A New Solution to Competitive Balance in Major League Baseball

Is it time for the Diamondbacks and Pirates to start spending some money?

Why MLB Needs a Salary Floor

During the 2002 labor negotiations, baseball owners arrived at the bargaining table with a unified central vision: To improve competitive balance while curbing skyrocketing player salaries. The most obvious way to achieve this goal would have been through a salary cap, a paradigm enjoyed by owners in the other Big Four sports. The MLB Player’s Association, however, vehemently opposed this policy, as it would have limited large-market teams from setting the salary bar indefinitely high during free agency.

So the owners and players compromised. The new Collective Bargaining Agreement (CBA) called for the institution of something of a “soft” salary cap. In comparison to a hard cap, under which teams cannot surpass a certain salary limit, a soft cap simply creates a disincentive system towards such excessive spending.

Two key facets of this soft cap scheme were the luxury tax and revenue sharing. The luxury tax, in essence, punishes the New York Yankees for crossing a certain threshold payroll (I say “punishes the Yankees” because the threshold has been so absurdly high that the Yankees have been the only perennial contributors to this fund). Moreover, given the requisite financial health of teams paying it, the luxury tax has been little more than a slight nuisance, rendering it ineffective as a means of inducing competitive balance and restricting salaries.

Revenue sharing, on the other hand, has had a more complex effect on the economic state of MLB. It is fairly self-explanatory, as teams set aside a portion of their yearly revenue (around 31%), which gets pooled together and then redistributed evenly. To get a sense of how this affects overall competitive balance, the mean revenue for teams in 2009 was $196,600,000, with a standard deviation of $57,308,963. That figure dropped to $39,543,184 after revenue sharing, indicating the variance in revenues decreased quite a bit through this practice. Needless to say, this revenue sharing system can improve competitive balance by providing poorer teams with more cash.

Revenue sharing also serves a means of salary depression. According to economic theory, without revenue sharing, owners simply need to ensure that a player’s value equals his marginal revenue product (MRP). That is, a player is worth the value he returns in the forms of ticket sales, merchandising, etc. With revenue sharing, however, owners now need to ensure that a player’s salary is restricted to just 69% of his MRP, as the owner will need to share 31% of his value with other teams. Owners will therefore be less willing to grant large contracts, or, at least, contracts that respect a player’s true market value.

It appears that this system falls nicely into line with the owners’ aforementioned goals. This is partially true. Granted, revenue sharing boasts a foundationally sound framework for depressing player salaries. With regards to competitive balance, however, the revenue sharing structure is fundamentally flawed. Why? Because the system says nothing about how shared revenue is to be spent. This loophole has created an ironically adverse effect, allowing teams to gain revenue while stagnating salaries and thus doing nothing to improve overall competitive balance.

Let us examine this phenomenon in further depth. The average shared revenue by teams in 2009 was $60,946,000. Ideally, all twenty-two teams generating less than this figure (and thus benefiting from the subsidy) should be using the money gained to increase their payrolls. Thus, for these organizations, we should find that 2010 payroll as a proportion of adjusted revenue should be greater than 2009 payroll as a proportion of initial revenue. For nearly two-thirds of the relevant teams, however, this assumption fails to hold true.

Declines in Payroll as a Proportion of Revenue After Receiving Revenue Sharing, 2009-2010

Team	2009 Payroll/Initial 2009 Revenue	2010 Payroll/ Adjusted 2009 Revenue
Los Angeles Dodgers	51.49%	48.57%
Seattle Mariners	50.98%	50.50%
Atlanta Braves	50.64%	43.80%
Cleveland Indians	43.39%	32.10%
Toronto Blue Jays	43.77%	33.36%
Milwaukee Brewers	43.82%	43.32%
Cincinnati Reds	43.02%	40.45%
Arizona Diamondbacks	42.99%	33.93%
Kansas City Royals	41.48%	40.54%
Texas Rangers	41.07%	31.48%
Oakland Athletics	39.94%	30.64%
Washington Nationals	38.92%	36.59%
Pittsburgh Pirates	31.41%	20.81%
San Diego Padres	30.16%	23.48%

These teams are the “parasites” of MLB, simply reaping the benefits of other teams’ subsidies while not actually doing their part in Bud Selig’s quest for competitive balance. The Pittsburgh Pirates, Arizona Diamondbacks and Cleveland Indians are the worst violators, each exhibiting drops of roughly 11% in payroll as a proportion of revenue after receiving the subsidy. Low and behold, from 2009-2010, the Diamondbacks and Pirates both came in last place in their respective divisions while the Indians finished next to last. It is unclear where the shared revenue is going, but it is clearly not being used for its intended purpose.

