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Home Biz of Baseball - Interviews Interview - Andrew Zimbalist - Sports Economist

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Interview - Andrew Zimbalist - Sports Economist PDF Print E-mail
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Written by Maury Brown   
Sunday, 08 August 2004 12:00

Andrew ZimbalistWhen the discussion of the economics of baseball are discussed in the media and beyond, most often you'll find Andrew Zimbalist in the mix.

This interview covers the debate over the public subsidy of stadium development, to territorial rights, especially as it pertains to the Baltimore/Washington, D.C. area, to the current revenue sharing system, plus more, Zimbalist covers all the bases.


The numbers are staggering.

Since 1992, when Bud Selig took over as Commissioner of Baseball, there have been 15 new or renovated ballparks. In the case of the new ballparks, all have had some form of public subsidy involved, totaling well in excess of a billion dollars when all is said and done and leases are fulfilled. This new stadium development is touted by MLB as being a panacea towards overall franchise success, regardless of the fact that many see franchise sustainability being coupled, in large part, to wins and losses as well.

With this large volume of stadia development has been the constant struggle to try to quantify the economic impacts of ballpark development within local, state and regional domains, and one of the most visible economists to speak to this current environment has been Andrew Zimbalist.

Zimbalist serves as Robert A. Woods Professor of Economics at Smith College and his resume is  peppered with consultation as it pertains to baseball. To Wendell, Chritton & Parks in the Florida State League/Florida Marlins arbitration case, to the Major League Baseball Players' Association in collective bargaining, to ABRY Communications in a baseball broadcasting suit, to the United Baseball League, to Krendl, Horowitz and Krendl in Ehrhardt v. Colorado Rockies, to the Portland Oregon Mayor's Commission on bringing another professional sports team to the city, the list is far too long to mention in this space.

To add to this, Andrew has several outstanding books on the economics of baseball. "Baseball and Billions: A Probing Look Inside the Big Business of Our National Pastime", and "May the Best Team Win: Baseball Economics and Public Policy" can be found on the desks of those ranging from politicians, to fellow economists, to baseball researchers.

The following interview covers several areas, from the economics of new stadium development, to the shifting of discretionary income as it pertains to this development, to the territorial claims by Orioles owner Peter Angelos regarding the possible relocation of the Montreal Expos to Washington, D.C., and possible ramifications to further relocation or expansion, to the overall health of small to mid-tiered markets under the current revenue sharing plan. Enjoy! - Maury Brown


BizBall: You’ve been following the economics of baseball for some time now. What has been the biggest fundamental change in how MLB conducts business over the last 10-20 years?

Zimbalist:
I would think that the biggest change has been the introduction of its revenue sharing system in 1996 and the extension of that system in 2002. Prior to that system the only thing that got shared in baseball was gate revenue. And in the American League they shared about 20% of gate revenue, and the National League about 5% of gate revenue. There was a program that they introduced in the 80’s to do some sharing in the American League of pay cable back then, but basically it amounted to just about nothing. So fundamentally out of all the revenue that got generated they only had either the 20% [shared] in the American League and roughly 5% in the National League; nothing else was shared.

And then when local television contracts really began to take off -- the Yankee contract that was signed with MSG back in 1988 was a 12 year contract worth $493 million over the period -- you had the emergence of TBS with the Braves and WGN with the Cubs, and the Mets had a big contract, the Red Sox got a big contract, baseball’s revenues became very sharply imbalanced.

And, the other thing that’s happening of course in the early 90’s is the introduction of the new stadiums, beginning with Camden Yards, or some people might want to date it to a year earlier in 1991 with the new White Sox stadium. But the retro-set architecture stadiums begins with ‘92 Camden Yards. Those stadiums for many teams ended up generating an extra $30 million a year for the team, so that together with the local television contracts and no revenue sharing meant that the revenue disparities between top and the bottom teams, which were actually no greater than $30 million back in 1989, all of the sudden exploded, so that by the end of the 90’s those disparities are up over $200 million. Or around $200 million, let’s say.

And in this context baseball introduced the revenue sharing system. I think it’s a really major change. It required a shift in political alignments, to get the big city teams to go along with that, to get Steinbrenner to go along with that, O’Malley at the time still owned the Dodgers, to get him to go along with it in ’96, to get the Chicago teams to go along with it, the Tribune Corporation, was a major political accomplishment. And they began sharing revenues, so I think that’s the big number, and of course as I’ve said elsewhere the system doesn’t work as well as it ought to because the incentives that are built into it are perverse, they’re backwards, they actually assess a higher marginal tax rate on low revenue teams than on high revenue teams. It therefore in my view has not done what it is supposed to do, which is to equalize payrolls.

