The winter months always bring to light the advantages of the rich over the poor in the MLB. Without a doubt, there will, again, be a ring of publications bemoaning the struggles of low-market teams as they fight to compete in their league and division.
The American League East division is, in many ways, a microcosm of the entire major leagues – running the gamut of haves and have-nots as hypercompetitive juggernaughts stand side by side with the financial runts of the litter.
The state of hypercompetition in the AL East is shocking, if not alarming, in the way that it dominates competitive balance within the division. There is no escaping the trends. Any layperson can make the connection between finances and on-field success. The ‘08 Tampa Bay Devil Rays were the only team this decade to win the division other than Boston or New York. Before then, it was the Orioles in 1997. The Blue Jays were the only team of Tampa, Baltimore, and Toronto to even finish second in the past decade, in 2006.
Clearly, there is a competitive balance problem, which is not being helped by the MLB Commish’s office nor the MLBPA. And why not? Sport fans love dynasties and heels – the Red Sox and Yankees fulfill both of these needs – even if they only love to hate them. And the MLB and MLBPA love the ratings, which inflate the sport’s bottom line.
But there is one grave misconception concerning bottom dwellers’ ineptness that must be addressed. Like the ridicule lavished on the middle school “fat kid,” people blame the problems of those unfortunates on laziness or stupidity. Toronto and Baltimore are poorly run. Their owners and GMs are idiots. Fire everyone until we find that Tampa Bay winning recipe.
But that’s where the problem lies.
The fat kid isn’t fat because he wants to be, he’s fat because of uncontrollable circumstances – he just got unlucky with genetics. Like the Blue Jays and Orioles, they aren’t inept because they don’t try hard or won’t spend money – they have to compete with the two titans of the industry on an annual basis.
And, even if Toronto and Baltimore fans plead, write letters to Congress, or criticize Bug Selig, things won’t be changing anytime soon.
Purveyor of America’s Pastime, the MLB is also home to arguably the most brutal economics in all of American sports – economics that create a unique kind of financial darwinism within the league. The financial strong, aka the rich, survive. The poor die, or at least finish last. Every other major sport, even the NHL, has some form of a salary cap in place – whether that be the soft cap of the NBA or the hard cap of the NFL – that keep this condition from cropping up. (As an aside, I have always believed that the NBA’s soft cap is a great example for what the MLB should adopt. More on that some other time.)
However, be it the power of the player’s union or the unwillingness of the Commissioner’s Office to alter the league’s financial structure, the MLB still has no semblance of a salary cap. Sure, there’s a “luxury tax”, but it’s a joke. Meant to encourage competitive balance, it hasn’t had nearly the effect it was expected to have – or we were lead to believe it would have – when it was instated. Instead, it gives the Yankees a yearly slap on the wrist while redistributing the “taxed” money to the rest of the MLB. And, in one last bit of irony and injustice, it least helps the teams who need it most. Sure, the Orioles might get $1 million of redistributed earnings, but so will the Athletics and Twins, who have so little competition in their division that they don’t need it. Sorry guys.
But I digress.
Getting back to the AL East, the outlook is quite bleak for the teams involved. Brutal economics get downright torturous in this division. Since so much of each team’s bottom line (whether that be driven by gate receipts or TV contracts) is driven by their winning percentage, every team in the division intuitively spends all they can on player salaries.
In the AL East, it hits an extreme. As one team spends, the rest spend in a vain effort to keep up. It’s a vicious cycle that has made the AL East the most expensive division to play in – and its not particularly close.
According to Forbes.com data from the 2007 season, the AL East had the top four thriftiest spenders in all of baseball. Yes, that’s correct. Within their means, the Yankees, Red Sox, Blue Jays, and Orioles were the four biggest spenders in all of baseball.
Now, there’s a catch to this. Of course, the Jays and O’s didn’t spend as much as the Mets or Dodgers. There’s just no way they could have. They don’t have enough money.
