Baseball Competitiveness and the Free Agency Era

Major League Baseball owners have fired the first shot over the bow in their perpetual war with the players association concerning the financial health of the sport and the need for financial reforms that might slow down the growth of player salaries. The owners' salvo comes wrapped in a Blue Ribbon Commission Report that is clearly an owners' document, as the commissioner's office authorized the study and no labor representative was invited to be part of the commission. ¹ For baseball fans fearing a repeat of the shutdown of the sport that occurred in 1994 and into the 1995 season, there is reason for both optimism and pessimism. The optimism rests with the fact that the owners have apparently recognized that the implementation of a salary cap is not a realistic possibility; the commission notably refrained from recommending such a cap as a solution to what it sees as the growing financial crisis affecting the sport, in recognition of the power and resilience of the players association in opposing such a cap and in the belief that other remedies short of the cap can combat the financial inequities identified by the commission.

The pessimistic side is that the commission, and many of the baseball owners, contend that there is a serious crisis of competitiveness in baseball that requires controversial reforms, including a luxury tax of 50 percent on all team payrolls exceeding $84 million. ² The commission argues that such a tax—along with a series of other measures, including wider distribution of radio and TV revenue—is necessary to overcome the substantial disparities of revenue that make it increasingly difficult for all but a handful of teams to compete. The players association has stated publicly that it sees such a high luxury tax as representing a drag on players' salaries and therefore unacceptable as a concession in bargaining negotiations. ³

The rival positions of the owners and players have their roots in two separate but interrelated issues. First, each side reaches opposite conclusions regarding the financial health of the sport as measured by the financial stability and profitability of franchises. Second, the owners and players disagree about whether or not the sport faces a crisis of competitiveness that relegates all but the richest franchises to having no hope of competing for the playoffs. The commission uses financial data to bolster the owners' position that most franchises have been facing a serious financial crisis since the last work stoppage of 1994, even claiming that only three franchises have made money since that time. The players association, along with other critics of the Blue Ribbon Report, counter that the commission exaggerates the financial losses by not including a variety of sources of revenue and tax deductions available to Major League teams, such as merchandising revenue, licensing agreements, and generous federal and state tax deductions, which allow a club to write off significant expenditures. ⁴

At this point, we simply don't have the data to confirm the reliability of the commission's claims of financial losses, but it's worth noting that business publications such as Financial Weekand Forbeshave used information available to reach conclusions very different from the Blue Ribbon Commission's. According to these publications, most Major League franchises have been making money, and the values of franchises have continued to rise across the board, as demonstrated by the escalating sale prices of Major League franchises. ⁵

Financial Inequality and Competitiveness

The competitiveness issue is perhaps even more important to this debate because, if the owners are correct, only a narrow range of teams can hope to compete in today's financial environment, relegating most fans to having no hope that their teams can reach the postseason even before the season starts. Just how true are the commission's and owners' claims? First, the commission is correct...