February 4, 2002

The Numbers (Part Six)

Profits and Revenue Sharing

by Doug Pappas

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Part One
Part Two
Part Three
Part Four
Part Five

At last we've reached the bottom line. The table below ranks the 30 major league clubs from most to least profitable, net of revenue sharing.

That's right: in 2001, MLB's most profitable team was none other than Commissioner Bud Selig's own Milwaukee Brewers, who play in the majors' smallest market. Even with a new ballpark, the Brewers' local revenues remained below the industry average, so the Brewers received a revenue-sharing check despite turning a $14 million profit without it.

The Brewers were one of 11 clubs to report an operating profit before revenue sharing. Of the 11, only the Brewers and the Tigers also received revenue sharing money. Four of the other 12 revenue-sharing recipients became profitable as a result of it (the Athletics, Reds, Twins, and Angels), while the remaining eight (the Royals, Pirates, Padres, Phillies, Marlins, Expos, Devil Rays, and Blue Jays) saw their losses reduced.

On the other side of the equation, 13 of the 16 clubs that paid into the revenue-sharing pool wound up in the red. Just three--the Mariners, Yankees, and Giants--earned enough to remain profitable after their revenue-sharing payments. Six other teams (the Cubs, Orioles, Cardinals, Mets, Indians, and Red Sox) saw their operating profits turn into multimillion-dollar losses. Finally, seven clubs (the Astros, Rockies, White Sox, Rangers, Braves, Diamondbacks, and Dodgers) suffered the double indignity of having their operating losses compounded by revenue-sharing payments.

As implemented for the 2001 season, MLB's revenue-sharing formula required each club to pay 20% of its local receipts, net of stadium expenses, into a common pool. Three-quarters of the money in the pool was divided equally among all 30 clubs. The remaining 25% was shared only by clubs with below-average local revenues, distributed so that the lowest-revenue teams received the most.

Revenue sharing is often defended as necessary to "give small-market teams a chance to compete." Measured against that standard, MLB's revenue-sharing plan contains two serious flaws. First, it doesn't require recipients to try to compete: owners can simply pocket the money, treating it as a no-obligation subsidy. In some circles this is known as the "Montreal business plan," which has reportedly caused several eruptions of Mt. Steinbrenner at owners' meetings.

As an extreme example, in 2000 the Minnesota Twins received $21 million from the revenue-sharing pool--$5 million more than the salaries paid to their entire 25-man roster. Not surprisingly, they turned a profit... and not surprisingly, their brethren eventually concluded it would be cheaper to contract the Twins than to continue subsidizing their parasitic billionaire owner. If revenue sharing is ever to serve its intended purpose of making small-market clubs more competitive, recipients must be required to reinvest the proceeds in their team.

The second problem results from a definitional ambiguity. "Small-market team" can mean either "low-revenue team" or "team that plays in a small metropolitan area." Since a team's revenues are largely dependent on its marketing and on-field performance, the second definition is the more meaningful... but MLB's revenue-sharing formula uses the first definition exclusively. As the table below shows, these definitions are far from synonymous.

(Populations adjusted to reflect number of teams in market.)

By focusing entirely on the amount of local revenues a team generates, MLB's revenue sharing formula shortchanges popular, well-run teams in smaller cities while rewarding incompetently managed big-market clubs.

For example, compare the St. Louis Cardinals and the Philadelphia Phillies. Though both play in 30-year-old stadia, the Redbirds generated $50 million more in local revenue despite playing in a market less than half the size of Philadelphia. For their trouble, the Cardinals paid more than $8 million into the revenue sharing pool, while the Phillies collected almost $12 million. Other pairs of similarly-sized markets--Seattle and Miami, Cleveland and Minneapolis-St. Paul--reveal similar inequities.

MLB needs to realize that badly run teams should lose money. Very badly run teams should lose even more, yet eight teams lost more money than the 2001 Expos, winner of the Triple Crown of Haplessness: lowest attendance, worst local media contracts, and lowest revenues. In fact, thanks to their $28.5 million of revenue-sharing subsidies, if the Expos had reduced their player payroll to the Twins' level they would have been more profitable than the Mets and Cardinals.

This problem can be addressed by adjusting the revenue-sharing formula to include market size. For example, based on the 2001 MLB average per capita local revenue of about $24, clubs falling below $20/person could lose revenue-sharing money proportionate to the shortfall, while any revenue-sharing recipient taking in more than $30/person could exclude the excess from their income for purposes of the formula. This would give more money to the Brewers and Pirates, whose 2001 revenues were artificially inflated by their new parks, and significantly less to the likes of the Marlins, Phillies, and Expos.

Commissioner Selig told Congress that MLB lost $519 million in 2001. Operating losses account for just $232 million of this sum. My next column will explain where the other $287 million went.

Doug Pappas is chairman of SABR's Business of Baseball Committee. His writings on the subject are archived at http://roadsidephotos.com/baseball/. Although his early professional experiences included helping the USFL win $3 in its antitrust suit against the NFL and watching Bowie Kuhn flee to Florida one step ahead of his bankrupt firm's creditors, he continues to practice law in New York.