It’s a simple question, but the answer is complicated by self-interest and disputes about facts in Major League Baseball’s negotiations with the MLB Players Association about how to divide a significantly diminished revenue pie in 2020.
Owners see an industry whose financial system has been upended doubly by the COVID-19 pandemic, first with the loss of games and then with the recognition that if and when the sport reboots, it will be without fans. Each factor will mean billions in lost revenue.
Without pay cuts, owners say, players would receive almost 90 percent of revenues from games that are played in an 82-game season — while teams would absorb $4 billion in losses, raising questions about whether it’s less costly to cancel a season than to conduct a shortened one.
Players believe that the league’s losses, while potentially significant, are vastly overstated and can be reduced by playing more games, both regular season and playoffs. The players agreed to give up salary for unplayed games — meaning a drop in earnings of more than $2 billion in an 82-game season — and have little appetite to give up more to help owners cut their losses.
On Tuesday, MLB proposed roughly $850 million in new salary cuts — reducing (according to its accounting) the players’ share of the revenue to about 60 percent. Late on Wednesday, Nationals star pitcher and MLBPA executive committee member Max Scherzer suggested that owners pound sand.
|162 games (full season)||82 games (March agreement)||82 games (MLB proposal)|
|Percent of total||100||56||37|
|Percent of salary||100||54||35|
“There’s no justification for players to take a [second] pay cut,” he wrote on Twitter.
The union is expected to make a counterproposal for a longer season — more than 100 games — at the full prorated amount, meaning players would get roughly two-thirds of their anticipated salaries for the season.
Based on conversations with industry sources and people involved in the negotiations, what’s the logic underlying each side’s position? Start with this:
Why is there a second negotiation?
In mid-March, players and owners reached agreement on key issues: If there was no season, established big leaguers would still gain a year of service time, thus permitting players to reach free agency on schedule; players accepted that their salaries would be prorated in proportion to the length of the season; teams agreed to advance players $170 million in salary through the end of May; and players agreed not to sue for their full salaries.
The agreement also included language about determining the “economic feasibility” of playing games without fans. In the eyes of owners, the March negotiation resolved the question of salaries under one set of circumstances (a shortened season) but left open another (compensation in a shortened season without fans) to a subsequent negotiation.
It’s unsurprising that owners would seek different operating structures for games played with and without fans. Even for an 82-game season, owners projected $2.2 billion worth of in-stadium revenue (tickets, concessions, merchandise, etc.) absent mass-gathering restrictions. That’s gone.
Half the games means half the revenue, leaving a $10 billion industry with $5 billion in earnings. Lop off 40 percent of that with no fans in attendance and you’re down to $3 billion (not far off MLB’s projection in a presentation to the union of just under $2.9 billion).
The difference without fans is of sufficient magnitude that MLB believes a negotiation is necessary and that the possibility was understood at the time of the first agreement. If paying full prorated salaries for an 82-game season, the league would devote just under 90 percent of its projected revenues to paying players — a massive increase from the typical 47-52 percent.
Such a large slice of pie for the players would leave slivers to cover billions of dollars in mostly fixed operating expenses, including the salaries of roughly 15,000 employees of MLB and its teams. MLB, in its proposal, offered players about $1.7 billion in salary and benefits — roughly 60 percent of revenues from an 82-game season.
To players, that outlook and proposal have a number of issues.
The agreement could have specified that players would be paid, say, 70 percent of prorated salary in the event there were no fans. It did not, and the union and many agents and players believe there’s no need to revisit the question.
The MLBPA believes that the industry will make more money by playing games than not, a view that suggests playing without fans is economically feasible. MLB, unlike the NFL, NBA, and NHL, does not have a revenue-sharing structure between players and owners, so to the players, the fact that their earnings would approach 90 percent of MLB’s projected revenue for the season is irrelevant.
The players believe that even if owners can cast doubt on the economic feasibility of games without fans, it doesn’t entitle them to another adjustment of player salaries; it merely permits a negotiation in which players are not obligated to accept lower pay.
There are a lot of disputed facts
It’s worth noting that the negotiations will be shaped by a long-familiar element between players and owners: mistrust, which has bubbled increasingly to the surface in recent years over team behavior in areas such as arbitration and free agency.
