MLB Players' Salaries as a Share of Revenues: Laying Out the Issues

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The chart above clearly explains what the issue is.  Major League Baseball players' salaries have decreased relative to the league's revenues. The players' shares of the revenues used to hover above 50%, but have since fell to around 40%. As a point of reference, all of the other North American major professional sports leagues have collective bargaining agreements that guarantee players approximately 50% of revenue.

In terms of real dollars, the difference is more striking. MLB revenues were over $8 BB last year.  That means every  percentage point in 2013 represents about $80 MM in salaries. That's close to $100,000 per player.  And that's just for one percentage point of revenues.  If players were receiving the industry standard of 50% (a gain of ten percentage points), that would mean closer to a billion more dollars going towards salaries.

Some people may not think that this is a problem. Players salaries have still been increasing rapidly, even relative to inflation, when most peoples' wages have remained stagnant. Most of the world's workers are not losing much sleep over how athletes may be missing out on a few hundred thousand dollars.

Team shareholders and MLB officials also probably don't see what the problem is.  After all, this is extra cash going into their pockets.  It's a transfer of wealth from millionaires to billionaires, and most fans probably don't care.

But for players and their agents, this is a real problem.  In fact, this might be the biggest challenge the MLB Players Association has faced in a generation.  And while a significant number of players do earn generational wealth playing the game, many fringe major leaguer's never make that kind of money. For them, even a small change in salaries could make a real difference.

But the big question is "Why has the players' share of revenue decreased?" This is too big a question to answer in one post, but I think it is important to lay out the major issues that need to be addressed.  I have organized my thoughts into four major points, that will each be the subject of its own post.  Two are listed as "Player-side issues" meaning that they are most affected by the actions of players (or perhaps agents and the MLBPA as well).  The other two are listed as "Management-side Issues", since they revolve more around the behavior of teams and the league.

Remember, we are trying to explain hundreds of millions of dollars in lower salaries, so it's probably not just one thing. And if it is just one thing, it would have to be a pretty big thing. Before I get into the issues that I will be addressing, I'll mention a few other alternatives.

Some could claim that revenues and salaries are not being measured accurately, or consistently over time. If that were true, this may not be as big of an issue, but there's just no way that the we are off by such a wide margin to explain the relative decrease in salaries.

One other interesting possibility that I didn't list below is if the supply of baseball labor had changed in some significant way. More precisely, if there was less variation in talent, in say, the top 5000 baseball players in the world, then MLB players would have less leverage in negotiating salaries.  Since the quantity of players demanded has been static since the late 1990's, this could be answerable by looking at the data.  Until I see empirical evidence, I'm not giving this scenario serious consideration.

Matt Swartz's latest works on The Hardball Times were not the first pieces to call attention to the players' share of revenue, but they were the most helpful in getting started.  Cot's Baseball Contracts and Biz of Baseball are valuable resources for anyone looking to do research on the topics. Also, Tom Tango's (and his esteemed readers') comments were really what got me thinking about the issue.

So I've already used a bunch of words, and I haven't gotten to the main issues, so here they are. They'll be a post on each one, but for now I've just written enough to clarify what I mean.

Player-side Issues

1. Players are not optimizing their compensation. 

Basically, players and agents are losing many more contract negotiations than they are winning.  The main theory is that early career extensions have been lopsided in favor of teams.  More players are willing to bypass arbitration and prime years of free agency in favor of relatively less rich extensions. Some would argue that this phenomenon can even affect players who haven't received extensions. Jeff Passan of Yahoo Sports thinks this issue is very important, and wonders if less players are looking out for the "next guy". These extensions are certainly a far cry from players' fights against the reserve clause and collusion.

2. Salary is a relatively less important piece of player's compensation packages.

Another possibility is that players as a whole are placing less of a value on salary when signing contracts.  In this scenario, a relative decrease in salary isn't necessarily a problem for the MLBPA.  Players, like workers as a whole, may be increasingly factoring in location, career development, or "fit", when considering offers. In baseball terms, this could involve working with particular coaches,  being a part of a certain team chemistry, or even "playing for a winner". While this likely wouldn't explain a huge change in salaries, it could be a part of the trend.  We may also be missing out on the value of small items such as health care and the players' pension plan.


Management-side Issues

3. Teams have become more efficient in the way they compensate players.

A generation ago, teams were only effectively able to limit pay via collusion.  Today, there is a common framework that executives can use to put a value on every player.  Every team is at least aware of the market $/WAR.  Additionally, newly available statistics and more modern thinking may have led to cheaper, younger players occupying more roster spots relative to older, more expensive players. Regardless, the increase of business-minded management teams have led to more sophisticated roster construction.