So, with the current CBA expiring in December of 2011, here is a revolutionary proposal: What MLB should do in order to increase competitive balance is not introduce a hard salary cap. On the contrary, what baseball needs is a salary floor. A salary floor is the very opposite of a cap. Instead of limiting spending done by large market teams, the new CBA should simply mandate a minimum amount of money each team spends on salary each season.

Consider that in 2009, payroll accounted for 21% of the variance in wins, indicating that teams must spend their money if they wish to win. Winning, in turn, generates more cash, accounting for 22% of the variance in revenue. This figure of 22% indicates that winning is actually more influential than market size (r-squared= 20%) in determining revenue. This revelation leads to an important insight: small market teams have the capacity to succeed, but they must apply more of their funds towards payroll. A salary floor creates a system of self-regulation that fosters competitive balance through mandated spending. As such, it should be considered in the upcoming CBA negotiations.

2011 MIT Sloan Sports Analytics Conference

On Friday, March 4th and Saturday, March 5th, seventeen club members, alumni and faculty traveled to Boston to participate in the 5th annual MIT Sloan Sports Analytics Conference. Held at the Boston Convention and Exhibition Center, the conference has grown in size each year (read about our commentary from last year's conference here). A record 1,500 attendees saw interactive panels and research presentations, as well as some new features. The subjects of the panels ranged from "The Coming War: Sports Labor Relations" to "Athlete Branding in the New Age" to "Hockey Analytics." Panelists included ESPN Analyst and former NBA Coach Jeff Van Gundy, Dallas Mavericks Owner Mark Cuban, Author Malcolm Gladwell, ESPN Columnist Bill Simmons, NFL player Justin Tuck, and Houston Rockets General Manager (and conference co-chair) Daryl Morey, among others. Indianapolis Colts Head Coach Jim Caldwell and Denver Nuggets General Manager Masai Ujiri even attended as paying guests! The experience was truly rewarding and enjoyable for all; read about our personal highlights after the jump.

Christopher Anderson, Professor A&S – “My favorite quote from the conference was when Jeff Van Gundy said, 'To succeed, you can be one of three things: you can be soft, selfish, or stupid, but not two of three.” A key takeaway from several analytics panels at the conference was that communicating insights generated by data analysis/analytics is crucial. How you communicate with decision makers and players is as important as generating novel insights from analytics.”

Josh Bader, HUMEC '13 - "My favorite part of the MIT Sloan Sports Analytic Conference was being able to hear the honest and insightful opinions of the experts on the panels instead of seeing them answer obvious questions with typical, media-savvy responses. It really allowed the audience to get a strong understanding of just how highly intellectual and aware that all these people are with respect to every aspect of the sports world and their business."

Matt Beyer, ILR ’10, Former Co-President – “My favorite part of the conference was being able to meet with or catch up with some industry insiders. Either that, or the awkward part of the "Business of Sports" panel when Andrea Kramer started talking about how there aren't any women in the industry and the MLS President, Sunil Gulati, referred to himself as the ‘token Indian’.”

Robbie Cohen, ILR ’13, Vice President – “I enjoyed the live tweeting what our club did from our twitter feed. They had large screens in every room that displayed any tweets containing the trend #SSAC. It was great to be able to provide updates to those who could not attend, and interact with fellow guests through twitter (and also seeing our tweets up on the screen in front of everyone in attendance). Through this, we were able to increase our following and promote our club.”

Joshua Erenstein, CALS ’11 - “The willingness of Bill Simmons, as the common sports fans’ chief representative, for attending athletic events to remain ‘old-school’ as Mark Cuban countered with the point that innovations being made for game attendees will only increase was very entertaining to watch.”

CJ Fears, CALS '13 - "The Birth to Stardom panel was very intriguing. It was fascinating hearing the perspectives regarding an athlete's natural ability from a head coach (Van Gundy) and from a player (Tuck). In addition, it was great talking to Nuggets GM, Masai Ujiri, and hearing his opinion regarding their blockbuster trade with the New York Knicks."

