MLB’s economics are broken. A few writers have noticed that teams just aren’t as interested in free agents any more. Joel Sherman claims that he supports players making a “ton of dough” in a $10 billion a year industry, but that this flawed system pays players for declining deals. He also noticed that deals exceeding both $100 million and $20 million per year have largely been unsuccessful. Jeff Passan noted that it has taken a long time for free agents to find homes this season and thought it signaled collusion. Turns out, he learned that people don’t think the MLB's current structure makes sense any longer. Teams are no longer interested in paying players for previous performance that they aren’t likely to repeat.
In addition, MLB has a problem with tanking. A number of mid/large market teams have decided to do complete rebuilds and cut spending. Passan writes in his article that “There’s less interest in winning than I’ve ever witnessed before,” one union official said. “MLB has done a fantastic job of convincing the public that’s OK. I think fan bases are accepting of losing now. Sometimes they even want their team to lose.”
According to Passan, a veteran agent is strongly considering recommending a salary cap. Union officials are openly talking about how this could result in a work stoppage. The health of the game is in the balance because it would be hard for baseball to recover from another strike. But if MLB wants to avoid a strike, they’ll need to change the compensation structure and do something about tanking. Here are the changes I recommend.
The first change would be to the amateur draft. Teams are now rewarded for being the worst team in the league by receiving the top pick in the draft. The difference between receiving the first pick in the draft and even the third pick in the draft is significant – the first pick was valued as worth nearly three times more than the first pick in 2013. In addition, teams receive a significant slot amount for the first pick – enough to pay for that pick as well as add talent later in the draft. This gives teams an incentive to be the worst in the majors.
The amateur draft should be changed so that half of a teams’ draft pool is determined by market size and half is determined by their record in the previous season per the slot value system (all slot values are cut in half). MLB determines each teams’ market size in the CBA for revenue sharing purposes, and they can use that analysis to decide which teams deserve more draft money than others. After the fourth round, draft order will be determined by market size as opposed to record.
In addition, MLB should have a lottery open to all non-playoff teams for the first five draft slots so that there is a further disincentive to tank. It is one thing to tank if a team will receive the #1 pick and a significant draft pool. It’s another thing to tank if they might get the sixth pick and receive only a slightly higher draft pool.
If small-market teams receive higher draft pools than large-market teams, then this means that free agent compensatory picks and competitive balance picks can be eliminated. Instead, small market teams will receive one franchise and one transition tag every five years. A small market team (ranked 21-30) can tag a player that has been under their control for the past two years. If a team tags a player with the franchise tag, then if the team is able to keep that player under their control, they’ll be compensated for one-third of his cost out of revenue sharing funds. Same idea for the transition tag, only the team will be compensated for 20%. Mid-market teams ranked (14-20) receive one transition tag every five years. Players that receive one of these tags can’t be traded for three years afterward and their teams receive no compensatory cash if the player is traded.
The minimum wage should be increased from $550k to $1.6 million. Teams receive significant production from team controlled players, so these players should see significant rewards. In addition, forcing teams to pay fair values for team controlled players will reduce the financial incentives to tank. A team that uses only minimum wage players will see its payroll increase from $13.75M to $40M. Such as increase could cost MLB between $300M and $450M. In an ideal situation for the players, MLB teams would eat the entire cost of the minimum wage increase. In the current situation, where the union has limited leverage, veteran players may need to take a 5-10% decrease in salary to help pay for a minimum wage increase.
Players will remain under control for six years, with players that have three years of service time eligible for arbitration. To reduce the likelihood of roster shenanigans, a player will receive credit for a full season of service time if he is on the roster for eighty days in one season. The Super Two rule will remain as is.
Revenue sharing would be significantly reduced. Instead of the current 33% level, teams should be taxed at 16.5%. There will be two forms of revenue sharing. The first set, taking 6.5% of revenue, will go from large-market clubs to small-market clubs based on market size. This revenue will also cover payments for players that receive a franchise or transition tag.
The second set, consisting of 10% of revenue, goes to all teams that make it to at least the division series of the playoffs regardless of market size. This reward should be at least $100 million per playoff team and strongly encourages teams to try to win their division and at least make it to the playoffs as well as discouraging tanking. This cash should be enough to help even low-revenue teams keep a playoff dynasty intact.
One of the major problems that large market teams have with revenue sharing is that some small market teams don’t always spend that money on players. This method primarily helps small-market teams that are willing to spend money to keep their best homegrown players. Other teams will see their revenue sharing payments slashed.
