The almost certain, impending demotion of Kris Bryant to the minor leagues for the season’s first couple weeks has brought renewed focus on Major League Baseball’s service time rules. As most readers are by now well aware, by sending Bryant to the minors for the first two weeks of the season, the Cubs will ensure that he fails to earn a full year’s worth of major league service time in 2015, preventing Bryant from becoming a free agent until 2021, rather than after the 2020 season. While it thus makes sense from a business standpoint for the Cubs to send Bryant to the minors for a fortnight to preserve an extra year of his services down the road, the thought that baseball’s top prospect – and MLB’s spring training home run leader – could begin the season in Triple-A has nevertheless led to calls for the Major League Baseball Players Association to take a stand on the issue.
Last week, for instance, Ken Rosenthal wrote a column arguing that the MLBPA should file a grievance if Bryant is demoted. Although he recognized that the union would almost certainly lose such a grievance – since arbitrators generally defer to teams on decisions regarding a player’s major-league readiness – Rosenthal nevertheless believed it would show the owners that the MLBPA won’t be pushed around on the issue. Meanwhile, others have taken a somewhat more patient approach, urging the MLBPA to address service time manipulation in the next round of collective bargaining talks following the 2016 season.
However, while service time manipulation certainly needs to be dealt with, the MLBPA has a much more significant and pressing – but often overlooked – issue to address in the next round of CBA negotiations: the players’ plummeting share of overall MLB league revenues.
Since 1995, MLB’s overall league revenues have increased nearly 650%, going from around $1.4 billion to over $9 billion in 2014. During that same time period, though, MLB payrolls have only increased by around 378%, from roughly $925 million in 1995 to just under $3.5 billion last year.
At first glance, an increase of $2.5 billion in annual salary divided among roughly 1,200 players doesn’t sound that bad. We should all be so lucky. But as the following chart shows, viewed as a percentage of overall league revenues, players’ salaries have been decreasing at a rather startling rate. (Payroll data from Cot’s Contracts and USA Today; MLB league revenue data from The Biz of Baseball).
After peaking at a little more than 56% in 2002, today MLB player salaries account for less than 40% of league revenues, a decline of nearly 33% in just 12 years. As a result, player payroll today accounts for just over 38% of MLB’s total revenues, a figure that just ten years ago would have been unimaginably low.
If I’m an MLB player, reversing this trend is my number one priority heading into the 2016 CBA negotiations. Unlike service time manipulation – which realistically impacts at most a few dozen players each year – the players’ declining share of league revenues is an issue that affects the entire union membership, young and old, rich and (comparatively) poor alike. Unfortunately for the players, solving this problem will not be easy, and may very well require the MLBPA to reexamine some of its bedrock principles.
Since the dawn of the free agency era in 1976, the MLBPA has relied on a simple but – for the most part – insanely effective strategy. By staunchly opposing a salary cap, the union ensured that owners would remain free to spend as much as they wanted on player salaries. And because a sufficient number of owners have always been willing to sign players to reckless contracts – gains that trickle down to the entire union membership through the salary arbitration process – players’ salaries rose exponentially throughout the 1980s, 1990s and 2000s.
So what’s changed? Rather than any one thing in particular, the decline in the players’ share of MLB revenues appears to be the result of the confluence of a variety of different factors.
Perhaps first and foremost, MLB teams have simply gotten smarter and more efficient in recent years. Gone are the days when a substantial number of teams were willing to throw boatloads of cash at free agent players on the wrong side of 30. Today, teams are increasingly signing their cornerstone players to team-friendly extensions before they hit the free agent market, while at the same time relying to a greater extent on cheaper, cost-controlled players to replace the holes they do need to fill. As a result, although the cost of wins continues to climb, that price is rising more slowly than one might expect given the hundreds of millions of dollars in additional television revenue that have been flowing into the game in recent years (more on this below).
At the same time, other factors such as revenue sharing and the luxury tax have further reduced the incentive for teams to spend on payroll. The decline in the players’ share of league revenues directly correlates, for instance, with MLB’s fine-tuning of its revenue sharing formula in the 2002 CBA. Unlike the days before revenue sharing, when a team would keep every dollar of extra revenue it generated locally, today clubs share 31% of their local revenues with one another.
In economic terms, this means that revenue sharing has caused teams’ marginal revenue product – the expected additional revenue generated from each additional dollar spent on payroll – to drop. Or, in plain English, revenue sharing has predictably caused the larger market teams to become less willing to invest in their on-field product, since they now retain a smaller portion of any additional in-stadium revenues that they generate.
Add in the luxury tax – which requires teams to pay a penalty of as much as 50 cents for every dollar spent on player payroll over $189 million – and the large market teams that the MLBPA has historically relied on to help drive the free agent market have now become more financially prudent.
Of course, one might expect that even if revenue sharing has reduced the large market teams’ incentive to spend on payroll, this would mostly balance out with increased spending at the lower end of the payroll spectrum, as the additional revenue flowing to the smaller market clubs would presumably allow these teams to spend more on player salaries. Unfortunately for the players, this has not proven to be the case.
