Talkin' Baseball - With Three Economists and a Lawyer

Talkin' Baseball - With Three Economists and a Lawyer

by

Warren Corbett

{Ed. note: Mr. Corbett, a business reporter in Washington, D.C., attended the April 25, 2003 Brookings Institution forum entitled "Are Baseball's Business Practices Ruining the Game?". Here is his account of the proceedings, which he has graciously made available for posting on Doug's Business of Baseball Pages.)

Contraction II - coming to a ballpark near you?

It might happen, says the noted sports economist Andrew Zimbalist, author of two books about the business of baseball: "Baseball is now thinking about the possibility of eliminating the Montreal Expos completely."

Under this scenario the Expos would continue barnstorming to different "home" cities until the current Collective Bargaining Agreement expires after the 2006 season. Then, according to MLB's agreement with the Players Association, contraction is back on the table and the union won't try to block it.

Zimbalist, a professor at Smith College, spoke at an April 25 seminar in Washington sponsored by the Brookings Institution, which published his new book, May the Best Team Win.

Some familiar baseball names joined him on a panel: Henry Aaron - no, not that one - this Henry Aaron is a senior fellow in economic studies at Brookings; Clark Griffith, returning to the scene of his father's crime (the Minneapolis attorney is the son of Calvin, who moved the Washington Senators to Minnesota in 1961); Edward Gramlich, a member of the Federal Reserve Board of Governors who was staff director of the economic study commission formed by MLB and the union after the 1990 contract negotiations; and Stefan Fatsis, who covers sports business for The Wall Street Journal.

Zimbalist sees two serious roadblocks in the way of baseball's plan to find a new home for the Expos in 2004. Peter Angelos's threat to fight infringement on his claimed territory is not one of them.

In the current economic climate, Zimbalist said, baseball may not be able to "extort" a sweetheart stadium deal from cash-strapped governments in Washington, Northern Virginia or Portland, Oregon.

The other impediment is the racketeering lawsuit brought by the former minority owners of the Expos, who charge that MLB conspired to undermine the value of the franchise. As long as the lawsuit is pending, a judge might block the sale of the Expos.

In the face of those difficulties, he said, "Baseball might instead decide that contraction of the Montreal Expos, rather than relocation…is the desirable option."

He said MLB is playing the monopolist's "old game - artificially reduce the number of franchises in order to make franchise values go up." If the Expos don't move, that would leave Portland, Washington and Northern Virginia as possible destinations for other ailing franchises, he added.

And even if the other recent contraction candidate, the Minnesota Twins, can be rejuvenated by their on-field success, new candidates may emerge to join the Expos in extinction by 2006.

Zimbalist's solution to the contraction threat is not new: Congress should repeal baseball's exemption from antitrust laws. He admits he is not optimistic; Congress has considered the issue sixty times since 1950, and has passed only one minor and, he says, ineffectual change: the Curt Flood Act of 1998, which removed the antitrust exemption as it applied to labor negotiations - a change that team owners supported.

"It's time for Congress to stop being a bunch of wimps about major league baseball," he said.

Most economists agree that Congress should limit the unique legal quirk that allows what they call "the baseball cartel" to do what would be illegal in any other business. Clark Griffith does not.

Griffith, chairman of the sports law division of the American Bar Association Forum on Entertainment and Sports, says MLB is not a cartel, it's a joint venture. Each team's value depends on the others. He quoted one judge who said, "A league with one team would be like one hand clapping."

In a joint venture, Griffith said, "everybody in it is protecting the central core, which is the production of games…The value of a team is based 100 percent on its membership in the league." The Yankees may appear to have more talent than any other two teams, but 162 games featuring only the Yankees - the Torres against the Zimmers - would not draw big crowds.

If the antitrust exemption were repealed, Griffith acknowledged it would likely trigger an avalanche of litigation that would keep his fellow lawyers fully and profitably employed. But he argued that courts would treat MLB as "a single entity," with the teams considered to be like divisions of a single corporation, bound together by their mutual dependence.

There is a difference, though, between MLB - where each team is independently owned - and true single-entity leagues such as the Women's United Soccer Association and, until recently, the WNBA - where all teams are owned by the league.

Gramlich, the Federal Reserve governor, said he favors repeal of the antitrust exemption, but is not sure it would make much difference in baseball's operations.

He pointed out that there are more similarities than differences between MLB and professional leagues in football, basketball and hockey, which are subject to antitrust laws. All the leagues have about the same number of teams; no new league has arisen to challenge the NFL, NBA or NHL in more than twenty years; and competitive balance is about equal in all the sports. "The one-third of teams in big markets won two-thirds of the championships in all sports in the 1990s," he said.

