Please welcome this first article by Kyle Lamb, the latest author for the Business of Sports Network. -- Maury Brown
A few weeks ago, several financial statements were leaked, causing shock and awe reverberations through the baseball community. Though the home front is all quiet in preparation for that National Pastime’s postseason, the winds of change are soon to pick up steam.
After the season, the MLB Player’s Association and Major League Baseball are due for earnest preliminary discussions for the next collective bargaining agreement. The Deadspin Scrolls, as I’ll call them, left some ownership seething over the (self) reported lack of spending by their colleagues. I can only imagine how the Player’s Association will respond.
As a refresher course, Deadspin leaked financial statements and balance sheets for six different Major League clubs. The gist of the documents suggested that some of these clubs were gratuitous recipients of Major League Baseball revenue sharing, but not necessarily aggressive spenders of those funds. Since Major League ownership is not privy to other clubs’ financials, owners were left staring at these documents in disbelief with the rest of us.
The affects of these leaks are not completely known and won’t be for some time. But rest assured hopeless romantics of a Major League salary cap were dealt yet another blow in the name of fruitless passion. Love hath no fury like revenue payors scorned.
The shock has worn temporarily. But it’s likely we’re merely inside the eye wall of “Hurricane Labor”, and the retribution for these documents will unleash the fury of a much stronger storm on the other side of the wall. The basic agreement expires following the 2011 season meaning the next 6-8 months are vital in the bargaining process.
I used to be in the camp that firmly believed a salary cap was key to the long term success of baseball. I’ve gradually come off those concerns. Instead, I actually support the implementation of a minimum salary tax. Make no mistake, I believe a tax threshold needs to be implemented on violators of both the high end (looking right at you, Yankees) and low end. However, the cries for a salary cap are likely to dwindle in the coming years, so it’s time to concentrate on the issues that are easier to get corrected.
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A plan laid out in March by the Federal Communications Commission (“FCC”) might hold the key to baseball’s salary disparity. From the Washington Post on April 22:
“The FCC voted Wednesday to begin studying ways to achieve that goal, which was part of the agency's national broadband plan. One proposal would require paid television service providers to deliver their signals to a small adapter that could serve as a standard interface for broadband and paid television content. That adapter would connect to a television, computer or other device.”
As part of that plan, Wired.com reported in March that the FCC has also delegated unused frequencies from over-the-air (“OTA”) television providers to be used in conjunction with the national broadband plan. The intent here is very clear—the FCC believes strongly in the future of delivering broadcast content over the internet.
David Colarusso, columnist for the Huffington Post, had an interesting column on this subject this past spring. He wondered how long it would be until a la carte programming was delivered, possibly free, over the internet.
Colarusso writes, “This week, the FCC laid out its vision for a future where everything is carried over the Internet, and Comedy Central cut the commercials back down to one per break for all but the first ad block. The future is clearly up for grabs. So I couldn't help but wonder, how long will I be able to avoid paying for cable, and more importantly, if everyone adopted my viewing strategy, would it be sustainable? Would someone still make Mad Men?”
The future is already here; sort of.
The cable provider Verizon FIOS already offers some a la carte programming through their television service. Fancast, owned by NBC parent company Comcast and Hulu, a joint General Electric, ABC and Fox venture, both stream many of the most popular shows over the internet with short advertisements in lieu of standard 3-minute commercials. Though this model has yet to fully vest a full evacuation of cable television, the media research site ComScore reported nearly 40 million unique visitors to Hulu in March 2009, which is significant considering there are an estimated 120 million television-ready homes in the United States.
By now, you’re reading this information and might be reminded of Annie’s famous Field of Dreams line to her husband Ray Kinsella, “look, he’s my favorite writer too, but what’s Terence Mann got to do with baseball?”
This seismic, fundamental shift to internet television, possibly pick-your- programming, will allow Major League Baseball a more concentrated portion of revenue from content. Wisely, Commissioner Selig had the foresight to set up MLB Advanced Media L.P., which is a subsidiary of Major League Baseball’s Central Fund (the centralalized revenue sharing account), the controlling entity of MLB.com and the growing services MLB TV and MLB.com’s At-Bat mobile device application.
These services, which stream Major League Baseball games over the internet by video and audio respectively (i.e. television and radio feeds of your chosen favorites), play an important role in the future of Major League Baseball revenue sharing. All 30 clubs have an equal interest in MLB Advanced Media, meaning as the transition from over-the-air television to online a la carte happens, MLB is in position to control most of the revenue and divide it equally among clubs.
This also means that as the revenue becomes largely centrally distributed, local revenue disparity from broadcast rights will dwindle. In fact, it’s conceivable that the majority of any disparity in revenue 10 or 15 years from now might be from attendance and concessions.
