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Sports / Baseball

Does Major League Baseball Need A Salary Cap?

Major League Baseball is the last holdout in a sports landscape dominated by salary caps. The NBA installed one in 1984, and the NFL followed suit a decade later. The NHL was the most recent adopter, instituting a cap in 2005. If history is any guide, there will be an MLB salary cap within our lifetimes.

It is no surprise that league managers, rather than players, have driven the proliferation of these spending limits in professional sports. The conventional wisdom is that salary caps are wholly bad deals for the athletes. By putting an artificial limit on wages, the thinking goes, they decrease earning potential. For the most part, ownership has found this effect favorable, seeking out salary caps as a way to avoid costly bidding wars over a player’s services. Conversely, athletes have historically opposed prospective caps, only agreeing to a limit after heated negotiations.

The history of MLB collective bargaining has followed this pattern. Since free agency was instituted in the early 1970s, owners have fought tooth and nail for a limit on player salaries. On the flip side, the players union (MLBPA) has resisted with fierce determination. While players have successfully avoided a full cap, MLB has inched closer and closer with each progressive collective bargaining agreement (CBA). As of now, baseball only has a luxury tax. Although the luxury tax does not put a hard ceiling on payrolls, any team that reaches the designated figure ($197 million in 2017) must pay a “tax” on each dollar above that line. As the overage increases, or if clubs stay over the line for consecutive years, the penalties get increasingly onerous. This, of course, incentivizes teams to limit their spending.

The MLBPA has agreed to the luxury tax as a compromise. By sacrificing the tax in negotiations, it has been able to avoid the implementation of a full salary cap. However, the current state affairs has not served the players well. The luxury tax penalties have increased with each successive CBA, and the players are not making up the difference elsewhere. In fact, the players’ percentage of league revenues has been steadily decreasing and is nearing a record low. Addressing this problem requires a change in tack; clearly, the status quo is failing. Counterintuitively, it may be in the MLBPA’s best interest to pursue that which it has so abhorred: a salary cap.

Since a peak around the turn of the century, the percentage of revenues going to the players has steadily declined. In 2015, MLB union chief Tony Cruz revealed that the figure had dropped below fifty percent. Current estimates put the value in the thirty-eight percent range. In different terms, MLB revenues increased by 650 percent from 1995 and 2015. During that same timespan, salaries increased by only 378 percent.

This discrepancy was produced by a variety of factors. Most importantly, teams have gotten smarter with their money. With the increase of statistical analysis and dollar-per-win calculations, MLB teams have moved away from exorbitant free-agent contracts. Why spend millions on a veteran player when a young call-up can provide the same production for a fraction of the cost? This year’s offseason was a prime example of this change. Solid veteran players, ones who would have received enormous contracts just a few years ago, were forced to settle for bargain deals. Last year’s National League home run leader was cut to be replaced by a Korean League import on a bargain-basement deal. The percentage of players receiving a near-minimum salary (i.e., those who have not yet reached free-agency) has increased from eighteen percent in 1995 to thirty-nine percent in 2016.

Meanwhile, as teams have reigned in their free-agent spending, revenues have gone through the roof. Much of the money has come in via local television deals. In a world of on-demand viewing, sports are one of the few products that people still watch live. This, of course, is highly desirable to cable companies that make their money through advertising. As a result, MLB has raked in TV money over the past decade. With TV growth as the primary cause, MLB has posted record revenue for an incredible fourteen straight years, peaking this past year at $10 billion.

However, traditional television is only the tip of the iceberg. MLB has invested heavily in streaming services under the umbrella of MLB Advanced Media (MLBAM). Created in 2000, MLBAM’s growth has been astronomical. Along with providing the MLB’s own streaming service, it is also the digital media partner of the National Hockey League as well as the engine behind HBO’s streaming platform. The growth has not gone unnoticed: The Disney Corporation (owner of ESPN) bought a thirty-three percent stake last summer for $1 billion. The company is now valued at an astounding $3.6 billion.

Most importantly, while MLBAM has been a windfall for Major League Baseball, the value of the company is not recorded as revenue. The $10 billion figure cited for 2016 does not take MLBAM into account. More worrisome, the thirty-eight percent split of revenue received by the players also ignores the MLBAM golden goose. In simple terms, the problem is even worse than we thought. Even though MLBAM doesn’t provide a revenue stream, it skyrockets franchise valuations. Jeffrey Loria, owner of the woeful Miami Marlins, reportedly has a deal to sell his team for $1.6 billion. For context, Loria bought the Marlins for under $160 million in 2002. MLB has become more profitable than ever and its players are receiving a smaller piece of the pie.

To address this problem, drastic steps are needed. If the current trend continues, and there is no reason to believe otherwise, the players’ share will continue to plummet. The MLBPA’s anti-cap stance is based on the faulty premise that the owners will spend an amount commensurate with profits. However, there is no evidence to support this theory. In fact, owners seem more than happy to pocket the additional revenue.

Under a salary cap, this imbalance would be eliminated entirely. How would it work? Despite the misleading name, salary caps should be thought of as salary zones. There is an upper bound on wages (the cap), but also a lower bound, the salary floor. These figures are directly tied to revenues—the players and owners agree to a split of income, and that split decides the cap. Under this system, if revenues increase, salaries do as well. No longer would owners be able to slash salaries while enjoying the profits of MLB’s growth. For example, the San Diego Padres began this season with a payroll of $34.5 million, a figure that belongs in 1997, not 2017. With a salary cap, however, the players would be guaranteed their fair share.

But what constitutes a fair share is up for debate. Negotiating the revenue split would be the most difficult part of implementing a salary cap. Undoubtedly, the owners would consider MLBAM an investment unrelated to baseball and thus not subject to the salary split. The players would have to argue that their labor made MLBAM possible in the first place and that much of the corporation’s value still stems from baseball. Aside from MLBAM, negotiations on the exact distribution of revenue would also be contentious. However, if the MLBPA could land a fifty-fifty split, as its counterparts in the NHL and NBA have done, it could mean a massive improvement in player compensation. With the newest CBA extending until 2021, there is a long time before such a change could realistically happen. All the better, as the process promises to be long, arduous, and research intensive. Indeed, it could easily turn out that a cap is unfeasible, or that the two sides are unable to find a common ground. But if the union fails to even investigate the possibility of a salary cap, it is doing its players a disservice.