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February 3, 2016Johnny Manziel and the prevailing Cleveland Browns sadness
February 3, 2016
Hey, what is more fun than discussing Cleveland Indians’ attendance figures? Maybe Chief Wahoo? Or, how about the nitty, gritty details of the MLB CBA and whether or not the Indians spend enough on payroll? Well, despite the gruesome chore of digging in, baseball finances are a pertinent topic given the current CBA is set to expire in December of 20161 and the Indians need for a solution at third base and center field.
Fangraphs demonstrated before the 2015 season how the player’s portion of the revenues have steadily decreased. And, there have been some rather interesting quotes and actions over this MLB offseason. Detroit Tigers owner Mike Ilitch possibly inferred about team collusion, the free-spending Los Angeles Dodgers let Zach Greinke go to a division rival, and Y! Sports Jeff Passan was not shy about his opinion with respect to MLB revenues.
@SportsBoyTony Eeeeeeveryone is swimming in cash. And teams that say they aren't are either lying, miserably run or lying.
— Jeff Passan (@JeffPassan) December 5, 2015
So, here is some research on the rising MLB revenue, competitive balance tax (luxury tax), and revenue sharing. Basically, a gauge on where things stand in the last year of the current MLB CBA, and if the Indians should be spending more on payroll during their current contention window. You know, so the Indians don’t end up a piece or two short – hence, should they spend money to push them over the top?
Sorry, but a couple definitions are probably needed before chasing the white rabbit down the hole.
Competitive Balance Tax
This line item is the luxury tax for MLB. MLB teams spending more than $189 million in 2016 have to pay a percentage tax on every dollar spent over that amount. The tax escalates each repeated year a team goes over from 17.5% to 30% to 40% to 50%, but if a team dips under $189 million for even a single year, then the repeater status resets.2
Important note: the money given to MLB through this tax does NOT go to other teams. It goes to the MLB general fund, international baseball growth, and other associated activities.
Revenue Sharing
Every MLB team pays 31% of their local revenues into the revenue sharing fund. Then, the pot is split 30 ways and each team gets an equal share. So, the smaller revenue teams get more money back than they gave in, while the big revenue teams get less money back. Also, MLB money gained from things such as national broadcasts kick back extra money to the smaller revenue teams.
Important note one: Some teams in the largest markets were receiving revenue sharing distributions during their rebuilding years. The Houston Astros were the most obvious example as they tore down their MLB foundation to build the current dynamic team. The MLB CBA was updated in 2011 to close this loophole by 2016 (this year).
Important note two: MLB does not release their revenue information, so it is impossible to know how many games are played and how closely MLB monitors such games. For instance, the New York Yankees own the YES! Network. Technically, they could say the network pays them $1 for the rights to broadcast Yankee games to protect that money from revenue sharing. Such obvious gamesmanship would be caught, but lesser methods are likely being enacted.
What has the Indians payroll been over the years?
The rhetoric from ownership (and recently departed Mark Shapiro) was the Indians would spend less during rebuilding seasons, then spend more during their contention windows. So, how has that process looked over the last 10 years on Opening Day payrolls?
- 2016 $78 million (current projected payroll by spotrac.com)(( Note: I have seen other sites list $83 million for current payroll. The $5 million disparity apparently has to do with when the Chris Johnson, Nick Swisher, Michael Bourn dead monies are to be paid out. ))
- 2015 $86 million (26th highest MLB payroll)
- 2014 $82 million (26th)
- 2013 $78 million (21st)
- 2012 $78 million (21st)
- 2011 $49 million (26th)
- 2010 $61 million (24th)
- 2009 $81 million (15th)
- 2008 $79 million (16th)
- 2007 $62 million (23rd)
- 2006 $56 million (25th)
Spending certainly rose during the 2006-2009 contention window, then dropped before rising again in the current contention window. But, remember all the talk about how the Indians spent big money on Nick Swisher and Michael Bourn ahead of the 2013 season? And, how those expenditures were due to a one-time windfall from the sale of the Indians cable network? Well, due to other contracts ending that same year, the Opening Day payrolls were nearly identical and did not rise much over the successive seasons either.
Has MLB revenue (and therefore revenue sharing) increased in the last seven years?
If the Indians were willing to spend around $80 million on payroll during their last contention window and MLB revenues are rising, then the Indians should be willing to spend more on payroll now. Right?
Maury Brown of BBWAA via Forbes.com
The chart does not even cover the increases MLB has seen from the 2014 and 2015 seasons (digital media rights have gone up during this timeframe), but MLB revenues rose from $7 billion in 20073 to $9 billion in 2013. So, $2 billion more money to throw around by MLB clubs.
To make things simple, let’s just do the revenue sharing math on that figure. Basically, allow for any increase in revenue since 2013 to be consumed by whatever revenue in the $2 billion number does not go into revenue sharing. It is fuzzy math, but all of these numbers are estimates anyway (again, MLB does not officially release revenue numbers), so it will get us within a reasonable estimate.
