Cash Flow

Money Changes Everything

Baseball may be the national pastime, but it's increasingly becoming a one-sided affair.
Stephen TaubFebruary 14, 2002

In his December 6 testimony before the House Judiciary Committee, Major League Baseball Commissioner Bud Selig made a startling concession for the head of a professional sports league. In his testimony, Selig acknowledged that major-league baseball is becoming a very one-sided affair.

According to the commissioner, there were 224 postseason games played from 1994 to 2001. Over those seven seasons, only five games were won by teams that ranked in the bottom half of the payroll scale. Selig went on to point out that, during that same time frame, teams from the bottom three-quarters of the salary scale failed to win a single World Series game. Not one. Said Selig, “Only teams that are able and willing to spend enormous sums on player salaries have any chance to win the World Series.”

This was basically the same conclusion reached by the Blue Ribbon Panel on Baseball Economics. That group, which released its findings in July 2000, noted that “large and growing revenue disparities exist and are causing problems of chronic competitive imbalance.” The root of that one-sidedness? According to the panel, the growing disparity in “local” revenue — ticket sales, skybox rentals, broadcasting rights, and the like.

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That’s ominous stuff for fans of small-market teams. Many state politicians champion the public funding of new local stadiums on the premise that a modern park will help a small-market team better compete. Not so, said the blue-ribbon panel, noting that most clubs will eventually have attractive, baseball-oriented facilities with modern amenities.

“Then,” the panel predicted, “the revenue/payroll disparities that breed competitive imbalance will be magnified because the clubs in large media markets have revenue opportunities from new ballparks that are greater than those of their counterparts in smaller markets.”

This fact wasn’t lost on Larry Lucchino, the incoming president and CEO of the Boston Red Sox. “You have to be revenue-driven in this day and age in baseball,” Lucchino recently told an interviewer. “Revenue begets player payroll, which begets on-field success.” On-field success, in turn, begets higher rights fees, advertising rates, and attendance.

The cycle rolls merrily along. Baseball tried to address the mushrooming imbalance in payrolls when it instituted revenue sharing in 1996. Last year, about $167 million in local revenue was sent directly from the 16 top revenue-producing clubs to the other 14 clubs. That’s four times more than the top teams shared five years ago. The 14 recipients ranged from Milwaukee, which collected $1.7 million, to Montreal, $28.5 million. The biggest payer into the fund: not surprisingly, the Yankees, which handed out $26.5 million in revenue sharing.

The problem with revenue sharing? For starters, owners of clubs that do the sharing don’t particularly like it.

More importantly, not all teams used the extra cash to make themselves more competitive on the field. The Minnesota Twins kept the $19 million it received, enabling the club to report a slight profit for the year. Cincinnati used its $13.4 million from revenue sharing to help report an operating profit of more than $2.3 million. “The team at the bottom has an incentive to (spend) less,” says Andrew Zimbalist, an economist at Smith College. Zimbalist argues that teams that receive the shared revenue should be required to spend the money on salaries — its stated purpose — not boost profits.

Other baseball watchers believe MLB should institute a salary cap, similar to setups in the National Football League and the National Basketball League. Not surprisingly, players aren’t overly thrilled with that proposal. But it’s hard to deny that the NFL and the NBA are more competitive leagues than Major League Baseball. “Our postseason continues to be dominated by high payroll clubs,” concedes Selig, “and those payrolls continue to escalate.”

Of course, in the real world, few economists would argue that an artificial limit on salaries is good for business. That kind of thinking certainly goes against most free-market economic theories. Then again, baseball is not truly a free-market economy. As some observers point out, how many industries are there where companies actually rely on their competitors in order to conduct business?

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