The Extra 2% (31 page)

Matt Silverman sat on a stage with four of the brightest minds in sports management at the 2010 MIT-Sloan Sports Analytics Conference. The “Next-Generation Sports Management and Ownership” panel was just getting started, and a large crowd was eager to hear what the Rays’ young team president and his dais mates would say. But Silverman kept shifting in his seat, looking uncomfortable. Suddenly, he stood up, grabbed a Red Sox jersey hanging right behind him, and set it on the ground.

“They’re always looming,” he quipped, bringing the house down. Silverman had good reason to feel like the Red Sox and the Yankees were always looking over his shoulder. In 2008, the Red Sox played with a budget three times bigger than Tampa Bay’s; the Yankees’ payroll was nearly five times larger. The revenue streams in Boston and New York demolished anything the Rays could ever hope to achieve, even if Tampa Bay were to build five new stadiums and thousand-dollar bills rained daily from the Florida sky. The Rays don’t hold any exclusive rights on brains either; the Red Sox
and Yankees are stocked with savvy baseball people at all levels of their organizations.

“When Theo Epstein took over in Boston, he changed the industry,” said Indians president and former GM Mark Shapiro. “Now we see the Red Sox and Yankees operating as if they’re creative mid- to small-market teams, and it’s widened the gap.”

Pitted against two teams with realistic championship aspirations every year, the Rays, Blue Jays, and Orioles face a bigger challenge than any other clubs in major North American team sports. Sky Andrecheck, a writer for the sabermetric site Baseball Analysts as well as for
SI.com
, broke down all thirty teams based on a combination of factors, including market size and owners’ willingness to spend. In his exercise, he had all thirty teams start from scratch with none of their current players on the roster, while also stripping out the quality of existing front offices and other related factors. With their massive resources and a Steinbrenner family that’s readily opened its wallet for four decades, the start-from-scratch Yankees made the playoffs nearly six times out of ten in Andrecheck’s simulation. The Rays, playing against the two behemoths in New York and Boston, with a much smaller home market than Toronto and weaker revenue streams and a thriftier owner than those found in Baltimore, were the least likely team to make the playoffs. According to Andrecheck’s model, in any given year the theoretical Rays owned just a 7% chance of cracking the postseason.

The massive competitive advantages that the Yankees possess are exactly what makes it so tough for the Rays to compete and win. Running up a payroll that’s multiple times bigger than Tampa Bay’s is merely a symptom of the chasm between the Yankees and everyone else.
Forbes
’s annual report “The Business of Baseball” looks at the franchise value, revenue, and operating income of every MLB team. Its 2010 report (encompassing the 2009 season) showed the Bombers pulling in $441 million in revenue; the Mets were number two at $268 million, and the Rays ranked twenty-sixth at $156 million. The Yankees also topped the list for franchise value at
$1.6 billion;
the Red Sox were second at $870 million, the Rays twenty-eighth at $316 million. Two teams, same division, one team banks nearly three times the revenue, with a business that’s worth five times as much as the other.

Before anyone plays a single game, the Yankees already own a gigantic advantage over everyone else, playing in the biggest market, with the brightest brand name. With more than 19 million people living in the metro area, their customer base is much larger, making it easier to pack the stadium. Greater demand means higher ticket prices. The new Yankee Stadium, opened in 2009, heightened demand and prices even more. The Yanks banked $319 million in gate receipts alone in 2009, more than double the Rays’ total revenue from all sources that year.

The Yankees’ revenue stream would blow the Rays away even if Jeter, A-Rod, and company played their home games in a garbage dump on Staten Island—thanks to the Yankees Entertainment and Sports Network. For the first century or so of baseball history, teams collected almost all their revenue from ticket sales, concessions, and related items. Although the growth of baseball on the TBS and WGN superstations introduced new revenue streams, most teams remained stuck with limited moneymaking opportunities. The Yankees breezed through a string of cable deals, searching for the right regional sports network (RSN) opportunity. Three years after the Yankees and the NBA’s New Jersey Nets formed a joint venture (brilliantly called YankeeNets), the two teams co-launched the YES Network in 2002. Three years later, YES became the most-watched RSN in the country. The hugely successful New England Sports Network (NESN) has similarly given a big boost to the Red Sox’s top and bottom lines, as well as the total franchise value. No team nabbed higher local television ratings than the Red Sox in 2009.

