For the next few years, expect to continue to hear how the current collective bargaining agreement (CBA) is unfair to players and how it must be fixed. The real questions here are whether both sides are ready to depart with long-held positions that have facilitated this situation, and whether both are open to real change.
For most of my life I have watched the MLBPA own the owners in the labor space. The owners of the game had a unique level of impotence to make key business decisions. In 1994, the owners determined to take charge of at least the financial framework of their business by implementing significant changes. Due to the strike at that time, this cost us the end of the 1994 season and the 1994 World Series. After two plus years of negotiation, court trials, arbitrators, and fan strikes, the historic 1997 CBA brought us the framework for:
- Interleague play
- Revenue sharing
- Competitive balance tax (CBT, a.k.a. Luxury Tax)
There was a lot of pain in 1994-1997 to get to that agreement, and the consequences of that framework dominate the current labor landscape. In 2003, the CBT transitioned from a tax on the top five teams (as measured by revenue) to today’s luxury tax model.
It was not until the next CBA in 2003 that a Joint Drug Agreement was implemented to start testing for PEDs. Baseball owners and the players’ union (the MLBPA) soon began to realize they jointly needed to get a grasp of this issue as their sport was severely tarnished. MLB and the MLBPA have spent more than 10 years strengthening this policy and making punishments harsher. This has diminished the artificially elongated careers of MLB players and changed the landscape of contract negotiations (see below). The impact of the Joint Drug Agreement is also part of the current labor landscape.
To find out more of the history of the CBA, consult Cot’s Baseball Contracts. This history shows that the 1997 and 2002/2003 CBTs are foundational for the changed business model that the MLB operates in today.
Maury Brown at Forbes provides some excellent analysis of the business of baseball and the current situation. Maury shows a trend line that indicates that the percentage of player compensation within gross revenue has dropped from a peak of 57.3% in 2014 to 54.2% in 2018. MLB had $10.3 billion in revenues in 2018.
Let’s add few other data points on revenue in the context of the CBA history above from the Cot’s posting and from a 2014 article from Maury Brown.
During the 21-year period since the 1997 CBA instituted the luxury tax framework, MLB revenues have skyrocketed 390% (average 7.9%/yr). Since the tax threshold system was instituted in 2003, MLB revenues have increased 164% (6.7%/yr). Many other international businesses would be jealous of that kind of growth. For a little balance, the growth since 2012 (5.4%/yr) and 2015 (2.7%/yr) have slowed considerably. You may want to remember this last number when considering the current environment.
Also for context, a big element of the discussion in 2002 for the 2003 CBA was around contraction. Several of the smaller franchises needed to have the revenue growth that occurred and the CBT to remain viable. It is worth noting that there is no discussion of contraction now, and there is potential for expansion. This period has been good for the business of baseball and it will pay off if both sides can show flexibility.
Competitive Balance Tax Threshold
How did the players fare during this time of rapid revenue growth for baseball? Since 2003, the CBT has gone up 68% (3.5%/yr). Further exasperating the players, the CBT growth has been very low since 2012 (1.7%/yr) and 2015 (1.3%/yr), creating a disincentive to let the salaries of marquee players keep pace with revenue growth.
The minimum salary, while not keeping up with the revenue, has grown more rapidly than the CBT. This means the younger players have been given access (I would state correctly so) to a higher percent of the gross salary allocation. This means there is less for experienced players.
What else has happened over the 10- to 20-year period since the CBT system was installed? Data – mountains and mountains of analytical data teams can use to better evaluate when a player is finished, or when his skills are beginning to wane. Teams have access to far more data than is publicly available. They have the opportunity to make more fact-based and fewer emotion-based decisions.
What has happened in the last few years of the trend, where the percentage of compensation to total revenues has dropped for four years? Two franchises (Cubs and Astros) have demonstrated a different model for becoming great without necessarily signing the top free agents. This analytically driven model has shown all of MLB that there is merit to not paying aging players; instead, they can invest time and effort in getting the best young talent (even if one has to “tank” to do it) and developing that talent.
Impact of the Joint Drug Agreement
Add to this that players are constrained far more by a PED testing regime. Older players are not remaining in the game as long, and teams will not project a player to be a big contributor past his mid-30s in general. Yes, there are the Verlanders or Beltres, but they are rare. The game of baseball is becoming younger and cleaner.
Although guaranteed contracts are not mandated by the CBA, they are the norm in the MLB. This means a team is committing to take the full financial risk for whatever is agreed to with a player during negotiations. Because of this risk, teams are mitigating the risk by shortening the length or reducing the value of the contract. There seem to be far more contracts negotiated with team options and player opt-outs, because neither side is satisfied with the risk and reward of a pure guaranteed contract.
Many small-market teams seem to be following the lead of the strategy laid out by the Astros. A small-market team will oscillate between making a competitive run and pulling back costs when a majority of their players go past their prime. This leads to several teams not spending even half of the CBT and not engaging in free agency in a meaningful way while they are in rebuilding mode.
Team Control and Arbitration
Multiple CBAs have included the system of team control of players for six years in the MLB. There are nuances where teams tweak call-up dates to get an additional partial season of control. Teams have been careful to only promote players to the big leagues when they are ready. If a player is promoted to the MLB at age 23 or 24, they are not hitting free agency until age 29 or 30. At age 30, they are generally viewed due to analytics as having a maximum of four years of peak production left. This means many MLB players have one shot at a free agent contract that will likely be around three years.
This is the reality of the effect of the youth movement in MLB, banning PEDs, CBA team control parameters, analytics, guaranteed contracts, and the CBT constraining spending and risk-taking. It is a new world where all of these factors are coming together at once.
Aging fan base and the recent slowing of revenue growth
While most of the past 20 years have experienced rapid revenue growth, the past three seem to be the exception and there are some very disturbing trends. Much of the revenue growth in past generations was driven by Regional Sports Network growth, a new generation of stadiums designed to grow gate receipts, and revenue advances with apps, MLB TV, and MLB Network. This growth has slowed as these advances have matured. Recently Street & Smith’s Sports Business Journal and Magna Global reported that the average age of a baseball viewer is 57. Younger generations are not engaging with baseball and this will cause problems with revenue. Teams are aware of these macroeconomic threats to the game, and this impacts the free agent marketplace.
While both sides are struggling to adapt to this new reality, free agent negotiations seem to be heading later and later into the calendar. Neither players, who want the same deal players 5-10 years would have gotten, nor owners, who are concerned about the long term prospects for the game and see cheaper options with younger players, are willing to give in.