August 29, 2002

Business for the Disinterested

Baseball's Finances Cannot be Avoided

by Greg Spira

Some people don't like the fact that the Prospectus has focused so strongly on the economics of baseball this year.

I don't blame them.

Personally, I don't really care about how much money players and owners make. When I see newspaper articles that focus on what players make what money, I turn the page. I care about the game, not the financials of the game. Unfortunately, the financial side of baseball has a significant impact on the game on the field. The negotiations between the players association (the press and fans have labeled them a union; they have never asked for that description) and the owners will have a massive impact on the future of the game, more than anything that happens on the field this year. It's something we can't ignore.

A small number of readers have made assumptions about the political affiliations of the BP staff based on our heavy criticism of baseball ownership. The reality is that the staff here is extremely politically diversified, featuring multiple representatives of the left, center and right and several people who are uncategorizable. The only presidential candidates who wouldn't get any support from the BP staff are Al Sharpton and Pat Robertson.

It is really therefore quite amazing that virtually everyone on the staff takes remarkably similar positions on baseball's labor negotiations. Our views clearly do not arrive from any one political bent. They come from analyzing the issues the same way we analyze baseball games.

We're no longer particularly unique in our disbelief of Bud Selig. Yes, there have been many articles in the mainstream press saluting the players association's gains of yesteryear, often while arguing that the players now should make concessions in order to help baseball prosper. But despite this common refrain, the mainstream media has been far more skeptical of the owners this year than in any previous labor-management dispute in baseball. Bud Selig's buffoonery has cost the owners more public support than the immoral reserve clause or illegal collusion ever did.

None of us believe that major league baseball is in real trouble. It's certainly possible that some franchises are losing money, but not to the extent that ownership would have us believe. In every industry in the world, some companies lose money from year to year. If hiring a Cam Bonifay or Chuck LaMar to run Baseball Ops or missing the most basic points of Marketing 101 as the Angels have done since their birth--leaving them with less fans than any other American team but the Devil Rays, according to a Sports Business Journal poll last year--has no financial downside, where is the incentive to improve? This year, no doubt, has been the hardest for baseball since 1994 due to a rough economy, Bud Selig's continued devaluing of his product, and the storm clouds hanging over the season. But unless Selig travels to every city and talks every season ticket holder out of his seat forever, baseball is not doomed.

The question of disparity within the game is a more serious one. I suspect there are more differences among my colleagues on this issue than have shown up on this website. I believe that disparity is now an actual problem in baseball. Oh, it's not any worse than it was in the 1950s, the supposed golden age of baseball. But the reality is that baseball suffered substantial losses in popularity during the fifties and sixties, and disparity may have been one of the reasons why. And the potential exists for a similar decline today--a decline that may have already started.

The owners have been crying wolf about disparity for years. There's every reason to be skeptical of their claims. But we may really be in danger of seeing new versions of the always hapless St. Louis Browns. It didn't happen earlier because the owners were making huge amounts of money thanks to the ever growing nature of the national television deals. Player salaries simply couldn't keep up with the owners' revenues. Now, however, the national television gravy train has slowed down for virtually all the major sports. Even the NFL has had to deal with smaller increases in revenues. NASCAR and men's golf stand out as having developed their audiences to an extent where revenue growth is still explosive.

The way revenue is earned by teams in baseball today, primarily through local television deals, results in an unfair distribution of baseball revenue. The Yankees do need opponents. Baseball's antitrust exemption, which allows the major leagues to limit franchise movement, has prevented ownership from coming to any real consensus even among themselves on how they would ideally share revenue. The NFL, meanwhile, stumbled into a revenue system that maintains parity because most of the league's revenue comes from a national TV deal and is shared equally. That system is far from perfect: the incentive for teams such as the Cardinals to spend to win--or the Bengals to stop their managerial drooling--is limited since owners make money on their teams whether they're successful or not.

But the owners' proposals for revenue sharing and a luxury tax are clearly not designed to significantly increase competitive balance. Instead, they are designed specifically to drag down overall player salaries. Indeed, rumor has it that the owners want to end the practice of awarding amateur draft picks as free agent compensation, a practice that has been among the strongest contributors to maintaining competitive balance in the 17 years since its implementation.

If I was running baseball, I would institute an entirely different method of revenue distribution. Teams would get to sell television rights to only their home games. That has always seemed like the fair thing to do anyway; why should the Red Sox or Dodgers get to sell television rights to games they don't host? This distribution would give smaller markets the ability to sell their home games to larger markets. This would divide local TV revenues more equitably, while maintaining a strong incentive for teams to improve.

A change of this sort is obviously not going to happen. Whether there is an labor agreement reached this week or next year, the players will eventually make some concessions to the owners that will have some small downward effect on overall salaries without doing anything to solve any competitive balance issues. It's quite possible that revenue sharing will hurt competitive balance, since in many cases it will reward teams such as the Phillies for their incompetence. Worst of all, the ratio of talk about baseball economics to talk about actual baseball will remain uncomfortably high.

Greg Spira is an author of Baseball Prospectus. You can contact him by clicking here.