Gabe Gershenfeld, ILR ’11, Co-President - "Delivering the first-ever Evolution of Sports Address was a great opportunity to share innovative ideas in a fun medium (read part of what I talked about here). I also enjoyed connecting with MIT SSAC organizers and student leaders from the Harvard Sports Analysis Collective, Brown Sports Business, Wharton Sports Business Initiative, and Columbia to learn how we can continue to build our own club and the Ivy Sports Business Network."

Reed Longo, CALS ’14 – “Speaking with Denver Nuggets' GM Masai Ujiri. Not only did I enjoy his insight on the Carmelo Anthony trade, since I am a Knicks fan, but, I also appreciated hearing about his rise from an unpaid international scout to working his way up to a front office executive in the NBA.”

Daniel Lowenthal, CALS '14 - "Personally, my event highlight was talking and interacting with Denver Nuggets General Manager Masai Ujiri. Speaking with him, talking about the status of his team; it was indescribable talking to a person in such a position, in such a relaxed way."

Jake Makar, A&S '13, Magazine Editor-in-Chief - "I thought it was great that club alumni advisor (and conference organizer) Rick Gold '06 arranged a lunch for us with Arizona Diamondbacks scout Joe Bohringer and The Extra 2% author Jonah Keri. It gave us the opportunity to have an interesting conversation and really spoke to the quality and positive atmosphere of the event."

Adam Schultz, ENG '12 - "The highlight of the trip for me definitely was playing pick-up basketball with Celtics Assistant GM Mike Zarren and ESPN's Henry Abbott on Sunday morning."

Justin Shapiro, CALS '13 - "Personally, being able to meet and talk to some of the smartest and most intellectual executives in the NBA was definitely a thrill. Many of these people came from similar backgrounds as myself, so hearing how they became involved in the business was really cool and exciting."

Joey Shampain, A&S '13, Secretary - "I was fascinated by all of the analytics companies that were at the conference. They used the conference as a medium to introduce and advertise their products. Cutting edge and innovative technologies were on display, such as the soccer networking technology (pictured here) that can provide insight into the way a team passes and moves on the field."

Matthew Spitz, CALS '11 - "The event was an unbelievable experience. I thought the first panel was phenomenal, listening to Jeff Van Gundy and Justin Tuck gave me a real grasp on how players and coaches view the industry. On another note, I thought Mark Cuban was the MVP of the conference. He just blew me away with his business acumen and it was very interesting to hear him breakdown how his management team evaluates players in the basketball analytics panel."

Jesse Stoopler, A&S '13 - "The highlight of the SSAC for me was attending the Basketball Analytics panel and hearing Mark Cuban, Kevin Pritchard, Marc Stein, John Hollinger, and Mike Zarren (a member of the Celtics front office). It was very interesting to see some of the smartest basketball minds discussing various NBA related topics."

Look through our club pictures on facebook or picasa. Also, check out official conference pics from Business Insider and MIT and coverage from Forbes, Time, and Deadspin, among others. Stay tuned for more analysis in our Spring 2011 Sports, Inc. magazine issue.

Solution for the NFL-NFLPA: Change the Rules of the Game

Yesterday was the day the NFL and NFLPA had been hoping to avoid for two years. With no new collective bargaining agreement, the league has locked out the players, and so the players union has decertified itself in order to file an antitrust lawsuit against the league. The two sides may still reach agreement, but the move from the bargaining table to the courthouse is an unambiguously bad sign for football fans. The issues at stake -- division of revenue, rookie pay, health and safety, and the length of the regular season, among others -- have and will continue to be discussed. However, a solution that brings long-term success and stability to the NFL must change the very rules of the game under which both sides bargain. Consider applying planes, trains, and labor relations -- the Railway Labor Act (RLA) -- to pro sports.

Why does the NFL legal bargaining framework need to be changed? And what exactly is their legal bargaining framework in the first place? As a private business, the NFL (and all pro sports leagues) fall under the National Labor Relations Act (NLRA) and the law's enforcing body, the National Labor Relations Board. Very briefly, under the NLRA, labor and management are allowed to use economic weapons, such as strikes and lockouts, to resolve contract disputes as long as they don't commit any unfair labor practices in the way. These tactics should be familiar to sports fans: baseball has had eight work stoppages from 1972 to 1995, and the NBA and NHL have locked out players in 1998-9 and 2004-5.

