Growing Baseball with a Cap
Why a salary cap, salary floor, and revenue split will grow baseball...and how to actually get it done
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No one wants another article on baseball’s flaws.
No one wants another explanation of the growing discrepancy between the haves and the have nots.
No one wants another ‘free market’ rant about the unfairness of six years of player control, or the stupidity of arbitration solving a problem that doesn’t need to exist.
And absolutely no one wants another example of the lack of trust between owners and players.
So what can I offer instead? How about a solution oriented article. How about we look for answers that are not “pro-player” or “pro-owner”, but instead “pro-growth”.
How about we work towards a solution that may not make anyone’s situation materially better today, but 1) keeps everyone happy enough 2) creates some small winners and losers and 3) sets baseball up to grow.
Why?
This is why.
Who is to blame? Who cares. There is a problem that needs fixing.
Different teams are playing different games. To some extent, this happens in all sports as organizations will sometimes bottom out to play for the future. Trust the process, right?
However, there is a lot more going on in baseball.
Teams are trading away stars left and right for little in return.
If they were bottoming out for a run in a few years…we could understand that.
If they had bad front offices making value errors…we could wait and see how it pans out with a skeptical eye.
But the problem is none of the above is true. Small market teams are doing a great job optimizing their desired outcome. The problem is their desired outcome.
Small market teams are making daily decisions to optimize team profitability- not wins.
This is a structural problem (more on that later) and I don’t blame them. They are responding to incentives within the current framework. Change the incentives and you change everything else.
So how do we do this? First, we need to analyze a potential deal from three viewpoints:
The Owners’ Perspective
While every team is run differently, we can look at a potential deal from a typical owner.
Above all else, no deal can significantly hurt the profit potential or franchise value of MLB teams as a whole.
Owners want to hold profit producing franchises that grow in value. They want to make money….and for people to expect otherwise is naïve.
With that in mind, when we think about a revenue split with players, we should do so keeping in mind the current annual spend.
Outside of combined profitability of the clubs, we also have to understand the different lives of large and small market teams.
A proposal must keep some competitive advantage for large markets, while also making the financials work for teams at the bottom.
The Players’ Perspective
The longstanding belief in baseball is players will never agree to a cap, since a cap prevents a free market. That thinking is laughable as the current structure is far from fair and open.
On the contrary, the leagues with caps- notably the NBA and the NFL- are much closer to properly rewarding talent.
Like owners, different players will have different goals. Rookies have different interests than vets, just as journey-men have different priorities than stars.
So, when thinking about the players’ perspective, we can think about what the MLBPA is after.
Most notably, I expect the MLBPA wants its players to be paid fairly, with pay consistently increasing over time.
They also want their members to have agency over their careers.
And finally, they want to be able to trust MLB.
The Fans’ Perspective
When going over what is important to owners or players, I am guessing. I am not rich enough to be an owner. Nor am I athletic enough to be a player. But I am exactly rich and athletic enough to watch games from the bleachers or my couch.
As I have written before, fans want to give baseball more of their money. We love going to the ballpark, buying our teams’ gear, and watching on TV.
We want to engage with our favorite athletes as much as possible.
We want to watch a league with uncertainty and drama.
And we want to believe our team can come out on top in November.
Fans want players and owners to grow the game….trust me, we will reward you for it.
Recapping Our Goals
After analyzing what these three parties are after, we can summarize the goals of any new revenue sharing plan:
Create a scenario where individual clubs are incentivized to optimize for wins, not profit
Maintain current profitability for clubs
Allow large market teams to keep some competitive advantage
Ensure small market teams are not overly harmed by increasing salaries
Maintain current salary level for players, while eyeing growth long-term
Create a more transparent, open system for paying and empowering players
Build trust between MLB and the MLBPA
Grow the game: create more drama, more competitive balance, and more engagement
Coming up with a Plan
With our goals in mind, we are almost ready to outline a plan- the last hurdle is getting a clear picture of the current landscape.
