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It’s David versus Goliath in Baseball’s Economic Battle

It’s David versus Goliath in Baseball’s Economic Battle

| On 21, Dec 2013

The off-season is one of my favorite times of year. Teams are abuzz with trades, free agent acquisitions, arbitration herrings, and many other roster moves that build the franchise for not just the upcoming season, but for many seasons to come. The Cleveland Indians made some big splashes in the free agent pool in baseball’s second season following 2012 by acquiring a couple of MLB’s top free agents in Michael Bourn and Nick Swisher. In this off-season, however, things seem less exciting. Both of the previously mentioned free agent signings came after the New Year, but this winter just doesn’t have the same feel.

Part of that is due to the Indians having fewer holes to fill. At this point they really only have a starting rotation spot available, and that could very likely be filled internally. It would be nice to have a big power bat in the middle of the lineup, someone that could hit 30 home runs and drive in 100 RBI, but there is no one like that available on the free agent market. I doubt Indians fans would like to see Ty Wiggington playing third base every day, or Jeff Francoeur in right field. So with the rotation spot being the only realistic spot to fill, why are the Indians not going after the likes of Matt Garza or Ervin Santana? It has to do with economics.

On the open market of free agency, the Indians just cannot compete with teams like the Yankees, Red Sox, or even the organizations within their own division. The economic state of baseball is such that each team is its own independent entity and is left to its own operations within its own market. The market of each team dictates the amount of money each team has available to spend. Team attendance, average fan costs, and local revenue are of utmost importance to these smaller market teams. Some teams can find success despite their economic limitations, like the Rays and the Athletics, and some teams take advantage of their financial dominance to buy winners, like the Yankees.

The Yankees utilize the success of YES (Yankee Entertainment and Sports) to help drive their finances. The YES Network does two things for the Yankees. Through programs about the team, its players, and its history, it sells its brand. The second thing it does is generate a huge sum of money. In 2012, revenue for the YES Network alone exceeded the total revenue of all but three Major League Baseball teams. Add that to the Yankees team revenue and they can generate twice the funds of nearly every other Major League team. The Yankees organization total revenue in 2012 was $471M with an average stadium ticket price of $51.55. Compare that to the Cleveland Indians $186M of revenue (fifth lowest of any MLB team) and $19.35 average ticket price (third lowest of any MLB team), and the Yankees clearly have much more money to spend. It’s laughable to even contemplate the Indians competing with the Yankees on a financial level. Looking at it from a market perspective, the Cleveland market is worth about $184M. That seems like a sizable sum until you realize that the New York market is worth $1,138M, more than six times as much as Cleveland. This is the biggest reason why the Indians lose on the free agent market to teams like the Yankees, the Red Sox, the Dodgers, and others in the large markets.

Even Detroit, which seems like it should have a market similar to Cleveland, generate $238M in revenue with a market size of $269M and a $26.36 average ticket price. Average fan cost for attending an Indians game is $157 (third lowest in MLB) while the average fan cost in Detroit is $207. Average fan cost comprises the prices of four adult average-price tickets, two small draft beers, four small soft drinks, four regular-size hot dogs, parking for one car, two game programs and two least expensive, adult-size adjustable caps. Under the same rules, the average fan cost of attending a Browns game is $286.

One may wonder about the other American League Central teams and their stadium prices. In Kansas City, the average ticket price is $19.83 and average fan cost is $172. In Minnesota the average ticket price is $32.59 and the fan cost is $221. Finally, in Chicago the average ticket price is $26.05 and the average fan cost is $231. The Indians are the lowest ticket price and fan cost in the AL Central, and one of the lowest of any team in all the Major League.

Let’s go back and look at the comparison between Cleveland and Detroit. The Indians finished the season with 92 wins, while the Tigers finished with 93. The Indians drew 1.57M in attendance, while the Tigers drew 3.08M. Just taking into account average ticket prices, and leaving out the stadiums operating income, this translates into a $50.2M revenue advantage for the Tigers over the Indians. Calculate those numbers using total average fan cost and that gap widens to a $97.7M advantage for Detroit. This is why they are able to afford a payroll that is about $70M more than the Indians.

Some point to the Browns and the Cavs and wonder why they are able to make the same moves every other team in their league can make. The NFL and NBA are set up completely different from MLB. While there is revenue sharing in MLB, it is not nearly to the extent it is in the NFL or NBA. The NFL revolves around national broadcast agreements while the MLB teams are forced to mostly generate their own revenue within each individual market. The NFL will produce about $5 billion in revenue, of which about 80% is shared amongst the 32 NFL teams, making the markets pretty equal across the board. By contrast, only 25% of the MLB national revenue is shared between the teams, leaving about $300M to be divided up among 30 teams. In this way, each team is left to generate its own local revenue, which decides its economic value.

The unfortunate reality is that Major League Baseball is not a level playing field. Each team is left on its own, trapped within the confines of its own local market. Despite the Darwinian style local revenue model, MLB teams are forced to compete on a national market to fill their rosters. This leaves teams like the Indians, Rays, and Athletics to find different ways to creating value on their rosters. Bidding head-to-head against the large market teams for top free agents is like going to a classic car auction hoping to get 1966 Shelby Cobra with only $1,000 in your pocket. The Indians just cannot compete financially, so they need to find alternative ways to generate wins. Low cost, low risk pitchers like Scott Kazmir in 2013, and platoon splits at certain position are how the Indians are forced to operate.

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