David Stagg

PNC Park: Home to the Pittsburgh Pirates and the third worst attended park in Major League Baseball

The other morning, I was listening to the radio on my way in to work when Lance Zierlein and John Granato began a discussion about the baseball playoff/salary cap/revenue system. As Zierlein put it: “It is the worst system in pro sports, hands down.”

They went on to discuss how to fix it. Zierlein tossed out an idea: Once a team is mathematically eliminated from the playoffs, they no longer get to play the remaining games on their schedule. As a result of the new rule, owners would then lose money on every game they weren’t allowed to play. This would then force them them to make baseball-centered decisions throughout the year (to keep their team in contention), in addition to financial-centered decisions (to generate a profit).

While this option will never happen (although I love the thought of it, similar to Malcolm Gladwell’s idea for getting rid of the NBA Draft entirely), it does warrant an interesting thought on how, given a certain set of ground rules, people will act.

Major League Baseball

Major League Baseball is the perfect microcosm for this. The league itself is an entire “mini-nation,” a group of teams, officials, administrations, owners, stadiums, field crews, retirees, etc. that are all more or less governed by a body. This body sets forth a certain set of rules and all the inhabitants of the game must abide because those are the rules. It just so happens the rules that MLB have set forth seem to mimic the economic model of socialism. Let’s take a look at a financial aspect of one of those rules.

The Major League Baseball System

Baseball’s system works like this:

1. Major League Baseball has a Central Fund. This Fund is like a collective pot that MLB uses to distribute to all teams in the league. It exists for the betterment of the league as a whole.
2. The Central Fund is “the repository for revenue from such sources as the national television package and licensing.” (Quote from the New York Times.) This makes sense. The league as a whole profits from people watching the games on TV, from selling advertising, from the licensing of the clubs’ logos for apparel, etc. Theoretically, it would keep all the teams in the league helping out other teams in the best interest of the overall game and “mini-nation” of baseball.
3. It is important to note, though, each year all 30 teams must pay 31% of their revenue to this same pot. At the end of the year, the entire pot is then evenly distributed to all 30 teams.
4. For some teams, like the Pittsburgh Pirates, the amount they owe to the pot is about $45 million (31% of their $138 million in revenue in 2009). For other teams, like the New York Yankees, this amount is about $116 million (31% of $375 million from 2009′s revenue) or more than double what Pittsburgh will pay to the Central Fund.
   (You can view full revenue charts from 2009 on Forbes.com’s The Business of Baseball.)
5. Take the remaining 28 teams, repeat the math, take that pot total, divide it by 30 and distribute evenly, and you’ve got a basic understanding of the baseball model, or, in my opinion, a good example of the classic “socialist” model.

The Central Fund Payout

Bobby Abreau trots in after a home run against the Pirates in a 2008 game. Photo courtesy of goddam.

You can already start to see how this can get sticky. For example, the New York Yankees have an owner that’s willing to spend his entire checkbook on big name players, not only to generate a profit for himself (ticket sales, attendance, parking, vending, etc.), but also to stay in the playoff hunt. In his mind, playoffs equal better buzz equals ticket sales equals more profit for the team. The casualty? As their revenue goes up, so does the amount they have to pay to the Central Fund.

Other teams, such as the Pirates, seem to be slicing and dicing their payroll to get overall revenues down, thereby paying the least to the Central Fund, but still netting a good amount from the end of the year payout.

It’s a push/pull decisions made by owners. Ideally, owners make baseball-centered decisions, and while the profit for the team is important, winning a championship for your city on a decent payroll should mean the most.

The Numbers Speak for Themselves

Looking directly at the numbers based on 2008 revenues, each team received about $60 million from the Central Fund. This is based on 31% of each team’s revenue added up and then divided evenly among 30 teams. Comparatively speaking, that a net loss of $56 million for the Yankees, but a net profit for the Pirates of $15 million.

The Fan-Upsetting Poor Business Model in Baseball

As a whole, it should be directly noted that there is clear incentive to keep the margin between costs and revenue as large as possible, a basic fundamental of business. Unfortunately under the MLB system, the teams that win are typically closer to losing money than the teams that end up with poor records. The poor cities and the poor teams might actually be the richest on the books.

Jeffrey Loria, art collector and owner of the Florida Marlins. Photo courtesy of umpbump.com.

Take a look at this article on “The Florida Marlins Love Living on Welfare”. Among other things, author Maury Brown points out that Florida Marlins owner Jeffrey Loria had a 2008 overall payroll of $20 million. (That’s good for dead last, 30 out of 30.) In addition, the Marlins ALSO have the second-to-last attendance in the big leagues. (The only team worse? The Oakland A’s.).

In other words, the Marlins have no big players and no one’s coming to watch. If you’re a regular business and you’re employing second (or even third) rate people, the clients usually go elsewhere. If no one’s coming to your store, you’d be worried sick because you’re not selling.

Not so for the Marlins! As it turns out, the Marlins are the most profitable team in baseball with an operating income of $43.7 million. As the author Maury Brown puts it:

Cut your margins enough (low player payroll) and regardless of whether you have embarrassingly low attendance by rolling out a team of made up with what can best be described as replacement level players, take in a healthy level of revenue-sharing, and what you have is a prime example of Jeffrey Loria and David Samson living on corporate welfare. —Maury Brown, “The Florida Marlins Love Living on Welfare”

Why Baseball Represents the Failure of Socialism

At the end of the day, the Central Fund is meant to better the league as a whole. It allows for struggling teams with smaller payrolls to get some money from the bigger, badder teams thereby leveling the playing field, keeping the game interesting, and giving other cities and towns the chance to win. According to the true socialist model, those that produce less, receive less (albeit still receive).

However, as the perversity of human nature wanders in, the system begins to break down. As one writer put it:

Socialism … (is) a way of distributing goods and services. At their ideal implementation, socialism and laissez faire capitalism will be identical as everyone will produce exactly what’s needed for exactly who needs it. In practice, both work sometimes in microeconomic conditions … and they fail for the same reason: Human pervserity. Too many people don’t like to play fair, and both systems only work when everyone follow the same rules. Socialism vs. Communism

Baseball is a true microeconomic environment. It is a way of distributing goods and services (and revenue!) with the exact intention of producing exactly what’s needed to get it to the teams that need it. But once human nature takes over, the system that was once ideal (but is dependent on human actions) begins to degrade. Owners manipulate it to make money for themselves. Cities suffer because their teams aren’t doing well. (The Tampa Bay Rays went to the World Series in 2009 but are still handedly in the bottom 20% of the league in overall value.) People begin to get disenfranchised with the game as a whole. The casual fan begins to disappear and raving fans of baseball remain limited.

I’m not a political person by any means, but if I were to have the option to test out socio-economic systems before implementing them, baseball has provided me that with socialism. And until the majority of people can put other people before themselves (which, I would argue, goes against human nature), the system seems flawed. The fans—the ones generating the money—are losing. When the fans lose, baseball loses.