Sunday, December 2, 2007

Correlating Revenue Sharing and Market Size

So, now let's see if adding in some revenue sharing data will help to clarify things. The Revenue Sharing Plan is rather complex, but basically, it is designed to redistribute funds from wealthy teams to less wealthy ones. In other words, revenue sharing is supposed to provide some balance, so that even teams in small markets can compete with those with much larger resources. The base plan has every team pay 31% of its positive net local revenues into a central fund, which is then redistributed to teams with a negative net local revenue. The money that teams receive is supposed to be used "in an effort to improve its performance on the field" ("2007-2011 Basic Agreement," 112), and teams must report what they use their revenue sharing money on. In fact, the commissioner has the authority to impose penalties if teams do not use their revenue sharing funds to improve on-field performance. While I am focusing on local net revenue here, teams also receive money from the central fund based on MLB's revenue such as from national TV contracts and MLB Advanced Media. Also, it is important to note that the 2007 CBA changed the formula slightly from the 2002 CBA, but the basic system remains in place.

It is important to note that the amount a team receives is based on local revenues, not market size. Michael Lewis recently wrote an excellent op-ed piece that examines this issue (Michael Lewis, "Baseball's Losing Formula," The New York Times, 3 November 2007). He argues that the system disincentivizes success. He proposes basing revenue sharing "on a statistical analyses [sic] of teams’ payrolls, winning percentages and attendance." While Lewis does not elaborate at length on his formula (which is understandable since The New York Times is not the best place for statistical analyses), he focuses on rewarding teams that improve attendance.

I agree with Lewis's criticism, but let's see if that's born out in the data. Here's a table sorted by market size including 2005 revenue sharing income. Unfortunately, 2005 is the last year I can find a complete data set for. If you have more recent data or know where I can find it, please let me know: Revenue Sharing data comes from (Stefan Fatsis, "Playing Hardball," The Wall Street Journal, 28 April 2006)

Market Size Rank Revenue Sharing Income Rank Team Market Size 2005 Revenue Sharing Income
1 30 New York Yankees 10988112 -76000000
2 26 New York Mets 10988112 -24000000
3 21 Los Angeles Angels of Anaheim 8887992 -11000000
4 25 Los Angeles Dodgers 8887992 -20000000
5 29 Boston Red Sox 7465634 -52000000
6 14 Philadelphia Phillies 6382714 5800000
7 18 Texas Rangers 6359758 -35000
8 20 Houston Astros 5641077 -11000000
9 19 Atlanta Braves 5478667 -10000000
10 3 Florida Marlins 5463857 31000000
11 5 Detroit Tigers 5410014 25000000
12 2 Toronto Blue Jays 5113149 31000000
13 28 Chicago Cubs 4862658.5 -32000000
14 23 Chicago White Sox 4862658.5 -18000000
15 17 Baltimore Orioles 4105606.5 2000000
16 16 Washington Nationals 4105606.5 3900000
17 12 Arizona Diamondbacks 4039182 13000000
18 27 Seattle Mariners 3876211 -25000000
19 22 San Francisco Giants 3614474 -14000000
20 9 Oakland Athletics 3614474 19000000
21 8 Minnesota Twins 3502891 22000000
22 15 San Diego Padres 2941454 5700000
23 10 Colorado Rockies 2927911 16000000
24 13 Cleveland Indians 2917801 6000000
25 24 St. Louis Cardinals 2858549 -19000000
26 1 Tampa Bay Rays 2697731 33000000
27 5 Pittsburgh Pirates 2462571 25000000
28 11 Cincinnati Reds 2147617 16000000
29 4 Kansas City Royals 2034796 30000000
30 7 Milwaukee Brewers 1706077 24000000
Some observations:
1. The Philadelphia Phillies and Detroit Tigers received a large amount of revenue sharing funds, but this is likely due to the ability to incorporate debt service into their local revenue calculation.
2. The Toronto Blue Jays also received an unexpectedly large amount of revenue sharing funds, but this is likely due to the formerly weaker Canadian dollar (particularly since their payroll was in U.S. dollars). However, now that the Canadian dollar has reached parity, this shouldn't affect calculations in 2007
3. Despite being the 10th largest market, the Florida Marlins received the 3rd most in revenue sharing.
4. It's interesting to compare the revenue sharing data of the Oakland Athletics and San Francisco Giants. Despite sharing a very large market, the Giants have a relatively new stadium, and I would speculate, a larger fan base. It'll be interesting to see if the Athletics' planned new stadium will change the revenue sharing picture.
5. The Cardinals more than pay their share, undoubtedly in part to an extremely large fan base.

There are many:
1. I'm mixing different years' data. In each case, I tried to get the best and latest available, but I haven't been able to find it.
2. The market data is somewhat arbitrary. Some teams have fan bases that far exceed their home territories, and dividing shared markets in half is an approximation at best.
3. I don't have complete revenue data. Obviously, neither Major League Baseball nor its teams have an interest in letting the general public examine their books.
4. I am an amateur. I have no experience with statistical evaluation, and am not a trained economist.
5. There is no direct cause & effect relationship between payroll and winning.

I don't think there's any strong, definitive conclusion that can be reached, but I do think this study points out that being a "small-market team" is too often an oversimplified excuse. The Phillies, Rangers, Astros, Braves, Marlins, Tigers, and Blue Jays all have home markets of over 5 million people. The Minnesota Twins are the 21st largest market, which puts them closer to the middle than the end. Obviously, there are many other factors that contribute to a team's revenues and its success. However, I think that we, as baseball fans, should be more critical when teams ask for taxpayer subsidies for a new stadium or when a team claims to be unable to keep a player because it is in a "small market." I would suggest that what limits a team's payroll is more the effective utilization of its resources and less its market, a point Michael Lewis made in Moneyball, and one worth repeating. Again, this is far from a definite study, but I think it may provide a little to think about.

For further reading:
1. Brown, Maury, " Interview - Andrew Zimbalist - New CBA," The Biz of Baseball, 19 November 2006, , Accessed 3 December 2007.
2. Brown, Maury, "The Upcoming CBA and the Battles Within it," The Hardball Times, 27 February 2006.
3. Gustafson, Elizabeth and Hadley, Lawrence, "Revenue, Population, and Competitive Balance in Major League Baseball," Contemporary Economic Policy, Vol. 25 No. 2, 250–261.
4. Lewis, Michael. Moneyball: The Art of Winning an Unfair Game, New York: W.W. Norton, 2003.
5. Maxcy, Joel G, "Progressive Revenue Sharing in MLB: The Effect on Player Transfers," Working Paper Series, Paper No. 07-28, October 2007.

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