What Baseball Can Learn From The NFL

I’ve written a great deal here about salary caps in baseball.  Also, here, here and here.  I looked at salary caps from every which way I could.  I wrote how salary caps always come with salary floors. I wrote how the revenue-poor teams in baseball (many of which are profits-rich, but that’s another story) could not afford much in the way of a salary floor, so baseball could not afford to have much in the way of a salary cap. So I did say it: baseball cannot afford an effective salary cap.

Unfortunately, I also said that I wished it were not so.  I said that baseball needs an effective salary cap, that I wished baseball split its revenue so that it could afford an effective salary cap. It seemed right to me that baseball should be played on a more even financial playing field, that some teams (like my beloved Yankees) should not be able to spend 5, 7, even 10 times the amount that their revenue-poor (if sometimes profit-rich) cousins in Pittsburgh and Tampa Bay were spending. A salary cap (and floor) would do something to narrow the gap between Pittsburgh and New York.  Narrowing this gap seemed fundamentally fair to me.

And it still does.

But there’s a better way to narrow the gap, and that way is to share revenues as fairly as we can between rich and poor baseball teams.  I will talk a lot about revenue sharing during the upcoming baseball season.

The current NFL labor woes highlight why baseball does not want a salary cap, or a salary floor: in order to have a salary cap and floor, the teams and the players have to agree on a fair division of the revenues.  The cap represents the high end of this split, and the floor represents the bare minimum that the owners have agreed must go to the players.  Once a sport puts a salary cap (and floor) in place, this split must be agreed to each time the owners and players negotiate a new collective bargaining agreement.

The problem is, there’s no obvious formula that owners and players can use to split league revenues.   The NFL owners are claiming that their expenses are rising and that they need a greater share of revenues to restore their teams to their former profitability.  But even if this were true (and naturally, the players do not believe that the owners have proved their claim), there’s nothing written in stone saying that the players have to make less so that the owners can make more.

This is why salary caps (and floors) are a bad idea, always a bad idea.  The idea of caps and floors is nothing more than an uncomfortable partnership between owners and players, where the partners are destined to bicker forever over how to divvy up the partnership revenues.  As a former lawyer, I can dutifully report that there ARE plenty of partnerships with bickering partners.  Some partners loathe each other, yet have to work together.  If you’re the lawyer representing such a partnership, the last thing you’d ever do is force the partners to renegotiate their partnership agreement every four years.

It’s common sense: when you’re dealing with a problem relationship, you don’t add issues to compound the problem.  If your marriage is a little shaky, that’s not the time to adopt a child. If things are testy with your next door neighbor, maybe you postpone your run for president of your neighborhood association.  And if you’re running a multi-billion dollar sports league where owners and players have a history of conflict, maybe you don’t make the league dependent on the owners and players agreeing every four years how to split the revenues.

Baseball has done this better.  At the moment, the “partnership” between MLB and the baseball players’ union is functioning reasonably well, but it will not always be so.  There will come a day when labor relations in baseball are as terrible as we’re presently seeing with the NFL. When that day comes, MLB and the baseball players’ union will have plenty of issues to divide them: luxury tax levels, and years to free agent eligibility, and “hard slots”, and the like. But they won’t have to argue how to split up the revenues, because (owing to luck, or foresight, or just the players’ ability to have their way back in 1994) baseball does not have a salary cap.  For which we should be grateful.

People like me, who would like to see baseball played on a more level economic playing field, will need to look to revenue sharing – a revised form of revenue sharing that improves competitive balance in an efficient and cost-effective way – as the principal means to achieve greater fairness in baseball.

Because salary caps are a bad idea.  Always were.  Sorry I ever said otherwise … but thanks to the NFL, I’ve seen the light.

43 thoughts on “What Baseball Can Learn From The NFL

  1. Thanks for seeing the light Larry. This whole NFL situation can lead to a lockout. Which bums me out. I would hate for baseball to have a similar fate.

  2. Larry – I DON'T WANT FAIR. I like the Yankees spending ten times as much. AFAIC, they should remove the luxury tax – I want a 120 win season.

    Money does NOT buy rings. Every year "poor" teams get into the playoffs. It ain't broke. Don't fix it.

