Thursday, November 27, 2008

Mid-Market Economic Impact Thoughts

The following is something that was posted on Padres front-office staffer, Paul DePodesta's blog:


Thank you for this bit of information, this may be the most insight into a baseball operations plan that I have ever read. I'm actually kind of shocked that there are only 23 comments.

My comment is going to bring us to current issues in collective bargaining. With the San Diego Padres operating income reaching $167 million at the conclusion to the 2007 season (Forbes), it puts the Padres 18th overall in total team revenue, 16 million below the league average (c. 183M). I have seen signs of concern for mid-market teams in the form that you point out in this discussion. The Padres have enough resources to field competitive teams and also develop top prospects; however it requires specific micro-management of talent, not to mention some surprises in player development. The team endured a tough 2008 season at the major league level because these efforts were spread too thin.

I worry that the 2001 and 2006 Basic Agreement's have changed the economic landscape of the game so drastically for large market and small market teams and their business plans so that medium market teams may be the most negatively affected by the new spending trends. For those who do not know, the 2001 agreement created meaningful luxury taxation on payroll dollars spent above a particular tax threshold of 49% on each additional dollar spent on player contracts. It also increased revenue sharing from a previous 20% to 34%, which meant that 34% of all local revenues from each team were put into a fund with the Office of the Commissioner and re-distributed back to teams evenly. This effectively gave a significant amount of money back to the small market teams to be able to compete in the increasingly polarized baseball economic climate, but had little effect on mid-market franchises. The small market teams of Tampa Bay, Milwaukee and Florida most notably have used these funds to re-invest into their minor league systems and have seen the fourth stage of this plan realized in the production of championship caliber players. Large market teams have also begun to adapt to the economic system distributing their wealth to major league talent and also developing minor league assets.

A significant problem that happened with the 2006 Basic Agreement is that the tax threshold will be increased significantly throughout the term of the agreement (through 2011) from around 135 million to over 170 million by 2011. Also, the percentage of revenue shared was dropped from 34% to 31%. This means that large market teams have the ability to spend greater amounts of money before being hit with a luxury tax and also the amount of money distributed to each team decreased by 3%. In 2007, this 3% drop in revenue sharing meant nearly $500,000 was lost for the Padres under the 31%. Sure, in a game that is about to see at least two players sign contracts in excess to $20 million per season, $500K isn’t much. However, it can go a long way to develop talent if you take a look at the facilities that teams have built in Latin America and the Caribbean Islands.

The problem that I forecast for mid-market teams is that their revenue sharing dollars really do not change that much and they are forced to effectively spread themselves thin in order to succeed. Small market and large market teams have been able to use their resources and develop successful business models through player development exclusively at the small market level or spending money and some player development at the large market level. The Padres and other mid-market teams will have the luxury to sign a few big contracts or retain a championship caliber player or two, but they also have to focus heavily on developing minor league talent with a large portion of their budget in order to be successful. Is this some of the sentiment that the Padres feel while being spread too thin?

While an unpopular statement, when word was spread that the Padres were considering a payroll of $40 million in 2009, it makes so much business sense. With a team comprised of level three developing talent, the Padres will enjoy significantly higher amounts of money to re-invest in their organization for future seasons to the tune of somewhere in the 30 million dollar amount. I believe that the Padres have done this before after Tony Gwynn retired they let the payroll decrease for 2002 and 2003, and then in 2004, they had the money and prospects to pay David Wells and also trade for Brian Giles. This business strategy resulted in two NL West Championships and one season that required 163 games to be played before a winner was determined from the NL West. I do fear however, that success for mid-market teams is going to follow in this load and re-load pattern now until new economic policy is developed in Major League Baseball.

Anyone’s thoughts?


Dan Fisher

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