Abacus: Our National Pastime's Economy

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I’ve grown up as a Boston Red Sox fan. I spent up to half of every summer (to my mother’s discontent) glued to NESN while I watched David Ortiz and Manny Ramirez do work at Fenway Park. My interest in Major League Baseball has never faded, and I still follow Our National Pastime closely (especially when it comes to the betting lines).

However, my fellow millennials have never shared the same enthusiasm for the sport. “It’s so boring,” many of my friends will claim about the one sport that plays without a clock. Interest in the sport and the length of the games is negatively correlated, and professional baseball games are taking longer than ever, with the average game now ticking up over 3 hours. The league is taking strides to attempt to shorten games in order to preserve interest of the ever-impatient younger viewers, but I ask: why? The biz of baseball has continued to inflate and inflate to new heights every year, even while my peers (younger and older alike) make fun of me for buying in.

So, this week I want to examine our National Pastime’s economy, and attempt to answer the essential question of: Why does Major League Baseball continue to put up record profit margins while viewership collapses? And, the secondary question: Why do professional baseball players get paid (or deserve to get paid) as much as 500 schoolteachers? Salaries have inflated 60% in the past dozen years, wherein the average baseball player salary is 66 times the average American household income.

Examining MLB monetary statistics is a cool look into the entertainment section of our capitalist economy (which, by the way, is massive). The MLB is estimated to be worth over $36 billion, with the average team now being worth well over $1 billion, which is 19% more than just a year ago. 15 teams are worth more $1 billion or more, with the New York Yankees being the most valuable team in Baseball. Profits and valuations for every team continue to go up year-to-year, for example: The Giants more than doubled in value between the 2014 and 2015 season, to about $2 billion dollars, with their operating revenue also doubling (albeit over the past 5 seasons) to close to $400 million. Thanks in large part due to 3 world series titles over that 5 season span, and the proliferation of sponsorships that comes with that kind of success.

Despite the above numbers, overall viewership isn’t high. It’s hard to accurately quantify trends in Baseball viewership over such a long and diverse regular season, but the trend in overall viewership for the Fall Classic has been downward (see graph below). The 2017 World Series (one of the most exciting in recent memory) pulled in an average of 24 million viewers; by comparison, Super Bowl 51 pulled in over 100 million viewers.

Source- Wikipedia 

Source- Wikipedia 

While 4-7 games in October may be a small sample size (even for its immense importance), these ratings represent a microcosm of overall Baseball popularity. It also seems to justify my personal interactions of young people who are adamantly NFL > MLB. However, Major League Baseball’s 2016 revenue numbers approached $10 billion, which is certainly within spitting distance of the NFL’s $13 billion in 2016 revenue. This backs up my initial observations: Why are Baseball numbers so inflated despite how out of demand it seems to be?

Let’s examine where all this money is coming from. The first thing that easily pops out is huge TV contracts! In 2009, television money accounted for 29% of Baseball’s overall revenue; in 2014, this number inflated up to 37%. The 2013 season deal with ESPN, Fox, and TBS is paying out $12.4 billion over 8 years, which is more than double the previous contract. Revenue growth = higher company valuations, obviously.

However, TV contracts don’t explain the full story. Baseball owners have shown real economic ingenuity in creating more options (and markets) for monetization of baseball, especially locally. CBS News calls it: “The Revenue Model.” but it’s really “The Local Revenue Model.” As David Jacobson wrote in the article, “Baseball remains an especially local, live form of entertainment,” and owners have pushed demand at the local level to drive their profits to new heights. First example: There are more options to stream baseball games to their viewers. Think MLB.Tv, DirecTV, etc. all forming to create “rapidly increasing numbers of competing options for TV viewership.”