BizBall: A common claim among economists is that spending on sports simply shifts spending from other entertainment options (movies, etc.). This theory assumes that most individuals have a finite amount of discretionary income to spend on entertainment. Some might argue that a high percentage of Americans have enough discretionary income to choose to attend most of the entertainment events that they would like to attend. If season ticket holders of an MLB team suddenly lost their franchise, would it follow that each season ticket holder would add 81 nights of other entertainment activities annually to their life?

Zimbalist: [laughter] Well, first of all, I don’t think that season ticket holders go to all 81 games. Most of them don’t, anyway; I think they end up sharing their ticket, or giving away their ticket to some other people, at least for some of the games. But no, I don’t think it follows that way, and look, I don’t think the proper argument is that there is a 1-to-1 trade off here. The argument is simply that for most people who go to ballgames they have a finite amount of discretionary income and there is a substitution effect working, but again, it’s not a 1-to-1 effect, maybe it effects 80% or 90% of the money that would otherwise get spent at the ballpark.
And it certainly is not the only basis for the argument that there is no positive economic impulse or developmental impulse from having a new stadium or a new team in your town.

One of the reasons is the substitution effect, but another very important reason is the leakage effect. Which is to say that if money gets spent at a ballpark, something like 60% of it on average goes to players, who have an average income of $2.4 million, and when money goes to those players, and most players don’t live in the town where their team is anyway, then the money leaks out, because a millionaire has a very high savings rate, much higher savings rate than somebody with ordinary income, thirty or forty thousand dollars, and that money they save goes into the world money markets, it doesn’t get spent at the local cities, and even more that’s true because the player doesn’t live in the city, so his permanent home is elsewhere, or if he has family elsewhere, a lot of the money gets sent back to the family.

And, also players are encouraged, and most of them follow the encouragement or the advice, they’re encouraged to save a lot because their life in baseball and their lifetime earning the mega-salaries is a very short one.

It’s not like what happens to me, an economics professor. I got into the business of being an economics professor when I was 25 years old and I could do that for decades, but for professional baseball players if you’re lucky you play 5 to 10 years and you don’t earn the mega-salaries your whole life. So, they’re encouraged to save a lot of money, and again the pattern is for the money to go into the world money markets and not to be spent in the local cities. So, there are leakages. And, of course, a lot of money goes to the owners and the owners have a similar pattern to the players, and those leakages are much higher than if the entertainment dollar gets spent at the bowling alley or restaurants, where the money ultimately goes to entrepreneurs who have a much more normal income, and who live in the local towns. So, very high leakages are another factor here. And, another factor still is that ballparks these days get financed with hundreds of millions of dollars of local tax money and if taxes go up then it means that that money is not being spent by consumers in other areas of the local economy. Either that or the city might rig -- I guess I’m not sure about this --either the services, and either higher taxes or lower services doesn’t help the local economy. So, if you put all of those effects together, the empirical research suggests that the expectation should not be that you get an increase in employment or an increase in per capita income.

BizBall: What about in cases where there are personal income taxes in some states? Wouldn’t there be money collected from the players and management in that framework?

Zimbalist: Yeah, there would be, but again the evidence is that the amount of expenditure that goes out of the public coffers in order to finance the debt service that they have to incur to build the stadium, or to improve the infrastructure, or both of those things, the amount of outflow is greater than the amount of inflow.

BizBall: Along the same lines, in the case of several cities, and possibly some new locations should relocation or expansion be considered, there are cities that border other states. Is there a case to be made that monies from bordering states cross over into these locales and therefore help the economies of these host cities via tourism?

Zimbalist: Yeah, sure, and in fact I made that case in part with the New York Nets leaving New Jersey and going into New York, in this case Brooklyn. So it can happen.

There are possibilities for, in essence, cannibalizing revenue across state lines.

And if what you’re interested in is the fiscal situation of a government on one side of the state line as opposed to the other side of the state line, yeah, there can be a shift in that way. It doesn’t end up producing a tremendous amount of difference, but there can be a small gain as a result of that.

It’s a different argument than an argument for regional development, though, because in terms of the overall metropolitan area the money is still in that area. But it might very well cross a political boundary and help one side of the boundary to the detriment to the other side.

