Baseball knows a good thing when they see it. When the 2002-2006 CBA was brokered at the 11th hour, it marked the first time since the formation of the MLBPA and the collective bargaining process that some form of work stoppage did not occur. Because there was labor peace, and because provisions such as revenue-sharing were adjusted and the Luxury Tax introduced, MLB has flourished. So much so that this year sees projections in excess of $5.2 billion in revenues--a staggering figure.
2007 will mark the beginning of a new Basic Agreement that will further work to extend this unparalleled growth. There were inadequacies in certain aspects of the last Basic Agreement, namely the revenue-sharing component.
One person who has worked on the economics of the new agreement--specifically the revenue-sharing component--is sports economist and author, Andrew Zimbalist. Zimbalist serves as Robert A. Woods Professor of Economics at Smith College, and has written several books on sports economics, including the recently released The Bottom Line: Observations and Arguments on the Sports Business and In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig.
I interviewed Zimbalist in 2004 and have stayed in contact with him since. With the new CBA, the increased interest in the posting process and the Red Sox bidding $51.1 million for the rights to negotiate with Japanese pitching sensation Daisuke Matsuzaka, as well as other economic factors in baseball that have occurred since first interviewing Zimbalist then, I thought it was time to talk to him again, given his work on the new CBA.
In this interview Zimbalist talks of his overall impression of the new agreement, why the agreement was reached well in advance of the Dec. 19th deadline, whether new stadium development impacts revenue-sharing, his thoughts on possible expansion, whether revenue-sharing has been the catalyst for competitive balance, and much more.
Maury Brown for Biz of Baseball: What is your overall impression of the new Basic Agreement?
Andrew Zimbalist: It is a significant improvement over its predecessor. It lowers marginal tax rates for all teams. It also realigns the marginal rates so the low revenue teams now pay basically the same rate as the high revenue teams (in practice the marginal rates now will vary between 30 percent and 32.5 percent). Together, these two changes will undo the perverse incentives in the last CBA which should minimize the behavior of some teams not using their transfers to improve their onfield performance. Moreover, a part of the sharing will be based on a fixed concept of revenue, so that the tendency to reward teams for their lack of success will be diminished. These modifications should result in improved competitive balance and improved incentives to grow the league. The new deal also eliminates the so-called cliff problem or mean discontinuity, whereby a team just above the mean revenue before sharing could end up with less net revenue after sharing than the team just below the mean before sharing.
BizBall: Much has been made of how smooth the new labor agreement was reached and how far in advance of the December 19th the sides came together to announce the memorandum of understanding. How much of this can be attributed to key deadlines, such as the expiration of the Luxury Tax and the rollback of penalties within the Joint Drug Agreement, compared to overall goodwill?
Zimbalist: I’m not sure I like either of your choices. I think the main factors behind the smooth process this time were: (1) the unparalleled economic success of MLB in recent years; (2) the growing ability of the negotiators on each side to understand the concerns and priorities of the other side; (3) the success of Bud Selig in fashioning a functional degree of coherence among the owners; and (4) the lasting effects of the chastening of both sides from the devastation of the 1994-95 work stoppage.
BizBall: The Yankees, Mets, and now it appears, the A’s will all have new facilities that will come online during this new agreement. Given the fact that clubs can still write off a portion of their revenue-sharing obligation by constructing new facilities, is this a concern that the total amount collected for revenue-sharing purposes will be lessened?
Zimbalist: Again, there is a false premise in your question. The total amount of revenue sharing should increase with the new stadiums. The total sum shared is based on what would be shared under a straight pool distribution at 48 percent, given the level of net defined local revenue (NDLR). NDLR basically is local revenue minus local team stadium expenses (with some tricky accounting rules along the way). A team would not invest in a new stadium unless it expected its new revenues to exceed its new expenses. So new stadiums should result in higher NDLR, and, hence, higher sharing.
The new deal actually has a special provision that, in effect, reduces the deduction allowed to teams with new stadiums, but it is too complex to go into here.
BizBall: The longest stretch between expansions in the modern era has been 11-years. Given the unparalleled growth in MLB, is it possible that expansion might be a consideration for the league within timeframe of the new Basic Agreement?
Zimbalist: I would like to see expansion, but I think that the growth of revenue sharing has made the owners even more leery of it than before. High-revenue team owners now see new teams as potential claimants on their revenue. Low-revenue team owners see new teams as diluting the pool of revenue transfers. My sense is that expansion would come only after the application of effective political pressure and I don’t see that materializing anytime soon.
BizBall: The league has said that revenue-sharing is a chief catalyst for the competitive balance we have been seeing over the past several seasons. How much of this balance is attributed to revenue-sharing, and how much of it can be attributed to factors such as the introduction of the Wild Card?
Zimbalist: I think that the bulk of the improvement since the late nineties to the present is attributable to the Wild Card and other factors.
BizBall: This off-season sees far more interest in the posting process given the Red Sox submitting a bid figure of $51.1 million, simply for the right to negotiate for his services. Many fans may wonder if the posting process impacts overall player payroll, which in turn relates to the luxury tax thresholds, etc. What, if any, impacts come with the posting process?
Zimbalist: The net impact of the posting system is probably inflationary for two reasons. First, it brings more of the world’s top players into MLB. Some GMs say Matsuzaka might be the best pitcher in baseball next year. Second, the total price the Sox will pay for Matsuzaka, if they sign him, will be $51.1 million plus his salary. The bid of $51.1 million does not count as payroll for purposes of the luxury tax. Although the posting system structurally is set up so as not to grant free agency rights to the posted player, it is likely that Scott Boras will be seeking free agent type money for his client. In a free agent environment, Matsuzaka would be worth roughly as much as some of the top salaried pitchers today (e.g., Randy Johnson at $16 million a year). But let's say since teams are not bidding against each other, Boras would settle for $48.9 million over four years. If the Red Sox went along (and I doubt they would), the team's total payment for his services is $100 million over four years, putting him in A-Rod territory. But only the $48.9 million (or $12.225 million per year) will be potentially subject to the 40 percent luxury tax. This is a bargain, in a sense, and induces the Sox to offer more money for the player.
BizBall: Finally, will baseball be able to sustain its 11 percent annual growth rate during the coming CBA?
Zimbalist: This is a good question. On the one hand, many of the structural sources of growth have weakened: the appearance of Fox as a national network bidding for sports rights; the emergence of ESPN and RSNs bidding for sports rights; the construction of gentrified ballparks in city centers with the attendant explosion of corporate revenues, and, the growth of the internet and the associated streaming of games and merchandising. On the other hand, MLB’s new CBA will better incentivize teams to innovate and grow revenues, the Yankees, Mets, Nationals and the A’s promise to have new ballparks in two to three years, MLBAM growth continues to be explosive, yield management ticketing strategies are being developed, and the overall management of the game continues to improve. There is also the issue of how baseball’s changing accounting procedures will recognize the revenues of related parties. Finally, part of the revenue picture will be determined by factors outside MLB’s control, such as the performance of the national economy – a matter about which I am not terribly sanguine over the intermediate term. If I had to make a projection, it would be for industry growth rates on the order of 8 to 10 percent annually over the term of the new CBA.
- Interview conducted by Maury Brown
To read other interviews on The Biz of Baseball with the likes of Jayson Stark, Ken Rosenthal, Stan Kasten, Marvin Miller, Bowie Kuhn, Bob Costas, and others, select the Interviews navigation element to the left on any page.