(I don’t mean to imply that Maury is the only person out there defending revenue sharing. For example, see Phil Birnbaum here and Rob Neyer here and my buddy Kristi Dosh here. Other analysts are less critical than I have been, but see a need to reform the revenue sharing system. See Dan Rosenheck here. I’m not trying to cover the entire spectrum of opinion with these cites, i just want to give you a flavor of what people are saying.)
Maury’s argument (begun here, continued here and principally made here) focuses on the success of the Tampa Bay Rays. While I’ve examined how the Pirates and Marlins have abused the revenue sharing system, Maury looks instead at how the Rays have used revenue sharing in the right way, to become one of the best and most exciting teams in baseball. Maury does not mince words: he calls the Rays a “Shining Example”:
“When Bud Selig asked for increase revenue-sharing in 2000 through his Blue Ribbon report, maybe this snapshot of the Rays from 2007-08 was his vision. While the Marlins (and to a lesser extent, Pirates) actions have been questionable as it pertains to the use of revenue-sharing dollars, the Rays (at least for the two years we have visibility to) fall within the spirit [of] its design.”
How is it that the Rays have used revenue sharing in the “right” way? Examined closely, Maury’s argument boils down to the following: (1) the Rays received a combined $75 million in revenue sharing in 2007 and 2008 (the two years covered by the financial statements leaked by deadspin.com), but earned only $15 million in net income during this period, so (2) without revenue sharing, the Rays might have lost $60 million during this period, so (3) without revenue sharing, the Rays probably would have taken drastic cost-cutting steps during this period to avoid these kinds of losses, and (4) these steps would have prevented the Rays from fielding a championship team. Add (1), (2), (3) and (4) together, and you logically reach the conclusion that revenue sharing was a necessary component for the success of the Rays.
What should we make of Maury’s argument in favor of revenue sharing? Is Maury correct to cite the Rays as a “shining example”? To answer these questions, we need to ask two other questions. (1) Did the Rays use revenue sharing to build their 2008 AL Championship team? (2) Will revenue sharing enable the Rays to keep their winning team together?
How The Rays Were Built: 2007
Did the Rays need revenue sharing to build their current ballclub? The answer is no. Not really.
To get a better picture, let’s look at the 2007 Rays roster, the roster for the year covered by the earlier of the two financial statements leaked by deadspin.com:
Note that most of the core of the Rays’ 2008 AL winning team is already present in 2007. Yes, Delmon Young and Brendan Harris would depart within a year, shipped to the Twins for Jason Bartlett and Matt Garza. True, the Rays would drop their 2007 free agents at DH and RP, and sign more expensive free agents for these positions in 2008. Otherwise, the core of the Rays’ 2008 team is present in 2007, either on the roster, or (in the case of 2008 Rookie of the Year Evan Longoria) in the Rays’ minor league system.
We can learn a great deal from examining the 2007 Rays’ roster. First, the core of the team was assembled from baseball’s amateur draft. BJ Upton (drafted 2002), Scott Kazmir (also drafted 2002, by the Mets), Delmon Young (drafted 2003), Evan Longoria (drafted 2006), and late 2008 arrival David Price (drafted 2007) are all early first round draft choices. Young and Price were the first players taken overall in 2003 and 2007 (respectively), Upton was the second player taken overall in 2002, and Longoria was the third player taken overall in 2006. (A great place to look up MLB draft choices is here.) In order for the Rays to consistently take players this high in the 2002-07 drafts, the team had to be consistently terrible during this period. And the Rays were consistently terrible: for the ten years between 1998 and 2007, the Rays finished last in the AL East every year but one (when they finished next to last).
Next thing to note: the Rays weren’t big on signing international free agents prior to 2007 (or after 2007, for that matter). Of the players shown above, only Akinori Iwamura (a 26-year old established Japanese player) was an international free agent signed by the Rays. The Rays did not (and do not) appear to be all that interested in scouting and signing young players out of Latin America. Consider this: in 2010, 28% of major league baseball players are from outside of the U.S. But of the 30 players on the Rays’ current roster, only 17% are from outside of the U.S. (we count Carlos Pena as from the U.S., as he moved to the U.S. at the age of 14 and was drafted by the Rangers in the MLB amateur draft), and all of these players were acquired by the Rays through trades with other MLB teams. No foreign-born player on the Rays’ current active roster was signed by the Rays as an international free agent.
