Friday, April 09, 2010

JSE: Zimbalist on salaries and revenues

The second article in the February, 2010 issue of "Journal of Sports Economics" is "Reflections on Salary Shares and Salary Caps," by Andrew Zimbalist.

It's an overview of the recent history of revenues and salaries in the four major sports. I say "overview" because Zimbalist implies there's a lot of detail that went into the numbers that wouldn't fit in the article. Zimbalist starts off by quoting some incorrect numbers that appeared in the press, and says,

"... it helps to get the numbers right before plowing ahead. ... Special knowledge of the real world, even though it may sometimes be proprietary or may entail diligent digging, can help sharpen and deepen research by sports economists ..."

The main question in the paper is: what percentage of revenues is paid to the players in salaries? Zimbalist touches on some of the issues involved in figuring that out. In three of the sports (MLB is the exception), there's a salary cap that's based on a percentage of revenues. You'd think it would be as simple as looking at the union agreements to see what the percentages are. But what counts as revenue? The details are different for the different leagues, as defined in their respective contracts. For instance, the New York Knicks and the MSG network that broadcasts their games are both owned by the same company (Cablevision). In order to avoid having MSG pay a too-low price for the broadcast rights (thus artificially lowering the Knicks revenues), the contract contains a clause that values the TV contract at the same price as the Lakers' contract (which is a transaction between unrelated parties).

Also, NHL revenues are defined to include the value of complimentary tickets; NBA revenues are not. And so forth.

Anyway, here are the numbers, as Zimbalist calculates them:

In the NFL, salaries from 2001-2006 fluctuated in the range of 54 to 60 percent of total revenues. Before that, from 1994 to 2000, they were higher, between 60 and 65% all seasons but one.

In the NBA, salaries from 2001 to 2006 were 57% of "basketball-related income" in all seasons but one (60% in 2002-03). In the six preceding years, they ranged from 53% to 65%.

Zimbalist doesn't give data for the NHL, perhaps because the salary cap is so recent. But the agreement calls for salaries to comprise 54% to 57% of revenues, with the higher numbers applying when revenues are high.

Finally, for MLB, Zimbalist's numbers fluctuate a fair bit. Here they are from 1990 to 2007:

1990-94: 42%, 47%, 54%, 54%, 63%
1995-99: 62%, 58%, 59%, 56%, 59%
2000-04: 56%, 61%, 67%, 63%, 55%
2005-07: 53%, 51%, 51%

Those numbers don't include minor-league salaries. If you add those in, the 2007 figure rises from 51% to 57% (since MLB pays minor league salaries but doesn't participate in minor-league revenues). The same principle holds for the NHL, but to a much lesser degree (since there are fewer minor-league players, and some NHL teams own their affiliates outright). With minor leagues included, the NHL ratio rises to 58%.

If you're interested in some of the issues behind these estimates, I definitely recommend Zimbalist's article. There aren't a lot of hardcore details, but there is a discussion of some of the many issues that have to be considered to get accurate numbers.


Generally, it looks like all four sports have about the same ratios, between 55 and 60 percent. Zimbalist expresses a bit of surprise at this, since MLB doesn't have a salary cap, while the other three leagues do. You might have expected the MLB ratio to be higher, because of that, but it doesn't work out that way.

I guess it shouldn't be that much of a surprise -- if the MLB ratio was too much higher, the teams would be demanding a cap, and that doesn't seem to be the case. To me, logic seems to suggest that MLB should be the healthiest of the four leagues: it spends the same ratio of revenues on player compensation, but the big-market teams pay more, and the small-market teams pay less. This lets all the teams make a decent profit, and puts the best teams where there are the most fans.

With a cap, the Yankees would have to spend the same as everyone else. They'd be an average team, and, since the Yankees are the biggest market, their revenues would drop more than the revenues of other teams would rise. And so the league as a whole would be worse off -- they Yankees would make less, and, with a salary floor like in the NHL, lots of small-market teams might start losing money.

Except ... well, as I wrote before, I wonder if, in the long term, the fans will be willing to put up with a system that virtually guarantees the Yankees and Red Sox so many more pennants than the Royals and Marlins. I guess time will tell. For my part, I much prefer the long-term competitive balance promised by the other three leagues.

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At Saturday, April 10, 2010 12:19:00 AM, Blogger Mike said...

With a cap, the Yankees (and Mets, Red Sox, Angels, Dodgers, and Phillies) would pocket a lot more money. I have never understood the appeal of salary caps. The issue to me is revenue sharing. Look at it this way: the Yankees' 2009 was $201M. The A' was $62M. Even if you put a cap in place that halves the Yanks' payroll (which would also hit 8 other teams), the A's would have to increase their payroll by over 40% to be near the cap limit. Is that likely? I don't think so.

Second point: what's wrong with the long-term balance in baseball? If you look at the top 7 teams in the AL for the 2000-2009 period, 12 teams appear. To no one's surprise, the Yanks and Sox top the list (10 and 9 appearances respectively), but the small market Twins appear 8 times, the small market A's 7 times, and the small market Mariners 6 times (all more than the larger market Rangers or Orioles).

The apparent disparity in MLB is a function of the small number of teams that make the playoffs and the fact that the top 3-4 teams in each league have a large revenue advantage. A Commissioner could fix it with the stroke of a pen, actually. Just declare all broadcast revenues to be property of MLB, who would be the sole negotiating agent with both the traditional networks and the "captive" cash cows like NESN, YES, and WTBS. Distribute that money evenly. After all, nobody would tune in to watch just one team, right?

At Monday, April 19, 2010 11:02:00 AM, Blogger Unknown said...

"Except ... well, as I wrote before, I wonder if, in the long term, the fans will be willing to put up with a system that virtually guarantees the Yankees and Red Sox so many more pennants than the Royals and Marlins. I guess time will tell. For my part, I much prefer the long-term competitive balance promised by the other three leagues."

Is there any evidence that they won't? Haven't they been accepting it since the 1920s? Yankees dominated in the 40s-60s, and people seem to look back in those times fondly as the golden-era of baseball. Since the current Yankee rise from the mid 90s, baseball seems to doing quite well.

I'd be worried about the state of MLB if there were signs of fan unrest ... true signs, not just blog posts. But I have not seen any compelling evidence.

At Monday, April 19, 2010 11:07:00 AM, Blogger Phil Birnbaum said...

My feeling is that back then, it seemed that other teams COULD compete, if only they signed a few good players, or got better management.

Now, every fan knows that the Pirates can never compete with the Yankees, who win just by spending twice as much money as most other teams.

I might be wrong ... but my perception is that, back then, fans thought the Yankees worked smarter and harder. Now, fans know the Yankees just buy more wins. Different mindset.


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