Economics of Baseball: Revenue Sharing Major League Baseball is the highest level of professional baseball in the United States and Canada. The organization is comprised of a partnership between the National League, founded in 1876, and the American League, founded in 1901. There are currently 30 teams in Major League Baseball, 14 in the American League and 16 in the National League. "Since 1903, the best of both of these leagues have met in the World Series, with the winner of the best-of-7 series being declared World Champion" (Burnett). When the World Series ends, baseball's business season starts.
Receipts are tallied to determine how much the teams that earned the most will have to pay the teams that have earned the least. Large market teams like the New York Yankees, Boston Red Sox, Los Angeles Dodgers, and the Chicago cubs "have an overwhelming advantage over smaller market teams which created an uneven playing field" (Alice). Revenue sharing gives small market teams like the Kansas City Royals, Tampa Bay Rays, Florida Marlins, and the Pittsburgh Pirates, a better chance at success by providing more resources to improve their roster.
In 1999, a "blue ribbon" panel commissioned by MLB found that "baseball franchises traditionally generate and retain a large majority of their revenue locally" (Jacobson) rather than nationally, causing a large and growing revenue disparity. Vince Gennaro, author of Diamond Dollars: The Economics of Winning In Baseball, found that 70 to 80 percent of a team's total revenue is contributed to local revenue. Local revenues consist of gate receipts, local television, radio and cable rights fees, ballpark concessions, advertising and publications, parking, suite rentals, postseason, and spring training.
Revenues that are retained locally are a problem because all teams participate in the same national labor market. MLB has no salary cap; therefore, it is the teams’ decision how much they spend on payroll. The teams with the largest revenues have higher payrolls and are able to obtain and make offers on players that teams with lower payrolls cannot. As big market teams began setting up their own sports networks on cable, the revenue disparities accelerated. The clubs started profiting directly from subscriber fees and advertising sales. At the same ime, other clubs began to benefit from building new stadiums. According to the Report of the Independent Member of the Commissioner's Blue Ribbon Panel on Baseball Economics, the amount of a club's payroll is determined by the amount of the club's revenue and it has been argued that "the size of a club's payroll is the most important factor in determining how competitive the club will be" (Elanjin and Pachamanova). It showed in just five years the ratio of local revenues between the top seven clubs and the bottom fourteen clubs more than doubled from 5. :1 in 1995 to 14. 7:1 in 1999, because of fast growth rates on already large revenues (8). The ratio of payroll spending between the highest and lowest clubs went from 2:1 in the 1980s to 3. 5:1 in the 1990s (9). From 1995 to 1999, no clubs from the 14 lowest payroll-spending teams won a Division Series game or a League Championship game and no clubs from the bottom 23 clubs won a World Series game (Levin, Mitchell, Volcker, and Will p. 2-9). All of the World Series Championships have been won by one of the top payroll spending teams.
The conclusion was drawn that these problems were getting worse and unless the MLB took action, the problems would remain severe. They would have to break more than a century’s worth of tradition, "to ensure baseball's broad and enduring popularity, and to guarantee it's future growth" (Levin, Mitchell, Volcker, and Will p. 13). The panel recommended that the league should impose revenue sharing, a competitive balance tax, central fund distributions, a competitive balance draft, reforms to the Rule 4 Draft, and should utilize franchise relocation. Revenue sharing money comes from two pools.
The first is central funds revenue, which comes from national television and radio deals, MLB Advanced Media, merchandise sales, and the MLB network. The other is net local revenue, which comes from ticket sales, concessions and media deals that each club negotiates individually. "Against that money, each club is hit with a marginal rate of 31 percent, which is applied across the board to each of the 30 clubs" (Brown). In October 2006, the MLB and the players association reached an agreement that requires all teams to pay 34 percent into a common pool, which is than split evenly among all 30 teams.
The Competitive Balance tax, also known as the Luxury Tax, penalizes teams with high payrolls by making them pay a tax rate to the MLB central fund, based on how far they go over their payroll ceiling on opening day. Only four teams have broken the threshold since it was put in place in 2003, the Yankees, Red Sox, Angels and, Tigers. The Yankees have “exceeded it every year, paying $25,689,173 last year, a high of $33,978,702 in 2005, and a grand total of $174,183,419 over seven years” (Brown). As of 2010, clubs are taxed if they exceed $170 million in total player payroll.