Furthermore, think of the examples Jacobson expanded on in his article. Firstly, Stadiums acting as (super) high-margin retail outlets, such as the Detroit Tigers cap that cost $35 inside Comerica Park but only $12 at the local sports store, and how many casual fans will only buy that cap when they go to a Tigers game. Next is that new media equals new money. This relates to my streaming of Baseball above, but the example Jacobson gives is of the League’s official website, MLB.com, which supposedly generates up to $400 million dollars in revenue each year and is backed by all 30 MLB teams. Stadiums also act as sponsorship platforms; I swear there must be 800 different companies placing advertisements around ballparks, in the forms of signs, TV ads on screens, plugs during game intermissions (“The 7th inning stretch is sponsored by…”), etc. Finally, there are regional sports network revenues; think YES for the Yankees, NESN for the Red Sox, and teams with stakes in their regional cable networks pulled in huge profits, as opposed to those who sold the broadcasting rights to their games.  

My point is that as options for local team monetization increases, competition and demand increases. Therefore, team revenues go up, and each team’s worth goes up. And as with pretty much everything in the economy, an increase in Money Supply = Inflation. Bringing us to the second part of my Baseball Biz analysis: Why do the players make stupid amounts of money?

The important thing to look at is what drives the demand for “baseball labor.” As I wrote in the previous paragraph: Money Supply = Inflation, of both team’s worth, therefore player expenses. This seems a pretty easy and logical answer to the second “essential question” of this article, because as all of baseball makes more money, they will have more to spend (or bid) on the players they want (or need). This is also easily proven by looking at the increase in the MLB Luxury Tax over the last dozen years or so. The Luxury Tax, by the way, is the tax penalty teams will pay if their team payroll goes over a certain amount, as to keep the league “competitive” (it was originally introduced as the “Competitive Balance Tax”). The threshold for the Luxury Tax has ballooned up to $195 million for this season, compared to only $117 million when introduced in 2003, and set to increase to $206 million by 2019. You can see my makeshift graph below (with data coming from Wikipedia, numbers in Millions of $.)

MLB Luxury Tax Threshold

In addition to the increase in this threshold, increases in contracts can be explained by the low supply of certain role players, especially good ones. For example, David Price is one of the best starting pitchers in the game, and also left handed, plus he can throw a baseball really fast. There are not many pitchers out there like David Price, therefore, the Boston Red Sox snatched him up on an 8-year, $217-million-dollar contract (which I was thrilled about at the time, but his career in Boston has been held back by constant injuries). However, the Red Sox can spend this much on a player because of the influx of money coming into baseball. Player contracts go up with MLB “money” contracts.

Obviously players will get paid more in a booming economy, accountants and fast food workers would get paid more if their sector was growing at the same rate. The really interesting part about player’s salaries, is that they actually (probably) should get paid more. While supply for players like David Price stays, relatively, low, demand for baseball labor is quite lower that it seems it should be. 

Consider the team revenue equation: Team Revenue = Tickets and concessions + TV Contracts + MLB Revenue Sharing + MLB Distribution of funds. Now, the marginal revenue of a new player added to the roster is probably best attributed towards new ticket sales and jerseys sold, minus whatever they’re paying the new guy. And, after all we talked about before with the Local Revenue Model, a quick-and-dirty analysis of the numbers seems to indicate that the marginal revenue of players added is simply not keeping up with the marginal revenue of TV contracts and everything else. For this reason, since 2002, “baseball player salaries as a share of new revenue has declined from 56 percent to 40 percent.” Matt Swartz expands on this idea in his article for The Hardball Times.

So, considering that baseball players seem to be the most vital organ to Major League Baseball, this decline in real salaries should be looked at as economically immoral. It an be determined that MLB players are underpaid, as they don’t receive the same share of profits as the owners do now. This is why the MLBPA still plays such a crucial role in relations between the players and the owners, to fight for the goal that baseball wages continue to rise with baseball inflation. Considering that Giancarlo Stanton, the Miami Marlins slugger (and an amazing one at that), just signed a 12-year $325,000,000 contract to play the game of baseball, presenting an argument that he is somehow “underpaid” for his labor is probably an unpopular and ridiculous conclusion. However, professional baseball is just another sector in our economy, and the money flows based on the same economic laws like supply, demand, and marginal revenue. Therefore, the astronomically high profits of owners and players could be ruled as immoral, but can also be ruled as economically efficient, and it’s interesting to see the biz of baseball continue to boom despite the skyrocketing disinterest of the younger generations.