Indeed, MLB’s payroll disparity has not changed appreciably in the revenue-sharing era, meaning that the smaller market teams are still spending roughly as little compared to the large market teams as they did before revenue sharing. As a result, revenue sharing and the luxury tax have combined to reduce the incentive for the large market clubs to increase their payrolls, without offsetting these decreases through increased spending by the smaller market teams.
A third but somewhat surprising factor contributing to the players’ declining share of overall league revenues is the recent explosion in MLB’s television revenues. With the league’s television profits tripling in recent years, many have assumed that teams would, in turn, spend this extra revenue on player salaries. In reality, though, teams have little motivation to use their television windfall to increase payroll.
Unlike ticket sales – which generally rise as a team improves on the field – television revenue is fixed via long-term broadcasting agreements. So while franchises can increase their in-stadium profits to some degree by spending more on payroll – thereby improving the quality of their team – the same is generally not true for television revenue. As a result, teams have little incentive to spend any added broadcasting profits on payroll (because, in economic terms, the added television revenue has not adjusted the team’s marginal revenue product).
So even though MLB’s television revenues have increased substantially in recent years, relatively little of this extra money is flowing to the players. Instead, teams are largely pocketing these additional revenues as extra profits, raising the league’s overall revenue without a corresponding increase in player payroll. As a result, the new television money is actually lowering the players’ share of overall league revenue on a percentage basis.
Beyond these baseball-specific factors, the decline in the players’ share of MLB revenues also reflects a trend occurring throughout not only the professional sports industry, but society as a whole. Economy-wide, workers are receiving a declining percentage of corporate profits, with a handful of the few wealthiest individuals – the owners, in MLB’s case – accumulating an increasingly disproportionate share of revenues. This trend is clearly visible in the professional sports industry, as reflected in the chart below. (MLB data the same as above; NFL and NBA payroll data primarily compiled from USA Today; NFL and NBA league-wide revenue data from Statista.)
While player payroll accounted for over 50% of league revenues in all three sports back in 2001, today players in MLB, the NFL and the NBA are all receiving less than 43% of their respective league’s overall revenues. And, rather remarkably, MLB players went from receiving the highest share of overall league revenue in the three sports in 2003 to the lowest just ten years later.
So what can the MLBPA realistically do to reverse this trend? To some extent, the decline in the players’ share of revenues may be beyond the union’s control; the MLBPA can’t force teams to act less efficiently, for instance. And while the union could, theoretically, try to force MLB to reverse its course on revenue sharing and the luxury tax, those ships have likely already sailed (the MLBPA has agreed to some form of revenue sharing and luxury tax in each of the last four CBAs).
Because the salary caps in the other pro sports are generally fixed at a certain percentage of the league’s overall revenues, a salary cap could – rather counter-intuitively – help reverse the recent trend by allocating a higher share of league revenues to the players. However, because some teams will inevitably elect to spend less on player salaries than the maximum amount allowed under the cap, a salary cap alone is unlikely to guarantee players a consistent share of league revenues.
Rather than endorse a salary cap, then, the more attractive option for the MLBPA may be to seek a salary floor, establishing a minimum amount that each team must spend on player payroll each season. By tying the floor to the league’s expected overall revenues, the players would be able to ensure that they will receive a consistent percentage of MLB’s growing profits.
This option faces a couple of hurdles, though. First, the MLBPA has historically opposed a salary floor just as strenuously as it has fought against a salary cap. As the late MLBPA chief Michael Weiner explained in 2009, “Players historically have suspected that the request for a salary floor is a precursor to a request for a salary cap, and you know what the position of this union has been on salary caps.”
But even if the union were willing to reconsider this position and push for a guaranteed minimum share of league revenues in the next round of collective bargaining, there is no guarantee that the owners would agree. And even if the owners were amenable to such a proposal, there is no telling what concessions they would demand from the union in return. So, to the extent the MLBPA is able to address its plummeting share of league revenues via collective bargaining, the process could prove quite costly in other ways.
It is often said that the MLBPA is the strongest union in all of professional sports. In many respects, this is still true (it would be hard to imagine baseball players enduring the type of union dysfunction that professional football and basketball players have had to deal with in recent years). But based on the data above, in the most important respect – protecting the earning power of its members – the MLBPA is arguably performing worse than the unions in the NFL and NBA. Unfortunately for baseball players, reversing this trend may prove to be the most difficult challenge the union has faced in the free agency era.
Nathaniel Grow is an Associate Professor of Business Law and Ethics at Indiana University's Kelley School of Business. He is the author of Baseball on Trial: The Origin of Baseball's Antitrust Exemption, as well as a number of sports-related law review articles. You can follow him on Twitter @NathanielGrow. The views expressed are solely those of the author and do not express the views or opinions of Indiana University.