For over 20 years, Major League Baseball has enjoyed nearly unprecedented labor peace among the major American team sports. Since the last time MLB had a work stoppage, the NBA and NHL have both had two lockouts that saw games canceled (with the NHL losing an entire season in 2004-2005), while the NFL went through a contentious fight with its players in 2011 that lasted over five months, wiping out most of each team’s training camps. The sting of losing the 1994 World Series has seemingly motivated both the owners and the players association to find common ground, and with the league prospering, both parties have been content to keep the ball rolling. With the current collective bargaining agreement set to expire on Dec. 1, 2016, however, there is some concern that baseball may be in for a more difficult path to compromise this time around.
The primary issue, of course, is likely to surround player compensation. Most labor negotiations hinge on the distribution of income between corporate profits and the salaries and benefits received by the workforce that creates those profits, and MLB is a profit-seeking corporation, incentivized to retain as much of its own income as it can. And over the last few years, the shifting media landscape has swelled MLB’s income-streams in a dramatic way.
The rise of DVR and streaming services like Netflix have led to a generation of so-called “cord-cutters,” who are uninterested in paying inflated monthly cable subscription prices for the right to spend a half hour trying to find interesting content across a couple of hundred segregated channels. The ability to time-shift our viewing choices onto our own schedule is destroying the value of advertising during live television, leaving the business model that helped create some of the largest companies in America trying to figure out how to keep their income streams afloat while their industry pivots around them.
To this point, their answer has been live sports; people are generally less interested in watching a game after its conclusion, leaving sports leagues as one of the few remaining holders of content that people demand to watch as it is aired. And because major league baseball is a daily sport, providing content for television networks seven days a week for seven months a year, cable companies have bet big on it, rapidly increasing the rights fees for both national and regional programming.
Just among the league’s national programming contracts with ESPN, Fox, and TBS, the league reportedly will be paid an average of $1.5 billion per year for the rest of the decade, as well as the start of the next decade. And that’s just the national rights fees; each team strikes its own deals with its regional sports network, or in some cases, owns part or all of that network and uses it to generate income. Since the current CBA went into effect, the Dodgers reset the market for local television contracts, landing a deal that paid them in excess of $300 million per season for the rights to broadcast their games locally.
Since that deal, smaller-market rivals have been able to lock in big raises in annual fees received from the deals that they were under previously, often pushing up from $10 or $20 million annually to closer to $100 million per year. The explosion of television rights money has dramatically altered the financial landscape in MLB since the last CBA was negotiated, and makes it unlikely that the players are going to be satisfied with salary raises that are not keeping pace with the growth in league revenues.
According to research from Maury Brown at Forbes, MLB’s revenues have grown from roughly $1.4 billion in 1995 to around $9 billion in 2014, which represents about a 650 percent increase. During the same 20-year period, player salaries have grown from around $900 million to $3.5 billion, a significantly smaller increase of a little under 400 percent. And MLB doesn’t plan to take its foot off the gas, telling Eric Fisher of the Sports Business Journal that it is working toward a goal of $15 billion in annual revenues. While no exact date is set for that goal to be accomplished, Fisher reported that this isn’t a long-term project, and mentioned a “half decade” as a potential window for the league to get to that lofty platform.
The upcoming CBA is the players association’s chance to fight for a larger share of that ever-growing pie, and it seems likely that the union is going to want to ensure that the league’s dramatic growth doesn’t disproportionately end up as ownership profits. But while the publicly reported and discussed figures of MLB’s revenues get larger, it remains to be seen how much of that total MLB will be willing to stipulate is baseball-related income generated directly by the performance of the players on the field.
In Fisher’s SBJ article, for instance, he quotes Giants CEO Larry Baer saying the following:
We are uniquely positioned to take advantage of the opportunities out there when it comes to digital,” said Larry Baer, San Francisco Giants president and chief executive. Baer will be part of a newly merged board of directors encompassing MLBAM and MLB Enterprises. “The digital world is changing really fast, but it also presents a huge array of opportunities. And I think we’re now set up as well as anyone to change with it and exploit that. Digital’s the big area where I see us getting to $15 billion,” Baer said.
You’re probably familiar with MLBAM—the league’s Advanced Media wing—which has been responsible for products like MLB.tv, the At-Bat app, and the implementation of tracking technologies like Statcast. There’s no question that baseball has been at the forefront of pushing technological advances, and its app has been the highest grossing sports application in the Apple ecosystem for six consecutive years. But when Baer and others talk about MLB’s opportunity in digital, they aren’t just talking about the opportunity to separate consumers from $20 for a mobile app, or $140 for an MLB.tv subscription; they’re talking about the opportunity to turn their first-mover advantage into a business that profits from other companies attempting to get up and running in the digital streaming environment.
