Revenue Sharing | Disciples of Uecker

Disciples of Uecker

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Revenue Sharing

By on December 7, 2015

Yahoo Sports covered an intriguing Forbes report: MLB revenues increased for the 13th consecutive year, this time increasing by approximately $500 million to $9.5 billion leaguewide. Incidentally, this increase is not necessarily anything to write home about after the MLB raised revenue by $1 billion between 2013 and 2014. Based on previous reports and expectations that players earn approximately 52% of revenue, that’s a healthy increase of at least $750 million between 2013 and 2015 (theoretically, if that money was spread equally among 30 teams, basically every single team in the MLB could afford another superstar contract). Incidentally, Fangraphs has reported that the players’ share of revenue is consistently falling, which raises an intriguing question: as MLB revenues continue to skyrocket, salaries have not kept pace, and players may actually be underpaid.

Yet, not every team can afford more than one elite contract, and incidentally, even as revenue continually increases, some of the biggest spenders in the MLB are running relatively stagnant payrolls. One could largely suspect that the revenue tax is actually biting into teams’ spending levels, since it was set at approximately $189 million for 2014-2016. Only (approximately) two teams reached that level in 2015 (depending on how “end of season” payroll data changes figures), and only nine teams came within 33% of the luxury tax threshold.

  • Two of the top 10 teams are not spending significantly more than they were in 2012-2013 (given the game’s growth).
  • Four of the #11-20 teams are operating at payroll levels that hardly match payrolls from 4-7 seasons ago.
  • Four of the #21-30 teams are operating at payroll levels below (sometimes significantly below) payrolls from more than a decade ago.
  • Even the Brewers, with their highest payroll in club history, are only operating 6% beyond their 2012 payroll.
Team Opening Day Payroll (Millions) Note
Dodgers $271.609 Three consecutive $200M+ payrolls
Yankees $217.759 Operating at only 95% of 2013 payroll
Red Sox $184.346 18% increase over 2014 payroll / Operating only 5% over 2012 payroll
Giants $173.179 Four consecutive $130M+ payrolls / 16% increase over 2014
Tigers $172.792 Eight consecutive $100M+ payrolls
Nationals $162.015 15% increase from 2014
Phillies $146.890 Five consecutive $140M+ payrolls
Angels $146.342 Entire decade of $100M+ payrolls / five straight $130M+
Rangers $141.734 Four consecutive $120M+ payrolls
Blue Jays $125.916 Three consecutive $100M+ payrolls
Mariners $123.226 Ar least 36% increase from 2014 / Operating only 3% above 2008 payroll
Cardinals $122.067 Five consecutive $100M+ payrolls
Cubs $120.337+ Only operating at 90% of 2011 payroll level
Orioles $118.976 Highest payroll since turn of century
White Sox $118.619 Operating at only 98% of 2008 payroll
Reds $115.374 Third consecutive $100M+ payroll
Royals $112.857 AT LEAST 20% increase over 2014 payroll
Padres $108.387 Highest payroll since turn of century
Twins $108.263 Operating at only 96% of 2011 payroll
Brewers $104.237 Eight consecutive $90M+ payrolls
Mets $101.334 Operating at 71% of 2011 payroll
Braves $97.086 At least 13% decrease from 2014 payroll / Operating at only 92% of 2003 payroll
Rockies $97.070 Highest payroll since turn of century
Pirates $90.053 At least 25% increase over 2014 payroll
Diamondbacks $88.187 Operating at only 86% of 2002 payroll (!!!)
Indians $87.997 Operating at only 94% of 2001 payroll (!!!)
Athletics $83.889 Operating only 5% above 2007 payroll
Rays $75.794 Second highest payroll since turn of century / Operating only 4% above 2010 payroll
Astros $72.464 Operating at 70% of 2009 payroll
Marlins $69.032 Second highest payroll since turn of century (!!!)

Payroll data is from Cot’s Contracts. Opening day payroll is the most reliable data available from the 2015 season thus far.

Why is it a big deal that teams like the Indians and Diamondbacks are operating at 86%-94% their 2001-2002 payrolls? MLB (adjusted) revenue for those seasons averaged $4.77 billion. Based off of a basic 50-50 revenue split between labor and ownership, those teams had excellent 2001 and 2002 payrolls. The average MLB payroll increase on this scale, from 2001 & 2002 to 2015 would be approximately $78.3 million per franchise. Granted, one can understand that these markets are not necessarily large markets, and have had their own struggles, but there is a serious question whether (a) inequality is increasing as MLB revenue increases, or (b) small market teams are sitting on revenue as it increases [or (c) some combination of the two]. (In this context, the Brewers’ payroll increases of approximately $54 to $65 million from 2001 & 2002 to 2015 appear to be inline with the industry’s growth).

Judging from MLB payrolls, players are only receiving 42% of revenue (by considering “payroll” to be the players’ share in “revenue”); in fact, if players were to fairly receive 50% of revenue, payrolls are approximately $1 billion short (the payrolls above roughly round up to $3.95+ billion, assuming approximately $120 million in midseason payroll additions beyond opening day payrolls). Cot’s Contracts includes salary bonuses and deferred compensation in their yearly payroll totals, so the $3.95 billion figure is fairly accurate in considering those alternative forms of compensation; the only remaining question is how to consider international spending, playoff shares, draft bonuses, and other forms of potential compensation as revenue for the players (for example, amateur spending has exploded in international markets, leaping from approximately $47 million in 2010-2011 to $160 million in 2015. The amateur draft is much less “potent” a market, with spending levels capped around $220 to $230 million with austere penalties. Merely considering bonuses, MLB teams spent approximately 4% of 2015 revenue on amateur players).

