Tagged: luxury tax

The New York Yankees: The Boys of Summer (Acquisitions)


Ah, the best laid plans of mice & men.

For the past two seasons anyone who either follows Major League Baseball closely or is a fan of the New York Yankees heard countless reports of the teams plan to work its way under the magical “luxury tax threshold”, undoubtedly rolling their eyes each time they heard it.

But alas, with the recent signing of Japanese phenom Masahiro Tanaka to a 7 year/155M dollar deal said plan went right out the proverbial window.

That isn’t to say the team won’t revisit the strategy at some point down the road, doing so certainly has its merits, but for the here & now the Bronx Bombers have decided that protecting the brand by putting a better product on the field was the way to go.

The team also surprised a good deal of people by selling a large chunk of its stake in the Yes Network to 21st Century Fox recently, a move that will yield a reported $150M per year, before they even get around to negotiating their new deal with Time Warner Cable.

In the big scheme of things, what exactly does this mean?

Well, for starters it means the team that is usually flush with cash will have even more chips to play with moving forward.

While that certainly doesn’t guarantee much, it is in all likelihood a fairly safe bet to say that barring another season with a record level of injuries they’ll score quite a few more runs because of the return of Jeter and Teixeira, coupled with recent acquisitions Jacoby Ellsbury, Carlos Beltran & Brian McCann.

But beyond that not much is certain.

No, winning the off-season doesn’t guarantee much more than owning the headlines for a while.

More to my point, amidst all the talk, all of the yammerin’ about the Yanks newfound purchasing power there hasn’t been a whole lotta solid analysis.

It seems like most folks have just tended to go for the glossy stuff, the easy byline then moved onto the next “flavor of the moment” story.

That being said, there have been a couple of solid observations, most notably from ESPN contributor Buster Olney.

Olney recently pointed out that while the same injury bug that hit the Yankees big league roster also depleted their farm system (not even kidding, it seemed like just about every big time prospect the team had got hit with an injury lasy season) we should look for the Bombers to be big players at the trading deadline this summer.

Simply put, come mid-July you need one of two things to make some moves.

You either better have some Grade A trade chips or you best have the cash to absorb some contracts other teams are looking to unload. And now that the Yankees have both flown right by that luxury tax threshold and increased their revenue stream they fall squarely in that latter category.

An obvious area of concern for the Yankees is there infield.

Jeter, as great as he has been is on his way out. If he stays healthy he’ll continue to be productive, providing a solid bat for his position, but the Yankees do need to think ahead & second base is just a mystery in the post-Robinson Cano era.

So if somehow the Rockies, Phillies, Blue Jays or Brewers find themselves out of the mix and looking to shed some money come late July then Tulo, J-RollJose Reyes or Rickie Weeks could find themselves being made available.

Granted a lot would have to fall into place for one of these scenarios to take place, but as we’ve seen over the years, stranger things have happened.

Another area where both the front office and the fans are both at least mildy concerned is the bullpen.

Let’s face it. One does not simply lose the greatest closer of all time and not see some sort of a regression.

David Robertson may very well be up to the task. He’s been one of MLB‘s premier relievers for a few years now and has all the tools to handle the job.

But in the end, ya just don’t know if he’ll hold up, either physically or mentally.

So once again, this is where the fat pockets come into play.

Come trading deadline if the Phillies are scuffling or the A’s are feeling bold (as they are prone to) one could easily envision Papelbon or the recently acquired Jim Johnson being dangled on the market.

Additionally, right-handed bats like Billy Butler, Michael Cuddyer & Josh Willingham all have the kind of contracts that team could easily absorb in order to provide financial relief to the small market teams that currently hold them.

If either scenario plays itself out you can rest assured that the “Evil Empire” will, at the very least, be keeping a weather eye on things, ready to pounce if need be.

Obviously it’s all just pie in the sky stuff right now, but some times the moves you make at the trade deadline aren’t just the difference between making the playoffs or missing them, but rather play a sizable role in determining who exactly is the last team standing.

This year, more so than the last few, the Yankees seem positioned to be major players at the July 31st deadline and that always makes things a little more interesting.


Baseball doesn't have a competitive balance problem, you have a perception problem

Rational Pastime has some interesting, albeit unsurprising, information about MLB’s perceived competitive balance problem:

That said, we don’t yet have enough evidence to make this claim just yet. A deeper investigation of the level of competitive balance in baseball and other sports requires more than a look at regular season win distributions. We also need to look at the distribution of playoff appearances, as well as the volatility of win totals from year to year (what sociologists and economists would refer to as “mobility” were we discussing household and personal incomes rather than success in sport).

So there you have it–based on win distributions, the MLB is clearly the most balanced American sports league, and the NFL the least balanced, contrary to popular opinion. This tells us that there is something inherent in baseball that is generating a great deal of fairness for the teams that play, regardless of payroll disparity. This also raises the possibility that Baseball’s “competitive balance problem” may be nothing more than a public relations problem (which isn’t insignificant, it’s just not a problem that can be fixed by modifying the distribution of payrolls).

This isn’t exactly news to me.  In fact, I have said it time and time again.

Every time some egghead runs one of these studies, they find the same thing: Major League Baseball’s competitive balance, as measured by regular-season wins, compares favorably with the other sports.

I’m not even sure you need an egghead (or me) to tell you this. Just look around. The worst baseball teams will lose roughly 65 percent of their games. The worst football teams will lose 90 percent of their games; the worst basketball teams, roughly 85 percent.

MLB has had more different World Series winners over the last 20 years than any other sport can claim.  It’s kind of obvious to those who can just get past the fact that, sadly, their teams suck or are just mis-managed all to hell.

So, I get it. Do you?

