Prospectus Feature: The Players’ Share of Baseball’s Wealth

Not long ago, Tony Clark, Executive Director of the MLB Players Association (MLBPA) gave an interview in which he said that players’ share of revenue is closer to 50/50 than public estimates have pegged. This was puzzling for a number of reasons, most notably that the head of the MLBPA made an assertion likely to negatively impact his own bargaining power, but also because nearly all commentators agree that the owners have profited comparatively more from the explosion of revenues than the players. A March 2015 estimate from Nathaniel Grow posits that revenues have grown nearly 650 percent since 1995 but payrolls have only increased about 378 percent. Scott Boras agrees, gauging players’ share of league revenue at approximately 43 percent, down from a high of around 55 percent as recent as a decade ago. With the current Collective Bargaining Agreement (CBA) expiring at the end of the 2016 season, the revenue split will surely continue to be debated.

Fortunately, a recent development in the business world will provide the public with greater insight into the finances of at least one MLB team. Last November, Liberty Media, the corporate parent of the Atlanta Braves, that it would be issuing publicly traded tracking stock for its Liberty Braves Group subsidiary. Tracking stock is common stock that can be bought and sold as other publicly listed stock, except that it tracks the performance of only a certain part of the larger company. So in this example, Liberty Media has segregated the Braves, its operating company Braves Holdings LLC, and certain assets and liabilities associated with the Braves’ stadium development project into a separate trading unit (parallel to two other units including SiriusXM Satellite Radio and other media holdings). Once listed, the tracking stock will allow investors to directly share in the Braves’ financial successes and failures, distinguishing the stock from that of teams like the Green Bay Packers who offer “public” shares, but the shares carry no public market or dividend. So if you’ve always dreamed of owning a Major League Baseball team, you soon can (buy a publicly traded share that resembles common stock of the holding company that indirectly owns a Major League Baseball team).

More significantly for our purposes, tracking stock triggers the same public disclosure requirements of other public companies. At least in theory then, the team’s complete financial results will be public record. Its 2016 financial performance, especially in what is expected to be a down year for the Braves, could offer the public a never-before-available window into MLB’s finances in advance of the upcoming CBA negotiations.

The Braves’ now-public financial data provides a useful starting point to assess the revenue issue. Earlier this month Liberty Media filed an S-4 registration statement with the SEC containing financial results of the Braves Group dating back to the 2012 fiscal year. In 2015, the Braves Group reported $227 million in Total Revenue (down $15 million over the same period in 2014), with Operating Costs and Expenses^ totaling $243 million, for a $16 million Operating Loss.*

* The filing covers only the nine months preceding September 30, 2015, but fortunately that captures the vast majority of the season (and based on past years, the vast majority of operating revenue and expenses).

^ Other costs impacting Operating Profit/Loss and Net Earnings/Loss include Selling, General and Administrative and Depreciation and Amortization.

That the Braves carry an operating loss for three of the past four years is somewhat surprising (the lone profit may have been driven by on-field success, as the Braves won 96 games and the NL East in 2013). Likewise, total revenues seem lower than expected given the explosion of cash in the game recently. On one hand, the Braves are thought to have a relatively small local television deal, despite the fact the deal was reworked in 2014, and while the national media revenues help lift all boats, local market deals still largely drive team revenue. At the same time, public estimates tend to show the Braves among the top half of MLB organizations in revenue: Business Insider placed the Braves’ 2012 revenue 12th among MLB teams and Forbes 2015 franchise valuations put the Braves’ 2014 revenue in the top 10.

On the cost side, though the filing does not contain a detailed breakout of expenses, we can take what we know about player salary to perform an initial analysis. The ratio of payroll to operating expenses, anywhere from 52-58 percent, seems relatively stable year-over-year. But as far as the CBA goes, the ratio of revenue to player salary carries more significance. The Braves’ four-year trend—42.7 percent (2015), 44.8 percent (2014), 34.6 percent (2013), and 41.3 percent (2012)—tends to support the notion that players are receiving less in recent years.

