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LWIB: Salary Cap in MLB, Reforming the Draft, Biz Tidbits PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Monday, 01 February 2010 10:21

Last Week in Bizball by Pete Toms

This week in "Last Week in Bizball", is it time for the MLBPA to abandon their long held philosophical opposition to a salary cap?, can reforming the amateur draft result in increased competitive balance? plus a few brief tidbits.

TIME FOR THE MLBPA TO EMBRACE THE SALARY CAP?

One of the most important challenges facing new MLBPA Executive Director Michael Weiner is increasing the amount of MLB revenues being spent on veteran players. “Rookie compensation” is a contentious issue within player ranks in both MLB and the NFL. In both leagues there is a movement amongst veteran players to curtail the escalating compensation being awarded “unproven” rookies (Stephen Strasburg and Matthew Stafford being the most high profile examples) and apportioning those savings to “proven” veterans. MLB veteran players have met with diminished demand for their services in the free agent markets of recent years both in terms of dollars and contract length while competition amongst clubs in the amateur draft and international free agent market has sharply increased. As well, the percentage of industry revenues being paid to MLB players has steadily diminished. The recent agreement amongst the MLBPA, MLB and the Florida Marlins that the Marlins will more closely adhere to the principles of revenue sharing by increasing their big league payroll is probably motivated - in part - by Mr. Weiner’s need to address “rookie compensation”.

LWIB, Buster Olney commented for ESPN on the continuing speculation that the next CBA (the current CBA expires in December of 2011) will address the divisive issue of “rookie compensation”.

And there is a strong belief on the side of management that a slotting system can be completed, because the union will embrace the idea -- so long as the Players Association is guaranteed, in some fashion, that more money will be spent on major league players. How this happens remains to be seen, but there are agents convinced that the interests of the draft-eligible will be swapped out for the interests of the union veterans.

NBC Sports baseball blogger Craig Calcaterra responded with scepticism to Mr. Olney’s comments, wondering if the MLBPA is open to any “capping” (i.e. “slotting”) of compensation;

I was always inclined to believe that too, simply because there were so many veterans on record taking issue with the size of draft bonuses and that it makes sense that they would be willing to negotiate away the rights of amateurs if they got something for themselves. But that changed when Michael Weiner referred to the idea of hard slotting as "a salary cap" in his introductory press conference last month. The term "salary cap" is a rallying cry for the union. Always has been. The owners know this, and they have publicly abandoned any effort to impose one because they know the union will gladly strike over it and will likely win. Again.

But has the MLBPA’s long and steadfast philosophical opposition to any “capping” of player compensation outlived its usefulness? One of the purposes of a salary cap is to limit player compensation but in recent years the players in the only “capless” league - MLB - have come to earn the smallest percentage of league revenues amongst their “big 4” peers. (Arguably so, more on that below) Not coincidentally, the NFL owners appear eager to rid their league of their salary cap as soon as next month, in part due to escalating player compensation. (see The Biz of Football)

The February 2010 edition of the Journal of Sports Economics includes a paper by Andrew Zimbalist entitled, Reflections on Salary Shares and Salary Caps (read the paper here in PDF). The paper examines the many variables in calculating “salary shares” amongst the “big 4”. As Mr. Zimbalist notes, there have been widely divergent media reports on the percentage of MLB revenues earned by the players. The different conclusions can be attributed to different criteria in calculating league revenues and team payrolls. On the revenue side there are widely differing valuations of the “related party transactions” of owners including most significantly in MLB the value of the TV rights “paid” to RSNs owned by the franchises. Similarly, discrepancies in calculating team payrolls arise over whether or not players on the disabled list are included as well as the difference in including or excluding the 15 “reserves” on the 40 man roster (as opposed to solely the active 25 man roster). As well, some calculations include or exclude player benefits and deferred salaries. Nonetheless, Mr. Zimbalist concludes that, “The player share reached a peak of 67% of revenues in 2002, but since has fallen to 51%.” That 51% would place the MLB players at the bottom of their peers in the “big 4” in terms of percentage of earned industry revenues. Mr. Zimbalist goes on to explain that, on average, MLB clubs spend approximately $20 million per season on player development, including an average of $11.5 for the salaries of their minor league players. If those expenditures are included, the percentage of MLB revenues being spent on players increases to 57%, slightly exceeding the percentages in the NHL and NBA. However, Mr. Zimbalist notes that, “…given the higher revenues in MLB, one would expect its share to be above those leagues.” More from Mr. Zimbalist;

The abiding question is why, given the presence of a salary cap system in the NBA, NHL, and NFL and the absence of a cap in MLB, MLB players do not command a higher share of sports revenues. The MLBPA has made a religion of avoiding a salary cap system at all costs and, as a result of this orthodoxy, has endured multiple work stoppages over the years. Has the fight been in vain?

