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A better way to think about the money divide between MLB players and owners

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What MLB’s financial report means for the Rockies in 2020 (and beyond)

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I used my Sunday Rockpile to highlight the various obstacles to starting the 2020 MLB season in the midst of the coronavirus that have nothing to do with money: health and safety. Finding solutions for these obstacles are far more important than money since there’s no play without agreement on health and safety, and there’s no reason to argue about money until you figure out a way to play.

That being said, the money question is a very interesting one, and on Saturday the Associated Press obtained a report laying out the owners’ accounting of the cost of playing games without fans while still paying players their pro-rated salaries as outlined in the March 26 agreement between MLB and the union.

As I was writing this article, Maury Brown of Forbes posted his in-depth analysis of the financials. Brown has been covering the business of baseball for longer than some of us have been able to read. Based off his writing, here’s what the AP report means for the Rockies.

Big losses

According to the 12-page document, playing without fans and paying players a prorated salary in 2020 based on how many games are played would result in an average of $640,000 per game loss over the course of an 82-game season, varying from team-to-team. For the Rockies, the AP report estimates a $134 million loss. This is EBITDA, which is a common accounting strategy used to assess profitability, so it means that Dick Monfort does stand to lose money. However, there are legitimate questions about how the document — which only Ronald Blum of AP has seen — uses terms like “EBITDA” and “free cash flow” (terms that do not fall under Generally Accepted Accounting Practices but are common and recognizable). That number also does not include distributions to the teams from MLB’s central fund, which the documents set around $1.35 billion, or average $45 million per team.

While it’s logical to assume that the owners figure to lose money if games are played without fans, there are reasons to be skeptical about the actual amount. No fans means the revenue that comes from games goes to zero. The question becomes, what do the other cost and revenue streams look like and how is that going to affect the bottom line?

Where the money comes and goes

There’s an interesting detail buried in the article about how MLB counts expenditures:

Expenses totaled $10.234 billion: $4.366 billion for major league player compensation, $198 million for pensions and benefits, $537 million to sign amateurs, $4.73 billion in local expenses and $403 million for the central office.

I’m just going to assume those numbers are inflated to as high as MLB can possibly present them without out-and-out lying about them. Those “local expenses” appear to cover everything from groundskeeper materials to stadium maintenance, scout salaries to front office salaries, local advertising to local outreach. The point is that owners spend money on more things than player salaries (so stop assuming that not spending means they are building up their yacht collection). For the Rockies, paying players a prorated salary for 2020 will cost upwards of $75 million. There is no way to know how much all those other expenses cost.

The other side of the equation is important here, too. “MLB said 2019 revenue was 39% local gate and other in-park sources, followed by 25% central revenue, 22% local media, 11% sponsorship and 4% other.” That “4% other” is very intriguing to me, but we lack the time to investigate. We’ve already said that teams would lose almost all of that 39% from the gate. Where are the other losses?

Local media

These figures also fail to include other areas of revenue that many teams have, such as stakes in their regional sports networks (RSN), like the Dodgers for example, or major holdings in real estate development near the stadium, like the Braves. The Rockies, like most teams, do not have a stake in their RSN, so they don’t figure to recoup any loses from not broadcasting games. And with McGregor Square still under construction, neither do they have real estate development.

The big cost here is due to the fact that RSNs only seem to be obligated to pay for games actually played. Craig Edwards of Fangraphs implies that RSNs could be willing to take a bath on the games not broadcasted because they “might choose not to alienate their partners.” This will allow teams to magically recoup 50% more of their RSN money, which means they’ll save $1 billion! “We paid for 150+ games, but you can only give us about half of those? What’s that between friends!” It’s safe to assume that that money lost is exactly that, lost. Brown notes that the teams can spread out repaying their RSN over years with interest, but it’s still quite alarming.

The Rockies and AT&T Sportsnet have a deal whose true number is unknown. Dick Monfort has said the terms of the deal are set to increase after 2020. AT&T Sportsnet is apparently under no obligation to pay the team for lost games (or at least there’s been no public statement to the contrary). On the local level, that represents a big shortfall, probably somewhere around the $20 million range for the Rockies if they play the proposed 82-game schedule.

Some local games will be lost by RSNs in to fulfill national contracts (a problem that is unlikely to hit the Rockies, if we’re being honest). That money goes into a central fund that is distributed to teams evenly. The expanded playoffs will also mean more money flowing into that central fund. So even if money is lost from the RSNs giving up games, the owners stand to make it back on the national side. Further, most of the national broadcast rights will go up in value starting in 2021, so an influx of cash is coming into that central fund (assuming games are played in 2021, of course).

