As talks between Major League Baseball owners and players on a new collective bargaining agreement (CBA) have stalled, one of the most troubling issues is that of “revenue sharing”. That is, money that is funneled from larger to smaller market teams with the idea that doing so will help to “level the playing field” created by the enormous gap in local revenue.
Players see revenue sharing as part of the larger issue of teams “tanking”, or not making an effort to field a competitive team and failing to spend on player salaries. The players’ association has made it clear that there will be no new CBA without addressing this issue.
The evidence is compelling:
- MLB revenues have soared from $8.2 billion in 2015 to over $10.7 billion in 2019, a 30 percent increase
- Player salaries have decreased by 6.4 percent, with the average salary declining from $4.45 million to $4.17 million during the span of the current CBA.
- The median salary has fallen from $1.65 million in 2015 to $ 1.15 million in 2021, a decline of 30 percent.
- 54 percent of players in MLB are not yet eligible for arbitration, earning near the minimum salary.
- 13 teams had payrolls under $100 million for the 2021 season. Five teams spent less than $50 million.
- Three teams spent less than $17 million on their 26 man major league payroll according to Spotrac. These teams are simply not trying to win.
- The Players Association filed a grievance against the A’s, the Pirates, the Marlins, and Rays over how they have invested their revenue-sharing dollars in recent years. The CBA requires “each Club shall use its revenue sharing receipts … in an effort to improve its performance on the field.”
From the players’ viewpoint, which is what matters in terms of reaching a new agreement, the fundamental problem is that teams are not spending, and not trying to compete. Others view the problem as one of competitive balance. Unfortunately, many MLB owners are not as concerned about competitive balance as they are about limiting spending.
The Revenue Sharing stalemate
According to Commissioner Rob Manfred when he announced the lockout, the players are demanding a reduction of $100 million in revenue sharing.
“Things like a shortened reserve period (prior to free agency), a $100 million reduction in revenue sharing, and salary arbitration for the whole two-year class are bad for the sport, bad for the fans, and bad for competitive balance,”
We can’t be certain that it’s that straightforward- consider the source- but the issue was apparently troubling enough to owners that they demanded it be dropped as a precondition to continuing negotiations. The players’ lead negotiator Bruce Meyer shot back:
“They proposed to make a proposal, if we would in advance agree to drop a number of key demands before seeing what was in their proposal,” Meyer said.
Manfred would be correct in stating that reduced revenue sharing is bad for competition if, in fact, teams were spending the dollars on improving their teams. But in many cases, they are not. And therein lies the problem.
If the players indeed are demanding a reduction in revenue sharing without demanding penalties for teams that fail to spend on payroll, they’re missing the point. But this is the same union that has unwittingly given the owners a defacto salary cap in the form of the Competitive Balance Tax (CBT) without any requirement for teams to spend the money on payroll.
If the players’ proposals for reduced revenue sharing come in the form of requirements on how teams must spend the money, that would make more sense.
So how does revenue sharing work?
Teams presently contribute 48 percent of all local revenues, including gate receipts, local TV revenue, concessions, parking, sponsorships, etc, and the funds are then divided equally among all 30 teams. Part of the rationale is that it takes two teams to put on a game, so both teams should share in the revenue generated by those games.
As a result, in 2018, each team received $118 million from this fund, according to baseball_reference with larger market teams putting in more and smaller market teams less. About half of teams are net recipients and the other half net payees. Teams also receive a share of national revenues, which were estimated to be $91 million per club in 2018, and they still have kept 52 percent of their own local revenues. And their payroll is how much?
In 2019, the Marlins received about $70 million, while the Rays are usually in the $50-$60 million range, according to The Athletic. The Indians, Pirates and Reds are around the top five payees, off and on. The Dodgers paid about $90 million in 2019. The Red Sox, Cubs and the Yankees round out the top four, at above $60 million.
MLB needs some form of sharing local revenues, because the revenue generated during the regular season is mostly local, and there is an enormous disparity in money generated between a market like Los Angeles or New York, and that of Pittsburgh or Kansas City. In the NFL, all the games are broadcast nationally, and all the television revenue is divided evenly. So when the Packers are playing the Cowboys, the Lions get an equal cut of the TV revenue, for example.
MLB’s national television revenues from TV contracts with ESPN, Fox, and Turner broadcasting will be renewed starting in 2022, and those revenues are divided among all 30 teams, as are revenue from streaming games on MLB.tv. The national TV contracts skew heavily toward post season play.