    • Jay, I didn't want to go into it, but let's be honest: the CBA's requirement for time of service before free agency is an extremely effective form of salary cap. And this is the reason why "poor" teams get into the playoffs.

      • Good point – didn't think of that. duh. So – and I know this is another topic – could that become a discussion point in the new CBA? Perhaps cut a year off the current time of service?

        • Well … it's likely that the owners and players will discuss the so-called "super two" rule, where rookies who play a full year their rookie season (like a Jason Heyward) have only two years to wait before they're eligible for arbitration, while other rookies called up mid-season (like a Buster Posey) have to wait three years. Beyond this, I don't see that the time of service question will become a point of contention in the negotiation of the next CBA.

          • That's not quite accurate. A Super 2 player has 2+ years of service time (there's a deadline at which anyone called up before qualifies after 2+ years of service but before accumulating 3 full years). Someone who gets called up at the beginning of the season like Heyward still plays 3 seasons before being eligible for arbitration.

            The difference is that a player like Posey who gets called up after the Super 2 deadline plays *more than 3 but less than 4* years before qualifying for arbitration, and has their free agency eligibility pushed back a year as well.

          • You're right. I rushed that description. Actually, we don't know today who's going to be a Super 2 in the future. For 2010, the cutoff for Super came out at two years, 122 days of service. I think it was something like 8 days longer in 2009. This is why the owners hate the Super 2 rule, because they can't know in advance how it's going to work … and that's why the union puts up with the rule, because the owners can't job the rule so that their players always miss Supr 2 status by a day or two.

            Thanks for clarifying.

          • My guess is that the Super 2 will get eliminated in the next CBA. The owners don't like it, and the players probably won't make a stink over something the owners avoid in most cases anyway.

  3. I say the players' union should agree to a salary cap when the owners agree to a profits cap.

  4. I'll go one step further and say that baseball would be worse off if it had a "fair salary cap" and complete revenue sharing. Why? Because that would kill incentive to grow the game. Even though we bemoan that sports is "about the money", that's why we have so much access to the game. A fair salary cap with universal revenue sharing might seem fair, but it would amount to a "tax" on the more productive, which would kind of be like throwing motor oil in the engine to slow a car down.

    Secondly, why do the Pirates need to close the gap with the Yankees? Shouldn't their sights be set on beating out the small market Brewers, Reds, Cardinals, etc.? Baseball doesn't need revenue sharing to even the playing field. The 25-man roster, reserve clause, Rule IV draft and wild card playoff system all do a very good job of that.

    • Finally, it should be noted that the NFL did not adopt a salary cap to foster competitive balance. That was propaganda advanced by the league and naively accepted by the media, fans and the NFLPA. The salary cap was always about one thing: cost control. Unfortunately, it took over a decade for everyone to realize this, but now they are seeing it first hand. The NFL doesn’t care about competitive balance as much as controlling costs, but with the salary cap they were able to achieve one while pretending to seek the other.

    • "I'll go one step further and say that baseball would be worse off if it had a "fair salary cap" and complete revenue sharing. Why? Because that would kill incentive to grow the game. Even though we bemoan that sports is "about the money", that's why we have so much access to the game. A fair salary cap with universal revenue sharing might seem fair, but it would amount to a "tax" on the more productive, which would kind of be like throwing motor oil in the engine to slow a car down. "

      This doesn't make any sense whatsoever. How in the world would a different revenue sharing regime kill baseball's incentive to generate more revenue? More revenue=more money in all cases.

      • It makes sense for two reasons: (1) generating revenue costs money, which creates an inherent risk to all investment; and (2) teams will be less likely to take this risk if they can only share 1/30 of the reward. If you had complete universal revenue sharing, it would make more sense to let another team spend the time and money needed to generate revenue because everyone is sharing equally. Of course, if everyone felt that way, no new revenue would be generated, which is exactly my concern.

      • Using an example to explain, let’s say the Yankees spent $10 million on a venture that would create $100 million in revenue. If their portion would only amount to $3.3 million after splitting it 30 ways, the team would wind up losing money. So, they wouldn’t make the investment and the $100 million would be lost. Even if the Yankees could first deduct their expenses from the total it wouldn’t solve the problem. For starters, if the venture failed and no revenue was generated, would the Yankees be reimbursed? If so, then you no longer have individual franchises, but one collective entity. Secondly, if the venture succeeded, the Yankees would wind up splitting $90 million and come away with $3 million. Such a return might not only warrant the risk, but Hal might decided the money could be better spent on one of his other higher margin, higher ROI businesses.

