If there is one thing most baseball fans can agree on, it’s their passionate hate for the New York Yankees. Why? Well, as one Phillies fan puts it, “they buy their way into championships”.
Large market teams such as the Yankees, Boston Red Sox, and Los Angeles Angels have the financial power to sign expensive free agents, over small market teams such as the Milwaukee Brewers. In fact, the Brewers contract offer of four years and $100 million to this year’s top free agent, CC Sabathia, was dwarfed by the Yankees offer of six years and $140 million.
The financial authority that large market teams have over small market teams is why baseball fans want a salary cap. A salary cap is simply a limit on how much a team can spend on their roster payroll. By implementing a cap, fans feel that a competitive balance will be restored to baseball since large markets teams will no longer be able to outspend small market teams on pricy free agents.
However, success is not directly tied to payroll. In 2008, of the teams with the ten highest payrolls, only five made the playoffs. In fact, the league’s three highest payroll teams did not even make even make the playoffs. The Tampa Bay Rays, the American League champions and World Series participant, had the second lowest payroll at just over $43 million. Competitive balance in baseball is fine and the belief that teams with money have a competitive advantage is a fallacy.
With a cap, small market teams would still not spend. Just because large market teams will be restricted, there will still be no incentive for the owners of small market teams to spend. Meanwhile, a cap would unfairly punish successful and organized franchises. Also, while large market teams can spend more money on their payroll, to be successful, they still need to spend it wisely. Spending money on just anybody is not smart business and can hurt teams. Before the 2007 season, the San Francisco Giants signed pitcher Barry Zito to a seven year and $126 million dollar contract, the largest ever for a pitcher at the time. Since then, Zito has been one of the worst starters in baseball and his contract has hurt the Giants.
Major League Baseball’s solution to the “problem” was revenue sharing. Under the current contract, all teams must pay out 31% of their local revenue and it is split evenly among all thirty teams. Also, MLB’s Central Fund is divided up among teams according to their revenue. In affect, revenue sharing is basically the transition of money from large market teams to small market teams.
The current revenue sharing system has its own problems. Again, owners of small market teams have no incentive to re-invest the money they receive from large market teams on their payroll. This is because if the team spends the money they receive to build a winning team, they will receive less money from revenue sharing. In 2006, the Rays collected more than $30 million in revenue sharing. However, their payroll was just $35 million. In most cases, the money of large market teams goes straight to the pockets of small market owners, which defeats the purpose of the system.
The best solution to revenue sharing comes from Michael Lewis, an assistant marketing professor at Olin Business School in Washington University. His solution takes into account team payrolls, winning percentage, attendance, and size of the local population. Depending on attendance, the amount of money a team receives from revenue sharing can go up or down. If a team’s attendance is around 70%, their revenue sharing will go up. If their attendance is below 50%, they won’t receive as much money.
This improved revenue sharing is the best way for baseball to allow small market teams to keep up with the financial strength of large market teams. If revenue sharing is tied into attendance, it will give franchises a reason to build a successful team, so more fans show up to games. If more fans show up, teams gate receipts, fan loyalty, and revenue sharing will go up. By forcing teams to construct winning teams, it will increase the competitiveness and health of the league.
Michael Lewis’s solution is a win-win. Teams get better, attendance goes up, and owners make more money. What’s not to like?
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