4. The revenues of teams are now less dependent on team performance (and how much they spend on players).

Of all the issues, this has the most potential to impact salaries.  It would also be the most difficult problem for the players to address.  As gate revenue, and other revenue related to team success (merchandise, concessions, parking, etc.) have decreased as a share of total revenue, teams have less incentives to spend big on winning teams.  With most teams locked in on long-term local TV deals, short-term winning is also somewhat less important. National TV money, and other centrally distributed revenue (revenue sharing funds, MLBAM earnings), is earned regardless of team performance. Finally, the competitive balance tax acts as a disincentive for teams with the highest marginal revenue products from spending freely on players.

Additionally, across all sports, the business operations of teams have become more professionalized. Every team business official I've talked to has described the importance of separating financial success from on-field success.  With revenue targets that must be met regardless of winning or losing, perhaps a larger share of MLB's revenues should be going to the front office folks who are finding better ways to capture every last dollar (at least in the short term).

So those are what I consider to be the main factors.  I think that my individual posts will be more content-filled and incisive, but I needed this post to lay out the issues.  Hopefully it helped line things up for you as well, and let me know if I missed anything.

The Weekly Rant: MLB Players' Salaries and the National TV Revenues

Offseason Spending is up this year. While that is not unusual, or particularly incisive, the increase looks like it will be kind of dramatic this winter. Check out Jeff Todd's piece on MLBTR for trends thus far.

Many have attributed the higher prices to the rich national television contracts MLB has signed in the past 18 months. These new TV deals are likely the largest factor in any increased spending.  A host of other issues could be at play, but anytime a sports league receives a new windfall of revenue, some of that will go to the players.

But just how much of this new revenue will find its way to players? 

A closer look is needed at both the new TV contracts as well as the relationship between players' salaries and league revenue.  Maury Brown has a breakdown of the new set of TV deals, and gives his insights on what they mean for spending. Basically, between the deals with ESPN, Fox, and TBS, MLB stands to make $1.5 Billion annually over the next 8 years.  That's an increase of approximately $788 MM per year. 

If you divide that figure amongst the thirty teams, you are left with each ballclub receiving a nice fat check for over $25 MM every season.  It's easy to see that figure and then comment on why Team X should go out and sign Player Y, since Team X obviously has the money for it. 

But this simple math doesn't account for a great deal of issues.  First, the exact breakdown of how this money will be paid out by the networks is unknown.  If the contracts really will pay exactly $1.5 Billion every season, then the deals will decrease in value over the length of the eight years.  In 2021, $1.5 Billion would be worth just $1.175 Billion at 3% inflation (which may be more than actual inflation, but less than "baseball" inflation). 

The contracts could start at a figure lower than $1.5 Billion and rise to a higher amount, that would still result in $12 Billion total. This would mean the total teams receive in 2014 could be substantially lower than $25 MM.  It this is not the case, teams should be hesitant of spending all of their new revenue immediately. Future spending will have decrease, relatively speaking, at least without other other increasing revenue streams (Local TV Contracts could be part of the answer here). 

So besides the effects of inflation, what other factors could limit the ability of teams to spend the average annual value of the contract in 2014? 

The Commissioner's Office could certainly take a chunk of the revenue for different initiatives.  I don't think too sizable a chunk could be taken from the teams in this way, but investments in baseball infrastructure internationally could certainly get expensive.  I'm sure there are many costs associated with running a professional sports league that will increase in future years as well (expanded replay systems).  Overall though, it seems unlikely the Commissioner's office would spend more than a few million of each team's share in any one year.

Individual clubs may also spend a significant portion of the funds on other baseball-related purposes other than player payroll.  Increasing budgets for scouting and development, front office personnel, as well as coaching staffs will all likely take a bite out of the player's share. But non-baseball investments are likely the greatest factors in why each club's payroll will not rise by $25 MM this offseason. These could take the form of stadium renovations or investment in other properties. 

MLB Revenues have increased fivefold since 1995. Players' salaries have increased dramatically as well, but not nearly at the same rate.  While league-wide revenues equate to approximately $7.5 Billion, team payrolls account for closer to $3 Billion. This mean's players account for just just 40% of revenues, a dramatic drop from a couple of decades ago, and ten percentage points less than players' shares in the other Big Four sports. 

While it's plausible players receive more than 40% of the new National TV Revenues, there's no real reason to expect them to share a much greater percentage.  Owners would more readily pocket some of these profits, or reinvest them into improvements to stadiums.  MLB is likely to even proactively educate club personnel on the best ways to spend these new revenues.

In the end, it seems unlikely that teams will spend anywhere close to all of the $25 MM  increase in national TV revenues.  A more conservative guess would be moderate increases of less than $10 MM in 2014.  Local TV deals and other revenues are what might allow some clubs to responsibly spend more than these totals.