The Rays’ relative lack of interest in signing international players only serves to highlight the emphasis placed by the Rays on the domestic amateur draft. Despite the fact that Maury Brown and others consider the Rays to be a “shining example”, it seems unlikely that other teams can follow this example and build through the draft like the Rays did. For one thing, few teams can afford to play losing baseball as consistently as the Rays did for a ten-year stretch in order to amass the high draft picks that are the heart of the Rays’ current team (the Pirates can and do play this badly, but other teams have occasional runs of competence).
Moreover, even at the very top of the draft, it’s not easy to find players that morph into major league stars. Consider: from 2002 to 2007 (skipping 2005), the Rays’ six first-round picks (none of which were lower than the 4th overall pick in the draft) were BJ Upton, Delmon Young, Jeff Neimann, Evan Longoria and David Price – all major leaguers, two of them all-stars. The Rays might just have easily drafted other guys, like Bryan Bullington, Rickie Weeks, Matt Bush, Luke Hochevar and Mike Moustakas. Who are these other guys? They were the top draft picks in 2002 to 2007 (again skipping 2005) that were not taken by the Rays. Never heard of most of these other guys? Me neither. Rickie Weeks has had a decent but mediocre career so far with Milwaukee, but the others? Bryan Bullington is a pitcher with a combined 1-9 record and 5.57 ERA over five part-time seasons with 4 clubs. Luke Hochevar has accumulated an 18-30 career record with a 5.68 ERA for the Royals. The other guys have not appeared (yet) in the majors.
In short: the MLB amateur draft is a crap shoot. Even given that the Rays were terrible enough for long enough to have high draft picks for many consecutive years, they still got amazingly lucky to have chosen so many good young players in the draft. The Rays’ heavy reliance on the draft (and their apparent lack of interest in signing international players outside of the draft) does not seem like a strategy that’s worthy of emulation. At best, Maury Brown seems guilty of hyperbole when he called the Rays a “Shining Example”. Unless, of course, Maury meant that the Rays were a shining example of how a losing team can get very lucky and become a winning team.
There’s another thing to note about how the Rays assembled their 2007 roster: they did so on the cheap. The Rays’ payroll in 2007 was around $24 million. A $24 million payroll is $12 million less than the Pirates’ current payroll. A $24 million payroll is $13 million less than the Marlins’ 2009 payroll, and the Marlins’ payroll entering 2010 was so low that the baseball players union acted for the first and only time to force the 2010 Marlins to spend more on player salaries. You’d have to go all the way back to the year 2000 (when the Yankees’ payroll was less than half of what it is now) to find a team other than Tampa Bay with a payroll less than the 2007 Rays. (You can look up historic team payrolls here.)
Take a look back at the chart above showing the Rays’ 2007 starting lineup. More than half of the players on this list were earning close to the then-league minimum salary of $380,000. Three other players were free agents making less than $1 million a year. Three players on the team (Navarro, Kazmir and Jackson) were acquired in trades where the Rays dumped salary by giving up more expensive (or potentially more expensive) players. If you looked at this roster at the beginning of 2007, you could be forgiven for concluding that the Rays were a “shining example” of how to field the cheapest possible major league baseball team.
From the financial statements revealed by deadspin.com, we can see that the Rays might easily have been able to afford a $24 million payroll in 2007, even without revenue sharing. Even before the 2007 Rays had received a dollar in revenue sharing, the team had already earned $25 million in TV, radio, sponsorship and advertising revenues, and had another $28 million incoming from the baseball central fund and MLB properties. True, the Rays’ combination of AL-worst attendance and some of the cheapest ticket prices in baseball meant that the Rays would earn only $28 million in ticket sales in 2007 (roughly comparable to what the Yankees earn during a 7-game homestand). But if you add in what the Rays received for suite sales, concessions, parking and the like, the Rays earned about $74 million in 2007 without including revenue sharing. Isn’t that enough to cover a historic-low payroll without the need for revenue sharing?
