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Great stuff from Mark Cuban:

In BFE, one of the smaller markets in the league, they just had a terrible season. Although they have a stadium they moved into just 8 years ago, they have no pricing elasticity for tickets or advertising, and in fact their attendance is declining. As a result, despite the additional TV revenue they will get from the new TV deal the league has signed, they will see a decline in total revenues of 5mm dollars this year and if they don’t have a good season, revenues could decline further in future years…

As you can quickly figure out, for the teams with new, big market size TV and stadium deals, the increase in the cap is no big deal. For those teams from BFE, who don’t have pricing elasticity or markets that can support stadiums that seat 100k, things are not so good. Every year seems to bring an increase in the salary cap , which their local fans and their own desire to win pressures them to spend up to, yet their total revenues never seem to keep up with.

Add to this pressure, the design of how contracts are structured so that teams which perform the worst and have the least pricing elasticity, get the highest draft picks and must write out checks for huge signing bonuses for their rookies, who they have no idea whether or not they will preform. Its not that they don’t want the high draft picks, but there is no question that their financial risk equation escalates dramatically.

I wholeheartedly agree. For as much as people consider the NFL to be the model league, I don’t think it’s very difficult to argue that MLB has taken over that spot. They’ve just about closed the revenue gap (despite having two less teams), and the sport’s competitive balance has been very good by just about any measure.

Could this have happened without the luxury tax and revenue sharing? I think that it could have. The expanded playoff system (and the illusion of fairness) allows it to happen. More teams are alive later in the season, drawing many more fans in August and September. And, as we know, more teams have a chance to win the World Series in any given season (it’s a lot easier to win 92 games, or 83, than it is to win 100, and the postseason is largely a crapshoot).

Now, it’s certainly true that sports leagues are inherently different than other industries. Teams compete, but they are also heavily reliant on each other (the Yankees would not make much money if they had nobody to play). Does that warrant the top teams subsidizing the bottom teams a bit? Perhaps. But they already do in a sense, since national contracts are shared equally, instead of being distributed based on the value added by each individual team.

One other point from Cuban, which I had never really considered:

Can a league survive without a cap ? Yes, but I think it must be a league where it takes more than 1 or 2 players to lead a team to a championship. Otherwise, the richest teams can just buy those 2 players, with a 3rd as insurance, which means the competitive balance of the league is purely dependent on finances. That is not a good position to be in. Baseball and football are 2 leagues that I can think can survive (as baseball has) quite nicely without a cap. The NBA and NHL would struggle competitively without them.

I don’t think that’s really true with the NHL, but it certainly is with the NBA. Regardless, it’s an important point in regards to baseball, since one or two players can hardly make a bad team competitive. Also keep in mind that there are greatly diminishing returns as a team spends more and more on player payroll (i.e. the Yankees spend much more than the Red Sox, but it hardly matters after a certain point).

Feedback? Write a comment, or e-mail the author at shawn(AT)squawkingbaseball.com

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  1. on May 27th at 01:55 pm
    phil said:

    “Add to this pressure, the design of how contracts are structured so that teams which perform the worst and have the least pricing elasticity, get the highest draft picks and must write out checks for huge signing bonuses for their rookies, who they have no idea whether or not they will perform.”

    You gave this a bit of a free ride, didn’t you? Who says those poor teams with rich draft picks can’t trade down?

    It makes more sense to me for a small-market team to want more draft picks. Say the consensus #1 pick has a 85% chance to make the big leages. 10% of the time, he’s replacement-level (“scrub”); 65% of the time he’s average to good (“starter”); 10% of the time he’s a superstar. So 85% of the time, he plays out, but you pay him that superstar signing bonus for the 10% superstar chance.

    Instead, the small-market team trades for three other draft picks (or prospects) each with a 50% chance to make the show, a 20% chance as a scrub, 25% as a starter, and 5% as a superstar. Your chances of getting at least a single scrub out of it are roughly 87%; you have about a 14% chance to net at least one superstar. Plus, sometimes you get 2 or 3 scrubs/starters/superstars. And you didn’t pay that hefty signing bonus to any of them.

    I realize the actual numbers may look a lot different from that, but you could tweak the model a good bit before three middling prospects comes out looking worse than one good (and highly-paid) one. At some point, it becomes a failure of scouting, not the economics of small-market baseball.

    Even if the three come out slightly behind the one, the poorly-performing team probably needs improvement across the board, so the possibility of multiple useful players becomes more important. As Barry Bonds demonstrates, one player can only do so much.

    There may be good reasons why the salary cap hits small-market teams disproportionately, but this sounds more like a sob story. I don’t have a lot of sympathy for teams that can’t turn a valuable asset for someone else into a valuable asset for them. (Although that may explain why they make so many #1 draft picks.)

  2. on January 20th at 06:33 am
    $eilig said:

    Baseball’s competitive gap has been closed? NFL is not the model league?

    The NFL is THE league and the Series has been won by ONE team in the bottom half of spending in since the strike.

    You just hate the idea of a cap because your team would lose a huge edge in cherry picking expensive free agents.

    In MLB, the Packers would have no chance at a SB.

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