MLB Stove Not Cold, Just “Very Slow Moving”

MLB2

MLB’s competitive balance tax was instituted (in ’03) to level the playing field between the league’s haves and have nots, but the players say that the owners are now using it as a “de facto salary cap” to limit player compensation; the percentage of total revenue ($9.4 billion) allocated to players (including those in the minor leagues) declined from 58% in 2017 to 54.2% in 2018. That decline – the steepest YoY since ’12 – and a 2nd consecutive “cold stove” winter (only 75/218 free agents have signed thus far) would appear to give credence to the players’ position, but a closer look at the numbers indicates otherwise.

Since 2007, MLB players have enjoyed anywhere between 53%-57% of total revenues, so the percentage received in ‘18 was in line with every other season over the previous decade. Since ’12, the number of players making $20 million+/season has more than doubled (from 16 to 43). The league’s median payroll is the highest it’s been in league history (over $150 million) and MLB Deputy Commissioner Dan Halem said, we’re projecting that clubs will guarantee the players more dollars this offseason than any other year in history, except 2015; if not $2 billion, close to it.”

Howie Long-Short: I asked Dan why the narrative exists that teams aren’t spending money?

Dan: I think it’s a function of a very slow moving free agent market that’s kind of taken on a life of its own. The speed at which the market transpired last year resulted in the creation of the storyline and its continued into this offseason. If the players signed for the same amount of money, but they were all signed by January, I really don’t think we’d be having this conversation.

Another trend in the industry is more money flowing to players who aren’t free agents, players who are arbitration eligible. Those players now receive essentially a quarter of player compensation, which is up significantly from a decade ago; so, there has been some redistribution of player compensation as well.

Unlike NFL, NBA & NHL teams, MLB clubs are not restricted by a salary cap, but there’s also no floor that forces team spending. That doesn’t mean MLB players are being short changed though. With players in the major leagues collecting between 48%-52% of gross revenues over the last 15 years, compensation (as it relates to a percentage of league revenue) is in line with what players across the other big 4 sports receive.

Climbing revenues (+$300 million in ‘18) are among the reasons the players are posturing for more money, but it’s misleading to imply owners are pocking profits that should be earmarked for player salaries. Since ’12 (the last time CBA was negotiated), industry revenue (+5%) and player compensation (+5.3) have grown at the same rate. It’s also important to remember that while franchise valuations have skyrocketed over the last decade, “on an operating basis, baseball teams don’t generate a lot of profit because they have a lot of expenses.” (see: 15 clubs did <$10 million in EBITDA in ‘18)

Patrick Corbin’s 6-year deal is the longest pact signed thus far this offseason, but I don’t see it as “short-sighted inactivity” as much as its fiscal responsibility; as Dan pointed out, “no other professional sport has 7-year contracts, 8-year contracts, 10-year contracts – we’re the only one – and given that a lot of those deals haven’t worked out, it understandable why teams are going to be very careful to commit to a player for that length of time.”

Fan Marino: If there’s to be a complaint about club spending to be made, it ought to come from fans of MLB teams in the league’s biggest markets. The Red Sox – with a $239.5 million CBT payroll – were one of just two franchises (down from 5 in ‘17) to clear the competitive balance threshold in ’18 ($197 million); and won the World Series. If a $12 million tax (+ $40 million in payroll) is the difference between winning and losing, you must wonder if your favorite team is putting forth its best efforts to win games. Of course, teams like the Yankees and Dodgers – stacked with young talent -are going to be less likely to spend in free-agency.

There’s no need to question the efforts of the teams in the league’s smallest markets, though. Since ’12, 12 of the 16 (smallest market) clubs have grown team payrolls and those that have, did so by an average of 60%. (see: Royals $84 million to $132 million, Mariners $88 million to $171 million).

Interested in Sports Business? Sign-up for our free daily email newsletter list, here!

Author: John Wall Street

At the intersection of sports & finance.

One thought on “MLB Stove Not Cold, Just “Very Slow Moving””

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.