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Home Pete Toms LWIB: The State of Revenue Redistribution in MLB, plus Tidbits

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Pete Toms Article Archive
Written by Pete Toms   
Monday, 14 February 2011 22:08

Last Week in Bizball by Pete Toms

This week in “Last Week in BizBall, the state of revenue redistribution in MLB, plus many tidbits

REVENUE REDISTRIBUTION IN MLB

LWIB, Baseball Prospectus published a very informative and thoughtful piece by Neil deMause on the past and present efforts in MLB to promote competitive balance via revenue sharing. Neil’s column was inspired by Yankees President Randy Levine’s recent caustic remarks directed at Rangers owner Chuck Greenberg. Essentially, Levine said that it was time for the Rangers to get off welfare. In other words, become a revenue sharing payor and stop being a payee. As Neil points out, disputes within MLB ownership over revenue sharing is nothing new. (Remember Kohler?) For decades, MLB has endeavoured via the amateur draft, splitting the gate, centralizing revenues, sharing of local revenues and the so called “luxury tax” to mitigate the inherent advantages that large markets have over smaller markets. Inspired by Neil’s column, and as MLB enters the final season governed by the current CBA, it is convenient for me to add my thoughts on the present and future of revenue sharing.

One of the most important changes made to the CBA in the last round of collective bargaining was to the marginal tax rates used to calculate the revenue sharing component. Subsequent to the conclusion of negotiations which resulted in the current CBA, Maury Brown interviewed sports economist Andrew Zimbalistv. Mr. Zimbalist was the architect of the current revenue sharing formula and made this forecast:

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.

MLB is about to enter its fifth (and potentially final) season operating under the current revenue sharing formula. Is/has it contributed to less economic disparity? 2010 saw the greatest number of $100 million plus contracts awarded (Lee, Crawford, Tulo, Werth, Holliday, Mauer, Howard) since 2000. Yes, MLB is awash in money (record $7 billion in revenue last year) but the SportsBusiness Journal pointed out that, “…nowhere in that list are the New York Yankees and Mets, Chicago Cubs or Los Angeles Dodgers — four clubs typically among the highest earners in MLB. That quartet of teams was involved in nine of the prior 19 $100 million-plus contracts. Just as in the standings this past season, and the San Francisco Giants-Texas Rangers World Series matchup, MLB’s economic middle class continues to grow more assertive.” Might the total amount of local revenues redistributed via revenue sharing last year also suggest diminishing economic disparity in MLB? Maury Brown pointed out in 09 that MLB had stopped disclosing revenue sharing figures in recent years. However, we do know that last year the total amount of revenues redistributed via revenue sharing actually decreased over 09 despite a year over year growth in industry revenue. Maury Brown explained the decrease. While revenues increased, some of the payors saw net local revenues increase at less a rate than some of the payees, hence the decline in revenue-sharing dollars. Any discussion about economic disparity in MLB inevitably focuses on the riches of the Yankees. But did 2010 demonstrate that the economic gap between the Yankees and their peers has diminished? Despite an increase in the Competitive Balance Tax threshold, the Yankees payment decreased over 09 and in fact was the smallest “luxury-tax” bill they had been assessed since 03.

SELECT READ MORE TO SEE THE REST OF THIS ARTICLE, PLUS A WHOLE LOT TIDBITS

But as Neil deMause notes, there are factors contributing to economic/competitive disparity beyond sharing of local revenues. Centralized revenues are also key. As competition amongst RSNs, telcos and DBS for local TV rights are yielding enormous guaranteed deals (see here) and some club owned RSNs (YES, NESN, SNY) are thought to be worth more than the baseball franchises, MLB’s national TV deals are less important to economic parity. From Neil’s BP piece:

…According to the informative (if less than creatively titled) book Free Agency and Competitive Balance in Baseball, by 1980 national TV revenues exceeded local TV revenues for the first time in baseball history. And because national TV revenues have always been shared among all the teams, what followed was the Golden Age of Baseball Parity, in which 11 different teams won the World Series in the course of 12 years, and baseball's Gini coefficient (a statistical measure of inequality) fell to all-time lows..

