we know that half was to pay back the loan that Nutting gave in 2003 (the rest of that loan was converted into equity).

The other half was to pay the owners' taxes on the team's profits. I have no idea if other teams do this, but most similarly-formed partnerships do, since the partners are not actually receiving any dividends from the company. I.e. they'd essentially be paying this cash out of their own pockets. So it wouldn't surprise me if ALL teams did this, at least once every certain number of years.

Aug 26, 2010 13:41 PM
 
Tarakas

My problem with what is happening is not that the owners make a profit—surely they have a right to make a proper. But revenue sharing helps separate product quality from the profit. By subsidizing the product regardless of quality, it lessens the incentive for offering a quality product.

Given the resources of the Marlins or Pirates, offering a quality product is difficult. One can throw large amounts of money into the effort and a little bad luck can cause you to have a bad team and losses. By promoting profitability regardless of product quality, it makes it more attractive for a team with limited resources to simply play it safe and keep payroll low and not worry much about quality. As you note with the Rays, success has actually limited their profitability in recent years. I am unsure if demonstrating that they lose money when the team is successful on the field is helping their resale equity, either.

If owned the Marlins and could make a guaranteed $15 million for fielding a 70-win team, and risk losing $40 million by trying to field a 95-win team, I might very well choose to not try very hard to contend.

Aug 26, 2010 09:13 AM
rating: 1
 
makewayhomer

"Revenue sharing has allowed small market teams to increase payroll when they are competitive"

Yes, assuming that owners want to win, and are ok with sacrificing profits to win. But the evidence seems to be that most teams are NOT willing to make this tradeoff. The Rays are the exception

how are the Pirates incented to follow the lead of the Rays? You are assuming they will, but I think that is a dangerous assumption. And this just means that fans like me are helping to line the Pittsburgh owners pockets. No thank you.

Aug 26, 2010 09:15 AM
rating: 1
 
BP staff member Shawn Hoffman
BP staff

At some point I'll write about what winning (and particularly winning a World Series) does to franchise value. I don't think there are many owners that don't realize this. So yes, I do think the incentive is there for the Pirates to compete.

Aug 26, 2010 10:49 AM
 
makewayhomer

ok, flags increase franchise value. But you are asking an owner to lose money or break even over a multi-year period for a chance at winnings a championship. But isn't it a whole lot easier for the Pirates to just pocket $15m ad infinitum?

if you do a 2 scenario NPV, where in one scenario the Pirates makes $15m PA for 10 years while winning 70 games each year, and the other where you give them some expected revenues from their "Win WS % chance" (and increase costs) I would bet the Pirates make more from collecting the $15m PA, thank you very much.

given the actions we have seen the Pirates and other small market teams (save the Rays) take, I think they agree

Aug 26, 2010 11:02 AM
rating: 2
 
jmb79

Only time will tell, but as evidence that they are following the Rays model consider just last week. Even if you figure they needed to sign Taillon to avoid a public backlash, they certainly didn't need to draft and sign Allie or pursue and sign Heredia. The $6.5 million to Taillon bought them some good PR, the additional $5+ million on Allie and Heredia shows a real commitment.

Aug 26, 2010 11:23 AM
rating: 2
 
makewayhomer

and the above is why the system is broken - small market owners are not incented to win

Aug 26, 2010 09:24 AM
rating: 1
 
yanksgood

Why should they be. Their incentive is to make money, they are a business. The idea that sports needs to be 100% about winning is just silly. Life doesn't work that way, why should baseball?

Aug 26, 2010 13:25 PM
rating: 0
 
Luke in MN

Well, a good system would line up monetary incentives with the production of high-value products. Like you say, this certainly isn't always true in "real life," but that's not exactly a good thing.

Aug 26, 2010 15:02 PM
rating: 2
 
makewayhomer

you would probably feel different if you were a Pirates fan instead of a Yankees fan.

if they aren't trying to win and exist solely to take handouts/profits from other teams, then (as a fan of a large market team) I would prefer they don't exist.

as a Yankee fan, you feel good about your money going to Pirates owners who don't care about competing?

Aug 26, 2010 13:59 PM
rating: 0
 
TGisriel

Focusing on what the poor teams do with the revenue sharing misses the point.

The real problem with baseball's financial system is that a few teams (especially the Yankees) have a huge financial advantage that grossly distorts the competitive environment.

Aug 26, 2010 14:22 PM
rating: 0
 
awayish

the competitive environment is utterly unimportant except for its being necessary for the continued operation of the whole industry.

Aug 26, 2010 17:19 PM
rating: 1
 
sgshaw

Revenue Sharing has done nothing to stop the obscene spending by the Yankees. Baseball needs a hard cap and floor. That would solve the problems of both the Pirates and the Yankees.

Aug 27, 2010 08:57 AM
rating: 0
 
drawbb

Yes, because that has worked SO brilliantly to "level the playing field" in the NFL and NBA.

Just wow. It's absolutely jaw-dropping how many Americans have bought this canard hook, line, and sinker.

Aug 29, 2010 07:09 AM
rating: 1
 
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