(I Can't Get No)
Contraction Satisfaction

Matt Bruce

On Tuesday, by a 28-2 vote, baseball's owners did something that looks unbelievably stupid. In the world of baseball analysis, denial gave way to anger. Joe Sheehan's attack on our favorite used car salesman is exactly what I wish I had written, and leaves little more to be said. As in any travesty, however, there is more than one villain.

Consider the economics of the situation in basic terms. The owner of a baseball team spends money on salary, equipment, and advertising. That money is supposed to result in a stronger team. More to the point it is supposed to produce a team whose games the local fans want to watch and to convince those fans to spend money on the team.

One goal of owning a baseball team is to maximize profit. Since costs have a lower bound of zero, the most important factor is the upper bound, if any, on revenue. A baseball team's revenue comes from fans who want to attend games and from media outlets that want to broadcast them. Each of those sources of revenue depends on keeping fans happy enough to partake of games.

Subject to whatever contracts bind it, a team can in theory choose which league to play in, so long as that league is willing to accept that team. Nothing stops me or my friends from securing playing space in San Francisco, attempting to recruit good ballplayers to our newly-formed teams, or charging admission to people who want to watch those games.

In practice, Major League Baseball has become America's most prestigious baseball league. The Fox network pays it millions of dollars for the right to broadcast games, money it would not spend on a competing league. In its most recent expansions, MLB has not absorbed teams that already existed but rather chose new markets to occupy, charged entry fees to eager new owners, and gave those owners access to its talent pool.

Suppose the Saint Paul Saints wanted to become a part of Major League Baseball. MLB could, and probably would, simply refuse the request. It would be theoretically possible for teams to schedule games against the Saints and for MLB to make a ruling as to which games counted towards regular season standings, perhaps even whether and how the Saints would be eligible to compete in the post-season.

Why would the Saints even want to do this? Apart from the obvious gain in prestige, some money is split among all teams in MLB, though membership agreements would probably determine how much if any the Saints actually got. The Collective Bargaining Agreement between MLB players and owners probably covers this. The CBA would sharply change Saint players' own contractual rights, reducing their ability to sign with other MLB teams but increasing their pay significantly to meet the $200,000 minimum.

Joining MLB would make sense if and only if the revenue gains from better opponents and greater publicity would exceed the new expenses. Some money, for example the television contract money, would come from the league but without revenue sharing, the intake from other teams would have no effect on the other team's bottom line.

Of course, there is already a team in the Minneapolis-St. Paul market. The more important question is why that team, the Minnesota Twins, would want to leave major league baseball. Local revenue for that team has recently been slim but its costs are among baseball's lowest, in fact baseball's "luxury tax" structure (now in limbo) rewarded the team for its low outlays. If the team is profitable in the long run then it will want to stay. If it is not then it will want to leave, or at least its owner will.

A team's effective ability to just leave depends on its contractual obligations to its league. The league's desire to waive those obligations depends on how that team affects the league's own bottom line. Apart from the effect of splitting money 28 ways instead of 30, a marginally prestigious team affects other team's revenues because there is an opportunity cost associated with scheduling games against that team instead of, say, the Yankees.

The point is that when whatever agreements exist between a team and a league are dissolved, the direction of any money that changes hands will tell you what you need to know about what benefit came from those agreements. Reports indicate that MLB will pay Twins owner Carl Pohlad $250 million to acquire and dissolve the team. If MLB negotiates with any semblance of rationality then we know that the net present value to Pohlad of the Twins' presence in MLB is close to $250 million.

If the point of contraction is that franchises are not viable in certain markets then do you see why this is fishy? Suppose being in Minnesota were so bad for the Twins that Pohlad couldn't maintain a franchise. Would the appropriate response be, "here's $250 million for your pain and suffering"? No, it would be, "don't let the door hit your ass on the way out."

We conclude from the direction of the payoff that MLB thinks it loses out from the presence of teams like the Twins and the Expos. Where does it lose the money though? Sure, there's about 0.5% of the TV money per team at stake, yet this falls far below the payoff prices. The contracted teams had salary costs but it was they and not MLB who paid those costs--and, given who these teams were, not very well.

Did teams get tired of paying the luxury tax money to profiteers? Understandable, though it serves them right for implementing such a stupid system. Still, instead of freeing Boston and New York team from paying that money, the loss of the cheapest teams would just mean that the next cheapest teams get a minor windfall. The public relations disaster we're witnessing more than offsets that windfall.

No, the other effects on the balance sheet are so small here that the only way contraction makes sense is with an eye towards new sources of revenue. Specifically, baseball teams have successfully cajoled lots of money out of various governments in the form of stadium deals. Is it any coincidence that the targets of contraction are in places where teams have failed to extort that kind of money?

If contraction is not stupid then it is diabolical. If baseball were truly what made America great then I'd almost call it treasonous. But baseball, MLB at least, is not even close to what makes this country great. It is one of many entertainment alternatives; if it is struggling relative to those choices then could the reason be that its purveyors are actively insulting its best customers?

I spend and money on MLB because I enjoy it. For that reason I might be trapped. In non-monopoly industries some competitor would come along and profit from my outrage by making me happy. In baseball the independent leagues are the best shot we have short of a change of laws or a boycott. Don't rule out the latter: Sure, the $500 a year I spend may matter a lot less than some $100 million taxpayer-funded deal. But I am not alone; watch this space.

about the author

Strikethree.com briefly considered relocating Matt Bruce to Ames, Iowa, until the city began paying his rent in San Francisco. Help us keep the negotiations alive by explaining what "Haaa, ha ha ha ha ha!!" means at mb@strikethree.com.