What ended the Golden Age was the rise of local cable deals. The Yankees' $500 million contract with MSG in 1988 begat the YES Network, and the Red Sox' purchase development of NESN, and so on. As the share of revenue that was shared via the national TV contract dropped, teams without tens of millions of cable-ready fans couldn't compete, and we soon enough had entered the Gilded Age of Baseball Disparity, which, the occasional Marlins championship banner notwithstanding, we're still in.

For many decades, centralized revenue meant national TV contracts. The present and future of centralizing media revenues in MLB will be increasingly about broadband and wireless rights (see recent ESPN deal with NFL). In 2000, the owners funded the formation of Major League Baseball Advanced Media (MLBAM or BAM), the so called digital arm of MLB. MLB awarded the rights to digital media for all clubs to BAM because they wanted to centralize that revenue. BAM evolved into, unquestionably, the industry leader in streaming live sports. BAM’s “out of market” live game offering MLB.tv and mobile “At Bat” app are both huge successes. BAM has been so successful operating MLB.com that they also provide live streaming and authentication technologies to the likes of MMOD and ESPN3. BAM also operates the team web sites of all MLB franchises plus provides primary (Tickets.com) and secondary (industry wide partnership with StubHub) ticketing. So successful is BAM that last year they reportedly rejected an offer of $1 billion. As consumption of digital media increases, the role of BAM, already vital, will become more important in MLB. As with any revenue sharing initiative in MLB, past or present, the centralizing of digital revenues in MLB has, and is, a contentious matter amongst clubs. In November I wrote:

…But for all BAM’s success, there are those in MLB who believe BAM is too powerful. Those critics question if BAM plays too large a role in areas that would be better exploited by either individual clubs or third party rights holders. Specifically, team and league wireless rights, in-stadium wireless, in-market streaming of live games, control of online video “highlights” (ie. ESPN.com broadcasts highlights of MLB games but RSNs - many owned, at least in part, by clubs, don’t have access to online video) and ticketing (both primary and secondary). (see more here) BAM has also antagonized some fans by restricting use of video on blogs. (see MLB Doesn’t Seem to Understand the Internet and follow the links within)

In January 09, MLB launched their own cable channel, MLB Network. (MLBN) Due in large part to sharing equity in the channel with the iN Demand cable consortium, MLBN launched in a record 50 million homes. That number has increased to 56 million. In December, MLBN CEO Tony Petitti stated that he hoped to cut deals with Dish Network and AT&T before this season which would increase the channel’s distribution to 70 million homes. Mr. Petitti also said, "We'll have the ability to make distributions in 2011," Petitti said. "That's really up to the commissioner's office as to what form those take and when and what they want to do with that money." When the current national TV deals with Fox, ESPN and TBS expire after the 13 season, MLB will have the option of “selling” an exclusive package of games to MLBN in hopes of increasing both subscriber fees (although that is complicated by sharing equity with iN Demand) and distribution.

Formal CBA negotiations will begin later this year and neither side appears to be fundamentally unhappy with the current revenue sharing structure. There are occasional outbursts of discontent such as we just witnessed with Randy Levine. In December 09, Red Sox owner John Henry lambasted MLB for subsidizing chronically uncompetitive teams guilty of pocketing revenue sharing/central fund receipts. 2009 also saw Brewers owner Mark Attanasio and Pirates president Frank Coonelly publicly argue that increased revenue sharing was a necessity. But the “leaked financial docs” of last year, which revealed that the Pirates and Marlins are profitable, provided the ideal opportunity for the big “payors” to discredit revenue sharing and not one was quoted in the media. The “leaked financial docs” also afforded an opportunity to the PA to discredit revenue sharing, but they too, remained silent. After all, revenue sharing suppresses player compensation. Satisfaction within the industry over revenue sharing was probably best exemplified by the cooperation amongst the PA, MLB and the Marlins last year in agreeing that that franchise will invest more of their revenue sharing proceeds in the big league roster. When formal CBA talks begin I’m curious to know if the PA will be looking to share in revenues from club owned RSNs and if they are satisfied with how (and how much) they are sharing in the profits of BAM and MLBN. But as for how currently defined local revenues are shared? I don’t see it as an issue in the upcoming negotiations.