$2 billion * 31% (revenue sharing pot) / 30 teams = ~$21 million per team
EDIT:
But, as was pointed out in the comments, we do know the national broadcast increase is about $750 million per year ($12.4 billion over 8 years was said to be over 100% increase from previous contract), so the equation needs to be updated thusly:
$1.25 billion * 31% (revenue sharing pot) / 30 teams + $750 million / 30 teams = ~$38 million per team
So, in an over-simplified manner, all MLB teams are making $38 million more than they were in 2007, plus whatever other contributions they have from their local revenue after taking out the 31%.
Yeah, MLB revenues have risen crazy amounts, but what about the attendance factor?
Attendance figures into the overall revenue, which was shown above to be increasing across MLB. So, even though the Indians local revenue from attendance has dropped, they still have made it back from through revenue sharing. But, how much have they lost from the precipitous drops in attendance?
Here are the Cleveland Indian attendance figures from the same time period.
- 2015 17,806 (29th highest MLB)
- 2014 18,428 (29th)
- 2013 19,661 (28th)
- 2012 19,797 (29th)
- 2011 22,726 (24th)
- 2010 17,435 (30th)
- 2009 22,492 (25th)
- 2008 27,122 (22nd)
- 2007 28,448 (21st)
- 2006 24,666 (25th)
Wow. The unpopular trades of CC Sabathia, Cliff Lee, and Victor Martinez not only took the steam out of the last contention window, but the fans left en masse over those years and have yet to return. The Indians now have 10,000 less fans strolling through the turnstiles each game, which means less ticket revenue, but also merchandise and concessions.
The Indians average ticket price was $21.31, meaning if the bought tickets were evenly dispersed, then the amount of ticket revenue lost can be calculated.
$21.31 * 10,000 less fans * 81 home games = $19 million per season “lost”
Local Television Monies
The Indians do have a $40 million dollar per year local cable television contract now. $40 million is over six times less than what the Dodgers pull in every season, but it is still relatively more than they made in their last contention window from STO. Precise figures are difficult to come by here as the Indians owned STO, but it was reported at the time of the sale STO paid $33 million per year to the team. So, an increase of $7 million per season upon the sale (plus the one-time $230 million banked from the sale).
OK, so should the Indians be spending more?
Overall, relative to 2007, the Indians are making $7 million more in local broadcasting, but $19 million less in ticket sales (figure only goes up if we factor in lost revenue from concessions, parking, merchandise). Therefore, the Indians are paying less now into the revenue sharing pot and pulling out approximately $38 million more than they did in 2007. But, they need to subtract out around $8 million lost of the local revenue not paid into the revenue sharing pot.4
So, yes, the Indians should be spending more than the $80 million they spent on payroll during their last contention window in 2007-2009. And, the rough figure comes out to as much as $30 million more for a $110 million Opening Day payroll. The difference is enough to sign David Freese for third base and Austin Jackson for center field. Or, it would cover a more high profile player such as the $22 million per year contract the Tigers gave Justin Upton.
But, hey, the MLB CBA expires this season, so it will be up to the Indians and other smaller revenue clubs to push for more equitable economic playing field moving forward because the large market clubs are still making a ton more and they reportedly want revenue sharing cut.
20 Comments
[this is not an endorsement of the Ownership, but] If the plan to “spend” during the windows of contention is to be believed, AND the trends above are to be continued, then the Indians payroll should jump to 15th or 16th in the MLB a la 2008-2009. Per http://www.spotrac.com/mlb/payroll/2016/, this amount is in excess of $115M. Lets assume the Dolans think they are smarter than the other 29 teams and that they can do it for 10% less, this is STILL exceeds $100M.
That only works if you believe the Indians look at “team rank” rather than their own revenue.
Really nice work here.
So while the Indians should be spending $93M in 2016, do we have any way to compare that going back for say, the last five years? Is there any reason to believe that the Dolans didn’t pocket between $30M-$40M that could/should have been spent on payroll to field a more competitive team?
Also, does anyone else think that IF the Indians had spent additional dollars to field a more competitive team, the loss in turnstile revenue could have been reduced or eliminated entirely, thereby allowing the Dolans to make the same $30M or so in profits over the same time span?
All difficult questions (but good ones) without any solid answers since MLB doesn’t share any of their actual numbers.
As Corey pointed out the other day, the Indians haven’t seen attendance correlate with record very well in the last decade:
https://waitingfornextyear.com/2016/02/cleveland-indians-attendance-al-central/
They have to figure out how to win back the casual fan. A deep October run might be the only way.
Wait, by cutting off at 2013 aren’t you ignoring the increase in revenue from the new national TV contracts? That’s about $25M per year, right?
The national TV contracts were included in that number (barely). It was the latest (somewhat) reliable number and the math was getting fuzzy as it was.
Here is the last big TV deal for MLB (nationally):
http://m.mlb.com/news/article/39362362/
Those deals were signed in 2012 but don’t go into effect in 2014 so 2013 revenues won’t include it.
