The MLB Hot Stove Season The Cost of Winning and Competitive Balance in MLB
ajor League Baseball’s “Hot Stove” season is heating up. Former three time National League MVP Albert Pujols recently signed a ten-year contract with the Los Angeles Angels of Anaheim, worth over $250 million. Even some of the league’s poorer teams have chosen to spend big this winter. The Miami Marlins committed nearly $200 million so far this off-season, signing shortstop and former National League batting champion Jose Reyes and pitchers Mark Buehrle and Heath Bell to free agent contracts. How can some teams afford to spend enormous amounts of money on star athletes, while others can only pay “scrubs” smaller salaries? And, more importantly, does the size of a team’s payroll really matter? Why are some team’s payrolls larger than others? Sports writers and league employees typically refer to baseball teams as belonging to one of two groups: big-market teams and small-market teams. Specifically, the “big-market” designation refers to those teams that play in the nation’s consolidated statistical metropolitan areas (CSMAs); “small-market” refers to teams that play in smaller CSMAs. In the league, the New York Yankees, New York Mets, Chicago White Sox, Chicago Cubs, and the Boston Red Sox are undoubtedly “big-market” teams. The Cincinnati Red, Kansas City Royals, and Milwaukee
Brewers are “small-market,” teams while the rest fall somewhere in the middle. While the size of the market refers only to the population of the respective city, it is also closely correlated, in most cases, to the amount of money that a team will spend on players. In general, teams in “big markets” attract more fans, allowing them to raise ticket prices. (This is a simple principle of economics. The larger the fan base, the greater the demand for tickets. Ticket supply is relatively constant; a stadium can only hold so many people. As a result, prices rise.) Larger ticket sales and higher ticket prices together increase a team’s revenue, allowing team owners to reinvest more money into their organization while still turning a profit. There are notable exceptions, however. Owners of big-market professional baseball teams may decide, for a number of reasons, to cut payroll and spend more like a middle-market or even smallmarket teams. For example, over the past few seasons, Fred Wilpon, the owner of the New York Mets, has lowered the team’s payroll by many millions of dollars amidst a Bernie Madoff lawsuit. On Opening Day of the 2009 MLB season, the Met’s total payroll was over $135 million—the second highest in the league. At the start of the upcoming 2012 MLB season, the club’s payroll is projected to be closer to $100 million. On the other hand, small mar-
PHOTO BY SIDEONECINCY ON FLICKR, WIKIMEDIA COMMONS
Former New York Met, José Reyes, signed a six-year $106 million deal with the Miami Marlins. The Florida Marlins ranked 24th in spending during the 2011 MLB season. 6
ket teams sometimes overspend, hoping that a higher payroll—and the signing of marquee talent—will attract a larger fan base. For example, the Miami Marlins—previously the Florida Marlins—play in one of the leagues smallest markets. (The team frequently struggles to draw fans and played a game in front of a dismal crowd of 347 this past August.) The Marlins, however, have rebranded them- PHOTO BY KEITH ALLISON, WIKIMEDIA COMMONS Mark Teixeira, first baseman for the New York selves this year. The Yankees, plays for the team with the highest team will be moving payroll in the league. to a new stadium for the 2012 season and The data is even more starrecently released images of its new tling when examining the payrolls uniforms. Considering the circum- of World Series winners. Of the stances, the Marlins’ owner, Jeffery ten World Series champions from Loria, has spent a large amount of 2001-2010, six ranked in the top money so far this offseason; the ten in end of the year payroll. The 2012 Miami Marlins’ payroll will remaining four teams all belonged be almost twice the team’s 2011 to the middle ten. payroll. The size of an organizaDespite the general trend, tion’s payroll is, in the end, com- there have been examples that defy pletely up to its owner. the common logic. Rich teams have Does a larger payroll crashed and burned; the New York really matter? Mets, for example, have accumuThere is a clear gap between lated a payroll of over $100 million the league’s richest and poor- each of the last few seasons, but est teams. At the beginning of the have not made the playoffs since 2011 season, the New York Yan- 2006. Last year, with a payroll of kees had the league’s highest pay- nearly $119 million, the Mets won roll; an astonishing $202,689,028. only seventy-seven games, and by Meanwhile, the league’s poorest the end of the season was barely team—the Kansas City Royals— competitive. Less commonly, poor had a payroll of only $36,126,000. teams have succeeded, playing (The New York Yankees highest over their heads and exceeding expaid athlete last season was Alex pectations. By example, in the early Rodriguez who earned $32 mil- 2000s, the Oakland Athletics, with lion, almost as much as the entire one of the lowest payrolls in the Kansas City Royal’s payroll.) game, ranked at or near the top of But does this payroll gap the league in total wins. really matter? Recently, CNBC’s MLB’s CBA sports business journalist (and Major League Baseball’s colNorthwestern alum) Darren Rovell lective bargaining agreement reported a study focusing on this (CBA) includes multiple condivery issue. During the period from tions that, when read together, 2001-2010, 61.5% of the league’s attempt to create competitive playoff teams were among the top balance. First, the league’s collec10 biggest spenders; 23.1% ranked tive bargaining agreement puts in 11th-20th in total end of the year place a system of revenue sharing. payroll and 15.4% were among Under the system, the league redisthe league’s poorest 10 teams. The tributes wealth away from richer evidence is clear: teams in the top teams towards poorer teams. Evthird in overall payroll have almost ery team is required to deposit a twice the chance of reaching the percentage of their local revenues playoffs than other teams. into a pot at the end of each season.