Here’s where Maury Brown’s math comes into play. In 2007, the Rays operating income was about $22 million. After the Rays paid about $10 million in interest on its $120 million of debt, and factoring in a few other charges, the Rays showed “comprehensive income” in 2007 of about $10 million. So if you took away the $39 million the Rays received in revenue sharing, (strictly by the math) the team would have lost around $29 million in 2007. Maury’s argument must be that the Rays could not have sustained this kind of loss – without revenue sharing, the Rays would have had to cut costs in a way that would have derailed the team’s efforts to build a winner on the field.
Unfortunately, this argument does not stand up to close analysis. Remember that the Rays’ 2007 payroll was only $24 million. By Maury’s math, in the absence of revenue sharing the Rays would have lost $5 million even if they had somehow cut payroll to $0. But baseball would not have permitted the Rays to field a team of 25 unpaid interns. The team was required to pay each player at least the then league minimum salary of $380,000. And as we’ve shown, this is close to what the Rays were paying to most of the team’s core players. The Rays would have saved next to nothing by releasing the likes of Navarro, Upton, Shields, Kazmir, Jackson, Sonnanstine and Hammel. The Rays might have given up Ty Wiggington, Delmon Young and Carl Crawford, but that would have reduced their hypothetical $29 million loss by maybe $7 million. No, if the Rays truly had to make ends meet in 2007 without revenue sharing, they would have had to make cuts in other areas: in their $18 million of general and administrative expenses, or $19 million in sales and marketing, or $10 million in “team expenses”. They would not have gutted the core of their 2007 team, even if revenue sharing had been abolished before the 2007 season.
So, let’s summarize. How were the 2007 Rays built? In the cheapest way possible, through extensive reliance on the MLB amateur draft. Did the Rays need revenue sharing to build a team in this way? The best and most accurate answer to this question is “no”. The Rays may have needed revenue sharing simply to survive in any form. But in 2007, the Rays’ payroll represented close to the bare minimum required to field a 25-man team. In hindsight, this “bare minimum” does look like money well spent. But we cannot say that the Rays needed revenue sharing to field a team when most of the team’s best players were playing for close to the minimum salary.
If the 2007 Rays are a “shining example” of anything, it is that a baseball team does not need much money to build a winner. All a team needs to emulate the Rays is the kind of consistent on-the-field failure required to amass a series of high draft picks, plus a dose of the kind of luck required to consistently select championship-level players in the draft. If revenue sharing is required at all in this process, it is required in only a modest amount sufficient to prop up the team during the lean period (10 years in the case of the Rays) while the team loses ballgames and alienates a percentage of its potential fan base. Paying more than a modest amount of revenue sharing to teams like the 2007 Rays, or to the current versions of the Pirates and Marlins, is a waste of money: it results in teams having more money than they can use productively.
(Note that Rob Neyer argues here, and IIATMS’s Brien argues here, that it would be foolish to force the Pirates to spend all of the roughly $40 million a year they receive in revenue sharing. To which I reply: then pay the Pirates only the fraction of the $40 million that they really need!)
How The Rays Became Winners: 2008
We’ve examined the 2007 Rays and learned that the team was built on the cheap, in heavy reliance on the MLB amateur draft, and against the odds that a high percentage of these draft picks would develop into top major leaguers. But while the 2007 Rays finished last (again); the 2008 Rays finished first, and went to the World Series. What caused the Rays to (finally) transform into a winner in 2008? And did revenue sharing play a role in this transformation?
There were a number of factors critical to the Rays’ historic turnaround in 2008, including the team’s promotion of Rookie of the Year Evan Longoria from the minor leagues, and the trade for shortstop Jason Bartlett and pitcher Matt Garza. But the key ingredient for the Rays’ 2008 success was time. In 2007, the team’s core consisted of rookies or players with a year or two in the major leagues. The team was more experienced in 2008, and this experience translated into more wins and fewer losses. While the team’s hitting held steady in 2008 (the team hit for a combined .769 OPS in 2008, compared to .762 in 2007), the team’s pitching improved dramatically. The Rays’ team ERA dropped from 5.53 in 2007 to 3.82 in 2008 (Andy Sonnenstine’s ERA dropped by a point and a half; Edwin Jackson’s by about 1.3).
