This is the title of my latest at the Huffington Post, a column that discusses the recent revelation that the Pittsburgh Pirates – a team that has been a loser for 18 consecutive years – is still earning a profit.
Alan Robinson – of the Associated Press – contacted me about this story a few days ago. From what I understand, someone who works in baseball leaked the Pirates’ financial documents to Robinson. One can speculate that this person was unhappy that a team that spent little on its players — and failed to win on the field — was taking some of the money baseball shared with the team and keeping it in the form of profits. And as I noted in my column, because the Pirates can earn a profit without being successful on the field, there is a problem with incentives in Major League Baseball.
Beyond that point, I wanted to offer a few more thoughts on this story.
- In the story I noted that the Pirates are taking baseball’s revenue sharing and keeping it as profits. There is another way of looking at the money MLB is giving the Pirates. In 2007 and 2008 the Pirates spent nearly $102 million on player salaries and another 44.4 million on player development. Put all these figures together and we see that the Pirates – across these two seasons – received enough money from MLB (as the article notes, the team received about $133 million) to cover all but $12.7 million of their player costs. So although the Pirates do relatively poorly at the gate – not surprising for a team that loses year after year – the Pirates are still able to turn a profit because the other teams are picking up most of their player expenses.
- Why are the other teams willing to give the Pirates money? The issue is competitive balance. Teams probably believe that it would be easier to sell tickets when the Pirates came to town if the Pirates were a better team. Certainly the Pirates – because they are very bad – are not quite as good a draw as the Phillies. When other teams see the Pirates keep part of the money – rather than spend it on players – it must make them wonder why the money is being given to Pittsburgh in the first place.
- When we think about this reported profit we also have to keep in mind baseball’s accounting history. In Pay Dirt – a book by James Quirk and Rodney Fort – the authors note that NFL owners were found to be paying themselves a salary. In other words, rather than report a profit, they took a salary and inflated their costs. And NFL teams are not the only teams that play with their cost data. In Baseball and Billions, Andrew Zimbalist offers the following quote from Paul Beeston (a former executive with the Blue Jays): “Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and get every national accounting firm to agree with me.” All of this means we have to be cautious in looking at profit data from teams. Teams have an incentive to minimize how much profit they are making (after all, they want to tell players in negotiations that it is hard to make money in sports). So we expect – as Quirk and Fort note – that profit data provided by teams probably doesn’t over-estimate how much money they are making.
- We should also note that historically, baseball teams have argued that they are losing money. Back in 2000, baseball’s Blue Ribbon Panel argued that from 1995 to 1999, only three teams – the Cleveland, Colorado, and New York – were making a profit. Clearly baseball can’t make this claim any more.
- Making money from a losing team is not restricted to baseball. Joe Lacob – the new owner of the Golden State Warriors – was asked if he expected to make money as owner of the Warriors. Here is his response to that question: This is an incredible business opportunity. Turning this into a winner No. 1 and running this business better in certain ways… Look, sports franchises appreciate 10% a year on average over three decades, the last three decades. There’s no reason to think this won’t appreciate in value. So that is the least of my worries. We will make money on this team in appreciation of value. The Warriors are similar to the Pittsburgh Pirates. But despite buying a team that hasn’t won, Lacob still expects to make money with this team. And note, he didn’t say “well, if we win we can be successful.” No, he is saying that making money is almost guaranteed (he also comments on statistical analysis and notes that rebounding guards are valuable, a point we might come back to in a future post).
- One last note on this story. It appears that baseball – and the other major professional sports leagues – want to have a system where profits can be made even if a team makes poor decisions. With that thought in mind, I encourage everyone to read a comment Henry Abbott offered on an interview Michael Heisley – owner of the Memphis Grizzlies – recently gave. In this interview Heisley revealed that his knowledge of the NBA was not quite as extensive as one might expect. Certainly there were basic things about the NBA he has not always known. As Abbott notes, people tend to think the owners know their business. But as Heisley demonstrated, this is not always the case. What sports leagues seem to want, though, is a system where even if you don’t really understand your business, you can still make a profit.
– DJ
Wages of Wins Journal 
marparker
August 25, 2010
Well the Yankees do need to play against other teams.
matt w
August 25, 2010
“Making money from a losing team is not restricted to baseball.”
Is it your position, then, that losing teams should not be able to make profits?
