Index the Minimum Salary to MLBAM and TV Revenue

Players like Noah Syndergaard are making the league minimum this season. (via Arturo Pardavila III)

Players like Noah Syndergaard are making the league minimum this season. (via Arturo Pardavila III)

The Collective Bargaining Agreement between players and owners is set to expire after the 2016 season, and negotiations are well under way to continue the 22-year labor peace and ink a new deal before any work stoppage. Both sides appear to expect exactly that. However, one issue that has repeatedly surfaced is the issue of the declining player share of revenue. According to my calculations, that share has fallen from about 56 percent in 2002 to about 39 percent last year.

salaries over revenue

Recently, MLB contested this and purported to show that player share of revenue had remained constant over the last decade. While this is partly because MLB’s calculations start at 2006 (after much of the decline had already occurred) and partly because those numbers include amateur spending levels, a big issue is that MLB includes only net income from MLBAM, the streaming service that provides MLB.tv. That simply does not show the player share of revenue; it shows the player share of a mixture of revenue from non-MLBAM sources and revenue net of costs for MLBAM sources.

The fact that MLBAM revenue gets re-invested is irrelevant—much of the rest of revenue that does not go into salaries is also re-invested. Teams use their ticket and television money to build new stadiums, finance existing ones, or just invest in player evaluation, scouting, marketing, front office staff and development. Revenue is revenue, and that is what should be considered if we are attempting to calculate the labor share of revenue. The argument is defensible from the teams’ perspectives in the sense that they never see MLBAM’s money before it’s invested, but MLB doing an investment on behalf of teams doesn’t change the calculus of the broader issue from the player’s union or league perspective. Money that goes to investment instead of labor isn’t a side issue—it’s the whole issue.

I have previously proposed a theory as to why the player share of revenue has declined, which is that player salaries are more likely to move with ticket revenue than overall revenue. Teams spend money on players based on the value they get in return for that—which is mainly additional wins. Wins are valuable because they increase ticket revenue. Local television revenue is generally based on multi-decade deals, so individual season winning percentage is unlikely to affect it. National television revenue has nothing to do with how much money a player generates for a team. Neither does MLBAM revenue. Teams get all of that money distributed equally, regardless of how many games they win or lose. As I explained in the linked article:

[Here we should] introduce the difference between total revenue and marginal revenue. Marginal revenue is the change in a team’s revenue due to the addition of a new player, and because so much revenue has come from national television contracts, local television contracts with only partial team ownership, or just MLB.tv, rather than straight-up ticket sales, marginal revenue growth just hasn’t kept pace with total revenue growth.

That was a pretty nice theory, but what gives it some extra credence is that it fits the data well. In the graph below, I used data from Biz of Baseball, Baseball-Reference, and Team Marketing Report to compile estimates of player salaries since 2000, as well as revenue. Most importantly, I was able to get the average ticket price in 2000 from this article referencing Team Marketing Report and compare it to the value the same organization produced for 2015 in this report.

Assuming constant annual ticket growth increases (which is not going to be perfect, but as you see from the graph below, a little variance in ticket price growth would not have changed the result much), I multiplied the average ticket price by the total league attendance from Baseball Reference and got a ballpark estimate of ballpark ticket revenue. The rest of revenue, backed out from total revenue from Biz of Baseball, clearly has grown rapidly as television and streaming money has poured in. It lines up well with what we know has been happening in television contracts and MLB.tv revenue growth.

As you can see below, the ticket revenue and the payroll growth track each other really well. Again, this is precisely what economic theory would predict, because a team’s ticket revenue is much more likely to be a causal outcome of spending more on players. Non-ticket revenue has grown wildly, but has barely dragged up player pay at all.

growth of sources

Other major sports leagues have more explicit rules that guarantee players a fixed share of revenue, usually about half the league revenue. Major league baseball players clearly get a good deal less than that—and this seems to be a result of not getting a piece of growing team-win-unaffected dollars from television and streaming. The logical question is how MLB could encourage this distribution without a mandate like other leagues. The answer is to think about what players are guaranteed to get, and link this to these non-marginal revenue sources.

Free agents are paid in excess of the league minimum based on how many wins they are expected to generate relative to players available at the major league minimum. Even players not receiving the minimum salary are paid based on their value added beyond the minimum. If a team thinks that a win is worth $9 million, and that a given player will generate two wins above a player earning the major league minimum, it will pay $18 million more for that player than the player earning the minimum. If the minimum remains near $500,000, the team will be willing to pay $18.5 million; if the minimum were $1.5 million, it would be willing to pay $19.5 million.