BizBall: How much of the financial forecasting that MLB presents to the press and government do you feel is done to leverage the public in terms of stadium development and for collective bargaining purposes?


Zimbalist: Some of it. I tend to believe that those are not the main motivations today. Of course historically the other factor has been to hold on to the anti-trust exemption, or the  presumed anti-trust exemption, when they testify to Congress. But more recently I think the strongest motivation that teams have to color their financial picture is to avoid revenue sharing. That is to say, if you can push your revenue off your baseball books onto your media books or onto your stadium books, or some other, as in the case of the Chicago Cubs onto their premium ticket company, then you can avoid some of baseball’s revenue sharing taxes. So I think there are a variety of motivations to do that, but it’s hard to believe in this day and age that Don Fehr or Gene Orza or Mike Weiner are very misled by claims of penury that either Selig issues for all baseball or individual teams issue. Because they’ve been down that road and they know the game pretty well.


BizBall: On that note about dispersal of revenues, the Yankees and Red Sox have been talking about doing a merger of TV packages. Do you think this continues to blur the line for revenue sharing purposes?

Zimbalist: Well, first of all, that story is simply the product of our idiotic media. There’s no truth to that story.

BizBall: Could you elaborate?

Zimbalist: I mean, look, what happens in a situation like that is that there are two people who are having a conversation over a drink who are connected to either the Yankees or the Red Sox, and there’s a third person there, and this person happens to hear one of them who sort of throws out this idea that they might bat around for thirty seconds or something. So that third person then calls up his friend who’s a journalist and the journalist wants to break the story so he goes out and writes the story. But I don’t think there’s any factual basis to the story. I’ve spoken to owners on both sides and they disclaim any such notions and even if you just look at it logically it’s absurd.

Number one, baseball has television territories that it would violate, and they’d have to get MLB’s permission. Number two, they’d be inviting anti-trust scrutiny from the Justice Department if they tried to combine forces and get more leverage in the cable television market. Number three, any synergies they might get that would increase their revenues would then have to be shared between the two teams. Number four, the Yankees and the Red Sox play at similar times during the day, or at the same time during the day, very often, and they have competing claims on the time.

There’s just an infinite number of complications. And number five, and perhaps most importantly, the Yankees and the Red Sox have gone out of their way to develop a classic baseball rivalry, and if they start jumping into television bed together it totally undermines the perception of that rivalry. And quite apart from personality differences that might make it a complicated thing to do, I don’t think it ever made any sense, and it’s just one journalist trying to get a jump on a story based on a silly rumor.

BizBall: Peter Angelos has made quite a lot of noise about fan attendance and cable share being diluted for the Orioles should the Montreal Expos relocate to DC or Northern VA. Do you subscribe to those arguments?

Zimbalist: Well, I think he’s correct that there would be some dilution in his television ratings and some dilution in his attendance. Whether the reductions would be 5%, 10%, or 15% in each case, I don’t know. I don’t think it would be more than 15%. But basically I would say to him, “Tough noogies.” You’ve got two substantial media markets there and  you can host two teams in those markets. I mean, you might as well have Jerry Reinsdorf come along and say, “Hey, the Cubs dilute my revenues.” And that would be true, too. So Reinsdorf might as well go to Major League Baseball and petition Bud Selig, and say, “Hey, Bud, you’re my friend. I’ve supported you. The Tribune Company really isn’t your friend. Why don’t we just eliminate the Chicago Cubs?” And to me, logically, there’s not too much difference in those two arguments. Politically it might be a little different, of course, because it’s harder to eliminate a team that’s been around for time immemorial than it is to create a new team into a market.

But, D.C. used to have a team. In fact, they used to have two different teams, and I think it’s a premier market and they ought to have a team. And whether or not Angelos ends up effecting Selig in the ultimate decision by baseball, I don’t know, but certainly I don’t think that he should.

BizBall: Buried deep within the wording of a bill before congress is verbiage that would allow sports franchises the same ability of other business to write off 100% percent of their intangible assets, such as TV revenues, on an evenly divided basis over 15 years, as opposed to the current system which only allows for half of the assets. Beyond the huge windfall for sports owners for long-term investment, is this simply a case of having all businesses treated equally?

Zimbalist: No, it’s not.