Further, treating all $2B of the revenue increase as subject to the 31% local revenue sharing arrangement is inappropriate because we *know* that the $750M increase in national revenue is NOT local revenue.
Rather than $2B*.31 / 30 = $21M,
750M/30 + $1.25B *.31 / 30 = $38M is much more appropriate.
a solid point and my mistake, thanks.
Thanks, mgbode. You and the people at Fortune deserve a lot of credit for diving into the opaque world of MLB revenue figures. I’ll be honest and tell you I had no idea the luxury tax and revenue sharing were actually two different things and that the luxury tax does NOT go the Pirates and Indians of the world but to MLB instead.
The only insight I can possibly add is that the cost of doing business in the AL Central has risen dramatically in the last decade. Back during the Tribe’s last window of contention in 2005-09, everyone in Cleveland was still correctly praising Dick Jacobs for moving the Tribe from the big-market AL East (Yankees, Red Sox, Orioles, Blue Jays) and into the small market AL Central (KC, Minny, Chicago’s second team, and the pre-Illitch “World Series before I die” Tigers). That move singlehandedly kept the Tribe in playoff contention more years than not. Now, although the Yankees, Red Sox, and Dodgers have continued to outpace the rest of the league in payroll, the AL Central has become a much wealthier division. According to baseball-reference, here are the total payrolls for ALC clubs going into 2016:
Detroit: $185.5M
Chicago: $115.9M
KC: $124.5M (!!!!!!)
Min: $108.2M
Cle: $77.9M
All of a sudden, the Indians are being very badly outspent by their division rivals. Granted, some of this will inevitably go down once the Royals stop making the World Series every year and Mr. Illitch goes to the great Comerica Park in the sky and his children start running the Tigers like a business, but it seems like the Indians, barring unforeseen attendance spikes in a now much smaller ballpark, are in a permanent underclass in their own division. Not the most encouraging thing I can think of as a Tribe fan, and it makes me hope the CBA gets significantly renegotiated next winter–not that I’m holding my breath on that.
Hey, thank you for taking the time to write this. While I don’t subscribe to the “Dolan is cheap” narrative, I do think they’ve been holding a bit back for the last couple years. (Although perhaps that’s in anticipation of all of their young guys getting more expensive over the next few years)
Thanks, and (at some point) we’ll update the posts from last year that demonstrated the increasing associated costs of the young guys. They were teetering on either side of $100m most years of already dedicated payroll.
Very well done, Michael. I still say the Indians make about $10m-$15m a year..all this we deficit spend is garbage IMHO.
I guess the only addition I’d have to make is the question, should the Indians be spending to their limit? Sure, a guy like Freese or Uribe, who they seem to be after, won’t do much damage if things don’t work out. But what if an Upton, or Swisher, or Bourn don’t? Suddenly you’re left throwing good money after bad in the upcoming years chasing wins you already budgeted for.
The Indians seem to value each player individually, and figure out whether he’s worth adding at his cost. And the free agent market rarely finds guys who end up being worth what they cost. Say they think Freese will take them from 86 to 88 wins, and they value that at $5M, but it costs $7M to get him. How often should they be making that move? I’m not saying the Indians have the right answer, or I even have any idea what the right answer is, but I think there are more sides to the problem than ‘if the Indians can afford $100M in payroll this year, they should spend $100M’.
The other issue is current contracts will push them towards that number in the coming years anyway, and the low payroll in 2016 might be a needed negotiating tactic for the new CBA talks. I hate to think of it that way when we need to win a WS, but business is business.
Right, it’s highly unlikely that each year’s budget is set individually. 2017, 2018, and beyond need to be looked at when spending money in 2016.
Also, when it comes to adding free agents, the Indians have to fight against the battle that Cleveland isn’t quite the most popular destination. For example, Upton has Cleveland listed among the teams in his no-trade clause. It seems that it wouldn’t have taken beating the Tigers by a dollar would get him here, but an even larger premium. At what point do you decide to stop bidding against yourself?
Wonderful article, bode.
This really is incredibly well done and eye opening, Bode. I almost want to join the “Dolanz are Cheap” mob I hate so do dearly.
I’m not willing to go that far yet. The narratives I’m seeing throughout MLB seem to all be pointing towards a CBA bargaining position more than credence to just being cheap. In 2010, the MLBPA pointed to the Indians as the model of how an organization should be spending the revenue sharing.
So, it is frustrating as all get-out especially given the near-contender status the Indians seem to be in. But, it might be necessary to slant the next CBA in our favor long-term. Hate thinking that way, hate that it might be the mindset, but also somewhat understand there too.
Ugh, business-side baseball.
Bode, you didn’t take into account sponsorships either. If I recall correctly, Progressive is paying them $4M per year for naming rights. How much do you think the rest of that signage, and “Official xxxx of the Cleveland Indians” nets them?
Between sponsorships, digital media rights (big one here), and other increased revenue streams, we are being kind here.