The NFL and NFLPA have been through this before, and just like 1987, the ability to sue the league for antitrust damages emboldened the union to withstand a lockout, to the detriment of negotiations and a new collective agreement. FMCS Director George Cohen is as talented a mediator as one can find, but over sixteen days even he couldn't overcome the legal / lockout alternatives both parties had. His official (under)statement yesterday said it all: "No useful purpose would be served by requesting the parties to continue the mediation process at this time." Clearly, the mediation process and this private system doesn't incentivize the parties towards agreement.

Before explaining the RLA, a brief introduction to the public-sector labor law is helpful for context. As we're seeing now in Wisconsin, Ohio, and Indiana, policies vary by state, but the basic principles remain the same. Policeman, fireman, teachers, and others who do have the right to bargain and can't reach agreement are not allowed to strike, because the work they do is so essential to the public interest. Binding arbitration is instead generally the last step of the dispute resolution process.


The RLA was passed in 1926, the same year as Northwestern Airlines (above) was founded, but the Act has clearly lasted longer. In many ways, the RLA merges the interests of private- and public-sector labor law framework. Since deregulation, the airline and railway companies are privately owned. However, the transportation industry is strongly in the public interest, as a work stoppage would direct affect the rest of the country's economy. I see a clear parallel to the sports industry. Like transportation, sports leagues are privately run with private owners, yet again in the public interest. An NFL lockout doesn't just directly affect players, but thousands of stadium employees and hundreds of thousands of workers in secondary business (one study estimated a lockout would cost $160 million per city), not to mention indirect effects on morale of millions of football fans. This public interest may not be enough to establish a government regulatory body, but is sufficiently central to the future of the sport to warrant a private version of the RLA.

The RLA -- and a potential application to the sports industry -- is effectively a hybrid of the NLRA and public-sector labor law. A couple highlights from the Act:

• Contracts don't "expire", they simply have a date after which they can become amendable
• Strikes / lockouts cannot be used for disputes classified as "minor"
• They can only be used for "major" disputes after mandatory mediation, non-binding arbitration, and a cooling-off period.

The Act's enforcing body, the National Mediation Board, has strong discretionary power to control the process based on the interests of the parties and the affected public. While some may complain this process is cumbersome, I believe it highlights the best characteristics of private- and public-sector labor relations. Like the private-sector, both parties reach the agreement themselves, without a neutral third party arbitrator essentially telling the company how to run their business. And like the public-sector, work stoppages are exceedingly rare, since their jobs are directly in the public interest.

What would the RLA and its strategic private / public advantages look like if applied to sports? Imagine these NFL-NFLPA negotiations in a world where their contract never expired (the 2011 season would be played under their previous contract if they couldn't reach a new agreement) and we would see a lockout and courthouse battles only after a dispute resolution process many times more exhaustive than George Cohen and the FMCS can subject them to.

Will this ever happen? Congress is unlikely to intervene as they did in the transportation industry in 1926, and even if they did, sports leagues and unions would likely resist government intervention. Any legal change must come from within the sport itself, if both sides look beyond their short-term economic gains to truly re-structure their process in the interests of the most relevant parties not at the table -- fans and communities. There is no better time to explore this option than now.

Note: this post was adapted from part of my Evolution of Sport address at the 2011 MIT Sloan Sports Analytics Conference last weekend. Watch video here.

Poll of the Week: Athlete Salaries

Alex Rodriguez signed a 10-year, $275 million contract in 2008

Poll of the Week is a weekly (duh) feature appearing every Monday (or whenever we want). Please vote on the right sidebar, and back up your opinion in the comments. Feel free to email poll suggestions to ilrsmcblog@gmail.com.

A lot of writers and readers of this blog probably consider themselves "die-hard" sports fans. Many of us are people who will fight to the death to defend our favorite player, team, or sport, especially against the "non-fan." The "non-fan" is that guy who doesn't understand why I think hockey is the greatest sport on ice. He's the guy who doesn't understand why the Cubs are so beloved for losing or why the Yankees aren't able to win every year given an unlimited payroll.

Conversations with the "non-sports fan" always become tougher, though, when they bring up the amount of money that our favorite players make.

Why does this guy make 1 billion dollars (in a Dr. Evil voice) for shooting a three-pointer but firefighters and police officers make practically nothing?

Depending on who you are or what sport you follow, you may counter with the idea that these athletes bring in extraordinary amounts of revenue. Or maybe it all comes down to supply and demand.

