The Captain's Blog

For the second straight winter, baseball’s hot stove has run cold. With the free agent market in a deep freeze, unthawed by the superstar talent of Bryce Harper and Manny Machado, and the game’s former big spenders conspicuous by their inactivity, whispers about pending labor strife have grown louder. Some have even mentioned the “C” word. But, it’s not collusion that has thrown a damper on the off season. Another “C” word is at the heart of the game’s transactional malaise…Competition…or the lack thereof.

Throughout the history of baseball labor negotiations, the Major League Baseball Players Association (MLBPA) has been an advocate of the free market, at least to the extent one can exist in a sport with an anti-trust exemption. The union has consistently resisted artificial means of sharing the game’s wealth, such as salary caps and floors, because it believed the biggest piece of the pie could be obtained by allowing free agents to be valued by the highest bidder. And, until recently, they had been exactly right.

So, what has changed? After having the pendulum swing completely in their favor, the MLBPA has gradually ceded its advantage by making concessions. Limits on amateur pay, which increase the value of young players relative to veterans, as well as a more punitive competitive balance tax (CBT) system are two examples that have had a chilling effect. But, they alone are not responsible for the rapid cooling caused by the burgeoning crisis of competition.

Yankees Expected Rights Fee Payments from FOX, 2013 to 2042

For players to do well in a “free market”, they only need one prevailing dynamic: owners who either want to win or need to win in order to make money. Unfortunately, that’s not what exists currently. From big market to small, teams have locked in so much revenue via marketing, media deals (such as the Dodgers 25-year, $8 billion deal with TWC and the Yankees’ 30-year deal with YES, depicted above) and long-term premium ticket/suite contracts that there is very little revenue elasticity. Simply fielding a team is enough to make a profit, and the sweet spot for cashing in is probably just a shade above mediocre. After all, to compete for the “playoffs”, a mid- to high-80s win total is often more than enough. As a result, the marginal economic value of extra wins, and the players who provide them, have declined.

Also, with business booming, sports teams have become less of a vanity asset. The new bottom line isn’t how many games a team wins, but the margin of its profit. Spending from personal wealth to supplement payroll is a thing of the past. Trying to win games to satisfy personal ambition is too. There are no more George Steinbrenner’s, Ted Turner’s and Ewing Kauffman’s who are willing to throw the balance sheet away when evaluating free agents. Instead, the ownership ranks are replete with investment banker types who define value based on contribution to EBITDA.

The competition crisis is bad news for the MLBPA. The good news is they still have plenty of leverage to address it. Because the owners are making so much money for doing very little, the last thing they should want is a work stoppage. In the past, owners have forced players to strike when they believed labor changes were needed to make their business viable. This time around, it will be owners who want the status quo and have more leeway to compromise in order to keep the revenue flowing.

The real question for the MLBPA is how to take advantage of its position? Systematic tweaks, such as reducing the service time required before arbitration and free agency, increasing the minimum salary and adjusting the competitive balance tax penalties, are all possible bargaining chips, and each would likely lead to an increase in overall player compensation. However, they would all likely come at a negotiated cost and neither would address the underlying problem of declining competition.

A better approach for the MLBPA would be to advocate for penalties or incentives that are tied to on-field performance. For example, as Dale Murphy recently proposed, the draft could be ordered from the first team to miss the playoffs down. There may have been a time when rewarding the worst team with the best draft pick was appropriate, but it isn’t now. Other measures to consider include clawing back revenue sharing transfers from teams who fail to win a minimum number of games, and offering CBT rebates for payers who exceed a defined level of success. All of these measures would be minimally invasive and require no direct transfer of wealth to the players. However, they would only nudge the owners toward being more competitive.

In addition to the initiatives mentioned above, the MLBPA would wise to begin working on a more direct financial incentive system that at least matches current payroll-based penalties with win-based awards. This would not only force teams to consider winning games as a viable economic alternative to tanking, but increase the incentive for teams to aim beyond simply being “good enough”.  

How exactly would such a system work? The starting point would be establishing a pool of money into which each team would contribute. To account for market disparity, a tiered fee would be applied based on revenue ranking. The size of the pool would be up for negotiation, but it would have to fall between being large enough to provide a meaningful award, but not so prohibitive that it absorbed too much of a team’s cash flow. The chart below provides a hypothetical breakdown of such a scheme.

Competitive Excellence Award Funding Structure

With each team invested, an award structure would come next. Once again, a tiered system would be used, but this time based on the number of team wins. Again, the details would be subject to negotiation, but the general premise would be to award teams a percentage of the total pool based on relative win milestones. Not only would a team earn more money for winning more games, but the award would be exponentially larger based on how exclusive the win total turned out to be. Again, the model below illustrates a hypothetical payout structure.

Competitive Excellence Award Payout Structure with 2018 Hypothetical

Without asking the owners to divert a dime of revenue from their coffers to the players’ pockets, the MLBPA could reinvigorate the competitive landscape, which, by extension, would increase demand for their services. After all, when owners are actually trying to win games, it always benefits the players, who are the primary means of achieving that goal. What’s more, because the players would not be asking for a concession, they may not need to make any in return. With owner pitted against owner, including large versus small, negotiating for these changes should be met with fewer obstacles. Think of it this way. Would the Rays, who earned an operating profit of $30 million in 2017, according to Forbes, be willing to force a strike to avoid a system that, in 2018, would have netted them an award of over $5 million? And how about the Brewers? The system outlined above would have netted them an addition $17 million from last season. Do you think Mark Anastacio would be willing to see a work stoppage over the possibility that his team would profit greatly from winning games?

Granted, it is possible that owners might resist an incentive system out of suspicion of each other. Smaller markets might be happy to let sleeping dogs like the Yankees and Dodgers lie on their cash stockpiles, but that’s where skilled negotiation will come into play. The MLBPA will need to convince enough owners that their best interests will be served in the long run by emphasizing competitive excellence (not artificial competitive balance), and for those who hold out, the union simply needs to make clear that the damage of a work stoppage would be far greater than an incentive system that would shift around less than 5% of league revenue.

The owners are no longer their own worst enemy when it comes to signing players, but their lack of competitive drive has become an enemy of the game. That, more than anything, should concern the players. Instead of obsessing over minor adjustments to the free agent and CBT systems, which might slowly shift the pendulum back in their favor, the MLBA should be focused on a more dynamic approach that restores the incentive for excellence. The next CBA will provide the perfect opportunity to bring about this change, but the players will have to trust the free market once again.  More than just labor peace is at stake. Hopefully, at least one side is looking at the bigger picture.