Overall, the most obvious news is owners are making money, and lots of it. Using the overblown cliché, they are hitting the ball out of the park. There may be disparity between the amounts of revenue clubs are pulling in, but no owner could claim with a straight face that they aren’t making money these days. It’s just that some clubs are making more than others are. As Badenhausen [senior editor, and co-author of the Forbes valuations] rightly said, “After listening to baseball owners cry poverty for 25 years, the outcries have been relatively few the last couple of years because baseball is in what like Bud Selig likes to call a ‘Golden Age’.”
I would encourage you to read the entire article, but the main takeaway is clear: baseball is in great financial shape, despite the Mitchell Report, the Roger Clemens saga, and escalating free agent contracts.
Ryan Dreyer, a co-op for the Boston Globe’s sports section, contacted me recently with some questions regarding MLB’s financial state. I have posted his questions and my answers below (click Read More to view). If anyone else has any thoughts or input on these questions or other issues related to baseball’s financial state, please feel free to comment. Ryan can be reached directly at ryand@bu.edu, or at his blog, www.sellthecubs.blogspot.com.
1. Do you agree with Florida Marlins president David Sampson’s statement that Ichiro’s new contract will ruin the game of baseball?
No, I don’t think Ichiro’s contract is out of line at all, really. Ichiro is overrated, because of his speed, but he is still a quality player. More than that, he is a huge draw in Seattle - he is the face of their franchise. Seattle has made some questionable moves (trading Jones and others for Bedard) but re-signing Ichiro was smart, and they didn’t overpay by too much.
2. Do you think that baseball needs a salary cap? Why or why not?
I do not think baseball needs a salary cap. Spending is not out of control, when you consider revenue growth. Baseball still spends less than 50% of its revenues on player salaries (the NFL caps player salaries at 49% of revenues, I believe, and baseball is below this level). Because of the arbitration system, and 3 years at the minimum for young players, player salaries are artificially held down for a long time. Baseball revenues surpassed $6 billion last year, there’s certainly no danger of teams going under. Small revenue teams are even turning profits (the Marlins, Royals).
The second thing a salary cap could help is parity, but that is also not a problem. The Yankees’ payroll is $200mn, again, but they haven’t won the World Series since 2000. Over-spending on free agents is not a good strategy. Smaller market teams can compete by investing in the draft, scouting (traditional and sabermetric) and in their minor league development programs. They have then been locking these players up early at huge discounts (Longoria and Shields by the Rays, Carmona and Sizemore by the Indians, Tulowitzki by the Rockies, Cano by the Yankees, etc.) While free agent salaries have been inflating at around 10% per year, arbitration salaries have been nominally pretty constant. This works in favor of small market teams. Carmona’s deal is pretty much identical to Mulder’s deal from 10 years ago, in nominal terms, so in real terms it is worth much less.
In the future, a salary cap might be needed. The Yankees and Red Sox seem to have figured out that the most efficient strategy is to invest in signing international players when they are teenagers and to spend on the draft. The Yankees draft players with “signability concerns” and then give them huge bonuses (pay overslot) to forgo college. The Yankees and Red Sox farm systems are now two of the best in baseball. So they now have huge payrolls AND great young, cheap talent. Smaller market teams are going to need to find another inefficiency in the market to exploit in order to compete with the large revenue teams.
3. Why, in your opinion, have teams become so willing to overspend on players such as Barry Zito? Even the Royals are spending money (Gil Meche). Why is this?
Teams are willing to overspend on players like Zito and Meche because they have a ton of cash and have nothing to do with it. A lot of teams also don’t understand aging curves. Hitters and pitchers peak around age 27, so by the time they hit free agency they are already declining, usually. The Zito contract is one of the worst in history, he is not even a league average pitcher. Everyone knew it was a bad contract at the time, I really can’t imagine what Brian Sabean was thinking. The Meche contract, on the other hand, isn’t so bad, the Royals needed to show their fans and players they were committed, and this was a decent start. It’s hard to draw free agents to KC, so this was actually turning point for them. As for other bad signings (Torii Hunter comes to mind) teams are pretty irrational. It’s hard to explain.
4. Can baseball overcome this period of economic chaos? Why or why not?
I don’t think it’s a period of economic chaos. Like I said before, revenues are at record levels, and while free agent contracts are inflating at about 10% per year, arbitration contracts (and the minimum salary) are fairly constant. Baseball has never been in better financial shape. Teams are somehow able to dupe city and state governments into financing their stadiums, which are huge sources of new revenue for the clubs, and studies have shown they don’t do much for the surrounding area (the Yankees, Mets, Rays, Twins, Marlins, Nats, the list goes on and on). Baseball is in great shape.
2 responses so far ↓
1 Alex Ahmed // Apr 29, 2008 at 12:59 pm
Bobby - nice article - what you said about the salary cap not being necessary makes a lot of sense for the current state of baseball. In the 3rd question, you start out by saying that teams are willing to overspend because they have tons of cash and nothing to do with it. I don’t think that’s necessarily true, I just think they are making poor judgments of player quality, as you get to later in your answer. I don’t think teams are stupid enough just to throw millions of dollars around just because they have nothing better to do, but you never know.
2 Adam Holzman // Jul 4, 2008 at 12:26 am
Bobby - In response to your answer to the third question, it seems that, when people consider how much a team values a player, they often seem to miss the economic impact of the signing itself. Yes, providing a better on-field product for fans will create more income for the owners, but it is not necessarily winning itself that is the main object of an owner, but income. One must remember that winning and making money are not always directly connected. For example, take the Mets’ signing of Carlos Beltran. At the time of the signing, was it possible that Beltran would continue to be one of the best players in baseball? Yes. Was it possible that he would fizzle out and never regain the ability he had during his prime? Yes, and I would argue that what has transpired since has borne more resemblance to the latter circumstance. However, in either case, the fact that people buy Beltran jerseys, buy more seasons’ tickets, etc, does not change. Far too many formulas that attempt to attribute a dollar value to players focus too narrowly on on-field performance and not enough on other factors that can impact team income.
…boola boola.
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