Nathaniel Grow argues that the MLBPA has limited leverage to convince MLB to increase salaries. With free agents losing their appeal, I think he’s largely correct. However, there is significant friction between large market clubs and small market clubs. Large market clubs have stopped allowing the Athletics to receive revenue sharing. In addition, large market clubs have complained about how small market teams support themselves via revenue sharing. Other teams in large markets complain about how they’re paying more than other teams in the same market. Meanwhile, the Rays were hoping for more assistance via draft reform. Both would get what they want from this proposal.
A plan like this would help ensure competitive balance, incentivize teams to win instead of tanking and reward players based on production instead of seniority. This would be a significant upgrade from the current system that rewards teams that tank and encourages teams to spend billions of dollars on players that can’t produce. If MLB doesn’t change to a system like this in the future, teams will quickly discover that this system doesn’t work and there are better uses of their money. That’s likely to lead to players receiving an increasing smaller portion of the pie and ultimately a strike.
Showing posts with label Money. Show all posts
Showing posts with label Money. Show all posts
19 January 2018
26 January 2016
Where MLB Receives Its Revenue
Recently, there was an article in Forbes claiming that MLBs Revenues were $9.5 billion in 2015. This is interesting information, but doesn’t explain much detail. Does MLB receive the majority of its money via media deals, attendance or maybe merchandise? Furthermore, there are certain categories of revenue that are split evenly between all thirty teams such as licensing fees, national media payments and MLBAM revenues and there are certain categories of revenue that are kept by the team that earned them (even if they are subject to revenue sharing). How much of MLBs revenue is in each of these categories and how does that impact free agent spending?
In 2010, Deadspin received financial documents that discussed the amount and where certain teams received their revenue. The categories were the following: gate receipts – otherwise known as ticket sales, concession sales, broadcasting revenue – including both local and national media deals, sponsorship and advertising, merchandise and MLBAM. These are largely the areas where MLB receives its revenue.
Likewise, in 2004, when Deloitte prepared a document discussing how the creation of the Nationals would impact the Orioles, they noted six areas where the Orioles would be impacted. These areas were attendance, broadcasting, concessions and novelties, premium seating, future naming rights and advertising.
MLB had roughly 73,760,000 fans attend a regular season game in 2015. The average standard ticket cost $28.94 in 2015 while the standard premium ticket cost $96.84. If 13.7 percent of tickets are premium and 86.3 percent are standard, then MLB would earn roughly $2.8 billion via gate receipts. This revenue is subject to revenue sharing but is kept by the club that earns it.
The MLB Fan Cost Index also predicts each fan to spend roughly $24 in concessions and novelties on average including programs and parking. For all 73.8 million fans, this comes out to $1.75 billion. However, not all concession money goes to the MLB clubs themselves. Some of this cash goes to the state and the companies that actually sell the concessions. The document from Deloitte discussing the Orioles 2004 revenue suggested that for each $5.40 that the team earned from ticket fees, they earned $1 from concessions. The documentation from Deadspin suggests that in 2008, the ratio decreased to roughly 5 to 1. Presuming that this ratio remains accurate, it’s reasonable to presume that MLB earned roughly $560 million via concessions and novelties. This revenue is subject to revenue sharing but is kept by the club that earns it.
These numbers don’t include postseason revenue. While some postseason revenue goes directly to the players, the rest goes to the Commissioner’s office and the teams themselves. It is reasonable to presume that MLB earns another $100 million in postseason gate receipts and concessions. Much of this revenue is subject to revenue sharing but is kept by the club that earns it.
Fangraphs claims that the national TV contracts, pay MLB $12 billion from 2014-2021. Presuming a standard 4% increase per year, then MLB would have received roughly $1.35 billion for its national TV rights in 2015 split equally among each team. In addition, MLB Network’s subscriber revenue is predicted to be $222.5M and probably earns over $250M in revenue when taking advertising revenue into account. Any profit earned from this revenue is split amongst each team equally.
Teams also earn cash from local TV media deals. In 2013, an article in Fangraphs listed terms for each teams’ local deals. All of these deals are certainly out of date. NESN may have paid the Red Sox $60M in 2013 but paid closer to $100M in 2015. Likewise, YES paid the Yankees $90M in 2013 but $98M in 2015 due to standard inflation.
On the other hand, other numbers are completely incorrect. MASN paid $36M in 2013 to both the Nationals and Orioles, but $42M in 2015 while Fangraphs claimed that MASN paid both clubs $29M in 2013. For some reason, Fangraphs decided that the Angels received $150M in media rights fees in 2013 based on a new media deal that doesn’t go into effect until 2016 and starts at roughly $60M with a 4% increase. Likewise, the Dodgers received $220M in 2015 compared to the $340M annual average value of their deal. Fangraphs made similar mistakes for the Astros, Rangers, Padres and Mariners deals resulted in them significantly inflating the value of local media rights.