Over the last two years, MLB has pushed heavily in this direction. After starting out as primarily a hosting provider for other networks—most notably ESPN’s World Cup coverage, but also providing the technology for NCAA’s men’s basketball tournament to be streamed online—MLB struck deals with HBO and World Wrestling Entertainment (WWE) that saw it co-develop apps to provide so-called Over-The-Top networks. Both of these products were new services, designed from scratch, and showed that MLB could provide full support for a partner that wanted to provide content (both on television and mobile) without going through a traditional cable operator.
But then, last August, MLB struck a deal with the National Hockey League that signaled an even more aggressive direction for its digital division. Instead of simply being a technology partner, MLB acquired the NHL’s digital streaming rights, paying $100 million per year for ownership of the hockey league’s digital broadcast rights, making MLB a full-on rights-holder. That agreement signaled that Major League Baseball expects to be a player in the market providing live sports (besides just baseball) to the cord-cutting generation. The NHL deal gives MLB three sports—already cemented was an agreement with the PGA to provide early-round coverage of events, since traditional networks cover only the weekends—that it theoretically could package together in a bundle, and positions MLB to become a supplemental option for the Netflix crowd.
As part of the deal with the NHL, MLB sold it an equity stake in BAM Tech—the working name for the the new division of MLBAM that is developing these partnerships—that will amount to seven to 10 percent of the new company, at a price that puts BAM Tech’s valuation in the $4-$5 billion range. Given that this arm of MLBAM is already worth as much as many famous technology startups based in Silicon Valley, there have long been rumors that MLB will look to spin off BAM Tech as its own company. An IPO of this new division would bring in a big windfall for each team, each of which owns approximately a three percent stake in BAM Tech. If an IPO priced the new company at $5 billion, each major league club would reap about $150 million in exchange for liquidating its ownership, and that kind of flood of cash would likely see the MLBPA pushing for significant raises in player salaries.
However, MLBAM CEO Bob Bowman said they are not currently anticipating an IPO, and instead are looking for a strategic partner to take a minority stake in the company. The expectation is an announcement of an investment from an outside party at some point in 2016, with MLB continuing to grow BAM Tech internally in the short term, potentially exploring even more deals to acquire content rights. It is certainly easy to speculate that with an upcoming CBA negotiation, MLB might not want to be sitting on $5 billion in cash as it negotiates the size of the increase in salaries players should receive going forward.
But it’s not even clear that the players have much of a claim to these revenue streams. In many ways, BAM Tech isn’t so different from a company like Uber or Snapchat, and if MLB owners had individually gotten together to form a venture capital firm that funded the growth of one of those companies, no one would be clamoring for those owners to then plow the returns from a smart investment into the sports team they also happen to own.
Perhaps a comparable example would be Mark Cuban, owner of the NBA’s Dallas Mavericks, who also operates as a venture capitalist, including appearing on ABC’s hit TV show “Shark Tank,” where he finances startups that often have nothing to do with basketball. When one of Cuban’s investments turns into a big success, he’s not expected to split that money with Dirk Nowitzki, because his ownership of the Mavericks is tangential to his technology investments.
MLB’s investment in BAM Tech is more complex, because it did grow out of the original premise of providing live-streaming of major league games directly to consumers. Most of MLBAM’s revenues still come from its baseball products, and players should be compensated for revenues generated by the league’s activities in monetizing their product. But the growth of BAM Tech as a partner with companies like HBO and WWE, plus its ability to generate revenues by selling access to hockey games, muddies the waters of how much of the increase in MLBAM’s revenues should trickle down to the players. Should baseball players really profit from MLB’s ability to sell hockey games or golf tournaments? It’s likely the two sides are going to have differing opinions on that, and sorting out the amount of future revenues that should be included in the discussion of player wages is likely to be a very complex negotiation.
Even beyond the size-of-the-pie argument, the implementation of increased player compensation is also not exactly straightforward, and could end up providing some major sources of disagreement as well.
The MLBPA, like most unions, has agreed to compensation arrangements that push the flow of wages toward employees with more tenure. Veterans receive a disproportionate share of the money teams spend on their player payrolls, while more productive young players earn something close to the league minimum for their first few seasons, then work up towards a market-wage in their fourth, fifth, and sixth years in the majors. But in recent years—perhaps not coincidentally coming during the drug-testing era—the relative production of veterans has fallen, with the game skewing more heavily toward young talent.
Editor’s Note: To view this graph, please visit Rob Arthur’s piece at FiveThirtyEight entitled, “Baseball’s Kids Are All Right.”
