Tuesday, February 2, 2010

The Revenue Sharing System

Ten Changes over the Next Decade for Baseball

#6 Substantial Changes to the Revenue Sharing System

Earlier today I was talking with a close friend and great baseball mind about the revenue sharing system. We both agree that the current revenue sharing system in baseball is broken and the 2011 Collective Bargaining Agreement discussions will largely re-shape this system. Whether it stems from changes in other areas of the game such as introducing a salary cap and minimum, altering arbitration, internationalizing the draft or other things that I have already discussed, something needs to be done. The large market teams are not effected enough by the current system, the small market teams do not receive enough assistance and the mid-sized teams do not get anything out of the system.

Revenue sharing went the wrong way in 2006. Instead of increasing the fines for passing the luxury tax threshold, the agreement significantly increased the taxation threshold and decreased the fines for exceeding the threshold. In its roots, the luxury tax looked to be a way to directly combat spending by large market teams and it could have laid the groundwork for a salary cap. By relaxing the standard, it encouraged more spending from large market teams and just the Yankees have been victims of paying the luxury tax more than twice since 2006.

The revenue sharing system also went in the same direction. Instead of the 34% of revenue being shared, the totals dropped to 31%. The 3% drop made a difference in the millions, money that could have been used in player development for small market teams and not on free agents for large market teams.

Further, revenue sharing does not wholly affect the sales of luxury box seating. Luxury boxes are thought of as being regular seats. So if one luxury box can seat 20 people and the price of those tickets is roughly $30, revenue sharing counts $600. Instead, teams charge thousands of dollars for these seating locations and they pocket the difference. Thus, the Yankees are better off in their new stadium that seats 10,000 less people because of this and the fact that the lower quantity of seating will increase demand and prices will rise. This is also reason why the Chicago White Sox have had two new stadiums in the past twenty years. This affects the entire tax paying community and should be considered to change when the revenue sharing system is looked at again.

During my conversation with my friend today said that he felt that he could name ten teams this season and not miss a single playoff team, meaning that the distribution of talent is heavily swung onto the top ten teams. Whether or not that is true is yet to be seen, but the fact that strong baseball minds feel this way shows that baseball still struggles with competitive balance. Just ask Royals or Pirates fans (one winning season combined since 1992).

The solution is not clear cut, there are many avenues that baseball could go to alter the economics of the game. If I were sitting in the negotiating room with the best interests of baseball in mind, salary cap based on percentage of revenue would be the first thing I would seek, meaning that the maximum that the players can earn can not exceed a certain percentage of revenue. So if the team earned 100M in revenue, only 52% or 52M could be spent on players. The NHL utilizes this system and is realistic for baseball and requires responsible spending. Ultimately, the system that the NFL utilizes with non-guaranteed contracts and short-term spending would allow teams the ability to be more nimble and decrease the rebuilding process, however the players union's strength being what it is, that is no more than a dream for owners. What is clear is that something needs to be done in 2011 and I expect that major changes will come to the now outdated revenue sharing system.

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