Other changes in 2008 should be credited to Rays’ team ownership. Current Rays owner Stuart Sternberg bought the team in late 2005, but he truly made his presence felt after the 2007 season. The team changed its name, colors and uniforms prior to the 2008 season, but more significantly, Sternberg promised to raise the team’s 2008 payroll. Sure enough, the 2008 Rays spent $44 million on team payroll – this was the second lowest payroll in major league baseball in 2008, but this payroll was a big jump over the team’s 2007 payroll. Below is a chart showing the payroll and starting lineup for the 2008 Rays:
We can see from this chart some of the places where the Rays spent their additional $20 million. Some of this added money was used to buy upgrades for the Rays’ free agents at DH and RP. While Cliff Floyd was not exactly a DH all-star, his 2008 .804 OPS was a big improvement over the 2007 .705 OPS posted by Greg Norton. As for aging closer Troy Percival … well, it’s not clear that Percival provided an improvement over 2007 closer Al Reyes, but at least Percival personified Sternberg’s effort to make his team better. In any event, these two upgrades cost the Rays about $3 million. Where did the Rays spend the other $17 million?
The sad answer is: the other $17 million was eaten up by the increased cost of keeping the 2007 squad together.
Without constant player turnover, all young teams get older, and more expensive. Players making the league minimum become eligible for salary arbitration, and eventually for free agency. Teams are often advised to sign arbitration-eligible players to longer-term contracts; the 2008 Rays signed Scott Kazmir to a three year deal, which explains his increase in salary shown above. Long term contracts with younger players often provide for increased salaries in later years, which explains Carl Crawford’s rise in salary in 2008. Moreover, when a bargain free agent like Carlos Pena performs above expectations (Pena was the AL Comeback Player of the Year in 2007), then the free agent is going to command a larger salary. So Pena cost the Rays an extra $5.2 million in 2008.
The Rays were a better team in 2008 because they were a year older, and they were a more expensive team in 2008 for the same reason. In baseball, there’s a rule of thumb for young teams: time is money. The 2007 Rays proved that it doesn’t take much money to assemble a good young team. But the 2008 Rays prove that it can take money to keep a good young team together long enough for the team to start winning.
This is where Maury Brown can make his most effective case for revenue sharing. Without revenue sharing, it’s hard to see how Sternberg could have added to his team’s 2008 payroll, let alone retain the core of his 2007 squad. Even after receiving revenue sharing of $35 million in 2008, the Rays barely made a profit. If the Rays had not made the post-season in 2008 (which netted the team an additional $11 million), the team would have lost $7 million in 2008.
Unfortunately, the 2008 Rays represent the high point of our discussion of what revenue sharing is able to accomplish. Unfortunately, even when a team like the Rays gets lucky enough to break through and achieve success, revenue sharing does not provide what the team needs to sustain success.
The Problem of Sustainability: The Rays 2009 and Beyond
The financial data for the Rays leaked by deadspin.com covers only 2007 and 2008, so we do not have a detailed picture of the Rays’ current financial situation. But taking the Rays’ 2008 financial data as a baseline and using other available information, we can generate a picture of where the Rays currently stand financially, and whether revenue sharing is providing the Rays with the help they need to remain successful on the field.
The picture is not a pretty one.
Let’s go back to 2008: as we discussed, the Rays used their post-season revenues to turn a modest profit that year. Fast forward to 2009. We can point to four events that hurt the Rays financially in 2009: (1) they did not make the 2009 post-season, (2) despite their 2008 success, their 2009 attendance increased only slightly (from 22,259 a game in 2008 to 23,147 in 2009), (3) the Rays’ revenue sharing moneys probably dropped in 2009, as a result of the team’s increased revenues in 2008, and worst of all (4) their team payroll increased from $44 million in 2008 to $63 million in 2009.