Given the skewed numbers from the pandemic I went back to 2019 to get some ballpark figures:
According to CNBC, the MLB grossed $10.7B in revenue in 2019
538 (from Forbes) gives a slightly different number, pegging revenue at $9.9B
538 (this time pulling from fangraphs) dives deeper, estimating $2.7B came from national media- split between national TV deals and MLB owned media- with the rest coming from local sources.
Those same Forbes estimates point to $8.7B in expenses- $4.6B of which are player salaries
Spotrac estimates the average 2019 payroll at around $139 million, which would bring player salaries to a total of $4.2B
The information above is not perfect. The pandemic makes finding relevant numbers tough and the teams’ (understandable) desire to not open their books does not make things easier. However, they get us close enough to start brainstorming.
Moving forward, we will use these estimates as our baseline:
MLB total revenue: $10B
MLB national revenue: $2.7B
MLB local revenue $7.3B
Total expenses: $8.5B
Player salaries: $4.4B
Other team expenses: $4.1B
The next important step is understanding the revenue split among clubs (not to be confused with a proposed revenue split with players).
It should come as no surprise the national revenue is split evenly- with $90 million going to each team.
Additionally, 48% of each team’s local revenue goes to a central pot to be split evenly. Given our estimates above, this would be $3.5B, or $117 million to each club.
This means each team has $207 million in revenue coming in annually from the collective pot.
That number has two important takeaways:
This offers a high floor for MLB owners. With non player expenses of around $137 million per team, clubs could break even (not that we can expect this to be the goal) with a payroll of $70 million regardless of local performance.
The current structure creates perverse incentives, especially for small market teams. Let me explain:
Any organization (in or out of baseball) expands profit one of two ways: increasing revenue or decreasing costs. The problem with MLB’s system is how much easier and more effective the latter option is:
Option 1: increase revenue. Let’s say a club with local revenue of around $150 million- which is a good estimate for smaller markets- aims to increase that number by 10% to $165 million. First, this is a hard improvement to make, as they need to plan big initiatives to bring more people to the park or have more local viewers (these plans usually come with higher costs as well). If they are successful- which is far from a given- only $8 million goes to their pocket, with the rest being split with the other clubs. And with $285 million of revenue already coming in ($207 + 52% of $150), this is a sub 3% increase. On top of that, the change in profit is unknown without factoring in the cost of getting there.
Option 2: decrease costs. On the contrary cutting salaries is easy. If a team chooses to cut, those are instant savings. And $15 million saved goes right to the bottom line…likely with minimal impact to top line revenue given what they receive from the collective pot. With the average team making $50 million of annual profit, those savings are huge.
Moving Forward
Again, I do not expect clubs to stop caring about profit. But maximizing profit should be a league wide objective. Leaving this much wiggle rooms for individual teams rewards short-term, individualistic thinking.
We need the opposite.
We need clubs to think long term and collectively. We need them to maximize league-wide revenue, engagement, and profit.
And this is what a salary cap, salary floor, and revenue split will do.
So let’s do it:
I would propose a starting salary cap of $168 million (20% above the current league average) and a salary floor of $126 million (10% below).
I want the cap to be skewed higher than the floor for two reasons: 1) to keep some advantage for teams that spend more and 2) to keep total salaries constant as I expect clubs to stay closer to the floor given the option.
(I expect the gap between the floor and ceiling to close over time)
I would set an additional hard cap 20% higher at $196 million with a luxury tax over $168 million. Every dollar spent above this number would be taxed at 100% and paid to non luxury-tax teams.
A luxury tax- which the NBA uses- allows for big markets to keep a competitive advantage, while giving a financial reward for those who stay below it.
I would peg the player/team revenue split to league revenues. This number could start at 44%- around current estimates- with the goal of gradually moving to 50%.
To make clubs happy, this increase could coincide with the league hitting growth metrics, ensuring increased profitability.