However, perhaps more intriguing – or concerning – is that these four teams spent a higher percentage of their annual revenues on player salaries than any other team in the MLB. Therefore, when measured by will, desire, and attrition, the AL East featured the four most competitive teams in all of baseball – the Yankees, Red Sox, Blue Jays and Orioles.
According to Forbes.com data for 2007, the Yankees grossed $327 million in revenues, the Red Sox $263 million, the Orioles $166m, the Blue Jays $160m.
Of these revenues, New York spent $253 on player expenses (77.37 percent); Boston, $199m (75.66 percent); Toronto, $104m (65.0 percent); Baltimore, $103m (62.04 percent).
Now, before you go running to Cot’s Contracts to calculate the sum of each team’s player contracts, know that the Forbes’ data is a different, yet more relevant measurement – one that includes bonuses, benefits, and anything else that goes along with maintaining the most expensive work force on Earth.
The MLB average for player expenses as a portion of revenues was 54.81 percent in 2007. Among AL East teams, only the Rays fell below that number, placing third to last in the league, at just 37.68 percent – or $52 million out of their total estimated revenues of $138m.
If you’re blown away by these divisional statistics, you’re not alone. It’s actually one of the most surprising and damning scenarios in all of sports.
Surprising in the sense that the Blue Jays and Orioles are often portrayed as either cheap, inept, or both when, in fact, they are far from it. Discouraging due to the fact that there seems to be no light at the end of the tunnel for these teams – even an event as drastic as an ownership change wouldn’t alter the fate of these teams. They just can’t compete. As demonstrated by the percentage of total revenues spent toward player salaries, these teams are already operating at full capacity, so, in essence, there is nothing that can be done.
Assuming that the Red Sox and Yankees are the two most compulsively competitive teams in the league, it is reasonable to conclude that a high-70s percent threshold is the limit for spending on player expenses while still pulling down a profit. Even if the Blue Jays were to increase their expenditures by another 10 percent to total 75 percent, they would only increase their spending by $16 million. Though a sizeable increase, this wouldn’t go very far in changing the competitive balance within the division.
Likewise, if the Orioles increased their expenditures by 13 percent, their player expenditures would only increase by $22 million. Again, like the Blue Jays, the higher budget would help the team a bit, but wouldn’t be enough to upgrade the club from basement to the middle levels – let alone the penthouse.
…Which brings us to the Red Sox. Though it feels nice to be second in the league in both total player expenditures and percentage spent on player expenditures, the team still lags far behind the Yankees. In fact, it would be virtually impossible for the Red Sox to remain profitable while raising their expenditures to that of the Yankees as they would have to spend over 96 percent of their revenues on players.
Unfortunately, there is no way for the team to operate at this level without going out of business. This, while certainly not as hopeless as being a fan of the Orioles or Blue Jays, still paints a bleak scenario for the ability of the Red Sox to be able to contend with the Yankees on a purely financial basis. Heck, there’s a reason that the Yanks can sign Mark Teixeira, C.C. Sabathia, and A.J. Burnett in one off-season.
Still, this isn’t a death sentence for the team. As an ode to all the Moneyball freaks out there, it is merely an opportunity to operate better and more efficiently than our most hated rivals.
And where does the rest of the league stand? As far away as possible. Only three other teams in the league surpassed the 60 percent threshold, the Mariners, Tigers, and Cubs. Even such economic powerhouses as the New York Mets only spent 55.3 percent of their revenues on player expenses – just a half-point above the league average, in the neighborhood of the Athletics, Twins, and Reds. So much for investing in the product.
But there may be a bit of a silverlining in this whole mess of finances. Revenue streams are largely a product of market size and the willingness for people in that market to purchase the team’s products. In essence, it becomes a practice in who is the most popular with the wealthiest clientele.
Or, looking at it another way, the teams with the largest, most rabid fan bases are the ones who can acquire the resources to make a push for the championship. In one last gasp at redemption, the league’s financial structure seems to create a meritocracy of sorts – the teams who have the finances, and thus the most fans, will also make the most people happy when they do win. At least no one will care when the Royals don’t win, while millions will rejoice every time the Sox bring home the title.