Let’s do the math. The Rays would have lost money in 2008 if they had failed to make the playoffs. We can guess that the Rays did lose money in 2009, when they did miss the playoffs. True, the Rays might have found some new or increased source of revenues in 2009 (though certainly not from increased fan attendance at home games), but any such revenue would probably have been eaten up by the team’s $19 million of additional payroll. If we are to take these numbers seriously (and we have to take these numbers seriously, if we’re going to take Maury Brown’s analysis seriously – which I do), then the Rays must have lost money in 2009.
(A note: according to Forbes’ estimates, the Rays had $15.7 million of operating income in 2009. This figure does not take interest payments into account, but even if we deduct these interest payments, the Rays would still have been profitable according to Forbes. Personally, I prefer my projections over the Forbes’ estimates, which were prepared before deadspin.com’s leak of the Rays’ financial data. For one thing, the Forbes estimates do not show any source of revenue that could have made up for the team’s loss of post-season income and increased payroll. But even if Forbes is right, this means only that the Rays were in better shape in 2009 than we might otherwise imagine. It does not change the fact that “time is money” and that the Rays’ financial picture is worsening. For a discussion of the accuracy of the Forbes estimates compared to the data leaked by deadspin.com, see here.)
The picture does not improve for the Rays in 2010. Below is a chart showing the cost of the Rays’ current starting lineup:
Let’s do the math again, this time for 2010. True, the Rays should make the post-season this year, though there’s no guarantee that they’ll earn post-season revenues like they did in 2008 (when they made it to a World Series). But the 2010 Rays are (so far) drawing fewer fans than they did in 2009 (22,679 a game, the last I looked). Moreover, their payroll is now over $72 million, 19th highest in the major leagues. Again, it seems like the Rays must be losing money – probably more so in 2010 than in 2009. How are the Rays continuing to operate as usual?
Perhaps the Rays found other ways to increase revenues in 2009 and 2010. Maybe the Rays are receiving more from TV and radio (their TV ratings are way up this year, but this probably won’t bring in more money until the Rays’ media contracts are up for renewal) or from another source. But here’s where baseball’s revenue sharing system gets truly perverse. If the Rays have found a way to increase their local revenues, this will cause their revenue sharing payments to drop. For every extra $10 the Rays might earn locally, they’ll lose $3 to $4 in revenue sharing. Now, it’s one thing if the Rays can find a windfall source of new revenue, one they can tap without any work or expense. But what if the Rays need to invest $7 in order to reap $10? For example, what if the Rays determined that with a $7 million increase in expenditures for promotion and advertising, the team might draw $10 million of new customers to the ballpark? It would not be worth it for the Rays to even try such a scheme. The team would lose more in revenue sharing than it would net after expenses in gate receipts.
We’ve already seen how revenue sharing rewards failure (in particular, the failure of the Pirates and the Marlins). We can now see in the case of the Rays, how the system punishes success.
Even Maury Brown sees that the handwriting may be on the wall for the current version of the Tampa Bay Rays. Maury writes that “the Rays are teetering ever so close to having this “loser to winner” story collapse under its own weight” and “the Rays are in dire need of increased revenues.” In looking for increased revenues, Maury focuses where he should focus, on the Rays’ attendance figures. The Rays cannot sustain one of the best teams in baseball with local revenues derived from the 8th worst home attendance in baseball (only 2,500 fans a game better than the lowly Pirates). The $30 – $40 million the Rays might receive in annual revenue sharing is not enough to bridge the gap between 23,000 fans per home game and the payroll required for a championship team.
Here in a nutshell is why revenue sharing doesn’t work: the system pays more to the 2010 Pirates than it does to the 2010 Rays. Only the Pirates don’t need all that money, while the current version of the Rays needs revenue sharing now more than ever before.
The Need for Sustainability
I’ve argued that baseball’s system of revenue sharing is a system of investment: baseball takes revenue from big-market teams like the Yankees, and invests this money with small market teams like the Pirates, Marlins and Rays. But as we’ve previously noted, revenue sharing lacks basic features required for successful investment, including transparency and accountability.