"The economist's dream," as Gramlich put it, is a free market in baseball. Teams would be allowed to change cities at will and new leagues could spring up to challenge the existing monopoly.

In the economist's dream, one or two teams would move into northern New Jersey, siphoning fans and revenues away from the Yankees and Mets, and - Voila! - the free market would beget the Nirvana of competitive balance.

Zimbalist subscribes to that theory. Aaron - the Brookings Aaron - argues that MLB could move teams into the New York market right now, if it wished. Competitive imbalance - revenue imbalance - "is a creation of the owners," he said. "They have the power to fix it."

Gramlich says the economists' magic bullet is too simplistic; the "headstart factor" would give an overwhelming advantage to established teams - Yankees and Mets - over the interlopers. He notes that the Angels, after more than forty years, have never approached the popularity of the Dodgers in southern California and the A's have never caught up with the Giants in the Bay Area market.

The revenue sharing provisions of the new Collective Bargaining Agreement won't cure competitive imbalance, in Zimbalist's view. He says the sharing formula means the low-revenue teams lose nearly fifty cents for every additional dollar of revenue they gain.

For example, if the Devil Rays sign a $10 million free agent and he improves their revenue by $12 million, they lose $6 million in revenue sharing payments; the net loss from that free agent signing is $4 million.

"It's very unlikely, it seems to me, that the bottom teams are going to be motivated by (revenue sharing) to improve their teams," he said.

Griffith described revenue sharing this way: "Big teams pay small teams so they can compete with middle teams." He said that squeezes the middle-market teams while leaving the Yankees, Mets, Red Sox and Dodgers still standing at the top of the money pile.

And that's the way the Players Association wants it, he said: the union opposes revenue sharing because it wants the big-market teams to retain the ability to spend on big contracts.

(Griffith, by the way, is a somewhat charming throwback like his father and namesake great-uncle. He urges us to remember "the ancient nature" of Major League Baseball, a business that was established in 1876 and underwent its last major change in 1903, when the American and National Leagues agreed to an equal partnership. He says today's owners are struggling to bring the industry up to date and doing a good job of it. Besides, he added - and I thought I saw the previous generations of Griffiths smiling over his shoulder - "the irascibility of its owners is one of its charms.")

So: what to do?

Aaron's prescription: market baseball as skillfully as the NBA and NFL have marketed their sports. Before that can happen, he said, the business must end "the chaos and mutual backbiting" among owners and between owners and players.

Gramlich, pointing to the success of the NFL with its sharing of all national TV revenues among teams, wants more revenue sharing in baseball.

Zimbalist agrees in part: "The biggest structural problem baseball has right now is the fractious ownership." He said the fight-to-the-death labor negotiations are really a three-way negotiation: big-market owners versus small-market owners versus players.

Part of his solution is not contraction but expansion: "One good way to excite America's youth about baseball is to bring the game's stars to more of the nation's top cities. Let the ten-year-olds in Washington, D.C., Portland Charlotte, Sacramento, and elsewhere seen Barry Bonds, Pedro Martinez and Randy Johnson play in person."

In his book he trots out the usual census figures to show that the eligible population of ballplayers - now including Latin America, Asia and Australia - could support additional teams.

Zimbalist sees some forces at work that might help reduce the revenue gap between rich and poor teams. That gap has been driven by skyrocketing local TV and cable revenues. But now, he says, the recent standoff between the Yankees' YES Network and Cablevision is being played out in other markets. Cable operators, who control the distribution channel, are balking at the fees - up to $2 per subscriber - being demanded by regional sports networks who own the programming, while the regional networks insist that their games be included in the basic cable package, not as premium services like HBO. He suggests the growing resistance of cable operators may shrink the revenue stream that enriches teams and their regional networks in the large markets.

He says the owners' one experiment in pure socialism may prove to be their salvation. MLB.com, now offering a variety of streaming audio and video products for a fee, will generate net profits of $50 million this year and perhaps $80 million-$90 million next year, by his estimate. That money is shared equally among the teams.

Zimbalist points out that Commissioner Selig loosed the contraction monster just as the game was showing signs of recovery from the 1994 strike: baseball revenues grew at an annual rate of more than 14 percent a year from 1996-2001.

Last year, with contraction and a potential strike making headlines, attendance dropped by 6 percent. He said attendance is down by 8 percent in the opening weeks of this season.

We should know soon whether Zimbalist's contraction scenario is a real possibility. MLB has said it wants to choose the Expos' new home by July in order to move the team next year. Recently, however, some anonymous MLB officials have been backing away from that; one said it's 50-50 whether the relocation will happen in 2004.

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