Importance of Market Size, Attendance and TV Revenue on Payroll by Craig Edwards March 4, 2015 The New York Yankees’ and Los Angeles Dodgers’ payrolls continue to dominate when it comes to paying players. Not coincidentally, those two teams have the best local television deals in Major League Baseball. On average, the two will receive more than $300 million annually over the course of their deals, per Forbes. As more teams cash in with big local television deals — the Arizona Diamondbacks are the latest — it’s becoming clear no team will receive anywhere near the haul the Dodgers and Yankees have enjoyed. How much those local deals impact payroll is less clear. The revenue from local television contracts is subject to revenue sharing, with one-third of the annual rights money going into the overall pool. The money produced from an ownership stake in a television network does not go into the revenue sharing pool. Local television deals are not the only source of revenue for teams. Teams are getting more and more money from national television deals. Smaller market teams are getting revenue sharing money from the bigger teams. Attendance at 81 home games brings in a great deal of revenue. Then, for that money to translate to payroll, there needs to be an ownership group willing to spend the money they receive. Payroll does not directly translate to wins, and there is evidence that overall, the correlation between payroll and wins is decreasing. However, the correlation between wins and Opening Day payroll last season (.28) is in line with the the four year average (.29). Looking at a number of different factors and comparing them to payroll can provide a better idea of the factors affecting spending. Using Opening Day payrolls from 2011-2015, 150 in total, payrolls are compared to a number of different factors. For the most part, the stadium boom over the last 20 years has died down, with most teams already owning new stadiums. A new stadium could boost revenue, but that effect dims quickly. Stadium age showed very little correlation to payroll. r=.22 The graph looks a little awkward with outliers on the far right. However, even removing the older stadiums in Boston, Chicago, and Los Angeles, the correlation was just as weak, but on the inverse side. A new stadium might provide an immediate boon, but the age of the facility across MLB did not appear to factor into payroll. Keeping a successful team together costs money, and sometimes a successful season can buoy ownership to spend more money to keep winning and reinvest in the team. Both the San Francisco Giants as well as the Royals saw payroll increases after World Series runs last year. On the other hand, disappointing teams like the Boston Red Sox and Chicago White Sox often choose to increase payroll as well preventing a strong correlation between wins in the prior year and Opening Day payroll. r=.41 The graph looks a lot better than stadium age, but is not as strong as other factors. Market size is likely a contributing factor to payroll. The bigger the market, the more inherent advantages a franchise has in selling tickets, attracting a wider television audience, and obtaining advertising revenue. There does appear to be a relationship between market size and payroll. r=.54 The graph is not the prettiest, with the big markets far down the axis, but there is a relationship between the two. The Mets are holding down payroll in the biggest market in the country while Mike Ilitch’s bid for World Series are outspending their market. Often associated with market size are the television contracts that come with them. r=.61 The massive deals that went into effect recently for the Dodgers and Yankees are way out on the graph. Big deals for the Phillies and Rangers are either just now beginning or will begin next year and are not yet represented. This chart represents the most estimations when it comes to the figures as many of the amounts are not public. The figures in the chart came mostly from this FanGraphs piece as well as supplemental information from Forbes. Every year Forbes attempts to place a value on each franchise. According to the introduction, Forbes team values are enterprise values (debt plus equity) and include completed television deals that begin in the future, but exclude the equity interests in other assets the team may own, such as regional sports networks or concession businesses. Revenues and operating income figures include all revenue and expenses for each team and its stadium where applicable. The figures from Forbes line up fairly well with payroll over the last five years. r=.78 The high correlation makes a good deal of sense as the Forbes valuations generally indicate the health of the franchise as a whole which should reflect the amount a team can spend on payroll. As much information as Forbes takes into account (and recognizing they are not trying to predict payroll), attendance showed close to the same correlation. r=.77 Despite television deals that continue to skyrocket and large markets receiving contracts that smaller markets could never hope for, revenue is still made by putting butts in the seats. There are many different reasons for high attendance. The stadium situation in Oakland and Tampa makes going to a game less desirable. Large markets still retain an advantage in attracting and retaining fans, and many of those advantages can translate to higher attendance and a greater payroll. Teams in smaller markets like Milwaukee and St. Louis have kept payroll high as fans kept coming to the ballpark. Detroit has seen high payrolls with ownership’s desire for a championship, but the team has also seen very high attendance numbers. Even in Pittsburgh, more money has been spent as fans increased in numbers to see a competitive team. Market size matters. Television deals matter. The overall financial profile of the franchise matters, but baseball is a regional game and the fans at home still have a big impact on the bottom line.