Led by generational talents like Bryce Harper, Mike Trout, and Clayton Kershaw, the game is being dominated by players in their 20s, and in some cases, their early 20s. But because players have limited ability to negotiate significant raises in the first few years of their careers, the majority of salary dollars still go to older players.
|Year||25 & under||26 to 30||31 to 35||36 & up|
The final numbers aren’t in for 2014 and 2015 yet, but given there were more than 30 position players age 36 or older with 100 or more plate appearances in 2012 and 2013, and just 22 in 2014 and 18 in 2015, this trend does not appear to be abating.
The recent rise in allocation of salaries towards players in the 26-30 age-bracket is due in part to the trend towards signing key contributors to long-term deals during their pre-arbitration years; teams have taken advantage of individual player’s desires for financial security, reducing their overall expenditures by keeping a larger share of premium players out of the free agent market. With more guaranteed contracts for younger players, teams are ending up with more money committed to a wider range of players in their peak years; when the player doesn’t work, the team is out $10 or $20 million it wouldn’t otherwise have spent. But when the player has a big breakout after he signs the deal—Paul Goldschmidt, for instance—the team often comes out way ahead, with the franchise paying far less for premium production than the open market would have forced it to.
So it’s not enough for the MLBPA simply to say it’s time for the league to start sharing a larger portion of the pie with the players; there likely will have to be a plan in place for either getting more players to the open market or pushing more dollars toward players who aren’t eligible for free agency. Both paths come with significant obstacles.
The most direct way to get more players to the open market would be for the MLBPA to fight for a shorter path to free agency. Currently, teams get a minimum of six years of team control, but given how easy it is to keep a player in the minor leagues for the brief time required to avoid giving him a full service year in his rookie season, most impactful players end up playing closer to seven years before becoming eligible for free agency. And if they opt for early-career security, as many of the game’s best young players have, the actual term with their original organization is more often upwards of 10 years.
When the system is set up to restrict costs before free agency, expecting that market rates will make up for the early-career shortfalls later on, that becomes a real problem; teams are becoming less willing to overpay for aging players, especially as their production has fallen, and the money that was supposed to make up for the underpaid years is simply getting allocated to keep the next generation of players from reaching free agency after six or seven years. For a significant portion of the major league population, the vast majority of the productive portion of their career will come during the years in which they have limited abilities to be compensated for their performances.
The MLBPA could propose reducing the amount of service time required to reach free agency, but that would be a dramatic structural change that ownership would likely strongly oppose. And with baseball currently celebrating unprecedented parity, with lower revenue teams achieving unprecedented success, reducing the number of years before free agency would likely be seen as a step back in the fight for competitive balance MLB has spent a few decades attempting to create. The more quickly players are valued at their market wages, the less important scouting and player development become, and MLB will likely hesitate to institute policies that give teams with significant payroll advantages an easier time turning that cash into a larger ability to buy premium players.
This is the same issue the league would likely raise if the players asked for a higher league minimum salary. A significant increase in the minimum salary would act as a regressive tax, increasing the marginal costs for the lowest-spending teams more than the teams in large markets with plenty of disposable income. While the minimum salary is likely to increase in a significant way, using a league-wide increase in the baseline salary of all players would make it more difficult for the league to sustain the current level of competitive balance; the Dodgers and Yankees can absorb an extra $10 or $15 million in mandatory spending a lot easier than the A’s or Rays can.
From a competitive balance standpoint, the league has been successful in part because the luxury tax has worked as a constraint upon the top tier of payrolls—with the notable exception of the current iteration of the Dodgers, anyway—while the rise in television revenues has allowed the bottom tier teams to spend enough to retain their best players, rather than simply acting as a farm system for developing players who get paid by the big boys in free agency. But with the revenue growth of television contracts going disproportionately to larger market teams, it’s unrealistic to expect the teams with the lowest payrolls to drive a large increase in the share of the pie going to the players.
If the players are going to get a significantly larger portion of the pie, they’re going to have to figure out how to get the league to extract it from the higher-revenue teams, but without ignoring the league’s concerns about maintaining the smaller spread in team payrolls that we’ve seen in recent years. And that’s no easy task.
Perhaps that involves asking for another expansion in revenue sharing along with a big bump in the the league minimum; if the higher-revenue teams were essentially underwriting most of the increase in costs across the majors, it could push more money to the players without dramatically altering the current spending ratios between teams with different revenue streams. But franchises with a long history of success—and the revenues that come with an entrenched fanbase—are probably going to be reticent to use their financial advantages to subsidize their competitors. With a new commissioner in place—one whose election was contested by a reasonably-sized bloc of owners, it should be noted—it isn’t clear that Rob Manfred will have the political capital to push increased revenue sharing on the teams that produce the most revenue for the league.
