On Tuesday and Wednesday, TYU will be running four guest posts from four excellent writers. The third comes from Mark Allen, who some of you might recognize from twitter as @markelderallen. He looked at the current economic system in baseball, and the Yankees’ place within it. It is an entertaining read that I am sure you will enjoy.
Since 2003 the New York Yankees have paid over $180 million to Major League Baseball in luxury taxes. The luxury tax bills have not been sufficient to prevent the Yankees from putting a quality product on the field of play, but one has to wonder why every 7+ years the Yankees should have to offer a full year’s payroll to the “poorer” or “smaller-market” teams in the game.
The most common justification for the luxury tax threshold stems from a belief that the goal is somehow to achieve a level financial playing field among all of the teams. Words like “fairness” are often used and comparisons to football are made to seem logical and relevant. Before we can address the issue of how to create a level playing field, how to be “fair,” and how to obtain competitive balance, we must first address the greater question of why these should be league objectives.
Is there something inherently wrong with one team, be it the Yankees or any other team, generating more revenue than any other team? If the Yankees, over the course of time, as their spending power increases both in total real dollars (meaning adjusted for inflation) and relative to other teams, find a way to use their superior resources to win a disproportionate number of regular season, postseason and World Series games, is that wrong, and if so, how? Is it bad for business? Is it bad for the purity of the sport? Is it immoral?
First, let us consider whether this financial advantage is inherent or achieved. In my lifetime, and likely yours if you are reading this post, the Yankees were outspent by the Royals. Yes, twenty years ago it was the Kansas City Royals who led Major League Baseball in payroll. It bears repeating. Kansas. City. Royals. I don’t have the figures in front of me, but I find it hard to believe that both teams were putting an equal share of revenue toward payroll in the early 1990s. Since then, the Yankees have dramatically improved their revenue stream with the creation of the new Yankee Stadium (aka YSIII and NYS), and more importantly, the YES network. Today the radio rights to broadcast New York Yankees games cost more than the television rights to Kansas City Royals games, so it is unlikely the Royals will be outspending the Yankees any time soon.
This minimizes the criticism of many small-market teams that they could compete better if they were to actually reinvest their revenue into product development (such as signing draft picks, foreign prospects, and proven free agents). It does not eliminate the criticism, but the truth is that under the current system, even if they were to ramp up efforts to bring fans to the ballpark with, say, ballpark renovations or fan promotions, their revenue stream would not suddenly jump to a level at which they could financially compete with the New York Yankees.
If we agree that the financial advantage is inherent to the market due to population density, then we can agree that the financial advantage is “unfair,” but not whether fairness is relevant. Understand that Major League Baseball in its current iteration is, in real terms, more profitable than it has ever been for players, owners and team management. It is hard for any business to grow the way baseball has grown and simultaneously condemn itself. If unfair baseball is more profitable, then as a business, it is illogical to make fairness the goal.
However, when we expand our scope, we see that all sports are more profitable today, and so baseball’s growth, when understood in the context of the broader sports landscape, is less impressive. It is plausible that baseball’s growth is being slowed by the public perception of a lack of fairness or competitive balance. I say perception because the financial disadvantages of smaller market teams does not necessarily have an anti-competitive impact that would be considered unfair, even if we agree that those financial disadvantages are, within the present-day system, inevitable.
So for the purposes of discussion, we are considering the current landscape of Major League Baseball to be unfair and unbalanced, but even if we agree that this problem is intrinsic to the system in place, we may still disagree whether the problem needs correcting. I am assuming, for the purposes of discussion, that correcting this problem would result in increased demand for Major League Baseball.
Now, any economics student can tell you that, if baseball were subject to market forces, and one team, such as the Yankees, were able to produce an amount of revenue so relatively high that it prohibited another team’s ability to compete, that team would either be folded or forced to relocate to a stronger market, and in the words of Shakespeare, there’s the rub.
No matter what the product, market forces prevent competitive imbalance and dictate that, over the course of time, no profit is earned. The only way to ensure that is to allow the businesses manufacturing the product to compete against each other, and Major League Baseball does not, except when they do.
In the case of the Oakland Athletics, a move from Oakland to San Jose has been blocked because San Jose baseball fans primarily root for the San Francisco Giants, and so Oakland – a team that already competes in essentially the same geographical market – has been prevented continually from moving into an area populated primarily by fans of another team.
However, in the case of the Washington Nationals, just the opposite is true. The Nationals were previously the Montreal Expos – a team with no proximity to Washington, DC. Washington, DC and its suburbs in Virginia and Maryland were filled with fans of the Baltimore Orioles prior to 2007 when the Nationals came to DC. Orioles’ management protested the move, but was overruled by Major League Baseball, as commissioner Bud Selig was in favor of the move.
The rules that prevent most teams from moving into the geographic jurisdiction of existing teams are precisely the reason we have competitive imbalance today. If Florida could move to Manhattan, they would not only be increasing the size of their natural market, but they would be reducing the market size of two competitors who are presently dominant in the marketplace of professional baseball. Unfortunately, if the Yankees and Mets even had to blink to block such a maneuver, I’d be shocked. Both teams are too influential for the issue to subject to even be seriously broached with the owners.
