Rich Team, Poor Team – Part I

by on January 4, 2011 · 14 comments

Scratch.  Moolah.  Dough.  Coin.  Benjamins.  Paper.  Opulence.  Rich teams has it.  Poor teams want it.  In baseball, it’s all about revenue or revenue gap to be precise.  Revenue gap often translates to talent gap, or it at least translates to differing margins of error.  There are exceptions, and it’s technically possible to field a competitive team with a relatively small payroll (A’s & Rays).  It’s also possible to field a bad team with a huge payroll (Cubs & Mets).  However, the latter two teams can afford to make a mistake on a $5M/yr contract that might sink one of the former teams.  Revenue-sharing attempts to help address this problem by compensating for local market variance, but it’s not nearly enough to adequately address all income constraints and competitive challenges.

Revenue-sharing fails, because it oversimplifies the revenue equation by limiting its scope to the local market size.  The basic premise is that huge markets like New York and Chicago have appropriately huge local market revenues, and smaller markets have proportionately smaller revenues.  To help create some semblance of balance, MLB instituted a revenue-sharing system via the CBA (Collective Bargaining Agreement).  Under the current agreement, all 30 teams pay 31% of their local revenues (ticket proceeds, local broadcast monies, vendor concessions, and parking fees) into a centralized “pot” each season, and the contents of that pot are split among the 30 teams.  While each team receives the same amount in dollars, the teams with the higher local revenues are still benefiting from the differential between 69% of a big market’s local revenue versus 69% of a small market’s local revenue.  Beyond that difference, there are some additional considerations that create disparity.

Let’s use an example that includes some income constraints and special considerations, shall we.  Consider San Diego (17th largest market at 2.485 million) and St. Louis (2.211million).  The market numbers represent the approximate number of people who live in the media markets which are regions defined by a shared set of television (media) offerings.  Regular people talk – If we have the same crappy tv channels, then we live in the same tv market.  The actual number of people living in each city depends on what source you use to obtain information and how you define the populace.  Based on “metropolitan area”, San Diego is 17th largest at 3.053 million people, and St. Louis is 18th largest with 2.829 million.  (FYI – The metro area numbers were obtained here.)

Given that San Diego is bigger by both population and media market, how do you explain the Padres starting 2010 with a payroll of $43M versus the Cardinals opening day payroll of about $93M? As you might expect, the answer is complicated, but it has to do with money. 

Jeff Moorad’s ownership group paid approximately $100M in 2009 to purchase 35% of the team, and the group announced that it would complete the purchase within 3-5years.  As part of the purchase agreement, Moorad’s group agreed to assume $200M in debt service associated with the construction of Petco Park.  $145M of that amount is secured by 8% bonds which are restricted by an agreement that prevents prepayment.  According to the annual “Business of Baseball” article section for the Padres published by Forbes (highly recommended read), the Padres’ 2009 total revenue was $157M with an operating income of $32.1M and gate receipts of $42M.  Average ticket price for 2009 at Petco Park?  $20.  Based on the 2010 paid attendance of 2.132 million, the Padres’ gate receipts may have increased only marginally year over year.  The real albatross for Moorad’s ownership group is the $145M in cash that the group must pay the Moores family in the next 3 years to finalize the purchase.  Based on some quick math, it’s fairly obvious that the new ownership group is simply using all positive cashflow to fund that final $145M cash payment. 

As for the Cardinals, Bill DeWitt Jr. purchased the team back in 1995 for what must seem like a bargain price of $150M.  The existing debt on Busch Stadium only requires about $15.9M a year to service, and the team is managing that just fine.  According to the Cardinals section of the same Forbes article, the Cardinals’ 2009 total revenue was $195M with an operating income of $12.8M and gate receipts of $94M.  Average ticket price for 2009 at Busch Stadium?  $29.  The Cardinals had a paid attendance of 3.301 million, so it’s likely that they pushed gate receipts closer to $96M for 2010.

Maybe now the fundamental reasons behind the payroll differential are clear.  Until the new ownership group finalizes the purchase, the Padres are operating at a severe disadvantage compared to much of the rest of the league (even the Cardinals).  Even after that last payment is made, the local market value will have to improve significantly to help them narrow the revenue gap with a team like the Cardinals.  The actual size of that disadvantage is difficult to measure, but I’d guesstimate it at about $40-45M/yr.  Ownership changes defnitely represent an exceptional circumstance, but that still shouldn’t result in a competitive disadvantage that lingers for 5 years or more as in the case of the Padres.  If you didn’t know already, at least maybe now you understand why the Cardinals appear to be a “rich team” next to the Padres which for the moment appear to be a relatively “poor team”. 

Check out my next post for some suggestions on how to fix the current system. 

TIDBIT:  The luxury tax and revenue-sharing are completely separate systems.  The luxury tax penalizes teams 17.5% for going over the cap the first time in a five-year period, 30% for the second time, and 40% for the third, fourth, and fifth times.  Taxes collected are split into various pots.  The first $5M is set aside for possible refunds in case a team ends the year at a lower payroll point than when they were taxed.  Once MLB determines that no refunds are to be paid, then the money is reserved for the Industry Growth Fund (IGF).  50% of the remaining money funds player benefits, 25% funds baseball programs in developing nations that lack high school equivalent programs, and 25% goes into the IGF.

Cardinals fan since I could hold a fishing pole steady. Accidental blogger. Opinionated. I could care less about what you think of me. Constantly confounded, bemused, and confuzzled (ie I'm a pc and a mac). I'm an IT infrastructure analyst with a penchant for breaking tech toys. I ate a sabermetric primer for breakfast. I love playing "All-powerful GM of MLB". The 2010 Cardinals represented a good, practical definition "cognitive dissonance". The 2011 version got by on duct tape and a prayer, and I'm fine with that. They just need new tape for #12 in 12.
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