If an increase in revenue sharing proves too difficult, the MLBPA may have to get creative. One interesting suggestion I’ve heard bandied about, albeit as a long-shot possibility, is that MLB could fund a comprehensive insurance plan for all players—similar to worker’s compensation—providing a significant benefit to players whose careers are prematurely derailed by injury. Currently, players are able to buy individual insurance policies, but they are prohibitively expensive and often don’t provide payouts unless it is proven that the injury sustained is career-ending. These policies are often of little help to a pitcher who undergoes Tommy John surgery, missing out on years of prime-aged earnings, but has no desire to retire after one elbow problem.
With the significant increase in Tommy John surgeries, pitchers are particularly harmed by a system that limits their earnings until the second half of their careers, so a comprehensive insurance plan that paid out a percentage of expected earnings while a player is rehabbing may be one way to not only distribute a higher percentage of revenues to the players, but to compensate the players who carry the most risk.
Additionally, a comprehensive insurance plan would limit the needs of players to self-insure by signing early-career extensions that keep them from reaching free agency after six or seven years. With a systematic safety net in place, individual players would not be carrying as much personal risk, and would have more incentive to try to maximize their earnings through arbitration and reaching free agency in the shortest time possible. Beyond just the actual payouts to players who become disabled, a worker’s compensation agreement would push more players into the open market, and theoretically drive an increase in wages by reducing the number of star players playing at wages that don’t reflect their contributions on the field.
Of course, the logistics of introducing a worker’s compensation program would be no small matter, especially since player compensation is much more variable in major league baseball than it is within most unions. Not only would both sides have to agree on how it would be funded—which would again lead to the question of how strongly MLB wants to push the highest-revenue teams to bear the burden of increased player compensation—but the union itself would likely have to have some long discussions about who would be eligible for the program. The players who would benefit the most from a comprehensive insurance program would be those with few years of service, but they usually wield the least power within their association, and the MLBPA would have to make an intentional decision to negotiate primarily for increased wages for their most junior members.
That’s probably why the idea has been described as far-fetched, but it also speaks to the difficulties of expanding the proportion of league revenues that go to the players. There is just no simple way to facilitate payments from owners to workers that doesn’t have ramifications on some other aspect of the sport, which is why this upcoming CBA negotiation may prove more difficult than the others.
And we haven’t even touched on the non-monetary aspects of the negotiations. Beyond simply dividing up revenues, both sides have their own separate agendas. MLB is likely going to push for some kind of unified player-entry system, (which Kiley McDaniel covers elsewhere in this book) most likely by advocating for an international draft to replace the failed bonus-slotting program currently in place. There will likely be additional discussions of the Joint Drug Agreement, and how the enforcement of the penalties handed down are enforced.
The players are rumored to be pushing strongly for limitations on media access, and might want a greater say in how pace-of-play changes are implemented. There will likely be discussions regarding the public reporting and sharing of health information, especially now that MLB is consolidating medical information into a central database. As biometric analysis (including systems that purport to measure a player’s physical degradation in real-time) grows as an industry, the players may seek some greater measure of control over how that information is disseminated.
Finally, there’s the matter of the length of the season. Commissioner Manfred has openly spoken about considering reducing the regular season to 154 games; an eight-game reduction for each team would either allow for an expansion of the postseason or for more frequent off days during the year, or both if done correctly. This would be a hit to the owners’ pockets, both in terms of gate revenue and of existing television contracts—which are based on a 162-game season and would need to be reworked—and thus isn’t highly likely. The negotiations will be complex as is. But players may view the reduced wear and tear as a big positive. More importantly, trading a few April or May midweek games for a best-of-seven Division Series is tantalizing, and that possibility makes the commissioner’s public statements intriguing.
In the end, though, these negotiations will mostly boil down to figuring how to spread the wealth from a very lucrative business. The last few negotiations have seen both sides not wanting to rock a boat that was bringing prosperity to everyone on board, but with players eyeing an increasing pile of gold on the ownership side of the boat, this could prove to be a significantly more difficult series of conversations. Add in a new union head in Tony Clark—a former player, who will bring a different perspective to the negotiations than former executive director Michael Weiner—and the current commissioner perhaps possessing less power than Bud Selig, and there are enough variables in play that an easily-worked-out agreement is probably not in the cards this time.
If Commissioner Manfred is going to use walk-up music as he enters the negotiating room, I will humbly suggest a little tune from The Notorious B.I.G.: “Mo Money, Mo Problems.” Indeed.
References & Resources
- Rob Arthur, FiveThirtyEight, “Baseball’s Kids Are All Right”
- Eric Fisher, Sports Business Journal, “MLBAM moving swiftly to pursue spinoff”
- Shalani Ramachandrian, The Wall Street Journal, “MLB’s Tech Unit Wins NHL Streaming Business”
- Peter Kafka, re/code, “Pro Baseball’s Streaming Video Unit Gets Ready for a $3 Billion Spinoff by Adding Pro Hockey”