Teams who exceed this amount get a further “repeat offenders” penalty, which raises the percentage they pay to 40 percent. In 2009 alone, $433 million of wealth was transferred from high to low revenue teams (Brown). Major League’s revenue sharing agreement does not dictate what the recipients must do with the money once it is received. Simply stated by Baseball's collective bargaining agreement, all that is required by teams is that they must use their revenue sharing money "in an effort to improve its performance on the field".
This is so vague; the money can virtually go anywhere, even the club owner's pockets. The main problem is that the teams receiving payments use them as their primary source of income. This allows them to keep their payrolls low but continue to receive large revenue sharing payments. Two of the biggest offenders of this are the Florida Marlins and the Tampa Bay Rays. In 2003, the Marilins won the World Series with a team of "great young players" and "talented veterans" that included Josh Beckett, Brad Penny, Mike Lowell, and Ivan Rodriguez. That year, the team had a payroll of $49. 5 million (Cohen). Rather than keeping the players that made up that payroll, they traded Penny and Beckett for much cheaper players, and lost Lowell and Rodriguez to free agency. "By shedding these stars, Florida was able to cut its payroll down to $14. 9 million in 2006, which is less than 20% of the Major League average of $78 million. It was also less than half of the $31 million in revenue sharing dollars the team received that year. " Instead of using the money to buy or retain talented players, the owners used it as part of the teams $43 million profit in 2006 (Ray).
The most extreme example of revenue sharing offenders has been the Tampa Bay Rays. From 2002 to 2006, the Rays received an average of $32 million a year in revenue sharing payments (Ray). In 2006, the team had a payroll of $35. 4 million (Cohen), $42 million less than the 2006 league average. "It won only 38 percent of its games and filled less than 40 percent of its seats for home games... and collected more than $30 million in revenue sharing" (Lewis). Other teams, like the Pittsburgh Pirates and the Kansas City Royals, also received significant revenue sharing money but have kept their payrolls low.
In Contrast, teams like the Colorado Rockies, have not been so frugal with their money. They received $16 million in 2006 and increased their payroll by around $15 million the following season (Lewis). Since 1999, millions of dollars have been transferred from richer big market teams to poorer small market teams in an attempt to create competitive balance and allow all 30 teams to share in the economic advantages associated with playing in big market teams; a large fan base, lots of press coverage, lucrative cable television contracts, and high payrolls and revenues.
However, baseball doesn't force revenue sharing recipients to use the money on payroll. All that is required is that the team uses the money to improve the product on the field. The system hasn't restored any true competitive balance for the league since, generally speaking, we see the same teams in the World Series year after year. The stark reality is that lower payroll and smaller market teams can make more money by losing than they can by winning because of revenue sharing.
So long as the rules and regulation in Major League Baseball remain lax and enforcement stays nonexistent, teams will continue to take advantage of the system. Work Cited Alice, Lynette. "Examining why MLB revenue sharing doesn't work. " Helium. 2002-2010 Helium, Inc. 10 Dec. 2010. Brown, Maury. "Revenue Sharing Is Making An Impact. " Baseball America. 2 Mar. 2010. Baseball America, Inc. 10 Dec. 2010. Burnett, Dashielle. "Major League Baseball. " Business Insider. 6 Dec 2010. Business Insider, Inc. 11 Dec. 2010. Cohen, Gary.
The Baseball Cube Statistics. 2002. 17 Dec. 2010 Elanjian, Michael, and Dessislava A. Pachamanova. "Is Revenue Sharing Working for Major League Baseball? A Historical Perspective". The Sport Journal. Volume 12. Number 2. United States Sports Academy, 2009. 8 Dec. 2010. Gennaro, Vince. Diamond Dollars: The Economics of Winning in Baseball. Hingham, Massachusetts: Maple Street Press, 2007. Jacobson, David. "MLB's Revenue-Sharing Formula. " BNET - The CBS Interactive Business Network. 14 July 2008. CBS Interactive. 8 Dec. 2010.
Levin, Richard C. , George J. Mitchell, Paul A. Volcker, and George F. Will. "The Report of the Independent Members of the Commissioners Blue Ribbon Panel on Baseball Economics". The Official Site of Major League Baseball. MLB Advanced Media, L. P. , July 2000. PDF. 11 Dec. 2010. Lewis, Michael. "Baseball's Losing Formula. " The New York Times. 3 Nov. 2007. 11 Dec. 2010. Ray, James Lincoln. "Baseball's Revenue Sharing Problem: Major League Baseball Hurt By Teams Who Don't Spend Money On Players. " Suite101. 12 Nov. 2007. 11 Dec. 2010