TIDBITS

  • Lots of pundits don’t like salary arb because it results in HUGE salary increases, whether you file or don‘t. I like salary arb because it ended holdouts and the players receive, relatively, peanuts in compensation their first two years, so I‘m ok with them cashing in big in year 3. (I won’t get into Super Two’s) Plus, the owners are uber rich and MLB hauled in $7 billion last year plus there are the RSN revenues and yada, yada….LWIB the Ross Ohlendorf salary arb settlement provided fodder for the anti-salary arb camp. (they also don’t understand the irrelevance of W/L in evaluating the worth of pitchers) Murray Chass, Now the standard has hit rock bottom. Ross Ohlendorf has won his salary arbitration case despite having won only one game last season. One victory equals $2,025,000, the three-member panel of arbitrators ruled last week. The $1.4 million salary Pittsburgh submitted wasn’t enough of a raise from the $439,000 salary Ohlendorf earned last year.” Ed Sherman, “When it comes to player salaries, this one tops everything. Last year, pitcher Ross Ohlendorf went 1-11 for the Pirates. Sure, Pittsburgh scored two runs or less in 13 of his starts, but he still was 1-11. Yet Mr. Ohlendorf managed to win his arbitration case against the Pirates. As a result, his salary will go from $439,000 to $2.03 million. Imagine how much money he will earn if he wins two games in 2011.” I say, congrats Ross.
  • I think I’ve mentioned this before, but this season will be the first that all local Cardinals TV broadcasts will be solely available on cable. The Cards are the latest example of the sports TV industry-wide migration from over-the-air to cable. I understand the money end of it, the superior “dual revenue” (sub fees and ads) cable model and all of that… but shouldn’t some games be available on so called “free TV”? I know cable subscription is tied to income and baseball fans skew relatively prosperous but still….a large number of people don’t have cable and some of them must be ball fans. And ball clubs get public money so shouldn’t all of the public be able to watch them play, at least occasionally? (have I become Dave Zirin?) And also, from a business end, doesn’t putting your games exclusively on cable risk “ghettoizing” your product to the already converted? Jacob Newkirk isn’t happy about the Cards cable exclusivity.
  • Last season, Fox experimented with Saturday prime time games. I guess they were pleased with the results because they have Saturday baseball on Fox scheduled in prime time three consecutive weeks in May. They also have some 1:10 PM ET starts scheduled and you should read the Sports Media Watch blog where I learned this.
  • Bonus kickbacks, age and identity fraud, steroid use…the reputation of the buscones in the Dominican Republic has taken a severe bruising the past few years. LWIB, the allegations against the buscones hit a low point when one of their most successful was arrested and charged with sexually molesting two of his players in 2003. See Baseball America and Alan Schwarz.
  • LWIB, it appeared more likely that this season will be the last for the Cal baseball program. Cal announced in September that the baseball program would be amongst five sports programs axed as a result of a need to cut costs. A subsequent fundraising campaign rescued three of the five programs but not baseball. Cal chancellor Robert J. Birgeneau acknowledged that Title IX was a major factor in the decision. Read Aaron Fitt in Baseball America for the full report.
  • Phillies fans already know that Comcast has them by the balls, so to speak. Thanks to the “terrestrial loophole”, Comcast has long been able to withhold CSN Philadelphia from their DBS competitors. So, if you’re a Phillies fan you’re also a Comcast subscriber, like it or not. But as Jonathan Berr reports, thanks to the FCC approval of the Comcast/NBCU merger, Phillies fans should soon have options.
  • LWIB, developers unveiled plans to construct a multi facility sports complex in Las Vegas. There is obviously a LONG road ahead before any of this becomes a reality but evidently it …would include a 9,000-seat ballpark capable of expansion for hosting an MLB team.

Pete Toms is senior writer 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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