May the Best Team Win Baseball Economics and Public Policy

by Zimbalist, Andrew

• ISBN13: 9780815797289
• ISBN10: 0815797281
• Format: Hardcover
• Copyright: 2003-03-03
• Publisher: Brookings Institution Press

Summary

The business of baseball stands in sharp contrast to the game's wholesome image as America's favorite pastime. Major league baseball is a deeply troubled industry, facing chronic problems that threaten its future: persistent labor tensions, competitive dominance by high-revenue teams, migration of game telecasts to cable, and escalating ticket prices. Amid the threat of contraction, existing franchises are demanding public subsidies for new stadiums, while viable host cities are begging for teams. The game's core base of fans is aging, and MLB is doing precious little to attract a younger audience. According to Andrew Zimbalist, these problems have a common cause: monopoly. Since 1922 MLB has benefited from a presumed exemption from the nation's antitrust laws. It is the only top-level professional baseball league in the country, and each of its teams is assigned an exclusive territory. Monopolies have market power, which they use to derive higher returns, misallocate resources, and take advantage of consumers. Major league baseball is no exception.In May the Best Team Win, Zimbalist provides a critical analysis of the baseball industry, focusing on the abuses and inefficiencies that have plagued the game since the 1990s, when franchise owners appointed their colleague Bud Selig as MLB's "independent" commissioner. Run by a shrinking and self-selecting group of owners subject to no oversight, MLB suffers from a lack of competitive pressure. Several large franchises are owned by media companies that have shackled their teams to lucrative broadcast and cable contracts --often making it impossible for fans to see games on television. Others own entities that do business with the teams, charging inflated prices for facility management, concessions, and catering. Complex intracompany transactions can reduce franchise revenues substantially, causing operating losses for teams while the owners still make millions. Zimbalist estimates that tens of millions of dollars are sheltered from MLB revenue each year --more than enough to eliminate the operating losses that led Selig to claim contraction and other radical remedies as fiscal necessities.Zimbalist believes that many of baseball's problems would be effectively addressed by removing the industry's presumed antitrust exemption. He urges reconsideration of baseball's antitrust status, encouraging legislation to force monopoly cable providers to de-bundle their services, along with private initiatives to cultivate the game's fan base, such as offering special ticket prices for families, allowing fans on the field after games, and involving players more in community events. Zimbalist also provides MLB with guidelines to reconstruct the incentive system underlying its revenue sharing policies.Zimbalist believes that consumers need an industry that is subject to judicial checks and competitive pressures. Only then will baseball fans be able to put the traumas of the 1990s and early 2000s behind them and utter freely the simple and enduring exhortation: May the best team win!

Author Biography

Andrew Zimbalist is Robert A. Woods Professor of Economics at Smith College.

Table of Contents

Foreword	ix
Bob Costas
Preface	xiii
Introduction: Cause for Concern	1	(14)
Baseball's Presumed Antitrust Exemption	15	(20)
Competitive Balance: Leveling the Playing Field	35	(20)
Profitability	55	(20)
Collective Bargaining	75	(48)
The Stadium Issue	123	(12)
What Is to Be Done?	135	(26)
Notes	161	(30)
Index	191

Excerpts

Introduction: Cause for Concern

Many would say that the baseball industry had much to celebrate on November 6, 2001. The most scintillating World Series in recent memory, between the Arizona Diamondbacks and the New York Yankees, was decided in the bottom of the ninth of game seven. There had been no work stoppages for six-and-a-half years, the longest stretch in thirty years. Industry revenues in 2001 were 2.57 times greater than they were in 1995. Total attendance was at an all-time high. Major League Baseball (MLB) was in the midst of rich, long-term national television contracts, with Fox through 2006 for $2.5 billion and with ESPN through 2005 for $851 million. A new group of well-educated, business-proficient, and talented owners and executives were bringing intelligent and effective management strategies to many franchises. The industry could be proud of its patriotic sentiments, rituals, and contributions following the events of September 11, 2001.

Yet much was not right in the baseball world. Commissioner Allan "Bud" Selig went before Congress and once again pleaded poverty for his industry. MLB called for the contraction (elimination) of two teams, seeking to become the first major team sport league in the United States to reduce the number of its franchises. MLB's collective bargaining agreement with the players expired in early November 2001, and formal, substantive discussions for a new agreement did not commence until January 2002. After years of public good behavior, sniping between the commissioner's office and the Major League Baseball Players Association reemerged. (Public sniping among the owners was effectively curtailed when the commissioner imposed a gag order with a possible fine of $1 million for violating it.)

As 2002 proceeded, MLB was confronted with one new challenge after another. The Massachusetts attorney general accused the commissioner's office of rigging the sale of the Boston Red Sox and commenced an investigation. In the spring, the two co-owners of the New York Mets could not settle on a price for which one would sell the other his ownership share. Several court actions were filed, with Nelson Doubleday filing a counterclaim on August 5, alleging that his partner, Fred Wilpon, had conspired with the commissioner's office to generate an "outrageously low" assessed value for the team. In July the former minority partners of the Montreal Expos (who had unwittingly become the minority partners of the Florida Marlins), representing several of the leading corporations in Canada, filed a RICO (racketeering) suit against the commissioner's office and Jeffrey Loria (owner of the Florida Marlins).