Per Fangraphs, the total value of each of these local deals combined is $1.7B in 2013. However, after taking new contracts, inflation and errors into account, it is more likely that teams earned about $1.8B in 2015 from both cable and radio deals. Without knowledge of each media deal, it is impossible for me to do anything more than make an educated guess.
According to the MLB IEG Sponsorship Report, MLB earned roughly $778 million in sponsorship money in 2015. This is an increase from $700 million in 2014. The Orioles were one of seven teams that had below average sponsorship revenues. Fortunately for the Orioles, sponsorship money is split between all teams equally regardless of the source.
The Baltimore Sun suggests that MLB had a total of $3.4 billion in merchandise sales in 2014. Forbes argues that MLB broke $3 billion in merchandise sales in 2015. In general, MLB merchandise sales have remained around $3 billion per year over the past ten years. Scott Sillcox from the Licensed Sports Blog suggests that MLB receives a royalty payment of 12% of the $3.4B in sales or roughly $400 Million that is split equally between all teams. In addition, MLB receives an unknown amount of licensing revenue from other sources.
MLBAM had revenues worth roughly $900 million in 2015 and has been earning a steady profit for MLB. Its revenues will likely take a hit as a result of the Garber settlement that forced it to offer single-team packages and reduce prices. This revenue is split equally amongst every team.
This comes out to roughly $9 billion compared to Forbes’ projected revenue of $9.5 billion. Some of the difference is due to other minor categories, while other differences are due to different methodologies.
In this article, Forbes creates a graphic that shows from which categories MLB earned $8 billion of its revenue in 2015. It ignores the $800 million earned via MLBAM, as well as another $200 million from other areas such as the all-star game where they claim money doesn’t filter down to the teams.
Their graphic looks like this:
My graphic looks like this:
Using this data and basic multiplication, it is possible to create a graph that shows where my calculations and Forbes calculations differ (numbers in billions).
There’s not much of a difference. My results have slightly higher attendance revenue and local media revenue, which is probably due to standard inflation. Prices increased from 2014 to 2015. Their results have slightly higher national media revenue, sponsorships and licensing fees. Their articles seem to indicate that they look at average media revenue as opposed to actual media revenue which would inflate their results. Their results also indicate that they’ve either been overestimating the amount of money MLB earns via sponsorships by over $100M or that the source I use is incorrect as well as potential differences in licensing. But, at minimum, our results are similar. This is a good sign given that we presumably didn’t use the same methodology and sources.
Gate receipts, premium seating, concessions, local media and postseason cash are subject to revenue sharing and are kept by the team that earns it, whereas national media, sponsorship, licensing, MLBAM and other revenue is not subject to revenue sharing and are split equally among each team. This is how the pie looks for revenue that is kept by individual teams and not shared equally for both Forbes 2014 numbers and my 2015 numbers.
Roughly 65% of unshared revenue comes from attendance while the other 35% comes from local media fees. This shows that while the amount of unshared revenue is increasing, it still lags far behind revenue from fans attending games despite the fact that the amount of total revenue earned via media (local, national and internet) is greater than that earned from attendance (gate receipts, premium seating and concessions).
The impact of media on MLBs revenue is considerably large. However, since most media revenue is split equally amongst teams, it has less impact on free agent spending than attendance revenue. It seems likely that attendance revenue will have more of an impact on free agent spending than media revenue until MLB is able to truly go international and convince people in Asia, South America and Europe to purchase their product.
In 2010, Deadspin received financial documents that discussed the amount and where certain teams received their revenue. The categories were the following: gate receipts – otherwise known as ticket sales, concession sales, broadcasting revenue – including both local and national media deals, sponsorship and advertising, merchandise and MLBAM. These are largely the areas where MLB receives its revenue.
Likewise, in 2004, when Deloitte prepared a document discussing how the creation of the Nationals would impact the Orioles, they noted six areas where the Orioles would be impacted. These areas were attendance, broadcasting, concessions and novelties, premium seating, future naming rights and advertising.
MLB had roughly 73,760,000 fans attend a regular season game in 2015. The average standard ticket cost $28.94 in 2015 while the standard premium ticket cost $96.84. If 13.7 percent of tickets are premium and 86.3 percent are standard, then MLB would earn roughly $2.8 billion via gate receipts. This revenue is subject to revenue sharing but is kept by the club that earns it.