        Incentive is one of the most fundamental requirements for growth. Across the board revenue sharing would effectively kill incentive

  5. From my perspective, it seems quite possible that the strategy (more likely from the players than owners) is to wipe out part or all of spring training this year. The games are full-priced for the fans and the veterans barely play.

    With that said, the NFL and players' union should have learned the lesson that the NHL taught everyone. When they start skipping games, their fans patience for either side will evaporate … even if they choose to not battle it out in the media. (I wouldn't want to put money on the fight not being in the media if it comes to this.) Every professional sport has a replacement if you absolutely must see the sport in action. It may not be a perfect replacement, but it does exist. It's called College sports.

    At least with hockey, what I personally found was that I enjoyed the game more than I did at the professional level. That's the risk any professional sport runs if they stop playing games. The fans will look for alternatives and may find they like them better.

    The NHL had the stoppage in play for a long-term view on trying to make the league more viable…. although they really didn't fix their tv revenues by much in doing so. It still doesn't seem that the they have regained the fans they alienated in having the stoppage. Given this does it really make sense for a long-term strategy to go without playing games?

    • The NFL is in very little danger of losing significant amounts of fans, provided they don't lose an entire season or something. Much like baseball, it's very popular and there simply isn't an alternative to it. The college game isn't substantively different enough in any way to stand out. The only different is that the players are younger and the talent is spread out much thinner.

  6. Why is it less true in pro sports? The Yankees had to spend money to build the new ballpark; they had to spend money to create YES; they had to spend money to build a quality team that could sustain fan interest. These endeavors involve a ton of risk. Just ask the Mets.

    Also, how does a total revenue sharing arrangement mitigate risk? Revenue sharing doesn’t collectivize losses. Any business that entered into such an agreement would be doomed to failure. It would be like giving your teenage son a credit card. Talk about moral hazard!

    You seem to be talking about “the league” as if it is one entity, but that couldn’t be further from the truth. American sports consist of franchises that spend their own money and bring in their own revenue. This is heightened in baseball, where revenue is mostly derived from local sources. In other words, baseball needs its individual clubs to grow the game, and limiting the amount of money they can keep from their own investments is the best way to ensure it slows to a crawl.

    • William, to some extent you're mixing up revenue sharing with sharing of central funds. Let's draw the distinction. Let's say that the Yankees decide to investigate whether they should invest in a huge mega-Yankee store to be located in the heart of Times Square. Revenue sharing requires the Yankees to share about 40% of the revenues they earn, so they'd have to earn better than a 40% return on this investment to make it worthwhile. There are precious few investments that can earn this kind of return.

      It's possible that the store itself might earn better than 40% on the profits it earns from the sale of merchandise at the new Yankee store. But that's where the profits begin and end, because the merchandising rights to Yankees caps, jerseys and other gear belong to Major League Baseball. The proceeds from these merchandising rights are central revenue. So, the Yankees would make just as much money selling Red Sox gear as Yankees gear from its new store.

      William, I'm sure you understand this, but it would be helpful to others if you drew this distinction.

      • I agree with your point, but I am not sure about your math. Just because the Yankees share 40% of revenue doesn’t mean they’d need a 40% ROI.

        Using an example, Yankees invest $10 to make $14 (a 40% ROI). Assuming they have to share 40% of net revenue, that would mean the Yankees keep $2.40 (60% of $4). As a result, the Yankees real ROI becomes 24%. Now, the question becomes is that enough of an incentive to grow make the investment? Maybe. Maybe Not.

        I agree that some forms of revenue sharing make sense (to some degrees). Any centralized stream of revenue is a good candidate for some form of revenue sharing because it isn’t generated by local investment. You have to be much more careful, however, when devising formula’s to share local revenue…areas where only one franchise has the risk. If you push the envelope too far, you create a disincentive. Because baseball is a sport that thrives from the bottom-up, you have to make absolute sure that any change in the system doesn’t tilt things upside down.