Players and agents don’t trust MLB’s characterizations of profits and losses. MLB counters that it has been submitting regularly audited reports to the MLBPA for decades — a requirement given the league’s revenue-sharing among clubs — and has never heard an objection.
The union, however, has never had a reason to audit such reports since, unlike leagues that feature revenue-sharing between players and owners, there’s no impact on player salaries from such reports. The MLBPA’s interest in the reports is limited to knowing which teams are subsidized by their peers, and then making sure that those teams are spending the money they receive on payroll.
Following an economic presentation from the league this month, the MLBPA sought several documents from MLB. Some were shared, but others — such as the regional sports network contracts that would outline the rules surrounding lost games — were not.
The RSN question is part of a thornier issue between the league and its players regarding non-game revenues. Some teams, including the Red Sox, have maintained for years that the cost of running the team exceeds its revenues on an annual basis and that losses in an individual year are common.
From an accounting standpoint, that may be true, but Fenway Sports Group, the parent company that owns the Red Sox, has an 80 percent stake in NESN, meaning that in ordinary seasons the team serves as a revenue generator for its owners, even if that’s not fully reflected in the direct operating profits and losses of the Red Sox. The same goes for revenue from concerts and other events, though such undertakings won’t be available this year.
There are other additional revenue streams teams have created such as real estate, dining, and entertainment surrounding ballparks. In ordinary years, those undertakings generate income. This year, at least, they won’t.
Even so, MLB owners will remain involved in profitable ventures. In 2015, BAMTech was spun off of MLB Advanced Media; within two years, Disney had paid billions of dollars to acquire a majority stake in it, money that went to owners but was not counted as MLB revenue. Moreover, according to Forbes, MLBAM retained a 15 percent ownership stake in the company, which benefits owners but is not considered baseball revenue.
The company has since been rebranded as Disney Streaming Services, meaning MLB owners are realizing income from a lot of people stuck at home watching “The Mandalorian.” That’s not factored into MLB’s earnings projections.
How much money will the game lose this year?
Setting aside ancillary business holdings, commissioner Rob Manfred has said that MLB stands to lose $4 billion this year. Where does that number come from?
The projection assumes an 82-game season with $2.9 billion in revenue. MLB maintains that local and national TV contracts (which the union hasn’t been able to review) will be prorated, lowering broadcast earnings to about $2.55 billion. There are a few hundred million dollars in additional revenue through sponsorships, merchandise, and online products such as MLB.tv and the MLB At-Bat app to bring the overall projected revenues to about $2.9 billion.
Even with no fans — and thus somewhat diminished operating costs for staging games — there are billions of dollars in additional expenses that would have to be paid. Based on estimates from clubs to the league that were subsequently relayed to players, the industry faces more than $4 billion in expenses (an average of about $140 million per team) to cover costs mostly related to employees throughout the organization such as front office executives, managers, coaches, scouts, and player development personnel.
|Expense||Cost (in millions) with no fans||Cost (in millions) with fans|
|Major league team operations||$763||$763|
|Scouting and player development||$668||$668|
|Amateur signing bonuses||$440||$440|
|Marketing, publicity, and ticketing||$412||$596|
|General and administrative||$798||$798|
|Central MLB office expenses||$360||$360|
|Total||$4.26 billion||$4.608 billion|
|Per team||$142 million||$153.6 million|
MLB, in a presentation to the union, included a team-by-team account of losses from an 82-game season that amounted to roughly $4.4 billion. In a separate slide, the league suggested that those $4.4 billion in local losses were $1 billion more than what the league would lose without a season.
But those figures, which account chiefly for local revenue from RSNs and sponsorship deals, require additional context. They don’t include revenue generated by the league office through elements such as national TV deals, projected by MLB at roughly $1.35 billion in an 82-game season. MLB’s projections also include $440 million in expenses for amateur signing bonuses — money that will mostly be deferred (save for about $16 million) to future years based on the March agreement that shortened the draft to five rounds.