Left to its own devices, baseball again seemed to be mismanaging its affairs. Since 1922, MLB has benefited from a presumed exemption from the nation's antitrust laws. It is an unregulated, legal monopoly.

Until 1992 the industry claimed that its "independent" commissioner would make sure that baseball did not abuse its market power and privilege. There is scant evidence that the commissioner ever consistently behaved independent of the owners' wishes, but whatever illusion of independence there may have been until Bud Selig, owner of the Milwaukee Brewers, was appointed acting commissioner in 1992 and then full commissioner in 1998 was now shattered.

Capitalism draws its strength from the competitive process, a process that MLB has been largely insulated from at least since the 1922 Federal Baseball Supreme Court decision. Absent competitive pressures, arrogance, laxity, and inefficiency are bred.

In exploring the changing economics of our national pastime, this book examines the abuses and inefficiencies in the baseball industry and how these problems are connected to MLB's monopoly status, its presumed exemption, and public policy. Three issues from 2002 illuminate the relevance of monopoly analysis and public policy to the functioning of the baseball industry: MLB's contraction plan; the January 2002 sale of the Red Sox for approximately $720 million; and the standoff between Cablevision and the YES (Yankee Entertainment and Sports) network over the cable-casting of New York Yankees games.

Antitrust and MLB's Proposed Contraction

Baseball commissioner Bud Selig calls himself a history buff. Maybe, then, it was to confirm the Hegelian dialectic that on November 6, 2001, just one day after the Diamondbacks completed their exhilarating dethronement of the Yankees, Selig announced that Major League Baseball would contract by two teams for the 2002 season. Some had harbored the unrealistic hope that the commissioner instead would announce his readiness to commence substantive collective bargaining, something the Players Association had been waiting for since at least the previous spring. The existing agreement expired at the end of the 2001 World Series.

The last work stoppage in baseball had ended the 1994 season with less than one-third of the season remaining. No World Series was played in that year for the first time in ninety years. The first eighteen games of the 1995 season were also lost. The impact on the business of baseball was devastating. Average game attendance fell precipitously, from 31,612 during the first part of 1994 to 25,021 during 1995. Many fans swore they would never return to a game where spoiled millionaires and greedy billionaires couldn't decide how to divide their fortunes.

Fortunately for baseball, Cal Ripken was in the process of breaking Lou Gehrig's consecutive-games record. After Ripken surpassed Gehrig, along came Mark McGwire and Sammy Sosa to hit more home runs than Babe Ruth and Roger Maris. Then along came Barry Bonds to break McGwire's newly set home-run record. Baseball picked up a few other tricks and rode the country's 1990s economic expansion and stadium construction boom back into the hearts of American sports fans.

Yet in 2002 both the owners and players knew that the game could ill afford another work stoppage. They could not count on another Ripken or Bonds to come along every two years. Under the circumstances, wouldn't it have made sense for Selig to start labor negotiations as early as possible?

For a while it seemed that he might. Back in early 1999, Selig had established a blue-ribbon panel to study the game's economics. He got an early start, but took a false step. Selig's panel was one-sided, containing only individuals representing ownership. The Players Association was not invited to participate. Many believed that it would have made sense to seek a common and balanced view of the game's economic problems in preparation for collective bargaining.

Selig's panel included pundits Paul Volcker, a former chair of the Federal Reserve; Richard Levin, an economist and president of Yale University; George Will, a columnist and minority-interest baseball owner; and George Mitchell, a former U.S. senator and soon-to-be high-paid consultant to the Boston Red Sox. They worked with abundant resources and staff. The panel studied the economics of baseball for fifteen months and produced its report in July 2000. The report called for additional revenue sharing, a luxury tax on high payrolls, and the internationalization of the amateur draft, among other things. It did not recommend contraction. Indeed, the report explicitly stated that if the panel's recommendations were implemented contraction would not be necessary. (Interestingly, the panel's plan closely resembled one proposed earlier in 2000 by Bob Costas in his book Fair Ball .)

But the escrowed owner of the Milwaukee Brewers and present commissioner put aside the recommendations of his experts and called for the elimination of two teams. One of the targeted teams was the Minnesota Twins. Some said that Selig had a conflict of interest. If the Twins were eliminated, the Brewers' television market would extend many hundreds of additional miles to the west. Selig attempted to refute such claims by telling Milwaukee Journal Sentinel reporter Don Walker that they were nonsense because St. Louis was closer to Minneapolis than Milwaukee was. The commissioner was off by over 275 miles.

Geographic gaffes aside, Selig wanted (or claimed he wanted) to reduce output in the baseball industry by two teams, or 6.7 percent. Since the 1994-95 work stoppage, baseball's revenues had grown at an average annual rate of 17 percent. Yet rather than first attempt to restructure the game to deal with its competitive imbalances-as recommended by Selig's handpicked experts-the baseball monopoly proposed a reduction in industry output in the face of rapidly growing demand. In a normal monopoly, such behavior would run afoul of our nation's antitrust laws. Whether it does so in baseball seems to depend on which judge you ask and what judicial circuit you are in. More on this in chapter two.

