Why MLB revenue sharing doesn’t work

7 Jan

On the surface the MLB (Major League baseball) revenue sharing system seems like a good idea. The teams that are earning the most share their wealth with the teams that are earning the least in the hopes that parity will be realized and an overall stronger league will be created in which each team has an equal chance of winning when the season opens. It sure does sound nice except that it really hasn’t worked out as planned yet. How is it supposed to be?

In 1999 a “blue ribbon panel” deemed that as the majority of a teams revenue is generated locally rather than nationally as is true with the NFL, large market teams like the Yankees, Mets, Red Sox, Dodgers, Angels, Cubs, and Cardinals to name a few had an overwhelming advantage over smaller market teams which created an uneven playing field, In the 1980’s this was true as the top seven revenue teams outspent the bottom seven by a ratio of 2 to 1 on average. By the end of the 90’s the gap had widened to 3.5 to 1 which was deemed as too much to be fair. The argument was that in the last half of the 90’s this hypothesis was bore out by the fact that none of the bottom 14 teams in payroll spending won a single one of the 158 playoff games in that short era, and the world series was always won by one of the top seven teams in terms of total payroll.

That sounds solid except that there were some exceptionally strong teams which remained largely in tact over that period of time who had not been  post season presences for quite awhile (in baseball terms) like the Yankees, Indians, Braves, Red Sox, and even the Orioles. In the first half of the decade, the only teams in the major markets that appeared in the playoffs were the Braves and Red Sox, and the Red Sox only made one trip to the post-season while the Braves made just two. For the Yankees the 1995 Wild Card win gave them their first post season play since 1981. This raises the question if it was really an issue of payroll determining winners or just the normal change of top to bottom standings as more small market teams like Minnesota, Pittsburgh, and Oakland made the playoffs and won the World Series before revenue sharing than after. That seems odd, but it is verifiable.

The current agreement states all teams pay 31% of their revenue into a pot which is then split among all 30 teams. In effect poor teams get back more from this than they put in, so technically they report their earnings and wait for a check. Revenue sharing doesn’t end there though. From the MLB central fund, which is where revenue for things like MLB broadcast rights are paid, this money is doled out disproportionately from the lowest income teams getting the biggest chunk to the highest income teams getting very little. It doesn’t end there however. The Luxury tax penalizes teams with high payrolls by mandating they pay a set percentage to the MLB central fund based on how far over the “ceiling” of $155 million dollars their payroll is on opening day. For teams that regularly exceed this this they get a further “repeat offender” penalty which raises the percentage they pay to 40%. In effect a team with an opening day payroll of $205 million would pay a  penalty on that amount which is $20 million. For instance the 2008 Yankees paid in $21.6 million which was equivalent to the entire Florida Marlins payroll.

The problem with all this is there are no regulations whatsoever that dictates what a team must do with their revenue sharing money once it is received. While there have been a mattering of teams that used it in various ways to improve tier roster, only twice has a team actually spent all of it on their payroll since this was instituted. A few teams have spent some of it to build their farm system which worked out well for the Tampa Rays, but has paid few dividends for most.

The stark reality is that most owners pocket the revenue money. The system really hasn’t restored any true competitive balance as we generally see the same teams in the playoffs each year now more so than we had in the past. The stark reality is for a dozen or so teams they can make more money by losing than winning because of revenue sharing. Recalling the above cited agreement, a tea, like the Marlins can consistently trade away young talent before the become arbitration/free agent eligible for more young players they can pay at or near league minimum saving only two or three mid range salaries to appear somewhat competitive. As such they have a payroll far under what they will receive in revenue sharing, earning more money the more they lose on the field.

Prior to revenue sharing a team was responsible for their own destiny and it worked. Teams that failed to be competitive on a regular basis had lower attendance, lower local revenue, and lower national/international revenue via merchandise sales. In order to earn more they had to play better, and as owners are in the business to make money rather than lose it, there was plenty of motivation to at least try to win. Revenue sharing has removed that as a necessity to win and those actually impeded parity rather than promoted it. That is why MLB revenue sharing doesn’t work.

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2 Responses to “Why MLB revenue sharing doesn’t work”

  1. Jimmy January 7, 2012 at 3:02 pm #

    “Prior to revenue sharing a team was responsible for their own destiny and it worked.”

    I disagree with the above line. There was a huge problem with balance which caused revenue sharing to be instituted. There were teams like the Expos and Royals who were nowhere close since the early 80s.

    I don’t like the revenue sharing plan in that it doesn’t work to force the lowest teams to get better. It does, however, work in keeping the best teams from spending even more… revenue sharing is something that the super teams must consider prior to doling out yet

    • mandyf January 7, 2012 at 4:24 pm #

      I think we all agree the MLB plan is not working. I am a firm believer though that revenue sharing money has to be rolled back into the franchise – specifically players. Owners need to be accountable for that. Maybe prior to revenue sharing it didn’t work for every team, but I tend to think that losing is generally more of an organizational problem than a revenue problem in many cases. Bad front office personnel, lackluster coaching in the minors, bad draft picks, trades that make no sense – even when considering payroll. Pittsburgh is a perfect example. They would have plenty of revenue if they could trot out 1 winner – and I mean just a playoff team! The city will support a winner, and they supported the Pirates through years of losses. Finally, fans gave up because the ownership was profit taking more than prospect making. There are a lot of ways to look at it, but almost every year we see small market teams making a splash.

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