The players’ problem with revenue sharing
- The current draft order provides an incentive for losing
- Economics and revenue sharing provide little or no incentive to win
- The performance gap between veterans and minimum salaried players doesn’t match the pay gap
- There are no penalties for not spending
Much of the focus on preventing tanking has been on reforms to the draft order, which currently gives the highest picks to teams with the worst records. As we explained in this article, that’s not going to solve the problem, or at least not by itself. Smaller market teams are receiving millions in revenue sharing dollars that aren’t necessarily going to improve their teams on the field. Players want that money spent- or just don’t give it to them.
The owners problem with revenue sharing
During the pandemic shortened season of 2020, with gate receipts reduced to nothing and the season reduced by over 100 games, MLB canceled the revenus sharing plan for the season. In 2021, some owners of large market teams saw an opportunity to torpedo the program for good. With reduced attendance to start the season, MLB wound up taking out a loan for half of the amount needed to fund the program, with the other half to be paid out in 2022. The league insists that the large market teams will have to repay the loan over time, so the payments are deferred, not forgiven.
Of course, not all owners are thrilled about sharing their revenues, so there is resistance whenever more sharing is proposed. Forcing recipients to spend their revenue sharing funds would seem a logical first step.
It doesn’t pay to win at Baseball
In this article, we highlighted the difficulty of spending on payroll and trying to win games by spending. The conclusion is that it’s not easy to make money by spending on player salaries. The only revenue stream that increases with winning is gate receipts, which includes ticket sales and concessions. That stream makes up about one third of the average team’s revenue in a given season. With 48 percent of all local revenues going into the revenue sharing pool, just about 17 percent of a club’s revenue will increase somewhat by fielding a winning team, if their spending results in winning more games.
What this means is that, if a club is motivated to make money, spending on players does not sync with that objective. This is a more likely reason why teams don’t spend money, and not usually because they want to tank for draft picks.
Allowing some teams to keep their gate receipts would double the monetary benefit of putting fans in the stands, since almost half of local revenues are presently shared. They would continue to share revenues in the same manner, except there would be a sliding scale that allows smaller market teams to retain a larger share of ticket sales.
I would suggest the following scale for sharing gate receipts only:
- Teams in the five smallest markets keep 90 percent of gate receipts
- Teams in the 21st to 25th largest markets keep 80 percent
- Teams in the 16th to 20th markets keep 70 percent
- Teams in the 11th to 15th markets keep 60 percent
- Teams in the 10 largest markets keep 50 percent
This would reduce the total amount of dollars available for revenue sharing for all teams, but would increase the share of instant gratification revenue for smaller market teams that comes from winning. It’s not a complete solution by itself, but with a draft lottery and requirements on spending revenue sharing dollars, it could incentivize winning- and spending.
A team that draws one million fans in a season at an average spend per fan of $50 receives $50 million in revenue. Keeping an extra 10 percent of that revenue adds $5 million profit. Keeping an extra 40 percent adds an extra $20 million. These profits can help to boost payrolls and pay player salaries, making the team more competitive on the field, increasing fan interest, and ticket sales.
Establishing a fund that teams could draw upon only to sign or extend players might help. That should take the abuse out of the revenue sharing system.
Loopholes in the System
The current system also has a number of loopholes that allow teams to avoid sharing all their local revenues. Over half of all MLB teams have an ownership stake in the regional sports networks (RSNs) that broadcast their games in their home markets. If these teams cut a sweetheart deal to accept the ownership and profits therefrom in lieu of the market value of money paid for broadcasting rights, those RSN profits are off the books in terms of revenue sharing. So those contracts have to be independently appraised before local revenues are calculated.
Teams also receive millions of dollars from real estate and other business interests associated with stadium agreements, usually including some public funding. Without baseball being played, those businesses would have far less value, but the profits are not included in the revenue sharing formula. This is probably a lost cause to pursue, however.
Finally, the local revenue that is shared among teams is “defined net local revenues”. Deducted from the gross revenues that teams take in from their large TV contracts are items such as stadium debt and operating expenses. All teams have these expenses, and they often eat up large chunks of local revenue before 48 percent is put into the revenue sharing pool. The amount of shared revenue could be increased if the contributions were based on gross revenue, but there is little chance of that happening, so we won’t go any further down that path.
Since the players are so concerned about teams not spending, the most obvious solution is to tax teams that fail to spend. In the absence of a “salary floor”, which they reject in knee-jerk fashion as the flip side of a salary cap, some requirement to spend revenue sharing dollars is essential. So is creating incentives to win, and that means more revenue sharing, not less, for teams that make an effort to win.
Revising the draft order can help by eliminating the incentive in losing, but MLB must also incentivize winning, and they need to force teams to spend the revenue sharing dollars that they receive.
Stay tuned for a discussion on making the Competitive Balance Tax more competitive and less tax