The MLB minimum ensures that roughly $380 million is the baseline that players receive, and that whatever extra wins players on the free agent market generate leads to an increase in salaries correlated with the associated growth in ticket revenue. In general, raising the minimum salary by $1 million will increase the salaries of all 750 players on major league rosters by a total of about $750 million. That is probably far too much money for owners to bear right now—baseball is still not an industry with huge margins. But what MLB absolutely can spare is letting the $380 million currently allocated to players from this method grow with the non-ticket revenue sources.

If MLBAM increases its annual allocation to teams, there is nothing about baseball’s current labor model that allows players to see a dime of that. If FOX and ESPN decide to fork over more money to broadcast national games, players won’t feel that either. The best approach is to index the minimum salary to all the revenue from these other sources.

This idea gives something to both owners and players. Players get a growing share of the large, expanding undistributed part of the revenue pie. Owners do not have to commit to handing off more revenue to players if the growth in their pooled revenue fizzles. Owners may be trying to claim that they are paying players a fairer deal than they currently are, but surely they expect players to try to get a bigger share. Promising to guarantee money only on the condition that it keeps flowing is a good compromise.

References & Resources

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Matt writes for FanGraphs and The Hardball Times, and models arbitration salaries for MLB Trade Rumors. Follow him on Twitter @Matt_Swa.
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Jim S.
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Jim S.

How about more money for minor-league players?

Matt Swartz
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Matt Swartz

As long as the labor share of the revenue pool that’s uncorrelated with team winning percentage grows at the same rate as that revenue pool itself, the same logic holds, and it’s certainly more equitable for some money to go to minor leaguers.

Mike
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Mike

How about cheaper tickets and making live entertainment affordable to everyone again?

We’ve lost track of stuff as a society when we figure out how to give more money to people that will never need it.

Matt Swartz
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Matt Swartz

Firstly, that would just go to scalpers if you hold ticket prices below market value. But that’s also a completely unrelated point from talking about how to distribute TV and internet revenue.

MarylandBill
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MarylandBill
Wait, how many MLB games are actually sell outs? While it is certainly true that some games are, and some sections in some stadiums are also sold out, it is also true that for many teams, there are whole sections of the stadium that have less than half of their seats sold, particularly for week night games. So from that perspective, I think you could argue that those seats are definitely priced higher than the market will bear. Now mind you, the business of baseball is a bit more complex. Baseball teams are not in the business of selling seats… Read more »
Matt Swartz
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Matt Swartz

Your second point is my answer to your first point. The existence of empty seats doesn’t have anything to do with whether the price is the market price. Yes, teams have a monopoly on their own team’s games, so the market price is not the perfectly competitive price. But it is still on the demand curve. Having a team sell seats below their demand curve would lead to scalpers buying them up and covering the difference.

Steve
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Steve

If the players agree to only a share of the new additional revenue wouldn’t that be very close to moving toward a “salary cap”. Most other league set there cap as a % of revenue. Would agreeing to a % of new revenue just be one step closer to the owners fighting for a % of overall revenue at some point as the basis for a salary cap?

Slacker George
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Slacker George

I assume that you mean only the MLBAM revenue that is baseball-related. MLB is spinning off non-baseball content from MLBAM into a separate entity. With that non-baseball revenue filling the owners pockets and baseball-revenue decreasing in relation to total revenue, I can envision the owners taking a hard stance in the negotiations. I’m not saying that the players shouldn’t negotiate for a bigger slice of the pie, i’m saying that they are less likely to succeed than they would if MLBAM had no non-baseball revenue flowing in.

John
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John

This might be a stupid question, but do you talk anywhere about what happened in 2002? Why the spike in non-ticket revenue, and why then? And how did the league/owners keep it quiet long enough to build that gap?

Matt Swartz
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Matt Swartz

I had to back out non-ticket revenue from total revenue and ticket revenue reported, but it was definitely a combination of things. New deals with ESPN and Fox were signed around 2000-01, MLBAM launched in 2000 and I believe was making good money already a couple years later. I think the giant local TV deals came a little later than that, but there isn’t a ton of data so that could have been part of the growth during those years too.

John
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John
I’m not an econ guy (though I can play a long most of the time) so this is fascinating to me, thanks. Also, just read Dave Cameron’s piece in the annual, and would be interested to hear your counter. (I’m curious, not a jerk.) He makes the point that the union in the next CBA might not actually be able to make that good of a case for an argument like you propose here. How could players say “we get a bigger piece of that pie” (by pegging salaries to BAM revenue) when the enlargement of the pie is due… Read more »
Matt Swartz
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Matt Swartz

I agree that they probably have a weaker bargaining position for that reason. I still think the share of baseball revenue coming from tickets itself has fallen and they’re going to get less money if they rely on getting paid more for adding wins.

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