Exactly how much the two teams reap from their RSNs every year is unclear. YES paid the Yankees an $84 million rights fee in 2009. The partnership yielded more than $100 million in dividend checks too. But the Yanks probably make a lot more than those reported numbers. They’re not technically the owners of YES; the
Yankees’ parent company, Yankee Global Enterprises, owns that stake. The Yankees wouldn’t be the first sports franchise, or the last, to play a revenue shell game and dramatically underreport their take.

“RSNs are what gave rise to all the imbalance in the first place,” said New York Mets GM Sandy Alderson. Before Billy Beane took the helm for the A’s, Alderson ran that franchise on a tight budget, dreaming up innovative ways to keep pace with far richer opponents. In 1990, the A’s owned the third-highest payroll in MLB, at a shade under $23 million, trailing the Red Sox and … the Kansas City Royals. “That was the inflection point, that’s when the disparity among payrolls began to escalate.” As the gap widened, some small-market clubs started deficit spending. For most of those teams, the strategy didn’t work. “So they said, ‘We’re just not going to throw this money away anymore to stay with teams that have more revenue.’ ”

MLB took steps to curb the disparity between richer and poorer clubs. The league implemented more aggressive revenue-sharing, as well as a luxury tax, to try to prevent the Yankees—and to a lesser extent the Red Sox and their ilk—from steamrolling the competition. Rod Fort, professor of sport management at the University of Michigan, breaks down baseball’s sharing efforts into three eras. Until 1995, all MLB did was share gate revenue, with 80% going to the home team, 20% to the visitor. From 1996 to 2001, baseball introduced pooled revenue-sharing, consisting of straight and fixed pools. As Shawn Hoffman, a
Baseball Prospectus
writer who became a Rays consultant, explained, straight pool funds are collected by taxing each team’s net local revenue (total local revenue minus stadium expenses) at a rate of 31%. For the fixed pool, MLB takes a portion of its national revenue and distributes it unevenly among all thirty teams, with small-market teams getting more and large-market teams getting less. In 2002, the league added the competitive balance tax (luxury tax) and also wrapped in fresh revenue streams, including new media.

In 2009, the Yankees paid
out
well over $100 million in revenue-sharing;
the Rays took
in
about $30 million. The thirty teams then split up a much larger pool of revenue stemming from national TV, MLB Advanced Media, and other sources, with a disproportionate amount going to smaller-revenue clubs. The Yankees have also paid the vast majority of luxury tax penalties, doling out just under $26 million in 2009 and $174 million of the tax’s $190 million total from ’03 to ’09. By some estimates, the Rays received roughly $70 million to $80 million in 2009 without lifting a finger, while the Yankees shelled out well into nine figures.

Even these seemingly large redistributions of funds barely make a dent. The
Forbes
numbers that had the Yankees banking nearly three times as much revenue as the Rays in ’09? Those figures already included revenue-sharing—and didn’t account for, say, the possibility of a massive YES Network IPO. “There’s no way revenue-sharing has improved balance—in the AL, the gap has only gotten bigger,” said Fort. “We ask ourselves why. The answer is obvious: it wears pinstripes and stares us in the face every day. Yankees revenues just lap the field. Sharing isn’t stopping that. The luxury tax may have just saved us from seeing how bad it could have gotten.”

