The Captain's Blog

Who pulled the plug on baseball’s hot stove? With so many prominent free agents still out in the cold, theories as to why have become more common than news of a big name signing. Some have even whispered “collusion”, while others have suggested the game is in the midst of a fundamental financial shift attributed, at least in part, to failures of the MLBPA in recent CBA negotiations. Have the business dynamics of the game really changed dramatically, or is the emerging conventional wisdom simply overacting to an off season marked by extenuating circumstances?

One popular narrative is based on the notion that the MLBPA fumbled the most recent CBA negotiations, resulting in a dramatically diminishing share of industry revenue. The basis for this argument is a comparison of player salaries reported by various sources to the gross revenue number MLB has released to the media over the years. As the aforementioned link notes, “After peaking at a little more than 56% in 2002…player payroll [in 2015] accounts for just over 38% of MLB’s total revenues, a figure that just ten years ago would have been unimaginably low.” Framed in that context, it’s easy to see why so many think alarm bells should be going off at the MLBPA. However, the comparison is based on flawed data, and so, naturally, it yields a flawed conclusion.

For starters, taking payroll data from a multiple unverified sources is unreliable, especially when AP reports on the official payroll numbers every year. What’s more, payroll data culled from these sources (USA Today and Cotts Contracts, in this instance) do not include other streams of compensation, including benefits and post season shares. Finally, the gross revenue figure, which isn’t exact, is not broken down into sources, making it impossible to determine what would be considered baseball related, an important consideration when comparing the percentage of revenue shared by MLB players to their counterparts in the NFL, NBA and NHL…leagues that share revenue only after factoring in exclusions or segmentation (*see appendix paragraph for further elaboration).

2017 Players’ Share of MLB Revenue

Notes: Revenue is net of stadium debt service (MLB reports “over $10 billion in gross revenue“). For 2017E, revenue is estimated as 7.1% greater than Forbes 2016 calculation (the average of the previous two years’ growth). All other 2017 data are actual. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. For pre-2015, benefit costs were determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll, post season revenue), baseball-almanac (older postseason revenue) and Forbes (net revenue)

The chart above attempts to provide a more accurate baseline with better data. In addition to using official payroll figures released by MLB, a more complete picture of player compensation is provided by including benefits and post season shares. The denominator is Forbes annual estimate of net revenue, which excludes stadium debt financing, but includes revenue derived from the use of the stadium for non-baseball events. Providing an allowance for this kind of debt seems reasonable, especially when you consider the revenue generating impact of a new stadium and the inclusion of non-baseball event revenue to prevent double dipping on the benefit. Using this framework, a different picture emerges. Instead of a steady decline since the advent of the competitive balance tax in 2003, we see a sudden correction followed by a gradual ebb and flow in which the players’ share of revenue hovers around 50%.

But, wait. Doesn’t the decline in share of revenue from 70% in 2003 to 50% in 2016 support the conventional wisdom? Well, yes, it does, provided you believe the game’s financial condition was stable and healthy when players were getting up to 70% of revenue and many teams carried heavy debt burdens. Those were, after all, the conditions that led to Bud Selig’s blue ribbon panel, which was convened in 1999 to study the game’s economic structure. The committee’s findings were the genesis of the revamped competitive balance tax (CBT).

The original CBT plan called for a 50% tax on payrolls over $84 million, but when the MLBPA finally acquiesced to the system as part of the 2002 CBA, the threshold was increased to $117 million and the initial tax dropped to 17.5%. With the threshold capacity amounting to 90% of industry net revenue, the new system was little more than a Yankee tax, and that’s pretty much what it turned out to be until the Dodgers joined the fray. In the first two years under the new system, the Yankees didn’t stop spending, but most other teams did, even though they weren’t subject to the tax. Meanwhile, revenues started to accelerate. The result was a decline in overall player compensation and a significant drop in the players’ inflated share of the revenue pie. From that point, however, the system reached a state of equilibrium, allowing the owners and players to prosper. Revenue kept increasing, and salaries followed close behind, a trend that has continued right up to the current deal.