Also, what do you think the new GM of the Pirates should have been doing differently?
szr
August 26, 2010
In most soccer leagues around the world. the professional clubs are divided into 3 or 4 (sometimes more) leagues. The bottom finisher of the league is then booted to the lower level league. And the top finisher is then promoted to the higher level league next season.
It won’t happen, of course, but I would love to see such a system in American sports leagues. The current system enables this silly state of affairs.
marparker
August 26, 2010
szr,
Hence the top tier teams sell out all their games. However, that will probably never be possible in a country that is founded on capitalism. Our only punishment for bad owners is having to move cities or sell the team.
Daniel
August 26, 2010
The Pirates are absolutely doing the right thing according to the current rules. If the rules change to better incentivize winning, they will need to start making an effort to produce a better product, but for now, it’s no contest.
Pittsburgh really should have brought back Barry Bonds a couple years ago when all the teams pretty clearly colluded to force him out of baseball. THAT would have filled some seats, especially since his leaving is what killed baseball in the first place. It would be like LeBron returning to Cleveland at age 40.
szr
August 26, 2010
Yeah, the competition for winning brought on by the threat of being sent to the “B” league really aligns the interests of the owners and the fans. Even a crappy team has everything to play for!
In Argentina, it works like this: There are 4 leagues. Each league has 20 teams. The bottom two finishers every year (based on average performance over a three year span, to not unduly punish a team that has a fluke unlucky year) are automatically sent to the “B” league. The top two finishers from the “B” league are automatically sent to the “A” league. Also, 16th and 17th finishing teams from the “A” league play a series against the 3rd and 4th place finishers from the “B” league. If the “B” leaguers win, they also move up to the “A” league and the loser goes to the “B” league. This means that, every year, between 2 and 4 teams switch leagues.
I think the system works the same all the way down to the “D” league, but I’m not sure.
tgt
August 26, 2010
I think you misrepresented the comments of Joe Lacob. He said the team would likely appreciate in value. He didn’t say the team would turn a profit or make money in any given year. In the 90s, houses appreciated in value greatly, but the maintenance on them was a net negative for most people every year.
TBall
August 26, 2010
I’m not sure winning should correlate with profits. Winning should, and does, correlate with gate receipts. Winning should, and does, correlate with viewership (radio, television, Internet).
Losing can come in two forms. One would be not trying to win and stuffing your mattress with revenue like the Pirates. The other would be trying and, because of bad decision making or bad luck, failing like the recent Knicks or Lions teams. For people who want to win, losing is its own punishment.
The NFL has had significant revenue sharing for years, but they haven’t suffered the same issues as the Pirates. The reason is that the NFL features a minimum salary cap that I believe is 2/3 of the salary cap. That salary floor forces teams to spend. The purpose of revenue sharing is to allow a team like the Pirates to sign more expensive players. Instead of just handing over money to the Pirates and other ‘small market’ teams, those teams should get reimbursed for up to 50% (or some other percentage) of their player expenses (minors and majors). Then, if the Pirates want to collect $40m, they need to spend $80m.
Good business decisions in baseball can result in lower salaries. Players often hit their prime before they reach free agency. Often free agent contracts pay for past performance. A team trying to win could spend ‘only’ $146m, but that team does not need to be receiving $133m from other teams.
matt w
August 26, 2010
Some background:
In January 2007, Bob Nutting replaced Kevin McClatchy as principal owner of the Pirates. He then hired a new President (Frank Coonelly) and GM (Neal Huntington).
The previous GM, Dave Littlefield, had been appallingly bad. One of his trademarks was managing for the short term, seemingly hoping to play .500 ball in a season or two rather than contend later. He consistently signed mediocre-to-horrible veterans for more than they were worth — Jeromy Burnitz, Joe Randa, Sean Casey, and I could name more, not to mention the Rajai Davis for Matt Morris trade. When he traded a player, he tried to obtain players that were close to the majors instead of real prospects, even if it meant that they didn’t have as high upside; the paltry return for Aramis Ramirez was an example of that. (The Ramirez trade itself was mandated because the Pirates had too much debt.)
After Littlefield’s reign was over, the Pirates had an incredibly poor farm system, and many of their players were due to become free agents after 2009. John Perrotto at Baseball America said “The Pirates finally completely blew up their organization following the 2007 season, after years of poor drafts and the farm system’s failure to produce star-quality players contributed to a continuing downward spiral for the franchise.” Charlie Wilmoth, the blogger at Bucs Dugout, has said “Littlefield was basically behaving for years as if the team would be contracted after the 2009 season.”
