SABR XXV PRESENTATION --
6/16/95
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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