Beyond the issue of whether MLB players are justly compensated, there are several problematic elements of MLB payrolls:

  • MLB payrolls, on the whole, are nowhere near an average of $130 million per team (based on $3.95 billion / 30 teams). The MLB median payroll of approximately $116.997 million is more than one impact salary shy of that $130 million mark.
  • MLB payrolls were nowhere near the average of $164.667 million per team suggested by a “true” sharing of revenue between owners and players (if ownership and labor split revenue 50:50). Only the Nationals, Tigers, Giants, Red Sox, Yankees, and Dodgers came close to or surpassed that payroll level.
  • The Dodgers and Yankees account for approximately 12.6% of MLB payrolls (despite serving as 6.7% of the MLB).
  • The top nine MLB payrolls account for 42% of MLB payrolls (despite serving as only 30% of the MLB).
  • Teams like the Astros do show that TV contracts do not always deliver “true revenue” in some cases, as carriage fees and other issues can sometimes deliver revenue severely lower than the sticker price.
  • Teams like the Mets and Cubs were working through various ownership issues that means their payrolls may have been artificially inflated below TV revenue (or, that their TV deals have yet to maximize market potential).
  • Twenty-One teams operated below 67% of the luxury tax threshold, suggesting that the measure does not punish large markets nearly enough as it should (for it clearly does not even come close to measuring the accurate payroll potential for the vast majority of the league).
  • Even worse, 30% of the league is operating payrolls below $100 million (53% of luxury tax threshold), including four teams operating below previous payroll capacity and two that have yet to surpass 5-8 year old payrolls by 5% (given the growth in the league, this raises a serious question about distribution of revenue sharing, and also competitive balance).
  • Cut in a different manner, at least 12 teams may be operating payrolls that are artificially deflated, even after considering luxury tax and market constraints.

It is intriguing to think that, in some sense, MLB players are underpaid; in some sense, 13 consecutive years of revenue increases have not necessarily efficiently distributed growth across the league (in terms of competition via payroll). However, investigating the application of revenue to payroll suggests that even in the Moneyball era, there is more payroll justice to be had in the form of revenue sharing and luxury tax provisions.

***

Moneyball in this sense is a doubly dangerous strategy: it can artificially deflate salaries in some sense, as even big market teams recognize the importance of shifting to lower-cost, controllable amateur talent to exploit market inefficiencies (or market enabling realities, such as MLB’s toothless International spending punishments). Yet, even as smaller market teams can successfully use these types of organization-wide strategies, they must fight tooth and nail with larger markets who can use Moneyball and then decide, at the end of the day, that they can still afford Clayton Kershaw or Prince Fielder or Adrian Beltre, etc. Ironically, in this sense, the Moneyball era is arguably more anti-labor and more anti-small market in its mature form than previous decades during the free agency era.

***

If you’re not inclined to think of this as an issue, consider this: even in their highest payroll season, the Brewers fell behind the league average payroll by about as much as a pitcher like Zack Greinke would have cost from 2013-2015. This is not simply an abstract example: had Milwaukee opted to keep Greinke after the 2011 trade, thanks to revenue sharing that allowed the club to carry at least two elite contracts (Ryan Braun‘s being the other), they would have completely changed their base of their rotation and perhaps their competitive outlook. It is painful to think, in some sense, that the MLB’s revenue situation constantly leaves the Brewers at least one elite contract behind the MLB: even in an era where “spending big” need not necessarily mean everything, having no ability to even offer more than one elite contract is indeed an inefficiency and competitive constraint.

On the other hand, even as one can argue that a team sinking money into Dominican Academies (which can be crucial and even humane, given the previous conditions international prospects faced), amateur international signing bonuses, minor league development, and the draft is a necessary organizational strategy for a team like Milwaukee, that strategy places revenue into anti-labor lottery tickets. When a team like Milwaukee is gambling on amateur talent, they are gambling on the chance to underpay a player for several seasons (hopefully an elite player, too, like Orlando Arcia, or maybe Monte Harrison or Demi Orimoloye or Gilbert Lara down the line). This is a brutal reality for a small market club that cannot afford to compete for elite MLB contracts, but still faces the prospect that they are flushing revenue into a giant crapshoot.

***

Throughout Commissioner Rob Manfred‘s tenure, the MLB has taken on an almost absurdist “reform” bent: make the game more exciting for youngsters, make the game shorter, improve the pace of play, ban fielding shifts, reevaluate Pete Rose‘s standing in the game, evaluate the strike zone, evaluate an International Draft, etc. As the next Collective Bargaining Agreement comes due for the MLB and its Players Association, Manfred’s biggest challenge will be the inequalities between large and small markets, which have somehow weathered two decades after few solutions since the 1994 strike.

That strike first hinted that small market owners can indeed add a dimension to the battle beyond the common players-versus-owners melee. Now, with MLB revenue taking the form of new marketing and licensing opportunities, and media potentially navigating to the Internet from Cable TV, the Commissioner must ensure that the next CBA is one that completely levels the playing field for teams. There is no sense pretending any longer that the luxury tax and revenue sharing are helping teams like the Brewers keep pace with the Dodgers. Big market clubs like the Dodgers can be analytical, they can sink money into elite veterans, they can gamble on qualifying offers, they can blow past their International spending limits with no real repercussion, and they will still have enough money to sink into their drafting strategies. Milwaukee can only afford a couple of those strategies.

It’s all well and good to cite Moneyball strategies, but true economic reform for the MLB could improve the ability of each team to spend revenue at the MLB level, and perhaps change the nature of the gambles they need to make in order to acquire talent.

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