Oh, and if Monfort wanted to make more money from broadcasting, the Rockies could sell local streaming rights, but it’s unclear if the team knows how to do that.

Debt

Part of the reason the league’s figures are so high, and especially so for big market clubs like the Yankees and Cubs, is construction debt is also factored in. For example, the Yankees owe the $100 million in bonds owed for construction on their now 12-year-old ballpark (yes, even MLB teams have rent problems, just not quite like the rest of us). The teams would have to pay this anyway (and I would imagine wouldn’t fully tie gate revenues to pay for it, but what do I know?), so it’s a little fishy to include it in these numbers MLB released leaked. There’s no way to predict this for the Rockies, but surely the $250 million McGregor Square project will factor in to those finances somehow. For now, though, we’ll just exclude that from our calculations.

The AP report also mentions how teams have increased their debt for 2020. This could be due to anything, like stadium improvements; or it could be a response to the need to pay off-the-field employees during the pandemic. It’s unclear which is the case from team to team, but it’s worth keeping in mind, especially since the Rockies are one of only a few teams who have promised to keep paying that staff. Not all debt is bad debt, and even rainy-day funds don’t last forever.

The murky future

While that national TV deal will mean more money in MLB’s coffers starting next year, it seems beyond doubt that it won’t be business as usual come March 2021. The long-term effects on the economy will affect everything, perhaps especially household budgets, which means, even if a vaccine were widely available before the start of next season, many people won’t be able to afford laying out hundreds of dollars on game tickets and concessions. Since that represents the largest revenue stream for teams, Brown notes that this will probably lead to the owners rejecting any proposal to defer salaries.

He also notes this could have a big impact on free agent salaries in the next few offseasons. Here is where I will mention the fact that Nolan Arenado can opt out of the remaining five years, $164 million ($32.5M AAV) after 2021. That is also when the Daniel Murphy, Ian Desmond, and super-bullpen contracts will fully come off the books, but also when Jon Gray and Trevor Story would become free agents. If the free agent market does suffer, those core players may be more inclined to stay in purple pinstripes. But, again, it’s an open question as to how much margin teams will have to spend, including Monfort and the Rockies.

Revisiting the players’ side

As private entities, the owners don’t have revenue sharing obligations with the players (like other leagues do) that would force them to open their books. But it’s hard to negotiate financials in good faith when you don’t know what the other side is holding. Since they’ve never shared openly before, we’re right to be at least a little skeptical of the numbers here. Let’s just accept the fact that the league probably overestimated expenses and underestimated revenues in this AP document. It is still safe to assume that some teams, especially mid-market clubs like the Rockies who likely depend very much on gate revenue, will lose money in 2020 under any plan. This is why they have proposed a new way to split the money.

The players union saying “no” to this deal doesn’t make them greedy any more or less than it makes the owners greedy for proposing it. And, the merits or drawbacks of the health and safety protocol notwithstanding, the players are taking a significant risk in their (and their families’) health by taking the field without a vaccine available. Not only that, but the owner’s proposed solution — a 50-50 split of baseball-related revenue — flies in the face of the union’s most closely held position: no salary cap.

Many have pointed out that the players already agreed to a pay cut but this is the “If You Give a Mouse a Cookie” Principle. If you agree to give the owners a pay cut, they just might want to ask for another one. The union left language in the agreement to “discuss in good faith the economic feasibility of playing games in the absence of spectators or at appropriate neutral sites.”

That’s a big factor in the owners coming back to the table seeking a restructuring of the deal. In their view, the situation has changed since would-be Opening Day and, based on the language in the contract, it has. The fact that the players will now have to negotiate a new pay cut is a problem that likely rests at the feet of union leadership like Tony Clark.

The league stands to lose a lot of money (though how much is very much open for debate), but even more if games aren’t played at all. Without games, the players will have to settle for the $170 million pot from the March agreement. Both sides are financially incentivized to find a deal, though both sides are also looking to maximize their own outcomes. At this point, both need to realize that a compromise on pay is the only way baseball will happen in 2020.

But, as I said on Sunday, I have my doubts that that will be the final sticking point. Even with more and more leaders (including Colorado governor Jared Polis) ready to open the door to fan-less games, the health and safety concerns may still prove too difficult to overcome.