Unfortunately, there are no definitive answers to that question, but the very fact that the question can be asked is of profound interest. After all, if cap and open systems are salary share neutral, but cap systems, as economic theory instructs us under most assumptions, are more likely to promote competitive balance, then cap systems would appear to be a preferred mechanism for optimizing league performance.

Mr. Zimbalist goes on to compare the pros and cons of the NFL “cap” system and the “open” system of MLB. He notes that in the NFL, due to “unequal club revenues” and a concurrent “narrow range” of team payrolls mandated by the salary cap, conflict has arisen amongst owners over “unequal rates of profit across the clubs”. He also speculates on whether the MLBPA erred in not accepting the owners offer in 02 of a minimum team payroll of $40 million and discusses the pitfalls that came with the increased revenue sharing of that same CBA negotiation. Mr. Zimbalist describes a “revenue-sharing welfare system” that has guaranteed profitability for low-revenue franchises choosing to “lowball” team payroll.

Indeed, several teams apparently adopted this strategy and lowered payroll into the $14-$30 million range over the ensuing years. The good news was that this option preserved the profitability and financial strength of low-revenue clubs, the bad news is that it did little to provide ownership incentive to produce a winning team or to promote the desideratum of competitive balance.

Many dispute that there is no salary cap in MLB. Those same people argue that in real terms the Competitive Balance Tax (aka luxury tax, aka Yankee tax) serves as a de facto salary cap for 29 franchises. Amongst those is Shawn Hoffman, who speculated last week in Baseball Prospectus that the MLBPA’s aforementioned success in forcing the Marlins to spend more of their revenue sharing proceeds on their big league payroll marks the introduction of a de facto salary floor in MLB;

The union probably won't stop there. The Pirates are supposedly next, and it's always possible that Weiner will expand the push to include any other team that is spending less than $50 million or $60 million. The short-term goal is pretty clear: if the union can pressure two or three teams to spend an extra $10 million on payroll, that's $20 million or $30 million that's being transferred to the players. But the long-term goal might be even more ambitious: the union could very well be trying to impose a soft payroll minimum, much like the luxury tax serves as a soft maximum.

In a lot of ways, it makes sense: the luxury tax is a real rule with real penalties for teams that spend more than what is deemed socially acceptable by MLB. But there's no similar penalty for teams that spend too little. A tax on payrolls under some very conservative number—much like the luxury tax, which very few non-Yankees teams have reached—seems pretty reasonable, especially if those teams are receiving revenue-sharing dollars and are turning healthy profits.

Increasing the big league payrolls of the franchises at the bottom of the scale would help to satisfy Mr. Weiner’s veteran player constituency but would it also put the small/mid revenue clubs in an even more disadvantaged competitive position? The Pittsburgh Pirates have been very vocal in defending their decision to reduce big league payroll in favour of increasing investments in player development. Again from Mr. Hoffman;

…..teams at the bottom end of the success cycle have no reason to spend on major-league payroll, and in fact it can actually be counterproductive. If the clubs are required to spend a certain percentage of their net revenue-sharing dollars to improve their teams, those other categories—the draft, international free agents, et al—need to be counted.

Concluding the upcoming MLB CBA negotiations will again depend upon finding a suitable compromise between small and large revenue franchises. Increased revenue sharing is not only unpopular with large revenue franchises but the PA as well. The increased revenue sharing and Competitive Balance Tax introduced in the 02 CBA are key factors in the players eroded earned percentage of league revenues. Nobody is predicting that the next round of CBA negotiations will include a work stoppage. The quietly negotiated agreement between the two sides over the Marlins use of revenue sharing proceeds is a recent indicator that labour relations are on solid ground. But the PA might no longer be able to credibly argue with either their membership or management that the introduction of a salary cap in MLB is the worst possible scenario.

Select Read More to see if reforming the draft is key to increased competitive balance, plus other cool biz tidbits from last week

IS REFORMING THE DRAFT THE KEY TO INCREASED COMPETITIVE BALANCE?