By looking at the Rays, we can see another basic feature lacking in revenue sharing: sustainability. Even if a team gets lucky like the Rays and builds a successful team from top draft picks, there’s nothing in the revenue sharing system that allows the team to sustain that success. The rule that “time is money” takes hold, and revenue sharing is not enough to bridge the gap between small-market revenues and championship team salaries. This is the problem facing the Rays: as Maury Brown admits, the Rays will have to be broken up (like the 1997 Marlins were broken up, even before baseball established revenue sharing) unless they can generate substantial new revenues.
Should we be surprised when teams like the Rays are unable to draw big crowds at home even after they start winning? Maybe not. The San Diego Padres have reversed their losing ways and are heading for the playoffs this year, but their home attendance has barely picked up (25,788 average home attendance in 2010, 19th best in baseball, compared to a 23,735 average home attendance in 2009). There’s been improvement in Cincinnati, whose Reds have turned things around and today own the best record in the National League (the Reds have 25,658 average home attendance in 2010, versus 21,579 in 2009), but the Reds’ 2010 attendance still trails even that of the Padres (and to note, the Rays’ attendance trails both the Padres and the Reds). Meanwhile, other teams – even small market teams – draw relatively big crowds despite losing more often than not. The Tigers draw 30,809 fans a game (in an economically depressed city) to watch a team play under .500 baseball; the 63-73 Brewers have 34,669 fans at an average home game. (Historic home attendance figures can be viewed here.)
Some have argued that the Rays need to build a new ballpark in order to draw big crowds. It’s true, there’s a lot to hate about the Rays’ Tropicana Field. But the Padres play in gorgeous new Petco Park (only 6 years old), and that doesn’t seem to be helping their winning team attract fans. Nor are fans flocking to Cincinnati’s 7-year old Great American Ball Park.
Would a new ballpark help sustain the Rays’ success on the field? Truth is, it’s too late now to ask that question. The question of sustainability should have been addressed long ago – before the Rays’ payroll began to outstrip the team’s revenue, even before the Rays began to emerge from their years of finishing in the AL cellar. The issue of sustainability should have been addressed when baseball was putting the first system of revenue sharing into place.
Instead, we have a system of revenue sharing where billions of dollars have been invested in the potential success of teams like the Rays, but no one has thought about how these teams might sustain this success. No sensible capitalist would invest in a system like this. If the Rays’ 2008 success was a “shining example” of revenue sharing in action, then the eventual wholesale distribution of the team’s best players to the sport’s richest ballclubs will be a “shining example” of why revenue sharing is a failure.
According to Maury Brown, the Rays have used revenue sharing in the right way. From a business standpoint, I disagree. From a business standpoint, the Rays are trapped between the increasing demands of a championship payroll and the limited local revenue they can derive from a small market. From a business standpoint, the Rays are (probably) losing money in spite of revenue sharing. From a business standpoint, the Rays have made escalating long-term financial commitments ($12 million of guaranteed contracts for 4 players in 2011; $11 million of guaranteed contracts for three players in 2012) without any sure source of escalating revenues to match those commitments. Meanwhile, the “time is money” rule will continue to work against the Rays until they succumb to business reality, dismantle their championship team and start all over again.
And what a waste that will be. Baseball does so little to ensure that teams use revenue sharing to improve their performance on the field. Success stories like the Rays don’t come around all that often (we’ll need another year at least to determine if the Reds and Padres are capable of repeating this year’s surprising performances). The Rays got lucky with their draft picks and built a terrific team. But baseball will do nothing (or at least, not enough) to help that team stay together. Billions of dollars poured into revenue sharing, and its few successes are allowed after a couple of years to fizzle out and revert to mediocrity (or worse). What a waste.
In the meantime, the Pirates will (probably) continue to lose game after game. They’ll keep in place a young roster and a cheap payroll. Local revenues will stay low, but revenue sharing and other central revenues will lock in a steady profit for Pirates’ ownership. Ironically, the Pirates have found the secret to sustainable success under revenue sharing, by remaining consistently awful.
Sorry Maury, but It’s All About The Money. The “shining example” of revenue sharing is the Pirates, not the Rays. And this is why revenue sharing needs to be overhauled, or scrapped altogether.