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. Continue Reading »