You should also get that the Royals, Reds and Pirates haven’t been truly competitive since today’s graduating college seniors were in diapers because of inept front offices for the most part, not some sort of overwhelming disadvantage.

The system is in place where teams like the Minnesota, Oakland, Tampa and Florida manage to compete, and sometimes even win it all.  The fact that these clubs go decades without even coming close speaks volumes to their incompetence.

That is a public-relations problem for Major League Baseball and a management problem for that handful of teams, nothing more.

So lay off the whining about a lack of competitive balance in baseball.

So you think baseball needs a salary cap? Think again my friend.

Small-market teams love salary caps. Or rather, they think they do. At least on paper, caps stop teams in New York, Boston, and Chicago from dominating the free-agent market, and should therefore help level the economic playing field. And, to a certain extent, they do; a small-market team in a capped league is more likely to acquire or retain top-tier talent. But there’s a catch. That same small-market team will need to win, and keep winning, just to stay financially viable. And sometimes, winning might not even be enough.

Let’s say, in some far-off universe, MLB owners and players actually did agree on a salary cap. With it would come the normal provisions one sees in EVERY league with a cap: a salary floor at around 75-85 percent of the cap, and a guaranteed percentage of total industry revenues for the players. Since the players have been taking in about 45 percent of revenues the past few years, we’ll keep it at that figure (the other three major sports leagues, which are all capped, each pay out over 50 percent).

Using 2008 as an example, the thirty teams took in about $6 billion (not including MLB Advanced Media revenue), for an average of $200 million per team. Forty-five percent of that (the players’ share) is $90 million, which we’ll use as the midpoint between our floor and cap. If we want to make the floor 75 percent of the cap (a low-end figure, relative to the other leagues), we can use $77 million and $103 million, respectively.

With a $103 million cap, nine teams would have been affected last year, and a total of about $286 million would have had to be skimmed off the top. Since total salaries have to remain at existing levels, the bottom twenty-one teams would have had to take on this burden, which had previously been placed on the Yankees, Red Sox, et al. On the other end, fourteen teams would have been under the payroll floor, by a total of $251 million. Even discounting the Marlins’ $22 million payroll, the other thirteen teams would have had to spend an average of $15 million more just to meet the minimum. Some of those teams might be able to afford it; most wouldn’t.

Imagine being Frank Coonelly in this situation. Coonelly, the Pirates’ team president, has publicly supported a cap. Had our fictional cap/floor arrangement been instituted last year, the Pirates would have needed to increase their Opening Day payroll by $28 million. Not only would the team have taken a big loss, but Neal Huntington’s long-term strategy would have been sabotaged, since the team would have had to sign a number of veterans just to meet the minimum payroll.

Now fast forward to 2009. Let’s say the Pirates’ sales staff runs into major headwinds, with the team struggling and the economy sinking. The team’s top line takes a hit, falling $10 million from 2008. The Mets and Yankees, meanwhile, open their new ballparks, and each team increases its local revenue by $50 million. If the twenty-seven other teams are flat, total industry revenues rise by $90 million (not including any appreciation in national media revenue). Forty-five percent of that, of course, goes to the players. So even as the Pirates’ purchasing power decreases, the payroll floor actually rises.

In other words, without a more “socialist” distribution of income, the system crumbles under it’s own guidelines.

Until recently, the NFL has been uniquely fit for this type of model, since most of its revenues have come from national television contracts. But now, with local revenues rising, small-market teams are feeling the pinch. This past May, the owners unanimously voted to opt out of their collective bargaining agreement, which was supposed to run through 2012. Some blamed the players’ share of revenues. Others, including Dan Rooney of the Steelers, cited the need for more local revenue sharing.

But sharing local revenue has a major drawback: it is a tax, which inevitably lowers incentives and decreases output. If the NFL shared all (or even most) local intake, why would an individual team ever look to maximize revenues at its own cost (i.e. by hiring a sales staff, or cleaning its own stadium)?

The NHL, which also has a hard cap, does very little revenue sharing, partly thanks to an overly convoluted system. On a league-wide level, the results have been very positive; the NHL has had record revenues every year since its lockout, and Gary Bettman has been very positive about this season as well. But the NHL is a great example of why caps and capitalism don’t mix: as the league grows, it ends up leaving teams behind. Small-market clubs like the Columbus Blue Jackets and the Nashville Predators are forced to spend almost two-thirds of their revenue on player payroll. And the Phoenix Coyotes, after years of hemorrhaging money, are on the verge of going bankrupt.

So what’s the best solution? Certainly not the NBA’s soft-cap system, which has too many problems to even count—imagine having to take on Gary Mathews Jr, Louis Castillo or Carl Pavano every time you wanted to unload a high-priced veteran.

So instead of these models, what if there was an uncapped league, a “free market” set-up with limited local revenue sharing to support small-market teams, and a post-season system that naturally created tremendous parity? Does this sound familiar? It should. It’s what MLB has had in place for over a decade, leading to record growth in both attendance and revenue.

The expanded postseason is key. More than any other sport, MLB’s playoff system acts as an equalizer. Fair or not, in broad strokes, a team that wins 83 games in a bad division has as much chance of winning the World Series as the Yankees or the Red Sox. Seemingly, no matter how much those teams spend over the winter, that competitive advantage is neutralized come October.

So while the capped leagues all struggle to find the right balance between capitalism and socialism, baseball continues to prosper operating within a much more free-market system. Teams in big markets and small markets alike are making money, and everyone has a chance to win it all.

I understand the system is far from perfect, but from a financial standpoint it is doing as well as one could expect.

From a competitive standpoint, look for another note in the not-too-distant future. I’ll break down the diversity of playoff participants/winners over the last two decades for ever major sport and you are going to find yourself somewhat surprised…

EDIT:  Here is the aforementioned piece.