First of all, you can’t amortize goodwill; that rule has changed, so businesses don’t get to amortize or depreciate all of their assets. Secondly, look, they might go for public relations purposes and say that this is to treat sports franchises the same as other businesses but the fact of the matter is that sports franchises, which might be valued depending on the league and the team anywhere from $100 million to $1 billion, don’t have many hard assets to establish that value. The main thing that a sports franchise has is a berth in a monopoly sports league which you could call goodwill, you could call it a going concern, and if you want you can somewhat falsely attribute it to television or other media contracts.

The IRS has always historically said that television contracts are non-depreciating assets or non-amortizing assets. They are always renewed. In other words, if I buy a car, it depreciates each year, it gets a little less valuable each year, that’s a physical deterioration that happens. But if I buy a baseball team and the baseball team buys a local television contract, if you go back and look at the historical records, when that contract is over there’s always a new one! And historically it’s always been a larger one. But whether it’s larger or not, the value is pretty much ongoing. Now in some cases something might happen that’s unanticipated, and then you might have an impairment of the asset, and they ought to be able to account for an impairment of assets, but generally speaking, baseball teams and other sports teams, almost all of their value is intangible.

In contrast, if you look at a manufacturing company, most of their value is tangible. They’ve got machinery, they’ve got technology, they’ve got patents, and so on. And therefore if you allow them to amortize some of their intangible assets, it’s going to be a minority of their  overall asset value. But if you allow a sports team to amortize the intangibles, you’re basically allowing them to amortize the whole thing. So it’s different for sports than for other businesses.

And to me the more fundamental question is, what is the theoretical basis for saying there’s any depreciation at all in the tangible assets? And I don’t think there is one. And so I see it as an improper give away, and I see it as once again as kind of absurd politicking wherein you have special interests who get politicians whom they donate money to to stick it onto a bill that has nothing to do with the operation of sports franchises.

BizBall: From an economic perspective, is MLB going to be able to have sustainable and healthy franchises in existing smaller markets, and how does this impact possible relocation of franchises and/or expansion?

Zimbalist: Well, it all depends on the economic system that baseball has. If baseball has a sound revenue sharing system they can put teams in smaller markets. But it also depends in part on what you mean by smaller market. Is Portland, Oregon a smaller market because it has fewer than three million people? Well, I don’t think so. It seems to me that Portland, Oregon is perfectly capable of hosting a sports team in a league that’s properly designed. And Portland is a town that has been experiencing very good population growth and looking down the road they ought to be able to have a baseball team. As should some other cities. I guess you could argue that Nintendo should make the same argument that Angelos does: “My goodness, if you put a team in Portland there’ll be some dilution in our fanbase!” And that’s true. They’ll be some. But whether it’s 2%, 4%, or 5%, or 6%, who knows? But also, who cares? Because the people of Portland deserve a baseball team just as much as the people of Seattle do.

BizBall: I think they’re hand-wringing over this situation because it really does open up and set precedent if they pay off Angelos when he doesn’t have territorial rights to D.C. And it opens up a can of worms, like you’re saying with Howard Lincoln and Nintendo, Seattle and Portland, even though it’s 175 miles away they deem this a territorial market from a regional cable perspective and radio broadcast perspective.

Zimbalist: Look, I’ll tell you what, you have two territories for a baseball team. One is the physical territory; it used to be determined by 75 miles, now it’s defined in terms of counties.

And then you have another market--that’s the television market--that is much broader. And in fact the television markets span territories so that they bump up against each other. And therefore, they cover the whole country.

And so there’s no reason why Major League Baseball would not allocate like the whole state of Arkansas to a team, like the Houston Astros, for instance. They wouldn’t say, “Oh well, you know, it’s more than X number of miles from your ballpark and therefore you can’t have it.” No, they’re not going to leave the potential fans in Arkansas without access on local cable to watching a team.

So what they do is allocate: television markets are allocated to everybody in the United States. Therefore, whenever you contemplate adding a team you’d be interfering with somebody’s television market. And if you held that argument as decisive that, “Oh, you’re taking away part of this guy’s television market,” then you’d never be able to have expansion. Not now and not in forty years. Even when the U.S. population might be 350 million instead of 290 million. So that argument can’t possibly be a conclusive argument in my view.

BizBall: How much of the current growth in MLB is attributed to the recent honeymoon effect of new stadium development and do you see a trend in which there will be repercussions when these honeymoon periods fade?

Zimbalist: The honeymoon effect is very short-lived unless the owner is smart enough to take advantage of it.