The MLB Fan Cost Index also predicts each fan to spend roughly $24 in concessions and novelties on average including programs and parking. For all 73.8 million fans, this comes out to $1.75 billion. However, not all concession money goes to the MLB clubs themselves. Some of this cash goes to the state and the companies that actually sell the concessions. The document from Deloitte discussing the Orioles 2004 revenue suggested that for each $5.40 that the team earned from ticket fees, they earned $1 from concessions. The documentation from Deadspin suggests that in 2008, the ratio decreased to roughly 5 to 1. Presuming that this ratio remains accurate, it’s reasonable to presume that MLB earned roughly $560 million via concessions and novelties. This revenue is subject to revenue sharing but is kept by the club that earns it.
These numbers don’t include postseason revenue. While some postseason revenue goes directly to the players, the rest goes to the Commissioner’s office and the teams themselves. It is reasonable to presume that MLB earns another $100 million in postseason gate receipts and concessions. Much of this revenue is subject to revenue sharing but is kept by the club that earns it.
Fangraphs claims that the national TV contracts, pay MLB $12 billion from 2014-2021. Presuming a standard 4% increase per year, then MLB would have received roughly $1.35 billion for its national TV rights in 2015 split equally among each team. In addition, MLB Network’s subscriber revenue is predicted to be $222.5M and probably earns over $250M in revenue when taking advertising revenue into account. Any profit earned from this revenue is split amongst each team equally.
Teams also earn cash from local TV media deals. In 2013, an article in Fangraphs listed terms for each teams’ local deals. All of these deals are certainly out of date. NESN may have paid the Red Sox $60M in 2013 but paid closer to $100M in 2015. Likewise, YES paid the Yankees $90M in 2013 but $98M in 2015 due to standard inflation.
On the other hand, other numbers are completely incorrect. MASN paid $36M in 2013 to both the Nationals and Orioles, but $42M in 2015 while Fangraphs claimed that MASN paid both clubs $29M in 2013. For some reason, Fangraphs decided that the Angels received $150M in media rights fees in 2013 based on a new media deal that doesn’t go into effect until 2016 and starts at roughly $60M with a 4% increase. Likewise, the Dodgers received $220M in 2015 compared to the $340M annual average value of their deal. Fangraphs made similar mistakes for the Astros, Rangers, Padres and Mariners deals resulted in them significantly inflating the value of local media rights.
Per Fangraphs, the total value of each of these local deals combined is $1.7B in 2013. However, after taking new contracts, inflation and errors into account, it is more likely that teams earned about $1.8B in 2015 from both cable and radio deals. Without knowledge of each media deal, it is impossible for me to do anything more than make an educated guess.
According to the MLB IEG Sponsorship Report, MLB earned roughly $778 million in sponsorship money in 2015. This is an increase from $700 million in 2014. The Orioles were one of seven teams that had below average sponsorship revenues. Fortunately for the Orioles, sponsorship money is split between all teams equally regardless of the source.
The Baltimore Sun suggests that MLB had a total of $3.4 billion in merchandise sales in 2014. Forbes argues that MLB broke $3 billion in merchandise sales in 2015. In general, MLB merchandise sales have remained around $3 billion per year over the past ten years. Scott Sillcox from the Licensed Sports Blog suggests that MLB receives a royalty payment of 12% of the $3.4B in sales or roughly $400 Million that is split equally between all teams. In addition, MLB receives an unknown amount of licensing revenue from other sources.
MLBAM had revenues worth roughly $900 million in 2015 and has been earning a steady profit for MLB. Its revenues will likely take a hit as a result of the Garber settlement that forced it to offer single-team packages and reduce prices. This revenue is split equally amongst every team.
This comes out to roughly $9 billion compared to Forbes’ projected revenue of $9.5 billion. Some of the difference is due to other minor categories, while other differences are due to different methodologies.
In this article, Forbes creates a graphic that shows from which categories MLB earned $8 billion of its revenue in 2015. It ignores the $800 million earned via MLBAM, as well as another $200 million from other areas such as the all-star game where they claim money doesn’t filter down to the teams.
Their graphic looks like this:
My graphic looks like this:
Using this data and basic multiplication, it is possible to create a graph that shows where my calculations and Forbes calculations differ (numbers in billions).
There’s not much of a difference. My results have slightly higher attendance revenue and local media revenue, which is probably due to standard inflation. Prices increased from 2014 to 2015. Their results have slightly higher national media revenue, sponsorships and licensing fees. Their articles seem to indicate that they look at average media revenue as opposed to actual media revenue which would inflate their results. Their results also indicate that they’ve either been overestimating the amount of money MLB earns via sponsorships by over $100M or that the source I use is incorrect as well as potential differences in licensing. But, at minimum, our results are similar. This is a good sign given that we presumably didn’t use the same methodology and sources.