    • I'm not really talking about much of anything, since we're discussing a hypothetical situation that isn't going to happen and that no one I'm aware of is advocating for. Obviously in a system of total revenue sharing business decisions would largely be made by the league and owners would basically be investors who get to operate a baseball team for their troubles. Anyway, the basic point is that revenue sharing doesn't kill incentives to generate more revenue, as evidenced by the fact that the Yankees and other large market teams have been aggressively seeking to increase revenues over the past decade.

      And since YES is a separate business and its revenues don't count towards revenue sharing, it's neither here nor there really. Except in so much as it's a good argument in favor of the need for some level of revenue sharing.

  7. Gee, if you live in California and you sleep a little late on a Friday, you can miss a full-blown comment fight between William and Brien.

    William, I come closer to siding with Brien on this one, though I understand your point. You're saying that revenue sharing is in essence a form of taxation, and that taxation tends to discourage whatever activity it is that we're taxing. Quite true. So when we slap the revenue sharing tax on certain activities of the Yankees and Red Sox, the Yankees naturally focus on non-taxed activities, like Stadium-building and the YES network, and the Red Sox go and buy an English-league football team. This distorts the way these teams would have spent their money in the absence of revenue sharing, and probably causes these teams to invest in less-productive (if untaxed) activities.

    But we're looking at just half the picture so far. The proceeds of revenue sharing CAN be spent in ways that accomplish some good. Then all we're dealing with is a classic cost-benefit analysis, where revenue sharing can be justified if the benefits of revenue sharing (greater fairness and competitive balance) outweigh the costs we've discussed above. This is part of the reason why I screamed as loud as I did last summer, when the deadspin.com documents revealed that some teams were merely pocketing the lion's share of their revenue sharing, while a team like the Rays could not get enough in revenue sharing to hold onto their core group of players.

    Two other things to mention. Brien has argued that revenue sharing should take the form of teams like the Yankees paying something for their exclusive market rights (shared only with the Mets) to the largest metropolitan and media markets in the U.S. There's something to be said for this. Brien, FWIW, Jonah Keri agrees with you in his latest book (he doesn't discuss this in depth, but he clearly agrees). Also, there's always been revenue sharing in baseball — until relatively recently, this revenue sharing took the form of splitting gate receipts.

    • Fight? I don’t think so…at least I hope not.

      You’ve summarized my point well, but I would add that I am not suggesting all forms of revenue sharing are bad (see earlier comments), or that revenue sharing can’t be used to benefit the league as a whole (although fostering competitive balance is the same red herring that led the NFL down the path it is headed). What I am stating, however, is that "more" revenue sharing could be just as detrimental as a salary cap.

      • As for your last point, I wouldn’t be totally opposed to opening up the New York market to a third team, for example, but I don’t think the Yankees and Mets should have to pay for their exclusive market rights (beyond the implementation of prudent revenue sharing formulas, which after all, amount to a market tax). I would also point out that one reason the Yankees and Mets spent around one billion to build a stadium is because they did it in New York. There are additional costs to operating in bigger markets that also have to be taken into account. The Mets offer a perfect example. Although Madoff is an x-factor, it’s also true that the team is heavily burdened by the debt it needed to build a very expensive stadium…one that would have cost a lot less had it been built in Kansas City. Also, franchise values exist as a form of market tax. It kind of doesn’t apply now because the Yankees and Mets are both owned by families who bought into the team at relatively depressed prices, but if the Wilpons sell, for example, the new buyer will likely be burdened further by the debt needed to purchase the team.

        • William, agreed, the question of how to value market rights is complicated. You'll notice that my home town of Los Angeles has not had a football team for quite some time. Why not? Because in football, the value of having exclusive rights to the L.A. metropolitan area is outweighed by the increased cost of building a stadium here.

          We also need to consider that a third baseball franchise in NY might not prove to be all that valuable. Look at the Nets and Islanders as examples — according to Forbes at least, these are not valuable franchises.