The Braves are one of 30 teams, of course, so it is worth looking at estimates for other organizations as well. Using Forbes’ 2014 Revenue and Income calculations and BP’s Compensation,# let’s take a look at a couple of teams at different revenue levels, one from each division (all figures in millions):

# Forbes' “Player Expenses” figures are uniformly higher than BP’s numbers, and include “benefits and bonuses.” This additional amount likely reflects non-salary benefits split evenly by each of the 30 clubs such as pension, medical costs, moving expenses, college scholarship fund, etc. This difference in calculation method is discussed in further detail below.

Though there is fluctuation from team to team, often correlated with on-field success, the six-team sample yields results consistent with the conventional wisdom concerning the revenue split. The same is true expanding the analysis to all 30 teams (salaries 45.4 percent of estimated revenue). The above is based on only a single year of data and relies almost exclusively on estimates (for instance, Forbes pegged the Braves 2014 revenue at $267 million while the S-4 filing reports $250 million), so all caveats apply, but the results appear to support the notion that the revenue split has shifted drastically in favor of the owners.

However, the Forbes data is useful in explaining Tony Clark’s 50/50 statement. The CBA provides that each organization contribute equally to a players benefit fund—a figure calculated to be just shy of $11 million in the first year of the current CBA—a contribution that Forbes appears to include under the category of “Player Expenses.” The vast majority of studies on this subject, including this one, focus entirely on salary only, but adding this mandatory contribution to each team’s 2014 payroll brings the percentage of league revenues going to the players to approximately 49.5 percent. In that respect, then, it is easy to understand Clark’s perspective.

So what does this mean for the CBA negotiations? Put another way, when considering the players’ split of the revenue, should we count benefits or just focus on salary? There are basically two competing interpretations: the first adopts a more expansive view of player expenses and is supported by the fact that other leagues like the NBA and NFL count non-salary benefits as player share for the purposes of their CBA. On the other hand, both the NBA and NFL are governed by CBAs that employ a salary cap and expressly divide league revenues, while the MLBPA has resisted both. The MLBPA has been called the strongest union in sports (and maybe in any industry) in part due to its ability to avoid a rigid salary cap and division of revenue, allowing for the possibility that salaries could rise at a greater rate than inflation. In light of this bargaining choice to keep salary and benefits separate under the CBA, I would argue the ~$11 million should not count toward the disputed amount for purposes of this analysis, especially because the next CBA is unlikely to change the revenue and salary structure currently in place. The players are also unlikely to be satisfied with the declining share of player salary just because of the existence of a benefit fund.

The CBA negotiations are also likely to take into account that at least a few teams, like the Braves, operate at an annual loss. From a labor perspective, the split of revenues is more salient than the annual profitability of individual franchises. What an organization chooses to spend off the field is likely of little interest to the MLBPA, and without detailed information as to what makes up these non-salary operating expenses, it is difficult to assess whether team-by-team annual operating income is truly representative of the financial health of the league and its franchises. Some organizations may also have incentives to incur long-term costs at different times, or potentially use accounting methods that reduce short-term profitability. The Braves are a useful example here as well, needing to justify their controversial move to the suburbs and their recent roster tear down.

The other point routinely overlooked in this debate is that the valuation of professional sports franchises has skyrocketed in recent years and shows little sign of slowing. In fact, the headline of the Forbes article referred to above was “MLB Worth $36B As Team Values Hit Record $1.2B Average.” It is difficult to downplay decreasing salary figures, even in the face of an annual loss, when the value of franchises are also rapidly appreciating.

So while Tony Clark’s position is valid, the limited information available to the public supports the theory that increased revenues have indeed benefitted the owners significantly more than the players. The impact of the revenue split to the upcoming CBA negotiations is quite uncertain, especially given Clark’s recent comments, but fortunately for public observers like us, by the time negotiations begin we should have more information from the Liberty Braves Subgroup to help us evaluate the competing positions.