Moreover, the league’s numbers don’t include layoffs, furloughs, and pay cuts. Those cost-saving measures are something the industry as a whole wants to avoid — and some in MLB see reduced player salaries as a means of making cuts to other industry employees less severe — but some teams have begun efforts to save money by spending less on employees.
Finally, there’s the potential for MLB to expand the playoffs this year and generate more revenue. One league source said the topic had yet to be broached with network officials, making it unclear what sort of additional revenue might be achieved. There is industry speculation that postseason broadcast rights could be boosted from $787 million to somewhere in the vicinity of $1 billion.
That ball of wax — $1.35 billion in already projected central revenues, signing bonus deferrals that would lower 2020 payments by more than $400 million, an additional $200 million or so in postseason broadcast revenue, and already planned furloughs and pay cuts — would lower the league’s losses by about $2 billion in an 82-game season.
Make no mistake: Even a $2 billion net loss for the league, with increased expenses coming down the road because of deferrals, would represent a brutal outcome with a number of potential repercussions in the form of more short-term and permanent job losses and future cash crunches that could affect player salaries in coming years.
Even so, players question why their salaries should be used as a subsidy to diminish owner losses.
Isn’t it in everyone’s economic interest to play?
For players, the equation is simple: more games equals more salary, so moving from roughly a half-season to roughly two-thirds of a season would boost earnings from about 50 percent to 67 percent of full salary. The league would likewise make more gross income in the form of local and national regular-season broadcast revenue.
But there are costs for teams to having games — foremost player salaries of roughly $2.1 billion (a figure that sets aside the signing bonuses, buyouts, termination pay, and pension money) in an 82-game season. On top of that, there are additional hundreds of millions of dollars for travel, stadium operations, medical expenses, and health and safety protocols, including regular COVID-19 testing (estimated at $30 million-$60 million by a major league source).
MLB suggested to the union that each game would cost, on average, $1.87 million, while estimating $1.23 million in local income from RSNs and sponsorship deals — a loss of $640,000 per game, or $320,000 per team per game.
However, those projections did not include national media revenue of about $1.3 billion — more than an additional $1 million per game in league income per regular-season game, enough to suggest that the average game could produce a profit of a few hundred thousand dollars.
But that’s an average. The specific circumstances of some clubs will be more challenging, particularly those with high payrolls that are largely dependent on attendance and don’t have great local TV deals.
It’s within the realm of possibility that some teams would absorb greater losses by playing games than by having the season canceled, even if the average game seems more likely to generate positive net income. A league source estimated that even assuming MLB receives the full prorated amount of its national TV revenue, at least 10 teams could see game-day revenue falling below costs in an 82-game season without fans.
According to MLB’s mid-May presentation to the MLBPA, under an 82-game schedule, league broadcast revenue would be “just” $553 million for the regular season and $787 million for the playoffs.
The value of the postseason is enormous, and could be more with an increase in the playoff field. But MLB and team owners harbor concerns about a possible second wave of the pandemic in the fall shutting down baseball before a postseason could happen.
If that occurred, the league could lose its postseason broadcast income. In a scenario where an 82-game season was played but a postseason was not, then based on MLB’s numbers (including regular-season national media revenues), it's possible that individual game revenue could drop below MLB’s projected cost of $1.87 million if players were paid their full prorated salaries.
Of course, with the season’s vulnerability to the public health environment, there are fair questions as to whether a season should be pursued at all, and whether players at potentially heightened risk of COVID-19 exposure should make concessions to diminish owner financial risk.
This is a complicated situation. Unknowns about a potential season exceed knowns, a phenomenon only amplified by the mistrust.
MLB and its team owners suggest that, as a league and in the case of some individual teams, they’re maxed out as borrowers, and note that more borrowing or deferrals would simply kick the can of financial reckoning down the road. Hundreds of millions of dollars in concessions by the players, they suggest, could help avoid mass industry layoffs.
But players approach all claims with suspicion, noting that their salaries had declined in recent years even as reported league revenues had continued a steady ascent, and they view requests by owners for further concessions as a cash grab.
All of which brings the line of questioning full circle: What’s fair?
“Fair is in the eye of the beholder,” said one person involved in the talks. “There’s no right answer.”