LWIB Buster Olney reported for ESPN on some of the particulars of a meeting last month attended by the General Managers, Commissioner Selig, MLB’s senior person on labour matters Rob Manfred and former GM John Schuerholz. Mr. Schuerholz has been assigned by Commissioner Selig to make recommendations on improving the Rule 4 draft (aka “amateur draft). If Mr. Olney’s report is accurate (and it very likely is) the focus of the meeting was on introducing hard slotting and the trading of draft picks to the amateur draft. Whether or not MLB can reach agreement with the MLBPA on these changes - along with expanding the amateur draft to Latin America - remains to be seen. But, assuming that these changes are implemented in the next CBA (the current CBA expires in December 11) will they contribute to increased competitive balance in MLB? Many small/mid revenue franchises are lobbying for slotting and expansion of the draft to Latin America (de facto the Dominican Republic) because they believe a “levelling of the field” in competing for amateur players is key to competing with large revenue franchises capable of outspending them on big league payroll.

LWIB Tom Singer reported for MLB.com on the Reds signing of the much heralded Cuban P Aroldis Chapman. That the small market Reds were the successful bidders in the very competitive bidding for Chapman surprised many. The Reds were not the only small/mid revenue franchise that seriously bid for Chapman. On the Reds’ successful pursuit of Chapman, Mr. Singer reported that, “As confirmed by agent Randy Hendricks, at the end they had to outdraw the A's and one other "sub-.500 club." (likely the Blue Jays) Mr. Singer’s report also notes that last month the small market Royals made a $7 million commitment to another Cuban P, Noelle Arguelles and the small market Twins recently spent $3 million plus on Dominican shortstop Miguel Angel Sano. The large financial commitments being made to international free agents is not limited to small/mid revenue franchises, as demonstrated by the Red Sox $6 million plus commitment made this off season to SS Jose Iglesias, but the trend is clear. More from Mr. Singer’s report;

What teams like the Royals and Reds may lack in resources to compete for the elite on the mainstream free-agent market, they are making up for, this winter in particular, with their ability to adapt, to be resourceful and to invest in the international market of baseball talent.

General manager Walt Jocketty showed his hand after announcing the Reds' Chapman deal: They had little chance of landing such a talent by other means, free agency or Draft, so they had to go all-in on the Cuban kid.

AND

"You have to get your talent somewhere," said Rob Manfred, MLB's executive vice-president of human resources. "We believe focusing on entry-level talent is the best competitive strategy, particularly for smaller-revenue clubs. We think that's a very good thing."

LWIB, Brewers assistant GM (and former Blue Jays GM) Gord Ash made suggestions for improving the amateur draft to Richard Griffin of the Toronto Star.

“Even though the last couple of big international signings have been by smaller-market clubs, traditionally speaking we have not been available to avail ourselves of that level of talent," Ash said. "The Brewers have focused pretty solely on the draft and have done pretty well. We don't even look at Chapman because we can't even go there (financially).

"Some people talk about having a parallel international draft, but then you're creating two No. 1 overall picks and I'm not sure you want to be doing that. The side benefit (with a universal draft) to me is that some of the players that get over-drafted in the U.S. and Canada might go down a little bit.

"By and large, most of the Latin-American guys are moderately priced guys. I don't think that's an issue there….

AND

"Baseball needs to adopt the NHL rule where if you're drafting underage players (high schoolers) you retain the rights," Ash said. "If you're forced into signing them and overpaying because you're trying to buy out colleges you could say, `Look, go to college. We'll keep our eye on you and we'll sign you later.' That has to go hand-in-hand with asking colleges to convert back to wood bats even if MLB has to subsidize it to some degree. It's a much different game with aluminum bats."

Ash also suggests an opt-in registration for players saying that, if drafted, they will sign.

LWIB, Baseball America Executive Editor Jim Callis was asked to comment on MLB’s plans to reform the amateur draft;

I could go off on this subject for hours, but if I were running MLB, I'd lay off the teams in regards to the draft. Right now each team spends about $6 million on the draft, a pittance in a big league budget. The players are severely undervalued compared to what they'd get on an open market, and severely undervalued to what they'll be worth if they become solid big leaguers who are cost-controlled for up to six years. If MLB mandates slotting and/or adds international players to the draft, it won't level the playing field. It will eliminate the opportunity for small-revenue clubs to grab as much talent as they're willing to pay for, which will make it that much tougher to compete because they're not going to be able to sign quality big league free agents. It also will drive more players to other sports and to college baseball.