Getting rid of this rule has the potential to permanently and summarily solve the problem of intrinsic financial advantages of a specific team. The luxury tax system, on the other hand, is not even a band-aid, nor is it a real acknowledgment of a problem. The Yankees are seen as having an intrinsic advantage because of the population density of their city and the lack of other teams in their geographic region, and yet the luxury tax does nothing to address this concern. If the Yankees made $10 billion in 2010, but spent only $100 million on payroll, they would pay not pay a cent of luxury tax this year. This tax is therefore effectively a safeguard for profit.
Baseball is exempt from antitrust regulations and therefore permitted by US law to operate in an anticompetitive business environment. The continued insistence on an anticompetitive marketplace has resulted in the ability of every team to make a profit – not just the teams from New York and Los Angeles. The Florida Marlins, for example, represent a metropolitan area of over 5 million people, so how is it that they recently had a team payroll that is considerably lower than John Lackey’s current salary? Ownership took money from the Yankees luxury tax payments, from ticket sales, from television and radio contracts, and they pocketed it.
If the fans of Major League Baseball are comfortable with ownership groups profiting and not reinvesting their revenue into improving their product (as EVERY other business must do to compete in the marketplace), then we should continue to operate in a system with salary restrictions, be they taxation-based or cap-based. If fans want teams to do everything they can to always put the best possible product on the field, then it is time to abandon the antitrust exemption and eliminate the geographic relocation boundaries presently in place. Let the market determine how many teams can compete, where they should situate themselves geographically, and individual teams can operate as they please in a free and open market. Then the success of each team will be the result of its merit, and that is what people are clamoring for. If that solution is unappealing to fans, then perhaps they should reconsider their stance on “fairness.”
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I have made this point before, the Yankees have 40 players or less than 10% of the talent pool available. How much each player makes is irrelevant. Can the Yankees at will buy whatever player they want, No. Have the Yankees spent money on players that were less than successful, yes. Are there team owners who do not invest in their teams to include spending the tax (revenue share). Are there teams in cities that do not have the population to draw fans, perhaps. Is it the Yankees or Red Sox, or Philly’s fault that they can sell out games, no.
Baseball needs to come to grips that it has teams that cannot compete for fans or on the field. Do you remember when there were only 16 major base ball teams?
If there is greed it is with MLB and not the Yankees
Just wanted to say great post. I love the concept. I haven’t had time to really think through any unmentioned flaws, though I am sure there are a few (including the possibility of too many teams or geographic imbalance). Regardless, it’s something I haven’t heard before and does seem to address the problem.
Loved the post, Mark. It was like breathing pure oxygen after gasping for air all day. Baseball is a business, and the answer to revenue disparities is to grow the revenues of the lower teams, not to penalize the Yankees. Penalizing the Yanks does nothing to improve the lower teams, it’s simply a transfer payment. Folks who want to punish the Yanks should be careful what they wish for. The big bad Yanks are the #1 road draw in Baseball, which fills the coffers of their local teams and helps them buy their own talent. But that wasn’t always the case, back in the early 90′s the Yanks were bad and played to empty ballparks both at home and away. Tearing down the Yanks or destroying their business model is bad for everyone involved.
People who criticize the Yanks for spending only look at the total (aggregate) payroll number. If you look at payroll as a percentage of total revenue, the Yanks are actually fairly restrained and middle of the pack in terms of spending. If they wanted to tie their payroll to the same % of revenue that the Red Sox or other teams spend, the could easily spend over 300 million. Other teams will argue they have to overspend to keep up, but that’s simply not true. As Joel Sherman pointed out the other day, the Rays payroll would be well over 200 mil if all of their players were acquired via free agency. Don’t get too hung up over salaries, but rather look at the talent assembled on the roster. Teams that are smart with their resources and focus on developing talent can compete, and do all the time.
I think the extra team argument is overblown and discounts the fact that because sports is entertainment and not a physical commodity loyalty plays a large role. Hockey has three teams in the New York market. One arguably stays above water because it drafts well and wins, another is all but drowning because it isn’t well run and doesn’t. It is a Rangers town, and so they will sell out or close to it regardless of success. New York is largely a Yankee town. The Mets drew fans because teams with a historic attachment to the two departed teams had none to the Yankees and indeed had considered them rivals before the Dodgers and the Giants left. A team might be able to establish itself in New Jersey as the Devils did and look to grow a fan base over time (kids who started watching the Devils in the mid-90′s are now adults with money to spend on tickets at a beautiful new venue) but competitive teams in the Bronx or Queens are going to undermine that. Looking purely at factors such as market size and discounting loyalty to an existing product and fan interest in the game is going to provide an incomplete picture. Even the Nationals example is problematic. Yes Maryland was an O’s town, but Virginia had no strong attachments. Some to the Orioles, some to the Braves because of the proximity of the (since departed) Richmond Braves, Throw in all the transplants in DC without any connection to the O’s and the awful product at Camden for a decade plus and the rationale for setting up shop there makes sense even when it might not in NY. All this and the Nats are still having problems selling tickets to a beautiful (if sterile) new ballpark, though their sales may improve as the product does.