Like all monopolies, MLB is wont to limit output in order to raise the price of its product. In the case of proposed contraction, baseball would reduce the number of franchises and hope to raise franchise value. Meanwhile, the consumers in Minnesota, Montreal, greater Washington, D.C., Portland, Oregon, and elsewhere potentially get shafted. It was as if GM bought up Ford, Chrysler, and Toyota and announced it would cease to sell cars in Oregon unless the state built the company a new assembly plant with public funds.

Some say baseball should be able to do what it wants. After all, if McDonald's has a franchise that is underperforming, it shuts it down. Sure, but McDonald's participates in a competitive industry. If it decides there will be no McDonald's in the nation's capital, then it cedes the market to Burger King and Wendy's and consumers are still served. Further, if McDonald's had a nationwide revenue growth rate of 17 percent annually, as MLB had from 1995 through 2001, then even if it closed down a franchise in one location it would open up new franchises in other locations. And, McDonald's does not require cities to subsidize the construction of its golden arches with public funds. Nor does it benefit from free, extensive, daily coverage of its business in the local media.

Thus it was appropriate for the U.S. Senate and House Judiciary Committees to call hearings during the 2001-02 offseason to inquire into the proper scope of MLB's antitrust exemption. At the House hearings in December, Commissioner Selig argued that contraction was necessary because baseball was losing money and it would improve the game's competitive balance. Selig promised that MLB would reveal all about the industry's finances to the House. Instead, he provided a few pages summarizing the teams' profits and losses. He claimed the industry lost $519 million in 2001. I consider the validity of this claim in detail in chapter four; for now, suffice it to note that more than a few members of the Judiciary Committee were unconvinced that the commissioner was leveling with them.

Selig's other proposition, that contracting two teams would improve competitive balance, is statistically incontrovertible. Consider a ladder. Lop off the bottom two rungs and there will be less distance from the top to the bottom rung. Of course, one could also lop off the top two rungs and achieve the same effect. One question, however, is whether addition by subtraction is the most efficient way to promote competitive balance, and another is whether the resulting distance from the top to the bottom would be acceptable.

Another question is how the contraction would play out in practice. Think about the lowly Detroit Tigers, for instance, who play in a two-year-old facility (completed in 2000 and built with the aid of over $160 million in public funds). With sixty-six wins and ninety-six losses in 2001, the team was able to draw only 1.9 million fans to the ballpark. Attendance in 2002 fell to 1.5 million. As long as the Tampa Bay Devil Rays are in the league and team owner Vincent Naimoli continues to keep his twenty-five-man payroll below $33.1 million, the Tigers would have a good chance of improving their record by beating the lowly Devil Rays. In a postcontraction world without the Devil Rays, the Tigers will face, on average, tougher competition and, other things equal, have a still worse record. Their attendance and revenue likely will dwindle further.

Even if MLB were able to get away with it, it would make little business sense for baseball to contract. First, as the U.S. population and income grow and world transportation and communication systems bring us closer to our neighbors, the proper trajectory for the industry is growth, not stagnation or contraction.

Second, it is no secret that baseball remains considerably more popular in the over-fifty than in the under-twenty crowd. Yet MLB continues to follow policies that appear to disregard young fans, such as moving the World Series games to prime time; not opening the ballpark to fans until after the home team takes batting practice; reducing the number of discounted family days; and preventing fans from going on the field after the game. And MLB has failed to act affirmatively to redress other problems, such as the difficulty urban youth have finding space to play the game.

Little League participation is declining, even as the population grows. One good way to excite America's youth about baseball is to bring the game's stars to more of the nation's top cities. Let the ten-year-olds in Washington, D.C., Portland, Charlotte, Sacramento, and elsewhere see Barry Bonds, Pedro Martinez, and Randy Johnson play in person.

Third, expansion has made baseball more exciting by promoting record-breaking performances. Why, until 1998, were almost all of baseball's personal achievement records set between 1910 and 1930? Rogers Hornsby batted .424 in 1924, Hack Wilson knocked in 190 runs in 1930, Earl Webb whacked 67 doubles in 1931, Babe Ruth scored 177 runs in 1921, and Dutch Leonard had a 0.96 earned-run average (ERA) in 1914. Many believe that players in the good old days were better than today's players. Not so. Baseball stats are the product of competing forces and reveal little about the absolute quality of the players.

The reason has to do with relative degrees of talent compression. The distribution of baseball skills in the population follows a normal distribution (like a bell-shaped curve). For any given curve, the larger the number of people selected to play Major League Baseball, the greater will be the difference between the best and the worst players in the league. If the population grows and the number of baseball teams does not, then the proportion of the population playing will fall and the distribution of talent become more compressed. This is what happened in MLB between 1903 and 1960, when the population grew from 80 million to 181 million and the number of teams remained constant at sixteen.

Continues...

Excerpted from May the Best Team Win: Baseball Economics and Public Policy by Andrew S. Zimbalist Copyright © 2003 by Brookings Institution Press
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.