Perhaps reforming the draft will contribute to increased competitive balance and perhaps it won’t. But the frustrations of small/mid revenue franchises in competing with their large revenue peers is easily understood. Despite record amounts of revenue sharing in MLB ($400-$450 million in 09) and a de facto salary cap (aka the Competitive Balance Tax, aka the Yankee Tax) small/mid revenue franchises and their fans understand that discrepancies in big league payroll most often explain why some win enough to qualify for the playoffs and some don’t. In a guest column earlier this month for the Sports Business Journal, minor league owner and law professor Len Simon wrote;

The data shows that MLB payroll levels separate the contenders from the pretenders. If one looks at 2004-08, and rank-orders the 150 team payrolls (30 teams times five seasons), the following pattern emerges:

  • ŸTop 10 percent of payrolls: make playoffs 80 percent of the time
  • ŸNext 10 percent of payrolls: make playoffs 47 percent of the time
  • ŸNext 30 percent of payrolls: make playoffs 24 percent of the time
  • ŸBottom 50 percent of payrolls: make playoffs 13 percent of the time

Is MLB genuinely interested in promoting competitive balance or is reforming the draft about controlling player development costs? Cynics would point out that MLB’s interest in reforming the draft has arisen in conjunction with the rapidly escalating signing bonuses being awarded to drafted amateurs and international free agents. (While industry revenues roughly doubled over the course of this decade) From Roger Noll, economics professor at Stanford University;

The only way to have equally balanced teams is to ban trades and sales of players and to have periodic drafts of managers, coaches and directors of player personnel. The methods that leagues use to create balance have been shown to have little or no effect on the distribution of quality among teams. The logic behind it is that it is not in the interests of owners as well as players to have balanced competition. If all teams were of the same strength, total league revenues would go up if the best player in KC were traded for the worst player in NYC. In a regime of salary caps and no free agency, the KC owner will be richer if he sells his underpaid star to NY.

SOME BRIEF TIDBITS

LWIB Darren Rovell reported for CNBC that MLB licensee 2K Sports is offering a $1 million prize to the first gamer to pitch a perfect game in their Major League Baseball 2K10 game. Might this promotion be linked to the disappointing results of 2K Sports MLB titles? Last month, Eric Fisher reported for the SportsBusiness Journal;

Take-Two Interactive, parent of 2K Sports and one of the video game industry’s most prominent producers of licensed sports video games, picked a rather routine forum to deliver some startling news. During a conference call early last month with financial analysts, company management warned it would report worse-than-expected quarterly results due to “several factors, the largest being the performance of its Major League Baseball titles in the fourth quarter.”

Two weeks later, when Take-Two indeed reported a quarterly loss of $22 million, the grim outlook for its MLB games continued, with the company projecting a fiscal loss of at least $30 million in 2010 solely from its licensed baseball titles.

2K’s licensing agreement with MLB and the MLBPA expires after the 2012 season. In particular this might be of concern to the PA which already saw their licensing fees greatly negatively impacted by their loss in the “CDM Fantasy Sports” case.

Michael Hiestand reported for USA Today that Fox is in discussions with MLB to move 2 “Saturday afternoon” games into prime-time this season. The Sports Media Watch blog followed up on Mr. Hiestand’s report;

Coming off of a third-straight season of record low regular season ratings, FOX is looking to move two MLB telecasts into primetime this season.
A FOX spokesman told USA Today that the network is looking into moving two regular season telecasts to primetime during the 2010 season. One primetime telecast would take place in May, with the other one airing in June.

FOX has only aired two primetime regular season games since acquiring MLB rights in '96 -- Cubs/Cardinals in September '98 (when admitted steroid user Mark McGwire hit his then-record 62nd home run of the season), and Yankees/Red Sox in April '04 (months after the teams' 7-game clash in the ALCS).

Not surprisingly, the same blog later reported that both those games would include the Yankees.

Eric Fisher reported last week in the Sports Business Journal that the Sun Life naming rights deal for “Dolphins Stadium” included an MLB connection. Fenway Sports Group put the deal together, the first naming rights deal concluded by the agency. Dolphins CEO Mike Dee formerly headed FSG.


Pete Toms is an author for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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