Ok, that I feel the need to put this here is depressing, but since Deadspin released leaked finance information of teams receiving the most from revenue sharing showing minimal to decent profits, in this terrible age stupid people, the internet and local sports radio blew up. The world socialism was thrown around, and I got pissed. Not at the teams, but at the outraged. Do you think the Yankees would give up 12% of their revenue for nothing? That if a majority of teams didn't benefit it, would have let it continue? Well teams didn't. They allowed it to grow.
Clearly there had to be sound logic behind the plan. And there is. But in binging on articles about labor relations in sports, around 50, I kept getting frustrated by how they were describing the rational. I sampled a decent number of articles looking at the expected vs actual changes by the leagues. In free agency. In salary caps. In the franchise tag. What I found was a disparity in the data and their conclusions.
In baseball, without a salary cap, small market teams may be unable to keep up with big market spending. With baseball losing the war with the NFL and the NBA for popularity, losing small market teams hurts on multiple fronts. Even in the age of ESPN, NESN, and YES, local teams help generate more fan interest than if no team was there. The hardcore fans are already locked in. They're buying the MLB online package. They're buying merchandise. But in today's sports world those aren't who you need. You need casual fans. It sucks because, you know, they suck. But without there money, baseball loses a foothold in the area as the team struggles. Kids aren't interested in sub .500 baseball teams. Those kids go onto pick different sports, taking potential talent from baseball. Baseball ratings in key demographics are weak. Numbers don't like. Factor in the lack of LeBron or Manning like stars and you have a problem.
Revenue sharing has been the MLB's solution. Based on the premise that competitive balance brings in more fans, take a percentage of revenue from teams in large media markets, and distribute that pool to teams in markets producing less revenue. This does not mean give the Marlins $80 million of the Yankees money. But to simply say small market teams need to be competitive can be ambiguous at best, and misleading at worst.
When talking about competitive balance and revenue sharing, it should be noted there are 2 meanings of competitive balance.
1.The average difference in winning % from complete parity. Sports have, for the most part, depended on fan attendance to provide revenue. Yet if a team won 80% of it's games every year fans would lose interest and stop attending. There needs to be competitive balance. An this season, while Yankees may have more wins than the Blue Jays. However, as the odds that the Jays could win increase, interest on both sides. And if you look at their head to head record, it's much closer than the difference in winning percentage would suggest.
In basically every article I've found the max a team can win from season to season without hurting revenue seems to be between 60-70%. That's not to say that teams can't regularly be in that range or surpass it. But in a market with multiple sports, the excitement, interest, and revenue all depend on competition. I'm not debating those numbers, they sound right, the logic behind them is fine, congrats econ people.
Here's what I'm calling bullshit on way past where anyone has read. The case for revenue sharing wasn't to primarily to maintain that kind of competitive balance. Only an idiot would say the Braves winning every division title between 91 and 05, 5 NLCS and a World Series motivated revenue sharing. The competitive balance of the league wasn't weakened when from 95 til now the Yankees won 9 straight division titles, 7 ALCS titles or 4 World Series. They have 27 total and have won 2 in every decade except the 80s. Baseball, like all sports, likes it's dynasties. And these were fine. Much more 80s Lakers-Celtics than 60s Celtics. What they really mean is....
2.The ability of a team spending less to perform on par or better than a team spending more. Does a team maximizing all potential revenue and then using that revenue efficiently give them a chance to compete? Not just immediately but in a 5-10 year range. Even if you scout well, develop players in a way that staves off arbitration and free agency, and bargain buy free agents, can you win often enough so that local fans don't lose interest?
It's called the fickle fan. And despite the annoying bandwagon Yankee fans, they're not the problem. For there to be a shortage of Yankee fans big enough to hurt revenue, you'd need an act from Jesus. I'm praying he makes them go away, but unlikely. No we're talking about your Brewers, Rays, Mariners, Marlins, and Angels. If 3 years go by with no real sign of promise or improvement an already limited revenue supply weakens. To survive you need to scout talent, time call ups, and bargains. For all the talk about Moneyball it was the intentionally and well timed, call up of 3 elite pitching prospects when their output was highest while paying them the least.
What motivated the MLB to institute revenue sharing was that even if you ran your team perfectly, your chances of competing were getting a lot slimmer. Specifically after the 94 strike. There are clear economic advantages to being in a big market (They're coming real soon you patient, curious bastard). But throughout the history of baseball, you could get around those. So clearly something changed, right?
Revenue sharing was meant to correct what was becoming a clear trend. Costs, media coverage, and expansion were changing the economic model of sports. In 99 all 8 playoff teams ranked in the top 10 in spending. From the end of the strike in 94 til the end of the decade, only 1 team that wasn't in the top half of spending made it to the playoffs. With no salary cap to subdue team payroll and the gap between payroll at the top and bottom of the league growing, the nature of the sport was changing.
Teams in large markets have what's called less elastic revenue. Even when the Yankees missed the playoffs they were still filling 90% of their seats if not selling out. Drop offs in performance hurt them less due to their higher population, higher per capital income, etc. National media made this worse. New York transplants and the casual fans watched their national TV games. They went to games when the Yankees came to town. They bought all those damn hats. It gave them even more resources.
I don't mean to imply the Yankees were at the bottom. But the extra income they got from being a 'national' team allowed them to shrug off mistakes that 10 years would have put them below .500. Pavano, Big Unit, Giambi, Zombie Clemens(aka Baseball Favre). When you spend close to a billion in half a decade and come away with a few division titles, ALCS title, the biggest collapse in playoff history, and a depleted farm system? You need more than luck to not end up like the Knicks. And it wasn't luck.