          But Brien's point still stands: the value of the Yankees is built on the team's shared exclusive rights to the largest market in the U.S. Of course, the Yankees' value is also a factor of fan loyalty built over the many years of the Yankees' existence, and the success the team enjoys on the field. But there are other teams (I'm thinking of the St. Louis Cardinals) with terrific fan support and storied histories, with a value that's a fraction of that of the Yankees. For the Yankees, New York is a very good place to be located.

          • I think I'd say that a big part of the reason the NFL doesn't presently have a franchise in L.A. is that by holding it open they're able to ransom present cities for new publicly funded stadiums as well. I don't think the cost has much of anything to do with it, especially seeing that the NFL has been adamant that they want a stadium downtown if a team (or 2) moves to LA.

          • Well, yes. That's part of the game. Jonah Keri points out in his new book that before MLB approved expansion to Tampa Bay, a number of baseball teams leveraged a threat to move to Tampa Bay to get State and local governments to finance construction of new ballparks.

            The point still remains, there's no compelling reason for a football team to move to L.A. There's no clear way to leverage the size of the L.A. market to generate revenues flowing to the team, that would not end up being shared centrally. There's no political interest here to publicly fund a new football stadium. Land here is expensive, labor here is expensive, cost of living here is expensive, state and local taxes are high — why would a team want to come here?

          • Even though every team has it rabid fans, very few would pay to see an intrasquad game. Sports is exciting because of the competition. Because of this, I think I see a better way to "share" revenue in baseball.

            Since a game is between two teams, I think they should share the revenue on a game by game basis after costs such as stadium rent, utilities and beer vendors (etc.) are paid. These costs would NOT include player and staff salaries. Revenue would include stadium income as well as local revenues from each team for broadcasting the game (both teams are playing). Let’s say the Royals are playing the Yankees in New York. All the revenue from both teams is calculated, costs of playing the game are deducted and the remainder is split. The same thing happens when the teams play in KC: The revenue is split. The Yankees would only receive 1/2 the profit on their home games but they would also receive 1/2 the profit from all the games they play as visiting teams. This would not eliminate the income difference between teams, but it would reduce it and do away with luxury taxes as well.

          • Unclearnie, if you were only considering gate receipts, I'd ask you to consider the NFL plan, where gate receipts are split 60% for the home team and 40% for the visitors. The home team gets a little more to pay the expenses of putting on the game — that way, you don't have the messy job of having to compute expenses per game, or having the home team move as many expenses as possible into the net revenue per game calculation (so as to reduce the amount they need to share).

            But if you're ALSO looking to split the revenues earned from TV, then I start to wonder why you'd rather not simply stick with revenue sharing in its existing format.

          • But if you're including broadcasting rights in this, for all intents and purposes you're talking about something that would amount to very nearly a completely equal split in revenues, at least from an intra-league standpoint. Considering that merchandise is already a part of central revenue, about the only thing left is stadium advertising.

            And ultimately, this would probably hurt small market teams as much as it would help them by depriving them of the bump in revenue they get when a team like the Yankees or Red Sox come to town, and potentially exacerbating the advantage teams whose owners also own RSN's have.

    • True enough. I've been wrong before. When I was five, I bought a 3×5 index card where I list every time I've been wrong. I also kept key phone numbers and stuff at the bottom of the card, and I have to admit, as my list gets longer I don't have as much room as I used to have for the phone numbers.

      ; ^ )

  8. Plus you need to account for the fact that the Yankees owners have a substantial investment in YES Network, whose revenues they aren't required to share with the rest of baseball either.

    • Deron, welcome to IIATMS!

      Folks, let's be VERY nice to Deron. Truth is, Deron's studies confirm the findings that J-Doug reached in his Rational Pastimes blog: if you measure competitive balance in terms of competitive mobility, then baseball trails the other major sports. http://bit.ly/ePwqei

      Yes, there are other ways to measure competitive balance, where baseball fares better. And yes, I don't see anything that Deron has advanced to prove that baseball's low competitive mobility is caused by baseball's failure to adopt a salary cap. Deron, I will read your posts more carefully to see if you advance any evidence regarding cause.

      Deron, I'm running out for the evening. Care to pick up this conversation with us a little later? I hope you stick around — we have an intelligent bunch of posters and commenters here, and we keep our tone reasonably civil.

    • It's a little late here on the East coast, but I'm with Larry; I'll pick this up tomorrow if you hand around.

