The Façade of Revenue Sharing

One of the most common economic complaints about Major League Baseball as a whole is the disparity between large-market teams and small-market teams. The New York Yankees had a 2011 payroll of $202,689,028. The Kansas City Royals, a small-market team, had a 2011 payroll of just $36,126,000, the lowest in the league (2011 MLB Salaries by Team). Thus, at first glance, one might deem competition between the two teams to be grossly unfair. A team spending almost six times as much money on players and team staff will obviously start the season with an advantage over the less expensive team. Major League Baseball has attempted to address this issue, but the current system of luxury tax and revenue sharing has left teams unsatisfied. Smaller-market teams want to be given more money, and larger-market teams want to give less of their money away. In the end, a greater issue is the way small market teams spend the money they receive through these revenue-sharing processes.

In Major League Baseball’s current system of revenue sharing, each team must pay thirty-one percent of its local-market revenue into a pot, which is then divided equally among all thirty teams. Major League Baseball’s Central Fund, a separate account made up of revenues from national broadcast contracts and licensing agreements, is then divided unequally. Teams receive more or less money based on their relative revenues. For example, a large-market team with high revenues, such as the Yankees, receives less money than a small-market team with low revenues such as the Royals. This unequal division penalizes large-market teams for something essentially out of their control, the size of the large market in which they happen to be located. The unequal division also allows teams to be granted millions and millions of dollars in compensation for being located in a small market (Brown). Though some may disagree with the concept of the system, most people have a greater issue with the way revenue-sharing money is spent, or not spent, by small-market teams.

If the market teams had been consistently using the large sums of money they receive to build better teams, the wealth distribution would be less of an issue. The Pittsburgh Pirates are the most glaring example of this problem. The Pirates have not played a winning season since 1992. Their attendance has consistently been either last in the National League or in the bottom five rankings. Pittsburgh, as a market, is small. There are very few ways for the Pittsburgh Pirates to make money and grow as an organization. However, in 2007 and 2008, the Pittsburgh Pirates were one of the most profitable teams in all of Major League Baseball. They may have lost more games than they won, but at least they made a profit. In fact, the profit they made, for the two years combined, was a little more than twenty-nine million dollars. Their payroll was a combined eighty-six million dollars for those two years. In 2007 and 2008 combined, the Pirates received almost eighty million dollars in revenue-sharing checks (Mason 146). The fact that the Pirates were a very highly profiting team is negative for Major League Baseball and illustrates that the real issue is not differences in market size. The larger problem is the loophole in the revenue-sharing system which allows for small market team owners to take personal advantage of the money they are given.

Although the only financial reports available for the public are those of the 2007 and 2008 Pittsburgh Pirates, which were accidentally released through an internet leak, the Pirates’ spending practices are by no means unique and can be used as an example for many small market teams. Though the reports do not specify exactly what the revenue-sharing money was spent on, as the reports are consolidated and thus not very detailed, the fact that the Pirates received almost forty million dollars each year through revenue sharing jumps off the page. This figure is very close to the same amount of revenues the Pirates earned off of concessions and home ticket receipts (Pittsburgh Pirates). If the Pirates’ operating income is subtracted from their operating expenses, and then this new operating expense is paid for through their total revenue amount, the Pirates have roughly forty million dollars left over. A successful business should reinvest a portion of these extra revenues back into the business itself, and there is no evidence that the Pirates have done so. Though not every detail is released, one can assume by looking at these basic figures that the Pirates do not spend their revenues, whether they be revenues from their own organization or revenues received through Major Leagu Baseball, in a manner productive to team development, such as increasing the amount of money spent player contracts or investing in scouting. Thus, their spending practices are poor, as they are not conductive to the goal of revenue sharing, which is to decrease the on-field effects of economic disparity between teams. The poor spending practices of revenue-sharing money by small market teams, particularly the Pittsburgh Pirates, hurts all of Major League Baseball because it takes focus away from the game itself, garnering negative press during a time in which Major League Baseball is trying to show itself in a more positive light.

The Pirates’ owners were clearly withholding more money than they should have if their goal was to produce a winning team. With their payroll exceeding their revenue-sharing checks by just sixteen million dollars, the Pirates obviously had more money to spend. With such high profits, it would not have hurt the Pirates financially, as a team, to sign or trade for a high-impact player each off season. The player would not necessarily have to be the most expensive player on the market, but with such a highly unsuccessful team for such an extended period of time, a moderately priced, decent player could have made considerable impact. The Pirates as a team clearly could use some help. However, the Pirates did little to improve their team during those years.