Gate receipts, premium seating, concessions, local media and postseason cash are subject to revenue sharing and are kept by the team that earns it, whereas national media, sponsorship, licensing, MLBAM and other revenue is not subject to revenue sharing and are split equally among each team. This is how the pie looks for revenue that is kept by individual teams and not shared equally for both Forbes 2014 numbers and my 2015 numbers.
Roughly 65% of unshared revenue comes from attendance while the other 35% comes from local media fees. This shows that while the amount of unshared revenue is increasing, it still lags far behind revenue from fans attending games despite the fact that the amount of total revenue earned via media (local, national and internet) is greater than that earned from attendance (gate receipts, premium seating and concessions).
The impact of media on MLBs revenue is considerably large. However, since most media revenue is split equally amongst teams, it has less impact on free agent spending than attendance revenue. It seems likely that attendance revenue will have more of an impact on free agent spending than media revenue until MLB is able to truly go international and convince people in Asia, South America and Europe to purchase their product.
15 February 2009
Weekend Links . . . Money and Stats
Typical weekend post . . . somewhat lazy and waiting for the day to begin.
Evil Oriole Empire
The Orioles outspent the Red Sox by about 16% on free agents this off season. Southies are gnashing their teeth and screaming about the injustice of it all. In other news, the Yanks outspent the Orioles by 1600%. The end play of it all suggests that the BoSox had few holes to fill and are keeping some sense of payroll control in anticipation of the trade deadline this year when other teams may be dealing out big contacts on a short end cost in order to evacuate some expenditures and be able to make payroll. Perchance, the O's might do the same.
OK, we just need a sample size of 3500 ball in play.
Esteemed statistician Pizza Cutter has determined that you can determine with general certainty a pitcher's personal BABIP after about 3500 BIP. Mt. Cutter found an r-squared of 0.696, which is pretty good. So, you only need to wait for seven years of 180 inning per year ball before you strip the uncertainty from the statistic. Of course, this statement assumes that a pitcher's BABIP is a static skill over the course of his early career and maybe his lifetime. I think we all can assume that to be false. So . . . why did I link this again?
Actually it leads to this: Weighted BABIP, essentially.
What the previous link lacked was any sense of the components of BABIP, which are the types of a hits a pitcher produces with his repertoire. This method needs some more tweaking as the r-squared is a mere 0.26, but I think it is a fine step in the right direction. Basically, they broke down the types of hit balls that resulted for each pitcher and related that to expected BABIP. They found that certain pitchers do have a tendency to procure poorly hit balls, while others get mashed. On his list of pitchers who produce the hardest balls to field we find: CC Sabathia and Garrett Olson. It might be the only list that will ever have these two, just a name apart from each other. Turkenkopf's next work will supposedly include park factors, handedness, and pitch f/x data. Looking forward to that.
Evil Oriole Empire
The Orioles outspent the Red Sox by about 16% on free agents this off season. Southies are gnashing their teeth and screaming about the injustice of it all. In other news, the Yanks outspent the Orioles by 1600%. The end play of it all suggests that the BoSox had few holes to fill and are keeping some sense of payroll control in anticipation of the trade deadline this year when other teams may be dealing out big contacts on a short end cost in order to evacuate some expenditures and be able to make payroll. Perchance, the O's might do the same.
OK, we just need a sample size of 3500 ball in play.
Esteemed statistician Pizza Cutter has determined that you can determine with general certainty a pitcher's personal BABIP after about 3500 BIP. Mt. Cutter found an r-squared of 0.696, which is pretty good. So, you only need to wait for seven years of 180 inning per year ball before you strip the uncertainty from the statistic. Of course, this statement assumes that a pitcher's BABIP is a static skill over the course of his early career and maybe his lifetime. I think we all can assume that to be false. So . . . why did I link this again?
Actually it leads to this: Weighted BABIP, essentially.
What the previous link lacked was any sense of the components of BABIP, which are the types of a hits a pitcher produces with his repertoire. This method needs some more tweaking as the r-squared is a mere 0.26, but I think it is a fine step in the right direction. Basically, they broke down the types of hit balls that resulted for each pitcher and related that to expected BABIP. They found that certain pitchers do have a tendency to procure poorly hit balls, while others get mashed. On his list of pitchers who produce the hardest balls to field we find: CC Sabathia and Garrett Olson. It might be the only list that will ever have these two, just a name apart from each other. Turkenkopf's next work will supposedly include park factors, handedness, and pitch f/x data. Looking forward to that.
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