Hi. As chairman of the new Business of Baseball Committee, I thought I'd explain why last year's ruinous labor dispute was so unnecessary.

Baseball's labor problems are basically a sideshow to the real battle -- the fight between the large and small market owners over how to divide baseball's revenues. The front side of the handout [which, unfortunately, I couldn't find to post here] presents figures from the May 9 Financial World, which projects Major League Baseball's finances for 1994 if there had been no strike. You'll see that even though everyone's competing for the same players, some teams have twice as much money with which to compete.

The biggest disparity involves local television money. The differences in stadium revenues relate to the terms of a team's stadium lease and the number of luxury boxes it can sell -- despite their Godawful stadium, the Giants make more from luxury boxes, concessions and parking than the Yankees, Braves, Dodgers or Bluejays. Gate receipts are, of course, a function of attendance, which usually rises and falls with the team's fortune. Thus you'll notice that despite playing in the nation's largest market, the Mets were projected to earn less at the gate than Milwaukee or Minnesota, and $16 million less than the Indians.

But the biggest factor affecting local TV rights is market size, not the team's performance or ability to market itself. The Media numbers in the second column of your handout include $8 million per team in national TV and radio money, which is split equally among all the teams. If that's subtracted, the Yankees receive $46 million from local TV and radio, while the Twins and Indians receive only $3.5 million. Even outside the New York market, some teams earn 5x more from local TV and cable than others do. The small-market teams have been upset about this for years. They pressured WTBS and WGN, which actually bring competing games directly into their home markets, into paying a combined $20 million/year compensation. But since this only gave everyone else enough money to sign one utility infielder each, they pressed for more. The small-market teams thought they could extract additional concessions by threatening the large-market teams' ability to earn their local TV money.

Before your local station's broadcast crew can telecast an away game, it needs the home team's permission to bring its equipment into the stadium. For decades every team in each major leagues has agreed to provide access to one another's camera crews. But this agreement can be terminated on one year's notice -- and in 1993, the Marlins, Astros, Expos, Pirates and Padres announced that unless the larger-market teams cut them in on local TV revenues, they'd withdraw from the National League agreement before the 1994 season and exclude the big-market broadcasters. If that happened, New Yorkers could still watch their Mets play in Philadelphia's Veterans Stadium, but when the Mets moved on to Three Rivers Stadium Met fans' only hope would be finding a station on the Pirates' broadcasting network. Nine of the 14 American League teams soon indicated they'd do the same before the 1995 season.

As you can imagine, the big-market teams didn't like this one bit. At the extreme high end of the scale, the Yankees receive over $250,000 per game from their TV and radio contracts; the Mets take in over $150,000 per game. If they could no longer broadcast from those five cities, the Mets would lose about $5 million in revenue every season. But instead of negotiating, the big-market teams called the small-markets' bluff. "Go ahead," they said, "walk away from our local-TV agreement. But before you do, remember the other part of that agreement...the part which assigns every team an exclusive territory. San Diego, you can lock Vin Scully out of Jack Murphy Stadium -- but if you do, the Dodgers will sell their games to a San Diego station."

Meanwhile, while all this was going on, the owners were supposed to be assembling a proposal for the Players' Association. The owners reopened the collective bargaining agreement in 1993, the year before it expired, but couldn't even decide among themselves what to ask for. The 1993 season was played under a no-strike, no-lockout agreement. Finally the owners reached a compromise: the large markets would share up to $38 million/year with the small markets, so long as the money ultimately came out of the players' pockets. To be sure it did, and to lock in profits by saving themselves from the free market, the owners demanded a salary cap equal to 50% of revenues. The players resisted, and we all know what happened next.

Now let's look at the salary cap the owners proposed. First of all, in a world with no salary cap the owners were already voluntarily paying the players a much higher percentage of gross revenues: the Congressional Research Service estimated that a salary cap would cost the players $168 million in lower salaries, while the large-market teams paid only $38 million revenue sharing to their poorer cousins. The salary cap was promoted as a way to make small-market teams competitive, yet more than 3/4 of its benefits would flow to the large market owners, the ones whose businesses were already so profitable that they could afford to pay the higher salaries. Second, the owners refused to let the players verify the revenue figures. If someone told you, "I'm going to cut your wages 20% and tie them to a number you can't verify," how would you react?

During the strike, I heard lots of excuses for the owners' position -- and almost none of them made any sense. First came the jealous ones complaining about how much money the players make -- to which I respond, "overpaid compared to whom?" They're professional entertainers. As George Will wrote, nobody ever bought a ticket to see an owner. And nobody put a gun to an owner's head and forced him to pay Barry Bonds, or even David Wells, so much money." Then came what I call the "Field of Dreams" crowd: the ones with a romantic image of some bygone era in which players were so glad to have a major league contract that they never dreamed of asking for more money. These folks should read more history and less fantasy. Ty Cobb and Christy Mathewson were vice presidents of a short-lived players' union in 1913. Walter Johnson jumped to the Federal League, them jumped back when the Senators raised his salary. Joe DiMaggio held out. Even "Field of Dreams" itself revolved around players who committed the ultimate sin of greed by taking bribes to throw the World Series.

