The Problem with Baseball’s Participation Trophy

This is the title of my latest at the Huffington Post, a column that discusses the recent revelation that the Pittsburgh Pirates – a team that has been a loser for 18 consecutive years – is still earning a profit.

Alan Robinson – of the Associated Press – contacted me about this story a few days ago.  From what I understand, someone who works in baseball leaked the Pirates’ financial documents to Robinson.  One can speculate that this person was unhappy that a team that spent little on its players — and failed to win on the field — was taking some of the money baseball shared with the team and keeping it in the form of profits.  And as I noted in my column, because the Pirates can earn a profit without being successful on the field, there is a problem with incentives in Major League Baseball.

Beyond that point, I wanted to offer a few more thoughts on this story.

  • In the story I noted that the Pirates are taking baseball’s revenue sharing and keeping it as profits.  There is another way of looking at the money MLB is giving the Pirates.  In 2007 and 2008 the Pirates spent nearly $102 million on player salaries and another 44.4 million on player development.  Put all these figures together and we see that the Pirates – across these two seasons – received enough money from MLB (as the article notes, the team received about $133 million) to cover all but $12.7 million of their player costs.   So although the Pirates do relatively poorly at the gate – not surprising for a team that loses year after year – the Pirates are still able to turn a profit because the other teams are picking up most of their player expenses. 
  • Why are the other teams willing to give the Pirates money?  The issue is competitive balance.  Teams probably believe that it would be easier to sell tickets when the Pirates came to town if the Pirates were a better team.  Certainly the Pirates – because they are very bad – are not quite as good a draw as the Phillies. When other teams see the Pirates keep part of the money – rather than spend it on players – it must make them wonder why the money is being given to Pittsburgh in the first place.
  • When we think about this reported profit we also have to keep in mind baseball’s accounting history.  In Pay Dirt – a book by James Quirk and Rodney Fort – the authors note that NFL owners were found to be paying themselves a salary.  In other words, rather than report a profit, they took a salary and inflated their costs.  And NFL teams are not the only teams that play with their cost data.  In Baseball and Billions, Andrew Zimbalist offers the following quote from Paul Beeston (a former executive with the Blue Jays): “Anyone who quotes profits of a baseball club is missing the point.  Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and get every national accounting firm to agree with me.”  All of this means we have to be cautious in looking at profit data from teams. Teams have an incentive to minimize how much profit they are making (after all, they want to tell players in negotiations that it is hard to make money in sports).  So we expect – as Quirk and Fort note – that profit data provided by teams probably doesn’t over-estimate how much money they are making.
  • We should also note that historically, baseball teams have argued that they are losing money.  Back in 2000, baseball’s Blue Ribbon Panel argued that from 1995 to 1999, only three teams – the Cleveland, Colorado, and New York – were making a profit.  Clearly baseball can’t make this claim any more.
  • Making money from a losing team is not restricted to baseball.  Joe Lacob – the new owner of the Golden State Warriors – was asked if he expected to make money as owner of the Warriors.  Here is his response to that question: This is an incredible business opportunity. Turning this into a winner No. 1 and running this business better in certain ways… Look, sports franchises appreciate 10% a year on average over three decades, the last three decades. There’s no reason to think this won’t appreciate in value. So that is the least of my worries. We will make money on this team in appreciation of value. The Warriors are similar to the Pittsburgh Pirates.  But despite buying a team that hasn’t won, Lacob still expects to make money with this team.  And note, he didn’t say “well, if we win we can be successful.” No, he is saying that making money is almost guaranteed (he also comments on statistical analysis and notes that rebounding guards are valuable, a point we might come back to in a future post).
  • One last note on this story. It appears that baseball – and the other major professional sports leagues – want to have a system where profits can be made even if a team makes poor decisions.  With that thought in mind, I encourage everyone to read a comment Henry Abbott offered on an interview Michael Heisley – owner of the Memphis Grizzlies – recently gave.  In this interview Heisley revealed that his knowledge of the NBA was not quite as extensive as one might expect.  Certainly there were basic things about the NBA he has not always known.  As Abbott notes, people tend to think the owners know their business.  But as Heisley demonstrated, this is not always the case.   What sports leagues seem to want, though, is a system where even if you don’t really understand your business, you can still make a profit.

- DJ

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