  9. Thanks for the warm welcome. I was not aware of the study on J-Doug's Rational Pastimes blog, but I am in agreement with it. I think upward mobility is the most important measure of competitive balance; without it, fans have nothing to look forward to. As I think about this subject more, I realize that there may be no viable solution. The problem is structural more than anything else; in basketball one good draft pick or free agent can change a last place team into a playoff team the next year. Baseball gets hit with a double whammy; very rarely are draftees ready to contribute on the big league level within a year, and even the best free agent pickup can only improve a last place team by a limited amount.

    • One potential problem I see with your charts is the focus on the "5 worst teams." For baseball, that means you're mostly looking at Pittsburgh, Kansas City, Baltimore, and Washington, and I don't really see any way to the control for the fact that those teams have been badly mismanaged over the last decade or so.

      • It is very difficult to quantify and control for poor management. If one is comparing baseball's currenty upward mobility to its past upward mobility, then poor management may need to be controlled for. However, if one compares baseball's UM to football or basketball, controlling for poor management may not be necessary. Each league has had chronically mismanaged teams. If baseball has the more than the other sports, then there would appear to be a structural problem in baseball, not just a few mismanaged teams. I have not yet thoroughly compared MLB to the NBA or NFL.

        • Well it could also be the case that bad management has a more outsized impact on a baseball team than in other sports. I think that's probably definitely true relative to the NBA. I would say that the Cleveland Cavaliers weren't particularly well managed during most of Lebron's time there, but just having Lebron and a mediocre supporting cast was enough to get them a decent amount of success. And I don't think they deserve much credit at all for winning the lottery and drafting Lebron.

    • Deron, the question of competitive balance is complicated. While I have problems with a number of the studies you've created on your site, you ARE trying to think about this subject intelligently and in a numbers-based way. So that's good.

      Baseball DOES have an issue with the disparity between the ability of its teams to generate revenue. As you may have noticed from the title of this site, we're WELL aware of this issue! But there's no consensus among the writers here as to the significance of this issue. If you look at last year's baseball playoffs, three of the eight playoff teams (Rays, Reds and Rangers) were small-payroll teams, three (Giants, Twins and Braves) were mid-market teams, and only two (Yankees and Phillies) were the big-spending bullies you might worry about when you write about competitive balance. As the Wall Street Journal announced, 2010 was a bad year for money in baseball, as wealthy teams like the Mets, Cubs and Red Sox failed to make the playoffs.

      Sure, 2010 was only one year. But there are statistics you can use over a longer range of years that point to some level of competitive balance in baseball. If you look at the number of teams that make the playoffs (and remember that baseball has the most restrictive playoffs system of any major sport) or the number of teams that have won the World's Championship since 1995, baseball compares very well to the other sports. If you look at how often each team has made the playoffs since 1995, then the advantage of rich teams like the Yankees and Red Sox becomes apparent. The competitive mobility measure is also interesting.

      The difficulty, of course, is attributing causes to these effects. You're right to point out that there are differences in the inherent nature of each sport that affects a team's ability to rise up from the bottom. But we're also looking at a small sample size, where we need to be careful how we characterize the things we think we're seeing. Take that Wall Street Journal business about 2010 being a bad year for money. Did we see a dramatic shift in 2010 towards greater competitive balance? I doubt it. I think what we saw was that the Red Sox were overrun with injuries, while the Mets and Dodgers were sunk by the incompetence and financial mismanagement of their owners.

      You'll get no argument here from me, or Brien, or Jason: baseball needs to have measures in place (such as minimum service time to free agency, the amateur draft and revenue sharing) to help level the playing field between high revenue and low revenue teams. You WILL get some disagreement here as to the effectiveness of the measures currently in place to address revenue imbalance, and what baseball could do to make these measures more effective. But the important take-away lesson here is that the issue of competitive balance is truly complicated. And you can probably forgive us if, at this moment, we're happy that baseball did not follow the NFL's approach on this question.

      • Well said. I think my causes for competitive imbalance are stronger than the remedies I suggested. It's a very complicated problem. The studies on my site are not meant to be comprehensive; they're meant to move the discussion into the right direction. Thanks for the feedback.