May 3, 2011

The Payoff Pitch

Bridesmaids, Revisited

by Neil deMause

the archives are now free. All Baseball Prospectus Premium and Fantasy articles more than a year old are now free as a thank you to the entire Internet for making our work possible. Not a subscriber? Get exclusive content like this delivered hot to your inbox every weekday. Click here for more information on Baseball Prospectus subscriptions or use the buttons to the right to subscribe and get instant access to the best baseball content on the web.

Subscribe for $4.95 per month Recurring subscription - cancel anytime. Subscribe for $39.95 for one year a 33% savings over the monthly price! Purchase a $39.95 gift subscription a 33% savings over the monthly price! Already a subscriber? Click here and use the blue login bar to log in.

Economic cause-and-effect is a funny thing. Last week, Matt Swartz laid out the reasons why the proposed addition of an extra wild-card team in each league could end up enriching the players at the expense of the owners. It's a long argument and worth reading, but the nut of it comes down to: More wild cards equal more teams in the playoff hunt, teams in the playoff hunt are more likely to bid up player salaries, and so shoehorning two more teams into October, even for a single game, is likely to drive salaries skyward. As he wrote: "In the late 1980s and early 1990s, players earned only about 30 percent of league revenues, but from the mid-1990s through the present day they have taken in roughly 50 percent, and sometimes more." The apparent tipping point: 1995, the first year of the expanded playoffs.

Matt's article caught my eye for a couple of reasons. First off, as should be clear by now, I find it endlessly fascinating how tweaks to playoff systems can result in unexpected consequences. Second, I'm a bit of an apostate from the church of rational economic actors. I, too, once argued that teams only spend what players are likely to be worth in terms of new revenues—if A-Rod is getting $30 million a year, it's because somebody thinks he's likely to generate more than $30 million in fannies in seats, jerseys on torsos, and beers in guts. Since then, though, I've since seen too many GMs spending up to arbitrary "budgets" and then stopping—as if the goal is to come home from the Winter Meetings having spent all the money their moms gave them without going over—to really feel confident that there's anything rational about it.

The final straw was my brief investigation a few years back into teams' return on investment. Unless the sainted Nate Silver was way off on his revenue-per-win estimates, virtually every team in baseball would make more money by shutting their wallets and just cashing in whatever ticket sales and wins they can scrounge together on the minimum—though only the Marlins appear to have been taking notes.

So, I was curious about this whole "teams spend more when they smell the playoffs" thing. And with the help of the Forbes revenue estimates and USA Today payroll figures—all helpfully compiled at Rodney Fort's sports business data site—I was able to put together this chart (with thanks to Sky Kalkman for the remedial Excel lessons):

As you can see, players indeed take home a bigger slice of the revenue pie than they did two decades ago. But it's hardly a smooth increase, and the impact of the expanded playoffs is more muddled than it might have appeared.

For starters, ignore that dip in the pink line (league revenues), and accompanying jump in the yellow one (payroll as a share of revenues), in 1994 and 1995: That's the impact of the strike, since USA Today still records full-season salaries for those years, but the resulting revenue dip is recorded.

That leaves us with: a quick rise in players' share in the early '90s, as the post-collusion era led increased revenues to almost entirely get poured into payroll; a leveling off in payroll-to-revenue ratio through 1998, right through the first four years of the expanded playoffs; a steady rise in the share of revenues going to players from 1999 through 2003; and then a gradual decline since then, to where players now get a smaller cut of the vig than at any time since 1991.

What the heck is going on? Some possible theories:

• Baseball revenues started to take off as soon as the 1995 lockout was over—so much for fans swearing they'd never return to the game—but salaries didn't catch up until a few years later. It's possible this is just a matter of GMs being a lousy judge of economic trends: the swift rise in revenues hit speed bumps in 1999 (hello, dot-com bubble) and 2002 (hello, post-9/11 recession), but payrolls kept going up, which makes sense: Long-term contracts mean that many players' salaries are set based on economic conditions from years earlier, and arbitration means that other players' incomes are pegged to those as well.
   
• Something else came along starting in 1999: the Diamondbacks and Devil Rays. They actually showed up as expansion teams in 1998, but it wasn't until a year or two later that they went on a spending spree in an attempt to get into quick playoff contention, adding more big spenders to the winter bidding wars. This worked out great in 1999 for Arizona, who rode Randy Johnson to the postseason; less so for the Rays, who rode Greg Vaughn and Vinny Castilla to their third straight year in the AL East basement.
   
• As Matt pointed out to me in an e-mail exchange, the post-2003 plunge in payroll as a share of revenues—really a plateau in salaries despite a flood of new money pouring into MLB coffers—conveniently lines up with the new collective bargaining agreement that went into effect for the 2003 season, which bumped up revenue sharing from 20 percent of local revenues to 34 percent. If teams are keeping less of the new income they get from adding a player, they're less likely to spend big on him; so here, at least, owners seem to be exhibiting rational economic behavior.
   
• The year 2003 was around when the Yankees/Red Sox domination of the AL got going in earnest, so it's possible that other teams started throwing in the towel in terms of going head-to-head with them on payroll, keeping down prices on players who weren't lucky enough to get one of those two franchises in on the bidding.

I'm sure you can come up with your own theories. The upshot, though, is that it looks like teams' spending decisions are way more complicated than can be predicted by mere marginal-revenue calculus. And if the ROPE data holds water, then even though teams spend way more than it makes sense to on individual players, they're still managing to put ever-larger shares of revenues into their own pockets before shelling out anything for players. I told you economics was a funny thing, didn't I?

---

As long as I'm revisiting old BP articles, I might as well check in on how the Great Attendance Drop is going since I first wrote about it two weeks ago. Right after my article appeared, Darren Rovell at CNBC wrote a piece alleging that the whole thing was a myth: Ticket sales were only down 1 percent from last year, he insisted, though I haven't been able to get hold of him to find out where he got his figures.

Until the last couple of days, Baseball-reference.com's figures were holding steady that the attendance drop was around 2 to 3 percent, but a big weekend helped cut that to 1.3 percent going into last night's games. (As I noted in my previous article, since this season started on a Thursday, there's a mismatch between the years in terms of how many weekend games are included.) The overall story, though, remains a handful of teams that are selling tickets like gangbusters (Giants, Rangers, Jays, Rockies, Padres) and a larger contingent that have seen moderate-to-large declines (Mariners, Dodgers, Rays, Mets, Cubs, Yankees, Royals). And the record lows continue, in the Bronx at least: The Yankees barely cleared 40,000 fans for last Thursday's game against the White Sox.

If I were going to speculate—which, paraliptically, I never would do—I'd hazard a guess that what's going on here is a broad softening of the ticket market, with low-demand teams scrambling to fill seats by any means possible. In the two weeks since my article appeared, I've sat in $100 seats at Citi Field for $22 apiece (thanks to StubHub) and $15 seats at the Impostor Known As Yankee Stadium for $7 (thanks to a team-sponsored discount night; I actually overpaid on StubHub relative to the $5 face value). It's tough to predict how this will play out as demand picks up in the summer months—it's possible that tourists will pay $60 a pop to sit in the upper deck at Wrigley Field even when they're paying for the privilege of watching Carlos Pena slug .182—but you have to think that if fans are learning that discount tickets can be had on the secondary market, that has the potential to let a lot of air out of the price bubble that's built up over the past decade.

To know for sure, what we really need is a successor to the Fan Cost Index that tracks actual prices paid for tickets, not face value, so we can see trends in ticket demand in real time. On our phones. In 3D. Hey, a boy can dream, can't he?

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