Based on the comments, I’m not sure I quite got across what I was trying to say. I think what I wanted to express was that fans who believe that “fairness” is the goal or should be the goal are probably misguided. It would be “fair” to simply let teams move where they wanted to move to try to earn money to keep up in the marketplace. Some teams probably could not, and so they would fold. I think we’d be left with a 20 to 24 team league, not a 30 team league. Furthermore, poorly run small-market clubs like Pittsburgh might fold and not be replaced. New York has supported three teams before, and there is a decent chance it could do so again. I don’t think fans who advocate fairness and competitive balance truly understand what they’re saying. Competitive balance is not achieved through payroll adjustment and neither is fairness. Ultimately we’re having a philosophical discussion about fairness, but in a semi-capitalist society, I think we can all agree that it is more fair to open the market and have clubs compete without antiquated market restrictions. And yet, when we consider the likely resulting scenarios, the objective of fairness achieved is more bitter than sweet to its advocate.
In the end, I believe that the Yankees are going to be the Yankees in this system, luxury tax threshold or no. The Yankees have a much better and more sustainable revenue stream than other clubs. YES is huge. WCBS broadcasts every game and people all over the world listen. The Stadium is enormous and wildly expensive. No other team is allowed to move into Yankees territory, and even if they did the Yankees have fans across the globe now, not just in the Bronx. People have to deal with it and stop trying to fix it, because their solutions, in their own opinions, would be less palatable than the present.
As a result, the luxury tax system is pointless, and a salary cap is no different. Go ahead, cap us. If you put the cap at, say, $100M, then the Yankees can easily spend that every single year, and ownership simply pockets the $100M savings for the first couple of years. After that, because of the cap, player salaries will simply come down across the board in order to level the playing field. Now players are disgruntled and the team with by far the most fans in the sport is severely hampered. Its ownership profits more than ever, angering fans and players alike until both strike. And then what are you left with? Any reasonable scenario in a cap or luxury tax system seems highly undesirable for the goals of growing the game and fairness. Conversely, if we were to change the system in favor of a more “fair” system, we end up harming the very fans who clamored for change.
Baseball is what it is. It’s not football. The revenue stream isn’t shared. The fans are generally more localized because they actually attend games. Allowing the Yankees to bring in limitless revenue but only allowing them to reinvest a minuscule percentage into their product development is completely counterproductive and, frankly, silly. Allowing them to bring in revenue and then asking them to give it to their competitors is even more unreasonable. Fans of other teams are just going to have to deal with it. Stop crying about fairness. The draft is unfair, the luxury tax is unfair, the arbitration system is unfair, but the Yankees don’t complain, because fair or unfair, we will find a way to win. It’s New York. Podunk towns beware.
I see what you’re saying, but I think you’re underestimating small market clubs ability to make money. Yeah if the Pittsburgh Pirates aren’t making any money, nobody would replace them if they moved. But isn’t there the possibility that someone would if they think they could squeeze even a little money out of that fanbase, competing or not? I guess taking away the luxary tax would make small market baseball a lot less palatable though. The idea is really good, but I was just saying that there may be some unintended consequences that you’re not contemplating, due to a lack of complete information reguarding the revenue streams of many of the teams.
Btw, loved your argument against a salary cap. An example of how a hard salary cap can mess with the league can be seen by the NFL’s current $$ crisis.
I don’t think we’re really disagreeing here, though. I actually agree that the Pirates or Royals might hang on because ownership can profit a bit from being a doormat that gets run over by the Phillies and Yankees, respectively, and because displaced Yankees and Phillies fans will love getting to see their team in road grays for 1/4 of the price of NYS. If they wanted to contend, they’d move, but they might not value contention as highly as profit, and that scenario is just as unappealing to this same set of individuals clamoring for fairness. Whether you think they’ll value contention and move to a new geographic location, or whether you think they’ll stay and eek out profit as a non-playoff team, you agree that the fans don’t find this new “fair” marketplace to be more palatable than the current “unfair” marketplace.
I think people should stop clamoring for fairness, because none of the scenarios resulting from “fairness” are appealing. Meanwhile, if competitive balance is the goal, and not fairness, then the league (and therefore the sport) will suffer instead of growing. I tried to make this point in the salary cap argument: even if I concede (which I do not) that competitive balance can be achieved by instituting a hard cap (soft cap is basically a modified luxury tax, so I’m not discussing that), and if I conceded that competitive balance is the goal of the commissioner/league offices, that does NOT mean that there should be a salary cap, because a salary cap would likely curtail the growth of the sport. Now, if the league/sport is operating in the broader marketplace for entertainment dollars (I would argue that it is), then baseball cannot afford to simply not grow. Demand for baseball is far from inelastic, meaning if it’s not growing, it’s necessarily shrinking, and the path to irrelevance is one we’d all like to avoid. I guess I’m arguing that the system isn’t as broken as I keep hearing it is on radio, TV and weblog. When you actually walk through the “solutions,” you realize you would have been better off not solving this alleged problem in the first place. Isn’t that where you stand, as well?