Sunday, August 11, 2013

Lockouts: The MLB Anomaly

As stated in the previous post only Major League Baseball, of the four primary major American team-sport leagues, has not endured a lockout or any work stoppages in the past fifteen years. (I don’t mean to slight MLS for those who put them in the primary and major group; but the single entity model puts labor relations there in an entirely different sphere.) The question begging an answer is what separates MLB owners from their colleagues in the NBA, NFL, and NHL who each aggressively pursued lockout strategies over this time frame?  Foremost the MLB CBA, radically altered coming out of the 1994-95 strike, mitigates much of the tension driving the lockout decision in the other leagues.  This despite that there is no salary cap provision, normally the top item on ownership's’ wish list.  They key provisions of the 1997 Basic Agreement were a unique and progressive revenue sharing system (a tax and redistribution scheme) and a competitive balance (luxury) tax on club payrolls exceeding a threshold.  These conditions, except for some a reworking of the mechanics of the payroll tax in 2003, have remained in place through all subsequent CBA negotiations, and both matter to the keeping of the peace. I’ll get at the revenue sharing here and follow up with a post on the relevance of the payroll tax and lack of the salary cap.

Sports labor negotiations center around the division of revenues; that is, how to split their big money pie. There are essentially two phases of the revenue sharing debate that drive labor unrest.  One is the very evident owners -to- players distribution, and also fundamental is the allocation of revenues among the owners themselves. CBA negotiations tend to settle on resolution of the former, but it is the latter that triggers the lockout decision.  Major league professional sports are profitable, but the spoils are not evenly distributed across owners. Those running clubs in smaller and less lucrative markets often feel entitled to a greater share of the revenue they help generate by supplying the opposition. The NFL accommodated its small markets early on with a sixty-forty home-visitor gate split almost from the league’s inception, and most importantly in early 1960s with league control, sale, and equal-share distribution of all TV broadcast rights. All leagues distribute in equal club-shares the national broadcast and other league-earned revenues, but only in the NFL is that all TV broadcast income and represents the majority of league earnings. Before 1997 the only sharing of gate revenues in the other three leagues ranged from none to slim.  

From the 1970s onward the MLBPA effectively exploited the big versus small market divide and prevailed in most labor disputes. However, small market owner Bud Selig—inserted as Commissioner in 1992—built a coalition of like-minded owners and managed to implement a Robin Hood style system to settle the post-strike CBA negotiations in 1997. The MLB system was revolutionary in that it is based on significant sharing of not just the gate, but nearly all sources of locally produced revenue. The league collects a tax of about 30% on each club’s local income (gate, other stadium, local TV rights, etc.), pools this with the other centrally generated funds, and redistributes so that the lowest revenue producers get the largest shares.  So as much as the NFL, MLB’s system benefits small market owners.

So why does this sharing, or lack-there-of, matter? Think back to the pre-lockout talk. Every time it centers on the financial difficulties besetting some portion of league’s clubs.  Meaning some subset of clubs is not able to “keep up” financially with their cohorts in the better markets. The cry is always that the needy group cannot afford to compete in the talent market…competitive balance… blah, blah, blah.  The poor could be made richer though increased distributions from the rich…or forge an agreement with them to reduce everyone’s biggest expense—player salaries—by reducing the players’ share of revenue.  Lockout leverage means the latter is the preferred option and why the NBA and NHL, with very limited local revenue sharing, have been the most eager to engage this method. Despite their quite generous sharing, growing revenue disparity also explains the NFL’s 2011 lockout. The NFL redistributes only gate revenue; other stadium and locally produced revenues are kept in full by the home team.  The new stadium building boom beginning around 1990, with is emphasis on luxury seating and other sources of non-ticket revenue has increased the disparity in club revenues.  The low revenue producers could be brought up to speed with more sharing, or by a reduction of labor costs. Doubtless, recognizing the success of the lockout by his peers Commissioner Goodell chose the latter.

So MLB’s small market owners are relatively better subsidized than their peers in the other leagues, but couldn't a successful lockout work to all owners’ benefit there too? Maybe but the alternative, luxury tax for salary cap, means for curbing payrolls also influences the incentive to lockout. Stay tuned.

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