Huntington recognized the need to restock the farm system. As Perrotto said in 2009, “After Neal Huntington became Pirates general manager late in the 2007 season, it didn’t take him long to understand what the organization needed: young talent and lots of it. Pittsburgh not only had a bad major league team, but it also had little talent in the farm system. It made for a deadly mix that appeared to sentence the franchise to losing into perpetuity…. [T]heir talent base has improved. Huntington has almost completely stripped the major league roster, trading away as many parts as he could in an effort to acquire prospects.” (In between these reports Perrotto worked for Nutting, but he did not leave his employment in the mood to write undue kind words about him.)
Trading away the major league roster for prospects has strengthened the farm system, as has spending extensively in the draft. (Over the past three seasons the Pirates have spent the most money in the draft of any MLB franchise. It’s not just because they draft early; they paid over $2 million for their 2010 second-round pick, who had fallen to them largely because other teams didn’t want to pay what it took to entice him from college.) It has also left them with a lot of players making low salaries. This is an inevitable side effect of a true rebuilding process.
So spending money to attract free agents isn’t just a bad financial move for the Pirates, it’s a bad baseball move. It’s exactly what Dave Littlefield would’ve done. Good free agents aren’t interested in playing for the Pirates, and bad free agents aren’t worth it — in fact they’re detrimental, because they prevent the Pirates from testing players who have some potential as building blocks for the future. In fact, the Pirates tried to spend some money on a veteran, trading for Akinori Iwamura’s $4.85m salary; he was a disaster (possibly because he didn’t want to play for them) and is in the minors, replaced by a rookie with a wRC+ of 112. (Or batting .296, if you like that stat.)
Perhaps the Pirates’ profit in 2007, under the old regime, shows that it’s too easy to make a profit without putting a decent team on the field. (Or maybe not; the massive loan Nutting gave the Pirates in 2003 complicates the picture.) But to say that the solution is for them to put more money into major-league salaries is short-sighted. That’s exactly the wrong thing for them to be doing.
BPS
August 26, 2010
Pure speculation here, but I wonder if the marginal revenue from a win, combined with the different salary cap / revenue sharing arrangements, have created a multiple equilibrium environment. Ideally the incentives line up such that every team wants to grab the cash bonus from reaching the playoffs. But there are only so many wins in a season, only so many playoff slots…and if you can’t compete for a slot, I can imagine that the marginal cost of a win could exceed its revenue value. If there’s a minimum value for having a team at all (you still sell some tickets, road games, media deals, revenue sharing…), the maximum revenue point could easily be a cheap, wretched team.
If that were the case, you’d see teams that can compete for a playoff slot overbid for players that might push them over the hump (since an additional win can have a huge value if it gets you another playoff series), while teams that don’t have a good chance want to cut costs to make money skimming off the bottom.
It could be dynamic too. Be a bottom feeder for years to build up draft picks and cheap supporting players, maximizing value, and if you succeed you spike your payroll in free agency to make a run at the prize. I recognize that this is the natural rebuilding cycle, but it could be exacerbated by the financial model as well.
A.S.
August 27, 2010
“One can speculate that this person was unhappy that a team that spent little on its players — and failed to win on the field — was taking some of the money baseball shared with the team and keeping it in the form of profits.”
I don’t think that this speculation holds water. As Prof Berri may or may not know (he hasn’t mentioned it), Deadspin has published the leaked Pirates financials, as well as leaked financials of several other teams: Tampa Bay Rays, Florida Marlins, Los Angeles Angels of Aneheim, Seattle Mariners, and Texas Rangers. This provides a cross section of teams – both those that failed to win on the field and those that have, and those that received money from, and some that have paid into, the MLB revenue sharing program.
link
So the motivation of the leaker certainly is not clear. That said, I agree with the premise that baseball (and American sports in general) are not highly capitalistic. As others have noted, European soccer is oddly more capitalist that American sports.
dberri
August 27, 2010
A.S.
As you probably don’t realize, I was informed of the Pirates financial statements some time ago from Alan Robinson of the AP. Alan had the documents leaked to him. So my speculation is based on the conversation I had with Alan. Again, I don’t know who specifically did the leaking. And I was aware of the Deadspin article (but again, don’t know the source there either).