Who Does Revenue Sharing Really Help?

A couple weeks ago here at BP Milwaukee, I discussed various reports that indicated owners were angry about the Arizona Diamondbacks spending $206 million — including, by the estimates of the owners, a good chunk of money Arizona received in revenue sharing — on their megadeal with Zack Greinke. ESPN’s Jayson Stark even went so far as to say in his Winter Meetings winners and losers column, “… a team that had the seventh-lowest payroll in baseball this year (and collected close to $30 million in revenue sharing) just blew up the salary structure of the sport with the Greinke contract. And it’s hard to say which group of clubs is more unhappy about that — the small markets who now know they can’t afford to keep their young stars, or the big markets that have been writing those revenue-sharing checks.”

This revenue sharing argument has been on my mind since I saw a news story discussing a similar system in another sport, the National Basketball Association. The tanking Philadelphia 76ers, who fell to a ridiculous 1-28 with another loss on Sunday night, recently hired former NBA executive, owner and current head of USA Basketball Jerry Colangelo to an executive position in the organization. The move was made, Brian Windhorst of ESPN reported, after NBA owners complained the 76ers weren’t pulling their weight in the NBA’s revenue sharing system. Specifically, Windhorst writes:

“Owners routinely complained about the economic drag the 76ers were inflicting on the league as the revenues of one of the largest-market teams — a franchise expected to contribute more robustly to league revenue-sharing — sagged.”

This is the kind of thing that, as a fan of small-market teams in Wisconsin and a resident in a small-market city in Minneapolis, makes me concerned about the future of sports in the places that I consider home. Nobody had a problem with the tanking strategy when middle-to-smaller market teams like the Houston Astros, Tampa Bay Rays, or Oklahoma City Thunder were the ones punting a season or two in attempts to get better down the line. They were doomed franchises anyway, perennial bottom feeders who needed to try anything to get out of the basement. If anything, in the moment, these teams were praised for their resourcefulness.

Leagues are perfectly happy to let these smaller market franchises languish for years on end, but now we see that this will not stand in a larger market like Philadelphia. Colangelo’s job is to lure stars to Philadelphia via his USA Basketball connections and his long history in the game, and NBA owners lobbied to put him there. This would not and could not happen in Milwaukee or Minnesota. Rich owners would be furious, and the other small-market owners would ask, why not us? Just look at what happened with Greinke. By actually spending the revenue-sharing money they were given, Arizona was accused of “blowing up the salary structure of the sport.”

It’s enough to make me question the entirety of the revenue-sharing scheme. It supposedly exists in order to give the Milwaukees and the Minnesotas a chance. But that’s not how the system has functioned, particularly as Major League Baseball has shut off alternate routes to spending on talent with caps on draft and international expenditures. A paper from William Ryan Colby of Amherst University, a former Rays employee, explores the failures of baseball’s revenue-sharing system. The whole thing is worth a read, but Colby makes a few key points that I want to highlight.

First, focusing on gate receipts while failing to capture unshared local television income, as will happen with multiple teams taking ownership stakes in their regional sports networks, will only make the problems caused by disparate market sizes even worse. Television money is the revenue source most effected by market size — it’s not the ratings that drove the Dodgers’ $8.35 billion deal, but the fact that the Los Angeles market has access to over 2.9 million cable homes, fewer than only New York City. At four-to-five dollars per subscriber carrying the Dodgers’ regional sports network, that represents huge potential profits, and because Dodgers owners The Guggenheim Group owns 50 percent of the network, most of that won’t be thrown into the revenue sharing pot. This pot is supposed to capture all baseball-related revenue and this is a television channel created primarily to broadcast baseball games, and yet it won’t be included in the Dodgers’ revenue-sharing contribution. Many large-market teams have taken controlling interests in regional sports networks, and this will only contribute further to leaguewide inequality.

Second, and most importantly, baseball’s revenue sharing doesn’t create incentives to spend that money in ways that will improve the team. In fact, it can work to subsidize terrible performances — tanking is in large part viable because revenue sharing can cover gaps, as the Tampa Bay Devil Rays regularly used revenue sharing money to pay off team debts. Worse, it can even run counter to the supposed competitive balance purpose. The Philadelphia Phillies, playing in the sixth-largest media market, were the recipients of revenue sharing in the mid-2000s because their teams early in the decade had been bad enough to put a damper on the team’s revenue. So instead of giving a small-market team a chance to capitalize on Philadelphia’s incompetence, the league came to the large market’s rescue (and, naturally, the Phillies had one of their best stretches in franchise history from 2007 through 2011).

Colby concludes: “[T]his research shows that MLB has tried many times and ultimately appears to have failed in their attempts to promote competitive balance through increased payroll balance. They have failed because they have constructed institutions that create backwards incentives and because they have failed to draw a distinction between ‘good’ and ‘bad’ imbalance. New sharing systems in MLB should account for these past failings and allocate resources in a new way that will incentivize success, not subsidize failure.”

Instead, what we have now is a system that encourages small-market teams to stay out of the big boy market and hope for the draft lottery tickets to pan out. When they’re losing, they’re accused of taking handouts. When they dare to spend, they’re accused of ruining the market and spending money they didn’t earn. And why spend to be a .500 team, anyway, if you don’t need the draw of the star players or marginal hope of contending to stay in the black? As an added bonus for the owners, with so many teams pocketing the money or spending it on non-player expenses like debt, it only serves to remove money from the free agent market and to depress player salaries.

We’ve seen teams win with the tanking strategy. It isn’t impossible. But it requires a lot more luck than we prefer to acknowledge. It requires avoiding the draft-day busts and playing service time windows just right, it requires avoiding key injuries and having the right bounce go the right way at the right time. That shouldn’t be the goal. It should be a system where teams can win by playing the game better, playing the game stronger, or playing the game smarter, and where the money they have available matters less than it did before. That’s certainly not what I see in baseball’s revenue sharing system. Instead, I see a system designed to keep small-market teams grasping for straws while clearing an even easier path out of rough situations for large-market teams. All in the name of so-called competitive balance.

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