Sports economics had been based on conventional theory based on a two team model. Each team had revenue and cost. Revenue was determined by how much each win brought in, how big your market was, and how much profit was likely to be made give your location. Cost was based on winning percentage, market size, and how much it cost you to get one win. This was an over simplification, but before large markets it wasn't that bad. It wasn't perfect, and it definitely doesn't fit now.
The growth of media allowed the big market teams to remove the ceiling on revenue. Teams with history, like the Braves, Yankees, Red Sox, and Dodgers could essentially sell their fandom across the country now. Through merchandise to transplanted New Yorkers or bandwagoners. TV gave teams the ability to reach out to the casual fan like never before. Teams became brands in ways small market teams couldn't match. I mean what the fuck does "Red Sox Banking" courtesy of Bank of America mean? Fandom became a commodity.
To exacerbate this problem teams like the Yankees and Red Sox took primary control over their broadcasting. NESN and YES showed every one of the teams games. The revenue from ads go to the teams. They not only get revenue from the ad shares, but as the team performs above expectations and more people watched or subscribe to the networks more revenue comes in. The Red Sox and Yankees pocket all of it. That revenue, when teams are gaining steam, cannot be tapped as efficiently by small markets. The majority of teams in markets unable to create their own networks sign contracts with Fox that do not adjust to higher ratings.
And the growth of sports and their coverage changed the way fans responded to parity. Teams set ticket prices based on expectations for that season and rarely change midseason. Since teams raise prices the next season, fan's capitalize when expectations are surpassed, paying less per unit of team quality. By looking at the price of tickets over team winning percentage you get a quality adjusted ticket price. To predict how an increase in parity would have changed revenue quality-adjusted prices are used to make projections. Starting sometime in the 80s the projected results one year after the change showed a sharp decline in revenue. Not just for the team readjusting to higher tickets, but the whole league. Revenue projections didn't grow until 3 and 5 year projections for the league. Despite all previous trends and models that showed growth from under performing teams coming back towards the middle, now it caused a drop. At the end of the 90s this effect had only become clearer.
So now you have small market teams getting smaller growth from better performance. You have the already existing disadvantage to big market teams, lower ticket sales, difficulty drawing free agents, and inability to keep up with rising salaries and payrolls. The branding of teams brought in new revenue streams to large markets that small market teams either couldn't get or couldn't match. Oh, and the inability to capitalize on better than expected performance without raising ticket prices was essentially erased as more and more of the country watched games. And the billion dollar sports media industry giving free advertising, maintaining interest throughout the long season, keeping the attention on teams that will bring in the most casual fans. Which will in turn add to the viewers and subscribers to NESN or YES that rake in more profit that other teams can't, all while hurting the value of the small market teams they're beating.
Revenue sharing began in 96. Through two raises in revenue sharing, we arrived at our current system in 2002. Teams with the highest revenues contribute to the pool. Distribution of the pool among teams depends on their market size and their revenue shortfalls. The Rays serve as a good model for the effects of revenue sharing. Despite bringing themselves into contention, the larger external forces often leave small market owners facing out of pocket spending to make up for losses.
The revenue sharing data leaked, for all the controversy proves that it's somewhat working. The data on the Rays shows how cultivating young talent can turn a team around. In 2007 they turned a profit of $11 million with a payroll of $24 million. The team was stacked with talent and contention seemed possible. When payroll went up to $43 million in 2008, the Rays still managed to turn a profit of $4 million. In these years, the Rays received around $35-40 million in revenue sharing each year. While the profit leaves something to be desired, the deep run into the playoffs was supposed to energize the fan base the way the Bucs turnaround in the 90's and the Lightning's Stanley Cup run.
Unfortunately any growth in the fan base merely made up for the drop off due to a growing recession. Florida's terrible unemployment has led to a drop in attendance in all Florida sports. Payroll for 2009 was $63 million and the payroll this season is $73 million. Even with the unlikely increase in league revenue from the big market Yankees winning the World Series it's doubtful they'd get much more than the $35-40 million they were.
Preseason rumors weren't exactly cloudy. The Rays have to be bleeding money. Payroll next season will be cut. Conservative predictions of $10-20 million can't have been based on no increase in attendance despite an assured playoff spot and contending for the division title. Rumors of cutting payroll in half seem pretty reliable.
It's hard to see what else the Rays could be doing differently. They currently spend $20 million on player development. No other team in revenue sharing spends as much, and it shows. Careful timing bringing up developing players has maximized team output while staving off arbitration. Evan Longoria's playing for a little more than $500,000. Attendance hasn't changed, ticket prices have barely gone up, and long term TV/radio contracts are unlikely to be renegotiated. The best chance to increase TV revenue would be to pair up with a local team and convince Bright House or DirectTV to carry it, but who? The Lightning owner has ties to the Red Sox and has no reason to give a team already competitive at half the payroll more sources of revenue. Any deal that could be worked out wouldn't exactly solve the problem either. Try convincing anyone that the high Rays and Lightning SunSports ratings that fans don't have to pay for will translate into subscriptions in any way NESN or YES.
Has revenue sharing worked? Yes. Absolutely. That the MLB made it through 2002 without contraction proves it. The Twins have a new stadium and the dominant force in the division. The Angels has prospered. So have the Rays for all the impending hardships. A new stadium looks less and less likely. There now exists a blue print for small market teams to thrive.Even when used executed incredibly well market forces can still cause regression. Going forward small market teams must seek out new innovations in talent development to exploit market inefficiencies.
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