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Fantastic post Mike.
The main reason New York is such a finantial juggernaut is because they have being perennial contenders for decades. All other teams go through ups and downs, and that affects their fanbase (and their markett). It’s hard to support a team who don’t even have a chance of winning. In the end, their fanbase is condemned to be only local. While the Yankee fanbase is national, and international. You are gonna find Yankee fans in every corner of the baseball world. From Venezuela to Japan.
And I think Boston, right now, has the opportunity and the means to build another perennial contender. If they do that, then their markett is only gonna grow.
That’s why I hate the idea of “surrender the season” so much. If Boston do that, they are losing the opportunity to secure a national (and international) markett. They need to biuld in the momentum of 2004 and 2007, and create a national and worldwide fanbase. Change the destiny of the franchise for good.
This is what happens in all the other sports in the world. In Soccer, the “Real Madrid” is an international juggernaut, and all the people who hate them support the “Barcelona”, who has become another international juggernaut.
Mike – A lot of good stuff for consideration. Your main criterion for comparing teams appears to be the % of revenue spent on player expenses. I think there are some other criteria that could be given equal consideration. For example, isn't the bigger variable actually the team's revenues? (and there is a whole separate discussion about baseball revenues and non-baseball revenues … Rousch-Fenway, anyone?). Is it possible to have sustained competitive balance on the field without having relative competitive balance of overall team revenues? And can we criticize owners just as harshly for doing a poor job of generating revenues as we do for the % of revenue they spend on payrolls? Some other areas I think would be interesting to evaluate would be the overall team spending on draft class signings, overall team spending on international free agents, and spending on scouting/player development (if this information were available). For example, teams with lower payroll as % revenues might be bigger spenders on player development, which would contribute toward competitive balance. Thanks again for your contributions.
Mike,
GREAT article. The best i've seen on this site. While, I actually completely agree with most of your points on here. I do think that it's really telling that only the Yankees and Red Sox that spend that high of a % of their profits on salaries. The other teams like the Blue Jays, I actually think with a good new GM, Anthroulpos may or may not be that guy, they can easily turn it around. Riccardi made some of the worst signings in history. (wells, rios, bj ryan, traded jayson werth, lack of trading halladay, releasing chris carpenter) it goes on and on. They have the money to win and they do spend it.
But as far as the AL East goes, Yanks finally spent their money well. Red Sox have some work to do, but will probably always be a more efficient business enterprise, the Rays will continue to produce good talent as they have a very good front office and supportive ownership finally, the Orioles have money, but really do just spend it unwisely. I actually think that they will be good in a couple of years, because they finally started to utilize their farm system in an intelligent manner.
I agree with Dave about the Orioles. With smart drafting there is no reason the Orioles or Toronto or Tampa Bay (as they've proven) can't be competitive. The biggest problem is their margin for error is much smaller than the Sox or Yanks.
Great post.
Have to ask, what revenue streams were used to determine a team's total revenues? I get the impression that it was only baseball-related revenue. If that's so, what does the term "non-baseball revenue" comprise? For example, would TV deals be considered non-baseball revenue? Because we all know that YES Network and NESN are pure cash cows; therefore, it's not fair to evaluate NYY's or BOS's player spending as a % of total revenue unless those TV revenue figures are included in the equation. Because after all, YES and NESN give the Red Sox and Yankees the ability to spend a higher portion of their baseball revenues on players while still turning a tidy profit on the side. So while it might appear (if you consider only baseball-related revenues) that the Sox and Yanks are trying harder than everybody else to put a quality product on the field, in reality the Big Two might not be as maxed-out as they initially seemed.
I also agree with the comment that a highly efficient player development system is the only way to level the playing field somewhat — whether you're talking about the Rays trying to catch up on the Red Sox a bit, or whether you're talking about the Red Sox trying to catch up on the Yankees a bit. It's the same difference. The kids are the cheap labor.