Ashley Walker takes a good look at the issue of overpaying athletes, and what this says about American society as a whole.

Take a look at her argument:

Let’s put this in perspective. The average brain surgeon makes $450,000 a year. A social worker makes around $46,000. A teacher, even in Connecticut, the highest paying state, only makes an average of $63,000. So, a person who saves lives, a person who protects and serves struggling families, and a person who shapes and molds young minds make a mere fraction of what sports stars make.

[...]

Not only do these athletes get paid tens of millions of dollars to run, jump, and catch, they’re treated as demigods in the process. Their morals and decisions seem to be above reproach or judgment. How many athletes, regardless of their sport, have been involved in scandals (usually sexual in nature), only to be forgiven by both the judicial system and the public at large?

It's a simple question this week:

Are athletes overpaid?

Voting will last until Tuesday at Noon. As always, follow up with your comments below.

Last Week's Poll

Last week, we asked:

Which sports city is the most "miserable?"

An overwhelming 63% of the voters chose Buffalo to be the unfortunate "winner."

Phoenix finished in second with 18% of the vote, while Forbes' choice - Seattle - received a lone vote along with a mysterious "Other."

In the comments, SMCBlog reader "RedBird" voiced his opinion that Cleveland is the worse, while "Robbie Cohen" made the argument that Atlanta may soon play itself off the list entirely.

Care to disagree? Keep the disagree.

Until next time, happy voting!

Event: Sports Internship Panel

Sports Internship Panel

On Tuesday, the ILRSMC will be hosting an internship panel featuring current students who have worked in the sports industry. Panelists have interned with a variety of sports companies and leagues including Major League Baseball, San Diego Padres, and Bloomberg.

Please join us on Tuesday, March 8th at 4:30pm in Ives 117 to hear how these students obtained these internships and their advice for interning in the sports industry.

RSVP via Facebook

Poll of the Week: Miserable Sports Cities

Can Pete Carroll help turn Seattle sports around?

Poll of the Week is a weekly (duh) feature appearing every Monday or Tuesday. Please vote on the right sidebar, and back up your opinion in the comments. Feel free to email poll suggestions to ilrsmcblog@gmail.com.

This won't be the most positive post you read on this blog.

Especially if you're a fan of Seattle sports.

In his blog, Fields of Green, Tom Van Riper of Forbes.com writes,

But through a cumulative 111 seasons and 37 playoff appearances, Seattle boasts only one champion: the 1979 Sonics of Gus Williams, Jack Sikma and Dennis Johnson. The list of playoff busts includes some real gut-wrenchers: The 1978 Sonics blew a championship by dropping a Game 7 at home to Washington in the finals, while the top-seeded 1994 club lost a first-round series to the eighth-seeded Denver Nuggets. And the 2001 Mariners went down in the playoffs to the Yankees after posting a 116-46 record during the regular season. Add it all up, and Seattle’s history lands it at the top of our list of the Most Miserable Sports Cities.

Oy vey. The rest of the top 10? After the jump. From, uh, "best" to worst:

10. Cincinnati

9. Denver

8. Cleveland

7. Kansas City

6. Houston

5. San Diego

4. Buffalo

3. Phoenix

2. Atlanta

Any surprises on this list? If so, familiarize yourself with Forbes' scoring system:

We scored each city on the number of times one of its teams has lost in the postseason, adjusting the misery points to give the most weight to losing in the final round (World Series, Super Bowl, NBA Final, Stanley Cup Final) and doling out progressively fewer points for losing earlier playoff rounds. We also factored in the number of years since each city’s last title (31 for Seattle), and the ratio of each city’s cumulative seasons to championships won (Atlanta, for instance, has compiled 153 MLB, NBA, NFL and NHL seasons while winning one championship, the 1995 Braves). And to keep the playing field even, we limited the contenders to cities with at least 75 cumulative seasons in the four major sports leagues.

That said, which sports city do YOU believe is the most miserable?

Also, which of the cities that Forbes ranked is most likely to play itself off this list in future years? Voting closes next Monday. Don't forget to comment below.

Most importantly, protect your fan base.

Last Week's Poll

Last week, we asked:

How many NFL games will be played next season?

In a close vote, 60% of voters believe that the NFL will stick to the normal 16-game regular season; however, 40% of the voters appear to be pessimists (or realists) and believe that there will be an NFL lockout in 2011.

Thanks for voting!