Further supporting the analysis provided above is a 2016 study done by the Associated Press, which was granted access to financial data by MLB. According to the study, “big leaguers’ share of net revenue was between 48.5% and 51.7% each year since 2006”, and when including signing bonuses for amateurs and minor league salaries, that share “ranged from 53.7% in 2012 to 57.5% [in 2015].” According to AP, the revenue figure used was net of expenses for contributions from Major League Baseball Advanced Media (MLBAM) and the MLB Network, but did not exclude Stadium debt. Also of note, quoted in the article were Scott Boras, who claimed players were receiving 43% of revenue based on gross contributions from MLBAM and MLB Network (still above the 38% figure noted in the Fangraphs article), and union head Tony Clark, who stated the split had been “fairly constant”.

Annual Rates of Revenue Growth and Total Player Comp, 2004-2016

Note: Revenue is net of stadium debt service. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. For pre-2015, benefit costs are determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll), baseball-almanac (postseason revenue) and Forbes (net revenue)

There is no disputing that players have seen their share of revenue decline from an early-2000s peak, but whether that indicates unfairness (and ineffectiveness on the part of the MLBPA) is open debate. As the chart above illustrates, the decline in share of revenue has occurred not because salaries haven’t grown, but because revenue has been growing faster. Also, since 2006, the relative rates of growth have been more in line, indicating again that the initial correction that occurred after the 2002 CBA has leveled off. In other words, players have done very well over the last 15 years; owners have just done a little better (and assumed the lion’s share of risk in the process).

Having established that MLB has not undergone a drastic economic shift to the detriment of its players, we can turn to the circumstances of this particular offseason. Although it’s easy to look at all of the unsigned players with a raised eyebrow, a confluence of mitigating factors provides a more reasonable explanation for the winter’s inactivity than conspiracy theories.  The Giancarlo Stanton and Shohei Ohtani sweepstakes predictably put the brakes on the free agent market, but since their transactions, the availability of All Star names like Evan Longoria, Gerrit Cole, Andrew McCutchen and Manny Machado have also gummed up the works. With so many attractive candidates available in the trade market, it’s no surprise that free agents have had to bide their time. The fact that so many of the top free agents are represented by Scott Boras hasn’t helped either. Boras, who is notorious for holding out for every last penny, has cornered the market and dictated the pace. Meanwhile, big market teams like the Yankees and Dodgers have been shedding payroll in order to get below the luxury tax threshold in anticipation of next year’s monster free agent class. This has limited the number of big pocketed spenders and led to a more deliberative approach by some of the game’s most aggressive teams. When added together, these extenuating circumstances help explain this year’s winter of free agent discontent.

Before using the quiet off season to suggest the current MLB business model is broken, or cast blame on the MLBPA’s effectiveness in negotiating recent collective bargaining agreements, it’s probably worth waiting for the remaining free agents to sign. When all is said and done, the level of spending may still rise, despite the delayed gratification. And, even if there is a bit of a retrenchment, there is every reason to believe owners will again open their wallets for next year’s dynamic free agent class. If the hot stove does get firing once again, and the class of 2018 really does break the bank, the idea that the players are victims of a changing financial landscape, with no leverage in future contract negotiations, will go up in smoke.

Appendix

*The NBA uses basketball related income (BRI) as the basis for its salary cap, but that only includes 50% of the proceeds from things like arena signage, luxury suites, and naming rights. It also excludes income from business in which either the league or its teams does not own at least 50%. The NHL uses a similar concept, but in addition to allowing for exclusions from hockey related revenue, the league also deducts “direct costs” before determining the players’ share. Not to be out done, the salary cap poster child NFL shares what they call “all revenue”, but does so only after splitting income into three distinct buckets that are shared at different percentages.