BTW, it's a bit of an afterthought, but I agree with MAG completely. Is anybody seriously considering throwing in the towel on 2010? What? Already? The Red Sox have no excuse for that. None at all.
1. The Sox aren't throwing in the towel. They rank among the most competitive teams in baseball and are finding ways to improve it, systemically. Hopefully, Theo's excellent team of evaluators make the correct decisions. After reading Mike's wonderful article, I prefer they NOT emulate the Yankees or Mets by spending huge $$, and trading our best young players and prospects for an instant fix. Further, the Sox for many years and in many ways were considered, in terms of personality, more like the feisty Rays, D'Backs & Twins than the big $$ Yankees who kept trying to buy championships. I hope the Sox NEVER give up their new bottom-up business model, picking up players like V.Mart only when needed, and turning highly talented castoffs like Hermida, Kotchman, Harden into important players on a driven team. I personally would embrace the Sox (Barcelona) as a juggernaught of young, hungry, talented players rather than overpaid pros who feel entitled. Mike's article confirms my hope the Sox don't compete in the Yankee manner, but rather they keep the farm and win with, as much as possible, a home grown team. THAT is a good model for all MLB and when the cap comes, which it must, the Sox will be positioned to remain competitive.
2. Whenever I say that Boston is NOT a big market team I get jumped on. Yet all of New England has fewer people than the immediate area around NYC, or LA, or Houston. I looked it up. Boston's 700,000 residents pales next to these megalopolis. MAG described the Yankee fan base as derived from being perennial contenders. Yes & No. They have won 7 times in 47 years, though they usually contended. I still travel quite a bit up the east and west coasts, and I see as many Red Sox hats as Yankee hats, and Yankee hats are often worn sideways on young men holding their pants around their knees. The Sox fanbase is also multi-generational. 5 generations of my family have gone to Fenway. They were right to preserve it because, with the demise of the NYY Cathedral that Ruth Built, Fenway is now the Cathedral, the crown jewel. The Sox understand the marketing value of this, and are stupefied the NYY would relinquish this marketing edge in terms of international branding. Red Sox Nation aren't Pink Hats. They are fanatic fans in diaspora. My family's fans live in a dozen states: Oregon, Washington, Cali, Hawaii, Colo., Florida, as well as all over New England. The Red Sox fan base includes Bostonians, plus N.E., plus Red Sox fans in diaspora. They subscribe to NESN, MLB.TV and their grand kids are members of RSN & wear Sox hats all over the world. I don't think many of them want the Sox to tear down Fenway, or buy championships. They are true fans, and love their players. They want to win, but they want Their players to do the job.
Well, I don’t think there is really a contradiction here.
I agree in the importance of building from within and in investing wisely. But invest CONSTANTLY, and don’t avoid to invest when an invest is needed. That’s what investing wisely means to me: it’s not the same as “not investing at all and pray every prospect turn into a superstar”, because that’s just bad management. If you invest in a bad moment or for a bad player you are gonna hurt the team. But if you DON’T invest in a good moment or for the right player, you are gonna hurt the team even more.
That’s what happen with Holliday right now. Many people think he will be “overpaid”. That’s not the point, IMO. Many people agree he worth 17MM$ p/y, so if we sign him for 20MM p/y we are “overpaying” 3 million. But the question is what’s worst for the team: to “overpay” 3 million for a premium LF who can secure the position, and turn into a superstar in Boston, or to save the money and have a hole in LF and in the lineup? What’s more costly in the end? And don’t forgett, Holliday is the kind of player who is gonna bring attention, and that means more interest in the Sox as a team, more ratings, and more money.
So, if we really were a small markett team, I can understand we have to accept the re-building process as a fatality. Sucking is just part of the natural circle for the Padres or the Royals. But let’s not pretend this is the case for Boston. If the Red Sox don’t invest in the team, that only means the FO is pocketing the money, instead of investing back in the team and in the fans.