The Pirates’ issue is only in part a financial one. Their management should take most of the blame. The owners have not made it clear that their goal is to produce a winning team. Richard Sheehan, a sports economist, wrote that “owners are in it both as a business and as a hobby and the weights that different owners places on these two goals sometimes differ dramatically” (178). The Pirates’ owners clearly are in the league as a business; they do not care if the Pirates win or not. Owners who treat the game as more of a hobby are more likely to spend the money needed to field a winning team. Treating the game solely as a business only becomes a problem for the league when a team’s profits can be made while losing (Bradbury). The goal of revenue sharing, to lessen the on-field performance imbalance between small-market teams and large-market teams by encouraging small market teams to use extra money on improving the quality of their teams, becomes irrelevant when the goal of the owner is to turn a hefty profit.

Nevertheless, one of the benefits of owning a Major League Baseball team undoubtedly is making a large sum of money. An owner certainly has the right to not care about his team’s performance and focus solely on his bottom line. However, in the long run, the most surefire way to turn a profit is to win. A winning team continuously increases its fan base. Their games are nationally broadcasted more often, and their logos become widely recognized. Victories sell tickets, as well as food and merchandise, which all translate to large checks for the owner. An owner can profit in the short-term by absorbing revenue-sharing money, but his profit should not depend on the charity of other teams. Such a dependency will prevent the team’s economic value from growing stably.

Not all small-market spending practices are released to the public, but the frustration of large market owners and executives at these practices is well documented. Red Sox owner John Henry stated, “Over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseball’s highest operating profits. Who, except these teams, can think this is a good idea?” (Brown). The Red Sox consistently pay into the luxury tax pool and are therefore spending their money on these seven teams, one of whom is the Pirates. The point of the system is to even the competitive balance, not help losing teams profit.

All of these spending inconsistencies hurt baseball’s image in the media. Coming out of a decade filled with steroid scandals, Major League Baseball has been trying to improve itself in the eyes of the American public. This goal cannot be achieved when teams like the Yankees are spending two hundred million dollars on their roster while the Pirates spend less than fifty million. The irony in the situation is that the Yankees are the team most often criticized for its spending trends. Major League Baseball has systems in place to help teams like the Pirates. Though the system may be flawed, if it was not abused by the very teams it is intending to help, revenue sharing would be more effective.

In order to stop this abuse, teams receiving revenue-sharing checks should be required to release records clearly explaining where they spent the revenue-sharing money. This would hold owners accountable in the eyes of the fans and the press and force the owners to explain why they did not spend the money they received to field a competitive team. Though this would tarnish the image of baseball when records are first released, the amount of negative press and public scrutiny would ultimately lead teams to change their ways in order to regain the respect and trust of their fans. Also, Major League Baseball would not be able to simply accept the bad press without action, and would therefore be forced to make teams visibly accountable for their spending practices. Such visibility would force teams to change their spending practices and, hopefully, turn owners’ attention towards fielding a respectable team that can turn a profit based on ticket sales, concessions, and merchandise sales, instead of focusing on profiting through the help of other teams and Major League Baseball. An end to the abuse of revenue-sharing dollars would improve the image of Major League Baseball because it would be seen as a successful, profitable business across the board.

Works Cited

“2011 MLB Salaries by Team.” USAToday.com. Gannett Co. Inc. Web. 9 Nov. 2011. <http://content.usatoday.com/sportsdata/baseball/mlb/salaries/team>.

Bradbury, J. C. “Encouraging the Poor to Stay Poor.” New York Times 29 Aug. 2010, New York ed., SP2s sec. NYTimes.com. The New York Times Company. Web. 5 Nov. 2010.

Brown, Muary. “Revenue Sharing Is Making An Impact.” Baseball America. Baseball America, Inc, 2 Mar. 2010. Web. 5 Nov. 2011.

Mason, Daniel S., and Dennis R. Howard. “New Revenue Streams in Professional Sports.” The Business of Sports. Ed. Brad R. Humphreys and Dennis R. Howard. Vol. 1. Westport, CT: Praeger, 2008. 125-51. Print.

Pittsburgh Pirates. Pittsburgh Baseball Project: Consolidated Statements of Operations. 2008. Web.

Sheehan, Richard G. “Revenue Sharing and Competition.” Keeping Score: The Economics of Big-Time Sports. South Bend, IN: Diamond Communications, 1996. 155-79. Print.