A new stadium gives the owner an opportunity to get more revenue out of his players, and if his players generate more revenue they should be paid more. And so the smart owner says, I’m going to take advantage of my new stadium by increasing my payroll and putting a better team on the field, and getting my fans really excited. If the owner does that you can get a honeymoon effect that lasts five, six, seven, eight years.

If the owner doesn’t do that, then there’s a curiosity effect that can last two or three months, after which the fans get ticked off that the owner isn’t doing anything to improve the team. So honeymoon effects are very differential. It depends on the strengths and acumen of ownership.

That said, yes, of course, baseball has had a building renaissance, since 1991, and that renaissance has, although some teams more than others, that renaissance has generally raised attendance appreciably. And as the newness of some of these stadiums fades into the past, they won’t have that factor to boost attendance anymore. So other things being equal, yeah, that would make attendance drop a little bit.

BizBall: In your book, May the Best Team Win, you talk about how the Yankees have incentives to increase their stadium expenses, new stadia development, and a number of other areas. The last Chapter is entitled, “What is to be done?” Can you touch on this facet of the book, and tell us if any of the points within that chapter have changed since publication?

Zimbalist: You mean things that I would recommend?

BizBall: Yes.

Zimbalist: Well, I wrote that book at a time when baseball was talking about contracting by two or four teams. And I believe that as long as baseball maintains that posture, especially after a period where its revenues have been growing by 15-16% per year, that the U.S. Congress ought to go after baseball and say, “We’ve had enough. Your demand is increasing by 15% a year. If you want to reduce your output, we’re going to force you guys to have competition so that we can have an appropriate level of output.” Meaning more baseball teams rather than less baseball teams when demand is growing at 15% a year.

That’s what I believe.

And I believe in general that it would better serve U.S. fans, U.S. consumers, to have more competition in the baseball industry. But I don’t believe, at this point in time, that it’s in the cards, because baseball isn’t talking about contraction anymore, and therefore it makes more sense when talking about policy to focus on more realistic policy options.

And for me the most important thing for baseball to do is to get their revenue sharing system right. Because this year they’re going to be sharing about $280 million, top teams to the bottom teams, and it’s not going to do anything, in my view, to improve competitive balance. Because the bottom teams face this higher tax rate than the top teams. And payroll disparity has actually grown since 2002 when this new revenue sharing system was introduced.

So, I think they need to get their incentives right.

Right now the way the incentive system works in the revenue sharing system is that successful teams get penalized, and poorly performing teams are rewarded. Failure is rewarded and success is penalized. And I think you need to have a revenue sharing system that does the opposite, where teams are motivated to improve themselves. And so that would be the first thing that I would change.

Second thing that I would change, although I recognize that Bud Selig has done some good things, I don’t think baseball’s commissioner should be an owner. And I think that Selig’s  botched a lot of stuff. And so I think they need to replace Selig. I don’t think that they will, but I think they need to replace Selig, get some independent, intelligent, outside businessperson who knows a great deal about baseball, and leads the sport in a way that doesn’t suggest that there’s any conflict of interest, or that there’s any inability on the part of the commissioner to act in the best interests of baseball rather than the best interests of a coterie of owners.

BizBall: I understand that you have another book slated to be published. Can you tell us about it?

Zimbalist: Very briefly, I’m writing a book with Stefan Szymanski, who’s a British sports economist. What we’re doing is looking at the evolution of basically soccer leagues and the evolution of baseball and other closed leagues in the United States. Soccer Leagues in Europe and throughout the rest of the world are organized on an open basis and systems of promotion and relegation, where the top teams in the league get promoted to a higher level league, and the bottom teams in the league get demoted or relegated to a lower level league.

That system creates a very different pattern of incentives and fan responses than the closed system that we have in the United States, closed meaning that the existing owners determine if there will be expansion, and if there is expansion, who gets to own a team. And that creates a system of leverage and monopoly that gives teams an ability to extort large public subsidies and deprives fans in many cities of getting to have a professional team, when they warrant one, given the economic size of the city.

So, these are very, very different ways of organizing sports leagues, and they generate very different kinds of tensions and problems, and have different kinds of successes.

So what we're trying to do in the book is to explain how the systems are different, explain why they evolved the way that they did, looking at economic and political and cultural factors.

And then, finally, trying to figure out where the systems are heading, and whether the two systems can learn anything from each other.

The following interview was originally published on the SABR Business of Baseball website, and can be read here: SABR Business of Baseball Interviews Page

Interview conducted by Maury Brown on 8/9/04. Edited by Jeff Sackmann.

 
 
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