January 30, 2002

The Daily Prospectus

Revenue Sharing

by Joe Sheehan

As I mentioned yesterday, I'm writing these columns as a result of a conversation I had with Rany Jazayerli about a month ago. One of the best points Rany made was that we, as fans, don't have much invested in how the owners and players carve up the money generated by Major League Baseball. Does it really matter to us how much money Fox or Disney or The Tribune Corporation takes from their baseball operations? Or whether the top player salaries continue to rise?

I can't say I disagree. You get what you negotiate, and if the owners want to agree to share more revenue, or the players acquiesce to an external salary restraint, that's their business. On one level, even a bad agreement is better than a work stoppage (and as we saw after 1995, MLB is quite capable of crafting a bad agreement).

With that in mind, I should make it clear that I don't think revenue sharing is necessarily a bad thing. There's an argument that both teams playing in a baseball game should share equally in the revenues generated by that game, as each is half the attraction. MLB has never done things that way, but the argument is made, and its proponents have become more insistent in the past decade, particularly as the New York Yankees' cable-television revenues have grown to astronomical levels.

I've made this point before, and it bears repeating: baseball's nominal "large-market/small-market" problem is primarily a "Yankees/everyone else" problem. The Bronx Bombers are an outlier in every category, and no more so than in the area of local revenue. It is difficult to construct a fair solution to a problem created by an outlier.

It's clear that revenue sharing above a token level should act as a drag on salaries. Assuming rational decision makers (pause here for five minutes of unbridled laughter), teams should be willing to pay players according to the revenue that they're expected to create. However, if a team can only keep a percentage of that marginal revenue, the value to the team of that player is lessened, and their offer to the player should be reduced accordingly.

This is why the MLBPA has a say in the amount of revenue sharing that the owners can implement, because revenue sharing should affect wages, and is therefore subject to collective bargaining. However:

As a practical matter, the MLBPA would be unable to prevent significant revenue sharing.

If the owners propose to share a lot more of their revenue without asking the MLBPA to agree to an external salary restraint, they will get a good chunk of what they want in labor-cost reduction, and they will have backed the Players Association into a corner. It would be difficult, perhaps impossible, for the MLBPA to stand in opposition to owners deciding to share lots of revenue without asking the players to compensate them for doing so. It's a fight they can't win.

The problem has been that the owners either don't understand or don't trust the effects of revenue sharing on salaries. They have always insisted on tying it to either a salary cap or a punitive luxury tax, both unacceptable to the MLBPA, and understandably so. The popular argument that the NBA and NFL have such systems and are successful is worthless; the NBA got its system by proving the league actually was hemorrhaging money in the early 1980s, while the NFL got its salary cap by breaking a weak union. Neither situation is applicable in baseball.

Now, revenue sharing isn't a panacea. As we saw after the 1995 agreement, the great danger is that it allows a team to be profitable without trying to be competitive. Anything that provides disincentives for a team to improve itself is problematic. Of course, this can be fixed in any number of ways, from a simple payroll floor--problematic in and of itself--to an elaborate distribution system tied to an assortment of factors. The important thing is to assure that every team has the same financial incentive to improve, and to win.

Redistributing revenue should work to correct the inescapable fact that the potential revenue of each team varies from market to market. A revenue-sharing plan that simply distributes money according to revenues generated is counterproductive and entirely unfair. The Phillies, playing in the largest one-team market in baseball, should NEVER receive money from teams like the Indians and Mariners, who have become cash cows in small markets.

If baseball is going to turn to revenue sharing to address its perceived problems, then it has to use it fix the problems that are real--different market sizes and potential revenue streams--and not ones that are the result of mismanagement. What I'm suggesting is distributing shared revenue primarily according to market size--using something like Mike Jones's research to determine market size--because that's the only thing a team does not control.

Market size would be the primary factor, although not the only one, because of the potential problems with small-market sandbagging. What has to be avoided, though, is penalizing teams that maximize their revenues in small markets while rewarding teams that do a lousy job of tapping into large ones. The proper system is going to be complicated, because it has to straddle the line between fairness and providing the proper incentives.

If the owners serious about doing more than just cutting costs or beating the MLBPA, they have to show it by devising an effective, sensible revenue-redistribution system. If they can do so, they'll have gone a long way towards regaining their credibility.

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Last year, Gary Huckabay and Michael Wolverton hosted a Baseball Prospectus Pizza Feed in Northern California. Dave Pease and I are looking into hosting one in Southern California. If you'd be interested in attending--most likely in late February or late March--drop me a line at jsheehan@baseballprospectus.com. Please indicate your hometown in your e-mail, to help us with selecting a location.

Joe Sheehan is an author of Baseball Prospectus. You can contact him by clicking here.

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