There will undoubtedly be some obstacles along the way. The Yankees’ and Red Sox began a trend pioneering their own cable networks, profiting billions along the way. With ownership in YES and NESN respectively, these cable networks pay the club annual fees for rights to broadcast games for just pennies on the dollar. The networks benefit by keeping the costs low, but making a fortune on advertising meanwhile the clubs have the advantage of reporting lesser revenue but still be able to pump back capital investments into the club. It’s been a win-win situation. It’s certain these investments, ones in which the Baltimore Orioles, Washington Nationals and other clubs have already joined suit, will complicate the transition to a mostly-internet revenue stream.
But assuming, then, the need for a cap is diminishing, and the efforts to get concessions to implement one from the Players’ Association is futile, perhaps the key to the immediate health of Major League Baseball lies within the NBA’s own cap structure.
To some people, the thought of using anything related to the NBA salary cap is more frightening than what Mark Cuban might say next. After all, the system is convoluted enough that general managers often hire a “capologist,” to explain if two plus two really does equal four within the cap guidelines. However, nested within the finer details of a complex cap system is a simple, equitable solution that players, owners and the commissioner could (and should) rally behind: designated income levels for players.
In the NBA, the league pools together what it terms all “basketball related income” or BRI, to create a functioning salary cap. The BRI is a league sum of revenue relating to attendance, marketing, television and radio, etc. Of course what we’re after is not a salary cap, and any system relating too closely to the NBA would be seen as a de Facto salary cap by the MLBPA—or at least another step towards it.
But we can draw the line before that.
The NBA currently defines its cap at 51 percent of the BRI. In addition to this, the league sets a mark (currently at an estimated 61 percent) to apply a luxury tax. The tax is set at a higher level than the cap because the NBA uses exceptions to function over the cap. A team cannot go over without using a limited number of exceptions. These exceptions range from signing your own free agents to signing a player at the mid-level average salary. Since teams are limited in their flexibility once over the cap, the league offers some leeway before assessing a tax.
In addition to this payroll, however, the league also has an escrow system that designates a certain percent of salaries paid to players. In this escrow system, a certain percentage of money is taken from each player’s pay and held in escrow. After the season, the league assesses the entire amount of money paid to players, and redistributes the amount necessary to guarantee the players their guaranteed share. Currently, players are guaranteed between 57 and 58 percent of overall BRI. Anything under this amount is paid back to the players. Anything over is redistributed back to the owners.
The Players’ Association would never allow any system that essentially garnishes wages of its earners. However, this concept could be strategically applied to the revenue sharing system to better guarantee compliance from payees within the system.
Let’s start with the basics of revenue sharing. The straight-pool plan transfers 31 percent of a team’s local net revenue into a pool, and distributes it evenly among 30 teams. Biz of Baseball reported in February that an estimated $433 million was transferred between local and central revenue. That amount derives from the local portion and an amount necessary from the Central Fund to achieve 48 percent of the revenue being transferred.
Local revenue is essentially the sum of a team’s revenue from local broadcasting rights, gate receipts, concessions or parking, advertising and marketing. If a team brings in $100 million, then $31 million would be paid into the revenue sharing pool. Let’s say a team earns $100 million in local revenue, pays out $31 million and then receives back $15 million from the equal pool sharing. We would say, then, a team has earned $84 million in net local revenue.
Major League baseball could potentially solve several problems by applying a stiff (i.e. twice the dollar amount) threshold to baseball income above and below the set parameters.
Using our $84 million example in net revenue, let’s say a team earns an additional $50 million in central fund sharing. We could apply a minimum threshold of 60 percent, meaning teams must spend at least 60 percent of their revenues in salaries (defined by signing bonuses and 40-man roster costs) and a maximum threshold of 80 percent. In our example of $84 and $50 million ($134 mil total), a team would have to commit at least $80.4 million to payroll obligations to avoid tax assessment, but less than $107.2 mil. If teams are under the threshold, the amount is withheld from the central revenue sharing and paid out to the players on the roster in proportion to their salaries, and the a fine is assessed and added to a large pool. If a team goes over the amount, twice the dollar amount is withheld from the central fund payment, and added to the escrow pool.
Essentially then, every dollar below or above these thresholds are taxed and applied to an escrow account. A percentage of the account shall go toward the industry growth fund (as tax payments do currently) and the rest shall be divided up and split evenly among non-violators of the tax threshold. This system would promote teams to spend on the low end, but spend conservatively on the high end.
The risk here is the union calling this a de Facto salary cap. But in reality, there’s nothing stopping teams from going over the threshold, merely a financial penalty for doing so. But the positives would have to outweigh the negatives if you’re the Players’ Association. This guarantees the players a set revenue as baseball grows in popularity and industry revenue.
If the future of television unfolds as industry experts are predicting, the need for a salary cap may vanish entirely. A tax penalty, or some sort of soft cap could be implemented later down the road, but baseball would conceivably be much healthier financially than it has ever been. Competitive balance might close to being achieved.
There’s still that hurricane-a-coming in the near future. But if the two parties want to avoid the storm surge, it should look to the NBA for guidance. A guaranteed percentage of revenue might seem like a short-term fix, but it could actually be the step toward a happier working relationship.
Kyle Lamb is staff writer for the Business of Sports Network. He looks forward to your comments.
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