This "meritocracy of sorts" comment is ridiculous. A meritocracy is a system where the talent is measured by achievement. I'm absolutely certain that rooting for a team is not a special talent that deserves the reward of watching others win at said sport. Perhaps you were thinking that the imbalance is somehow utilitarian in that the teams "with the most fans" get to see their team win. The greatest good for the greatest number line of reasoning. That doesn't work either. The majority of fans still don't root for the Yankees nor the Red Sox. The article is fine until this silly line of reasoning trying to find a justification for why it is OK for the richest teams (including one you root for) to have significant advantages (money) that make baseball a game where the privileged (i.e. most monied) excel and not a meritocracy based on front office astuteness.
Baseball is a plutocracy.
Just like the rest of the world.
The point being made is that individual team income drives success on the field due to higher financial resources for players. This income is derived mainly from the purchasing patterns of the fan base. Fan interest in the team is what creates revenues, whether that be through gate receipts, TV contracts, radio contracts, merchandising, or any number of streams.
Gate receipts are larger and more profitable when more people attend the game and their is more competition for seats, driving up the price. Likewise, the more people that watch a television broadcast make advertising during those games more profitable. This also increases the value of the TV contract, bringing in more revenue for the teams.
This is a very important part of baseball economics that can't be ignored. It is true that the more rabid a fan base and the larger a fan base gets, the more money a team can bring in. It is also true that these fans care more about their teams and also put more money into the consumption of their team's products and services. This drives up the revenue streams and allows their team to spend more on players. More money on players makes more wins. The teams that don't have large revenue streams tend to have underdeveloped fan bases and also don't spend high portions of their profits on players (i.e. the Marlins and Devil Rays). This is a fact, not an opinion.
And, as for the "majority of fans still don't root for the Yankees nor the Red Sox", unless you are adding up every team in baseball versus the Yanks or Sox, I have to disagree. The Sox and Yanks are two of the highest grossing teams in baseball because of the size and enthusiasm of their fan base.
The Washington Nationals have more Sox fans at their head-to-head games than Nats fans. This is a pretty big indicator that the Sox have more fans, and thus more people are happy when the Sox win the World Series than the Nats. It's not surprising that the Sox have a much higher revenue stream than Nationals, which is a product of the size and consumption patterns of their fan base.
More fans and more rabid fans = More money
More money = More money to spend on players
More money to spend on players = More wins
Transitive property at work. More fans = More wins and more happy people.
I have to disagree with you here. The evidence for money=wins is very little. The amount of effect a solid FO has is much more than the money.
I did a quick run of wins vs Salaries (2009) and the R^2 is 0.25 using a linear assumption.
That means money spent has less to do with money spent than you claim. It’s even more interesting if you remove the outlier that is the Yankees. Without the Yankees the R^2 is now 0.14.
So unless you spend $200+ million there is very little effect of spending money although this is not entirely true. We have to account for more FO and scouting which leads to this lack of correlation.
If every team was well run then money=wins, but that is not the case (ie Vernon Wells)
Oh, and for the record, while the NY metro consists of about 19m people and is undoubtedly a larger population than New England, which is about 14m people, the LA metro is about 13m people, or approximately the same population as NE. Houston, however, has less than 6m people in its metro area and doesn't really belong in the discussion.
Of course, to be fair, we need to judge by size of media market, not simply by size of population. I don't know where to find those numbers, but I believe Boston is the 6th or 7th largest media market in the county. New York and LA of course would be #'s 1 and 2 respectively. But then again, both the NY and LA metro areas contain not one, but two MLB teams. That levels the playing field a bit.
And FWIW, there's a lot of money in LA, and a lot of people, but neither of LA's baseball teams could be called a dominant franchise. Same could be said of the two Chicago teams. They spend more money than small-market clubs, but has it really done them much good?
How happy are Cubs and ChiSox fans? How happy are Dodgers fans? What have the boys in blue done lately except blow in the playoffs a couple or few times? And yeah the Angels have been pretty good in the last decade, but in a weak division, their success looks superficial. They have a recent World Series title to their credit, but that doesn't exactly earn them the title of a dominant franchise, in my book.