I would increase the revenue split between clubs to 60%. This would be tough for larger market teams, but necessary. The revenue floor would add about $50 million in costs to teams with the lowest payrolls (based on pre pandemic numbers). To get them to agree, they need to see an immediate increase to top line numbers.
Increasing the local revenue split from 48% to 60% would put nearly $900 million into the pool- or $30 million per team.
Growing the Game
While the details are fun to talk about, ultimately we have to ask if we are reaching the goals outlined above:
Create a scenario where clubs are incentivized to optimize for wins, not profit
Yes. MLB as a whole will still optimize for profit…as they should. However, once a deal is made teams will be more free to make roster decisions that maximize on-field performance, as their profitability outcomes are more tightly defined. With a salary cap and salary floor, roster decisions will more closely resemble the NFL and NBA.
Maintain current profitability level for clubs
Overall, yes. While there will be winners and losers, owners has a whole should keep a constant profit margin. And if these changes are successful- revenue, and therefore profit, will grow.
Allow large market teams to keep some competitive advantage
Yes. While this may be somewhat diminished, large market teams will still see higher revenues due to their local TV deals and attendance numbers. They are also welcome to max out the cap and pay the luxury tax for an on-field advantage.
Ensure small market teams are not overly harmed by increasing salaries
Yes. While the increased revenue split did not make up the entire difference, it got a lot of the way there. Additionally, these teams should benefit from increased competitiveness. (And if we are being honest, they had room to spend a bit more anyway.)
Maintain current salary level for players, while eyeing growth long-term
Yes. Players need to have an expectation this deal is 1) at least as good as their current situation today and 2) will lead to better outcomes in the future. This does that by keeping current salaries where they are, with an eye towards an increased revenue share.
Create a more transparent, open system for paying and empowering players
Yes. A revenue split among teams and players means players can see where the clubs make money. While clubs may be hesitant to open the books, increased transparency is a positive. Once everyone is aware of the levers that impact the business, players and executives alike can row in the same direction.
Additionally, once 1) teams know what portion of their revenue goes to players and 2) the MLBPA knows what their members will receive, both sides can eliminate unnecessary rules and focus on growing the game.
Ideas like removing arbitration and reducing team control become more palatable. And initiatives like expanded playoffs and a universal DH turn into easy boxes to check.
Build trust between MLB and the MLBPA
It’s a start. Remember, there is a reason why the NBA figured out the bubble so quick. The league and the players individually knew that playing games and delivering the best product to fans would recoup as much of their lost revenue as possible.
Maybe this was a trust. Maybe this was everyone selfishly knowing how the CBA affected them. Either way, fans received a great product at a time when delivering one seemed tough to pull off.
Grow the game: create more drama, more competitive balance, and more engagement
This is the ultimate goal and the long-term unknown. But it seems to reason more competition will lead to better outcomes. And in a league with so much revenue driven through local engagement, the more fans who enter April thinking their team has a chance to be alive in November, the better.
Why This May Not Work?
I assume I am not the first person to think of an idea like this. So why would it not work? I can think of a few reasons:
MLB and the MLBPA have a relationship so strained that a landmark deal can’t get off the ground.
Big market clubs are quick to say no if they see their competitive advantage decrease; small market clubs are equally fast to nix the idea as they see rising costs.
The MLBPA does not agree to any sort of revenue split- either due to a lack of trust with MLB or other reasons- especially one below 50% of revenues.
Plenty of other reasons I have not thought of.
At the end of the day, I am not naïve. I know labor negotiations are not solved with one article. But solutions have to start somewhere.
There are a variety of problems brewing in baseball: slowed growth, a distrust between players and management, and a lack of competitive balance to name a few.
Rethinking financials will not solve everything. But I believe a cap, a floor, and a revenue split are the best way set the stage for further improvements that grow the game. And the game needs growing.
*One additional source: William Juliano http://www.captainsblog.info/*