Get your head out of the clouds, folks...and while you're at it, give a reality shot to the ones who think that player salaries make ticket prices go up. Sorry, guys, but there's no relationship. At any level of player salary, a rational owner will price his tickets at whatever level brings in the most money. Of course these people should be happy now that the strike has devalued the product -- when I went to a Met game last month, $6.50 bought me a general admission seat, 50% off food and drink concessions, a postgame fireworks show and a free reserved-seat ticket to the future home game of my choice -- but I'm sure they've found something else to complain about.

Then come the fearful types, the ones who believe owners' perennial cries that unless salaries fall, half the teams in Major League Baseball will go broke. But if Major League Baseball clubs are such lousy investments, why do their values keep rising? No team has sold at a loss since 1973, when George Steinbrenner bought the Yankees from CBS. Even the Mariners, Padres and Pirates have recently sold at a profit. You and I haven't seen the owners' books -- but those purchasers have, and they concluded that even these franchises were worth $80 million or more. I think it fair to assume they don't plan to lose money forever -- if they wanted to do that, they could have just as much fun with no capital investment by climbing to the top of the tallest building in town and throwing fistfuls of $100 bills into the street below. Even during the middle of the strike, the owners charged $155 million for the Arizona and Tampa Bay expansion franchises -- over 60% more than the Marlins and Rockies cost. And those expansion teams still have to create farm systems and pay front-office people during the years before they start playing; if an expansion team in Arizona is worth $155 million, any existing team which relocated to Arizona would be worth at least that much.

Which brings me to the one argument for reform which does make sense: in baseball's current economics, teams in cities like Pittsburgh and Milwaukee may well have to move unless something's done to help them. Unfortunately nothing the owners have proposed will help them. Let's look at the owners' final luxury tax offer: a 50% tax on all payrolls over $44 million, beginning in 1996. At that tax rate, it would cost the Braves or Yankees $3 million to sign a player to a $2 million contract. At the very least, these teams will reduce their payroll substantially; most likely, they'll cut back to around the $44 million target level where the tax kicks in. Compared to Opening Day 1995 salaries, that would mean Toronto cuts $10.6 million from its payroll; the Yankees spend $7.4 million less; and the Braves save $6.1 million. The low-revenue teams receive a few million as revenue sharing, but most of it goes right to the bottom line: the players are still supposed to take money out of their own pockets and give it to George Steinbrenner.

But the really self-defeating part is the flip side of the luxury tax -- a salary floor affecting the poorer teams. The large-market teams demand a salary floor in return for revenue sharing. The owners' final proposal contained a salary floor of $29 million. Again using 1995 payrolls, this would force the Pirates to spend $6.6 million more on players, while they receive only half that amount in revenue sharing. Do any of the locals here believe that a fair labor settlement should leave the Pirates $3 million/year worse off than they are now? To listen to Bud Selig, small-market teams like his are teetering on the brink of bankruptcy -- yet his own proposal would force the Brewers to raise player salaries by nearly $9 million! Does Orlando need another car dealer?

But there is a solution which would help the small market teams compete -- one which would strengthen the entire industry without provoking constant labor turmoil. I propose that all teams share 30% of their locally generated revenues: 30% of the gate, 30% of local TV, 30% of luxury boxes and concessions. Gate receipts and concessions could be split directly with visiting teams; for TV contracts and luxury box leases, which cover the entire season, the money could be paid into a central pot which is then split 28 ways.

Right now the American League shares 20% of the gate, while in the NL visitors get a whopping 46 cents per ticket. Some cable money is shared, but no broadcast money -- and no money from luxury boxes and the like. The White Sox make over $22 million per season from luxury boxes and concessions since moving to New Comiskey -- a powerful incentive to blackmail local government into building stadiums at taxpayer expense by threatening to move.

This plan has several additional advantages. First, it’s self-adjusting: as teams build new stadiums or attract more fans, they automatically move from net recipients to net payers. Second, it’s based on revenues, not player costs, leaving each owner free to adopt his own strategy. A rebuilding team will always have a lower payroll; a good team with many talented players in their prime will have a higher one. Why should a team be penalized for investing in better players just because one of his competitors thinks he’s spending too much?

Third, a system of revenue sharing would bring greater accuracy in team financial reporting. According to Financial World, the Braves receive only $18 million/year in local media money -- this while airing over 400 hours a year of live network programming over WTBS! The Mets sell their TV rights to “Sterling Doubleday Enterprises L.P.,” an entity which exists solely to skim some of the TV money off the top. Fourth, revenue sharing would encourage teams to think and plan in terms of what’s best for the entire industry, not just for their own team. And fifth, the plan would strengthen competitive balance and improve overall industry profitability. Player salaries would almost certainly decline -- but in a rational manner where the benefits flow directly to those teams which most need assistance, rather than simply to make the rich teams even richer at the players’ expense.

Copyright © 1995 Doug Pappas. All rights reserved. Originally presented at the 1995 SABR convention.

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