The Captain's Blog

The MLBPA is expected to consider a proposal by baseball owners that would begin the 2020 season in July, but there could be fireworks long before Opening Day. Although “who plays where” is the question on the minds of most fans, the players and owners seem more concerned about answering “who gets what”? So, before a pitch is thrown, both sides will need to settle a brewing financial dispute that could be the first salvo in next year’s collective bargaining war.

Hypothetical Model of MLB Revenue and Expenses (82 games played without fans)

Based on some back of the envelope math, MLB owners stand to lose about $1.6 billion if 82 games are played without fans in attendance, which would more than wipe out the cumulative operating profit earned by the league in 2019. In an effort to mitigate this financial burden, the owners have incorporated a revenue sharing plan into their proposal. According to reports, players would be guaranteed 50% of all revenue, including the post season, and each contract would be paid proportionally.  Needless to say, the initial response from the union has not been welcoming.

Using last year’s estimates from Forbes, and reapplying the same assumptions outlined above, a 50% revenue sharing agreement would effectively amount to a 41% pay cut for the players. Essentially, the plan would shift two-thirds of the owners’ projected loss to the players, allowing the teams to lower their operating loss to around $600 million. It would also allow the owners to benefit fully from slashing other expenses. In fact, by cutting all non-payroll expenses by 30% (some of which would come naturally as a result of not hosting fans and having limited travel), MLB teams could actually turn a profit if the players agreed to such a drastic reduction in their compensation.

Effective Payroll Reduction Due to 50/50 Revenue Sharing Arrangement and Potential Profit from Overall Reduction of Expenses

Another reason why the MLBPA would be well advised to avoid a revenue sharing arrangement is because of how difficult it would be to determine eligible revenue and make sure teams did not manipulate the process. For example, if team-owned RSN revenues were exempt (as they currently are under MLB’s revenue sharing program), clubs could effectively shelter income from the players by offering rebates on rights fees. Considering the lack of trust between the two parties, coming up with a verifiable and enforceable revenue sharing agreement doesn’t seem possible at all, much less on short notice.

So, does that mean the players should reject the owners’ request for a concession out of hand? Unfortunately, the situation requires a more practical response than a stand on principle. After all, if forced to choose between losing $1.6 billion and not playing the season, the owners might opt for the latter, in which case, the players would take a much bigger financial hit. Not only would they collective forfeit well over $2 billion in compensation, players would also irrecoverably lose a year of earnings potential. Meanwhile, the owners would limit their losses and likely recover any lost enterprise value somewhere down the road.

Clearly, teams are facing a real financial burden, so it makes sense for the MLBPA to consider offering a reasonable financial concession. One potential solution could be a deferral. Instead of forfeiting salary, players could help teams free up cash flow by deferring 30% of their salaries over a defined period. For example, 50% could be payable in 2021, followed by 25% in each of the next two years, with these latter amounts adjusted for inflation. This framework would ease the burden on teams during the crunch, while ensuring players would be made whole once the crisis subsided.

Another alternative would be a straight cut of a more modest amount, perhaps 10%, with a revenue-sharing based bonus pool. Under this set up, players would know their minimum salary before playing a game and also leave themselves the potential to earn more should the league generate higher than expected revenue. From the owners’ perspective, they would get a needed immediate reduction in expenses without the obligation of future remuneration.

Getting the owners and players on the same page will likely be difficult, but even if both sides eventually come to an agreement, MLB will still have more financial restructuring to do, and, the result could be a revenue sharing agreement among teams that sees money flow from small markets to higher revenue clubs.

The cause of this unorthodox imbalance stems from the disproportionate levels of local revenue earned by each team as well as the widely variable percentages of that amount derived from stadium sources. As a result of this disparity, which ranges from the Red Sox at 71% to the Marlins at 21%, as well as the large differences in team payrolls, five of the largest market teams would be in the red before even considering non-payroll expenses. To share the burden, it is likely that MLB will not only have to suspend its current revenue sharing scheme, but perhaps implement a new one that transfers money to perennial payors like the Red Sox, Giants and Cubs.

Even before the pandemic upended the sport, baseball was headed for a contentious round of collective bargaining, but now, with recriminations flying from all corners, the path to labor peace seems a lot more treacherous. In the coming days, as they grapple with how best to salvage the season, players and owners will take the first step on that road. If they can resolve their differences amicably, the goodwill created could pay long-term dividends. However, if the two sides remain at a stalemate, or begrudgingly come to an acrimonious compromise, shortened seasons could become the new normal for baseball.