When it doesn’t pay to win at baseball

The Detroit Tigers have slashed their payroll by over $100 million in just four seasons, from over $215 million in 2016 to under $112 million, according to Cot’s Contracts. While the team was losing an average of 103 games per season, the Tigers went from losing $82 million in 2016-17 to earning $49 million over the past two seasons. Despite losing huge numbers of fans in attendance, viewers on television, and games on the field, the club is now turning a healthy profit increasing annual revenue every year.

The Tigers are not alone. Several MLB clubs have recently halted spending even as their teams suffer losses on the field. If the math were such that investing more in player salaries resulted in greater profits, that trend might be reversed. Sadly, that is not the case.

The way that revenue works in Major League Baseball, it doesn’t always pay to win. If a team owner is simply looking to turn a profit, like any business tends to have, spending on players does not always contribute to that cause.

Where do MLB revenues come from?

Here is a general breakdown of where MLB gets it’s $10.5 billion in annual revenue, according to Forbes.

Gate receipts: $3.2 billion, 30.4%
National: $3.2 billion, 29.5%
Local media: $2.1 billion, 20.9%
Sponsorships: $1.1 billion, 9.6%
Other stadium revenues: $925 million, 8.8%

Total revenue is calculated before annual stadium debt service payments. Gate receipts include club seating and luxury suites. National revenue includes equally shared revenue from national media contracts, sponsorships and licensing. Local media includes TV and radio. Sponsorships include ad signage, pouring rights, and naming rights. Other stadium revenue includes concessions, team stores, parking and non-MLB stadium revenue.

National media revenues are divided evenly among the 30 MLB clubs, while 48 percent of local revenues go into the revenue sharing pool and are divided unevenly according to a formula.

Does it pay to win?

Winning does not alter national TV revenues and has no immediate impact on local media revenue from long term contracts. If anything, losing helps bring more revenue sharing dollars, depending on the club. The only significant financial impact of a team’s performance on the field shows up in attendance, and almost half of that revenue goes into the revenue sharing pool.

Between guaranteed revenue streams from local and national television contracts, and revenue sharing of remaining local revenues, teams make the bulk of their revenue from shared streams rather than from their local fanbase.

Certainly, making the playoffs brings immediate revenue, and boosts season ticket sales the following season, but the marginal benefit to increasing attendance does not pay for the cost of player salaries to make the on-field performance more entertaining.

According to Forbes, the Tigers lost $20.7 million the last year they made the playoffs in 2014. From 2011 through 2017, the club lost over $105 million in total. After slashing payroll, they turned a profit of $19 million in 2018, and $30 million in 2019.

The Tigers showed gate receipts of $46 million last season for 1.5 million fans. If they doubled attendance and gate receipts, they would keep $23 million. How many wins would that buy?

As MLB reported record revenues of $10.5 billion for the 2019 season, several teams made little effort to field a competitive team. According to Forbes, 29 teams posted profits with just one team in the red.

National media revenue

MLB has a national contract with Fox Sports that pays them $5.6 billion for eight years, through the 2021 season, or $700 million per year. After 2021, the new deal with Fox is for $5.1 billion over seven years, or $729 million per season.

MLB also has national TV contracts with ESPN for $5.6 billion ($700 million annually), and with Turner Sports for $2.6 billion ($325 million per season), both running through the 2021 season.

The national television revenues from just those contracts average out to $57.5 million per team through 2021, when they will increase just as the current collective bargaining agreement (CBA) will expire. This does not include revenues from “out-of-market” broadcast and streaming rights through offerings such as MLB Extra Innings on DirecTV or MLB.tv, or MLB Network.

Local media revenue

The Tigers have a local television contract with Fox Sports Detroit that also runs through 2021, and that pays them $50 million per season. Analysts have estimated that the annual revenue from that source could as much as double in their next contract. The Ilitch family could also negotiate an ownership interest in the network, or even start their own regional sports network to broadcast Tigers and Red Wings games.

Two-thirds of MLB teams now have an ownership interest in a Regional Sports Network (RSN), ranging from 10 percent to 100 percent, according to FanGraphs.

The Tigers’ abysmal performance on the field has resulted in a huge drop in television ratings. Through the 2019 season, ratings were down over 75 percent in a six year span. Here is how the Tigers have ranked among all MLB teams in television ratings in recent years (Data from Crain’s Detroit).

2019: 2.28 (23rd)
2018: 2.64 (18th)
2017: 4.48 (6th)
2016: 7.01 (3rd)
2015: 6.21 (4th)
2014: 7.72 (2nd)
2013: 9.59 (1st)
2012: 9.21 (1st)

One ratings point in the Detroit area is equal to about 18,000 homes out of approximately 1.8 million households with television. That means that just over 41,000 homes were tuned into games during the ratings period this past season. Still, they are the only game in town for that marketing demographic.

The Tigers taking an ownership stake in a RSN could benefit fans, as revenues from those independent businesses are shielded from revenue sharing, and profits gained from higher TV ratings increase the incentive to win, drawing more eyeballs on television sets and butts in seats.

Gate receipts

Attendance has also dropped sharply as the Tigers losses mount in the standings. After topping 3.1 million fans during the 2012 and 2013 seasons, attendance was just 1.5 million fans in 2019. That’s a 51 percent drop in six years.

The decline in attendance does hurt the team’s bottom line, as fewer ticket sales, concession dollars and parking fees reduce part of the local revenue formula. But then, 48 percent of local revenues go into the revenue sharing pool to be divided unevenly among the 30 major league teams. So when the Yankees are playing the Red Sox to a packed house in Yankee Stadium or Fenway Park, the Tigers are getting some of the revenue from those games. When they lose $10 at the gate, they only take a loss of $5.20 on their bottom line.

Maybe if losing on the field meant more losing in the owner’s income, teams would make a stronger effort to put a winning team on the field. In what crazy world does a team see attendance cut in half and TV ratings fall by 75 percent, yet the club makes more money?

Is there any good news?

The good news for Tigers fans is that they are in a division that will allow them to field a competitive team with a relatively modest payroll. The average payroll in MLB is $138.8 million per season for a 26-man roster. In the American League, the average is $130 million. The Minnesota Twins and Chicago White Sox are spending $132 million and $125 million respectively, and the Cleveland Indians have dropped to $92.6 million. These teams are contenders, playing meaningful games late into the season. The Tigers can be contenders and still turn a nice profit.

Games with no fans?

As for the current debate about playing games with no fans in attendance, over 60 percent of MLB’s revenues come from other sources, while a 50 percent reduction in player salaries, by far their biggest cost, should more than offset that overall. Each market is different. The Tigers took in $46 million in gate receipts last season before revenue sharing. They should still turn a profit if they held onto their media revenue.

All of this is aside from the fact that franchise values continue to soar, even as player salaries continue to decline overall, and are down even more as a percentage of revenues. This is the problem that has to be addressed in the next round of collective bargaining. It’s not an easy conversation, but is one that must take place.

The lack of competitiveness of several teams should be a grave concern to commissioner Rob Manfred and the 30 owners of MLB teams. They need to find a way to incentivize winning, and penalize losing — in a financial way. A good start might be letting smaller market clubs keep their gate receipts. Losing on the field should mean losing profits. If baseball ceases to be competitive on the field, they could kill the golden goose.