How Small-Market Teams Survive Baseball Economics
Senior Editor, CNBC
Spring training starts on Feb. 18, when pitchers and catchers begin reporting to training camp. As is the case before the first pitch of every opening day of Major League Baseball, teams talk playoffs and maybe winning a World Series.
But for smaller-market teams like the Kansas City Royalsor the Pittsburgh Pirates, the chatter is more along the lines of how to survive economically, let alone compete.
Although it's not easy, analysts say, the teams can do both.
"Small-market teams do compete with bigger-market teams on the field," says Elaine Allen, a professor of statistics at Babson College and a former consultant to the Toronto Blue Jays.
"In general, it's the teams that have kept their top draft choices because they have the ability to improve without spending big money on players," Allen says.
What defines a small-market team is usually based on TV households and the size of the local population. St. Louis, Cincinnati and Arlington, Texas, are at the high end of the range, and Pittsburgh and Oakland are at the lower. Washington, Baltimore and Cleveland are toward the middle.
Allen, who will be working with the Los Angeles Dodgers this year on how to improve player training and performance, points to the renamed Miami (formerly Florida) Marlinsand Tampa Bay Raysas recent examples that have the better business models among smaller-market teams.
"Both kept their draft choices and capitalized on them," Allen says. "The Marlins can be cited for doing this in the 1990s and early 2000s. The Rays have sustained themselves over the past four years. And Oakland had success when it used analytics — that is 'Moneyball' management."
The moneyball theory(turned into a book and movie) that captured MLB economics over the past 20 years is still in play.
The concept, which actually dates to Brooklyn Dodger days, is to find good, but inexpensive, players by using certain statistics — most often on-base and slugging percentage, while ignoring the traditional numbers of stolen bases and batting average.
With moneyball, the 2002 Oakland Athletics had about $41 million in salary. They won the American League West division, but lost in the playoffs to the Minnesota Twins, another small-market team.
In contrast, the New York Yankees had a payroll of some $125 million in 2002 and failed to make the World Series.
Payroll is just one part of the financial equation for small-market teams, says John Vrooman, a professor of sports economics at Vanderbilt University.
"The key to success for them is risk-free, luxury-seat money from new ballparks and lucrative regional TV contracts," explains Vrooman, a former college football player. "This has made many teams 'legitimate contenders.'"
While luxury-box income has increased as new stadiums get built, television revenue has exploded since 2002, when MLB actually considered reducing the number of its smaller-market clubs.
The league changed its mind, however, when the financially strapped Seattle Mariners reported revenue of $37.8 million that year from their deal with Fox Northwest, which put them just behind the Yankees ($56.7 million) and New York Mets ($46.2 million) in TV money.
More recently, the midsize market Texas Rangers, who made the last two World Series, signed a deal with Fox Sports Southwest for 20 years at a reported $20 million a year.
Talk of contraction has disappeared.
revenue sharing still key for many teams
What's also helped smaller-market teams, of course, is revenue sharing, experts say.
"Many fans don't believe it's helped, but it has," says Allen. "There is some evidence that the revenue of smaller-market teams, because of revenue sharing, are growing faster than those in large markets."
Started in 1996, the revenue-sharing model initially only required that ticket-sale funds be distributed among MLB teams; now it includes local funds from luxury-box sales, TV deals and food-and-drink concessions.
All of the money goes in a pool that's distributed evenly among the 30 teams, with the majority of funding going to those in need.
The pool was $433 million in 2009 but fell to $404 million in 2010.MLB does not disclose distribution data , but teams needing money are said to average around $35 million. (A luxury tax on teams that go over their payroll threshold is distributed separately.)