Sharing is Caring–Except When it’s a Monopoly (Part 3 of 4)

How did sports owners convince the players’ unions and the American public to accept the salary cap? You’d think the Republicans would hate it for going against free market principles, the Democrats would hate it for it giving breaks to big business, and everybody would hate it for abusing monopolistic power. By operating in plain sight and even making the cap a spectator sport, the sports owners are pulling off a serious Houdini act here.

The sports of football, basketball, and hockey should be ashamed that their players’ unions agreed to a salary cap. Only the baseball players union was able to prevent a salary cap. Baseball, though, does have a luxury tax system that financially penalizes teams that go above a payroll of $189 million. This luxury tax system does provide an incentive to limit player salaries, but it also gives baseball teams more flexibility to spend big on players if they so choose. This is why the Dodgers have about a $300 million payroll this year, and why they are able to eat so many of their mistakes and actually pay $87.5 million in salary this year to players not even on their roster anymore.

So what is the rationale for the salary cap? A salary cap, the argument goes, evens the playing field so a small market city like Pittsburgh, for example, can compete with the bright lights and big money of New York. But what about revenue sharing in sports? Doesn’t this shoot down this rationale for a salary cap?

That’s right, in a addition to a salary cap, these sports also have revenue sharing. Under revenue sharing, profits from sources such as TV deals and merchandise get distributed equally among all the teams. In the NFL, it is estimated that 61% of all revenue is shared among teams. Somewhere, Karl Marx and Vladimir Lenin are high-fiving at this sharing concept, although I’m not sure they would be ready for the rallying cry  “Big Business Owners of the World, Unite…to Maximize Your Bank Account!”

Revenue sharing is a sign that the team owners realized that they are all part of the same corporation, and that there are benefits to working together and sharing. In revenue sharing, the owners are coming together to strategically share resources and for the good of their businesses. In the salary cap, owners are coming together to fix player salaries below market value and prevent bidding wars among themselves. Both revenue sharing and the salary cap create an economic ecosystem within sports. Revenue sharing is actually a good solution to solving the big market vs. small market dilemma, but it’s just mind boggling that owners have gotten away with such a self-serving policy as putting a cap on salaries.

But even revenue sharing can be abused. Believe it or not, revenue sharing can be a disincentive for teams to spend money on players, turning a team with no chance to win–into a win(dfall). Case in point: the Pirates in 2008, who used their revenue sharing income and their total team payroll of $34.9 million to lose all the way to the bank. Slate called it “The Pittsburgh Paradox“. The Pirates had the lowest opening day payroll and ended up with a horrible record, but as the Associated Press reported, “losing was very profitable”. The Pirates gained about half of their total revenue through revenue sharing, so skimping on player payroll and not fielding a competitive team did not appear to affect their profit margin, and could have even improved it.

Deadspin published some of the actual baseball business statements from this time period, and called them “the financial documents baseball does not want you to see“. There are a lot of documents here from six privately held teams: The Pirates, Rays, Marlins, Angles, Mariners, and Rangers. There is some crazy info in these documents! For example, the Rays spent $11 million more on salaries in 2008 than in 2007, and in 2008 they had their best year ever and went to their first World Series. However, from all this on field success in 2008, they actually made $9 million less than the year before!

Perhaps this whole business ecosystem thing being created is not conducive to the purpose of professional sports, which I thought was to compete and win games.

It appears that sports is spending a lot of time in the lab trying to create this ideal business ecosystem, which ironically has the purpose to minimize off the field business competition as much as possible. It’s like they are combining certain parts of capitalism and socialism. But there is a lot of risk from this, including the crony capitalism monopoly of the salary cap, as well as the disincentive-to-win socialist outcome. Possible outcomes from this could be players strikes or more teams like the 2008 Pirates… the 2015 A’s. Would teams still be so willing to sacrifice a few years of winning to build for the future if they were not still assured of profiting while losing?

Can you imagine if the top software companies got together and limited worker salaries, kept the profits themselves, and shared some of their revenues with each other for “the common good”. Some might call this the Federal Government. Others might call it a sci fi futuristic dystopian system. Whatever you want to call it, this is the business climate of sports today.

Something is wrong here. If a team has to rely on the salary cap and revenue sharing to survive, it’s time for that sports owner to stop being a sports owner.

Revenue sharing is a good idea to deal with the current wealth gaps between owners, although the system needs to be tweaked so that teams have an incentive to invest every year in putting the best possible team on the field. The salary cap, though, is inexcusable. The existence of revenue sharing should eliminate the need for a salary cap if the main goal is to help small market teams compete.

Next in the conclusion of this series: Is this ego system, err I mean ecosystem,  even needed at all?


One thought on “Sharing is Caring–Except When it’s a Monopoly (Part 3 of 4)

  1. I have to be honest here, Dan, I think you’re swaying me a bit. I hadn’t really considered the fact of revenue sharing as I thought this through initially. The ostensible point of the cap is fairness. But as you point out, isn’t that what rev sharing is supposed to be for?

    The obvious problem with the rev share method is, as you point out, the small market teams have little incentive to invest, because the ROI isn’t there.

    Complicated and interesting problem!

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