Another reason revenue-sharing isn’t helping as much as it should, or could: poorer teams benefit less from revenue-sharing when they start winning more games. For a team like the Rays, this creates a tricky situation: win more games—as they have since 2008—and you get less money from the league. On the flip side, going from one of baseball’s worst teams to one of its best should theoretically fuel a giant leap in revenue. But Tampa Bay’s poorly located, aging stadium, combined with a litany of other factors, has prevented the Rays from realizing the kind of attendance gains they might have expected. After a huge jump in 2008, turnstile counts edged slightly higher in 2009, then fell slightly in 2010. Thus, the Rays will be severely challenged as they try to sustain their success. An overhaul in revenue-sharing that accounts for differences in market size but also incentivizes on-field success would be a welcome addition to baseball’s next collective bargaining agreement.

That step aside, the best solution to the revenue disparity problem, said Fort and other experts, is to eat into advantages in market size. Add three more teams in and around New York—say, one in Brooklyn, one in New Jersey, and one in Connecticut—and you’d get closer to leveling the playing field. Add another team or two in New England and one in metro L.A. while you’re at it. Practical solutions, in theory. In practice, the thirty teams maintain a delicate balance of competition among themselves and profit-seeking. If the commissioner took aggressive steps to knock down the competitive advantages of richer teams, he’d also nullify the entrepreneurial efforts those teams make to dramatically grow the value of their franchises. The whole thing would dissolve into a decade of lawyers billing enough hours to own a fleet of private jets.

Without such checks, though, the Yankees and Red Sox wield huge advantages over the Rays, Jays, and Orioles. The Rays would need to sell off nearly half their roster just to pay Alex Rodriguez’s 2010 salary of $32 million—let alone the rest of his ten-year, $275 million deal. Stronger rosters in turn attract higher-caliber free-agent talent. When Marco Scutaro and Adrian Beltre hit the open market after the 2009 season, the A’s offered three-year contracts to both. Scutaro and Beltre passed, signing less lucrative two- and one-year deals, respectively, with the Red Sox and giving themselves a better chance to compete for a World Series.

The Yanks and Sox have also figured out more subtle ways to exploit their big financial advantages. They can take sizable risks and easily write them off if they fail. The Yankees looked past Carl Pavano’s history of injuries when they inked him to a four-year, $40 million contract after the 2004 season. Pavano made just 26 starts and won just 9 games during that span. New York made the playoffs in three of those four years anyway. In 2009, the Red Sox handed a combined $10.5 million to John Smoltz and Brad Penny, gambling on two pitchers with major age and injury concerns, respectively. Neither one panned out, Boston released both in August, and the Sox still sashayed into the postseason.

Even more nefarious has been the muscle both teams flex in the
amateur draft. The draft was originally designed as a mechanism to save the owners money—with the side benefit of giving the worst teams first crack at the best high school and college players. But as the cost of signing top amateur talent has soared, many smaller-revenue teams have balked at paying big signing bonuses. The threat of reprimand from the Commissioner’s Office has heightened weaker teams’ reluctance to pay big bucks for the best of the bunch. The Yankees and Red Sox have taken full advantage, nabbing elite prospects twenty-five picks or more into the draft and paying them massively over recommended “slot value.” Along the same lines, richer teams have also started going hard after top international prospects. The one area of the game that was supposed to be the great equalizer for the have-nots—drafting, signing, and developing your own talent to avoid paying megabucks in free agency—has become just another chance for the Yanks and Sox to push the little guys around.

“The draft and international market are no longer dispersing talent equally like they were intended to do,” said A’s assistant GM David Forst. “There are teams that budget two to three times as much as we do in the draft. How does that help, when they have the ability to spend so much more than we can?” There’s more. MLB and the Elias Sports Bureau devised a rule that assigns values to various free-agents-to-be, such that teams that can’t afford to retain their walk-year players can collect high draft picks as compensation. Unintended consequences abounded. Poorer teams have begun trading away players approaching free agency, usually to contenders. That shift allows rich teams like the Yankees and Red Sox to add even more premium young talent through the draft. They can then develop those players into potential stars or trade them for high-priced veterans. The strong get stronger, the weak get weaker. “All of this exponentially exacerbates the problem,” Forst lamented.