Passan: Inside MLB’s financials fight – and the numbers to solve it

    ESPN MLB insider
    Author of “The Arm: Inside the Billion-Dollar Mystery of the Most Valuable Commodity in Sports”

There are simple solutions for baseball’s return. They’re right there, waiting for owners and players to embrace before the parties unleash more damage on the sport.

Already they have taken what could have been a triumphant return and dragged it through a swamp of pride and avarice and obduracy. In the middle of a pandemic. As cities around the country burn. With more than 40 million unemployed. It is myopic, and it is time to stop.

Because the answer is clear. All of this — this gridlock and inability to get anywhere close to a return-to-play deal — is a fight over a few hundred million dollars.

If that seems like a paltry amount in the grand scheme of baseball economics, that’s because it is. In a typical year, Major League Baseball generates around $10 billion in revenue. While hundreds of millions of dollars isn’t exactly a rounding error, it is also not the sort of money worth piloting an industry into a full-on labor war.

What’s about to come is slightly math-intensive, but it illustrates exactly what’s at stake and why a peaceful resolution is not only possible but imperative. It relies on numbers that are generally accepted by both sides, a rarity considering the rampant distrust that has turned negotiations thus far into a stalemate. It requires compromise, which will be crucial to avoid the severely shortened season MLB can impose unilaterally per its March 26 agreement with the MLB Players Association.

First, we must start with two true premises.

1. MLB is willing to pay players a full prorated share of their salaries over a 48-game season.

2. The MLBPA is willing to play an 82-game season at a full prorated share of players’ salaries.

Each of these is important to establish the parameters in place. While MLB has yet to propose a schedule, multiple sources told ESPN that the league’s discussions with owners about the implementation of a short season have focused around 48 games. The union, on the other hand, has shown a willingness to accept an 82-game schedule that would pay players full pro rata — slightly more than half of their contracted salaries — according to sources. Though the March agreement between the parties established that players would be paid full prorated salaries, MLB believes language in the deal allows for an adjustment if games are played in empty stadiums.

Three other points are vital to explain how a deal can come together.

1. If teams were to pay players a full prorated portion of their salaries, it would cost around $1,674,800 per game. The union and league both accept this figure.

2. In a financial statement MLB provided to the union, the league suggested every game played would generate $980,000 in local television revenue. Over the course of a 162-game season, that would total $2,381,400,000. In a 48-game season, that amounts to $705,600,000 in local TV revenue. For 82 games, it is $1,205,400,000. While the union disputes MLB’s accounting in a number of areas — and rightly points out that the local TV revenue numbers do not include teams’ valuable ownership stakes in their regional sports networks — it is generally believed actual local TV revenue is in the $2.4 billion range.

3. The league in its financial statement said that for every game played in 2020, teams would combine to lose $640,000. The union has not validated this claim and has requested documentation from MLB to verify it. A simple equation — full pro rata salary minus local TV revenue — leaves a loss of $694,800 per game. Considering teams could generate a combined $54,800 per game in other revenues to bridge the gap between the difference, both will be considered going forward.

The per-game loss is an important number because it gives a sense of what owners are willing to lose in game-day revenue to put on a season. The league says 40% of revenue comes from tickets, concessions, parking and other game-day purchases. (Other estimates have pegged the number slightly lower.) Because the league plans to play games without fans in stadiums due to coronavirus concerns, a significant portion of its standard revenue vanishes. This is the basis for owners’ arguments that they are better off playing fewer games.

Still, a 48-games-per-team schedule would leave a 720-game season. At MLB’s self-reported loss of $640,000 per game, a 48-game season means the league would be willing to lose $460,800,000.

The players desire a longer season. More games played means more games paid — and a closer facsimile of a representative season. After rejecting MLB’s initial proposal of an 82-game season with an insulting pay cut — an offer that furthered discord between the sides — the union answered with a plan for 114 games at full pro rata. That was almost equally outlandish and was rejected by the league, which informed the union it would happily pay full pro rata at a schedule of its desired length.

Regardless of the number of games played, MLB’s plans include a regular season that would end around Sept. 27. The league predicates the date on fears of a potential second wave of the coronavirus wiping out the playoffs, a cash cow MLB said in its financial presentation is worth nearly $800 million in media rights. Having staked out that position publicly via surrogates — Arizona owner Ken Kendrick said as much on a Phoenix radio station Tuesday — the league is unlikely to relent. If it did, it would look like it were treating player and employee health as a financial bargaining chip, a macabre optic for a sport already fighting a torrent of bad publicity.

Accordingly, between the time it might take to settle on a deal and the September cutoff, an 82-game season might be the most players can hope for. Seeing as they would settle for a full pro rata at 1,230 total games, the projected losses from owners based on the $640,000-per-game figure is crucial for this exercise: $787,200,000. Compared to the projected losses owners would face in the 48-game season they’re ready to rubber-stamp, playing an 82-game season would cost $326,400,000 more.

And there you have it. Distilled to the simplest form, Major League Baseball is in crisis because of a $326 million problem.

The players will say: That is $10,880,000 per team. Or the cost of a decent No. 4 starter. And they are right.

The owners will say: That is another $326,400,000 on top of the $3.5 billion we are already set to lose. And though there is no publicly available documentation to substantiate those claims, the lack of gate revenues alone is a significant enough blow that some sympathetic to the union acknowledge the league’s finances have been hampered.

Now comes the difficult part. The negotiating endpoints have been established. So has the chasm between the parties.

“Both sides have created through ignorance and deceit their own universes,” said one source involved in the discussions. “The owners are convinced they’re victims. They players are convinced they’re aggrieved. It’s two echo chambers.

“You can’t talk money,” he said, “without trust.”

Distrust is the hallmark of the current relationship between the union and league, and it has metastasized into other areas. The lack of urgency demonstrated by both sides illustrates just how badly baseball has allowed the financial standoff to bungle its return. While April was spent figuring out the best plan to return to play — MLB considered playing in a bubble setting like the NBA and in multicity hubs before settling on trying to play in home stadiums — May was a completely wasted month. The sides are as far apart now as they’ve been. On Thursday night, following a meeting with the executive subcommittee, player representatives and other players, MLBPA executive director Tony Clark issued a statement that said: “The league’s demand for additional concessions was resoundingly rejected.” The animus and ill will is as bad as it has been in decades, which makes brokering any sort of a deal perhaps a fool’s errand.

Nevertheless, it’s worth playing the fool to illuminate what’s possible, because while the league and union might have demonstrated good-faith negotiations in the legal sense, neither side’s offer exhibited them in spirit. Deals get done with compromise, and in the absence of that tenet from both sides, here is what one might look like in reality.

Remember, the league has indicated it is willing to lose $460 million for a 48-game season. It stands to reason, then, that the league would be willing to lose $460 million over any length of season. In an 82-game season, that number is achieved by the players taking a 17.2% pay cut off full pro rata.

Throughout the process, as owners on the league’s powerful labor-relations committee have stated they will settle for no less than a 30% haircut off the players’ full pro rata, players have been steadfast: no further pay cuts. They already have forfeited their salaries for however many games wind up canceled. Part of their issue stems from the owners of teams, all of which are worth at least $1 billion, trying to socialize losses after privatizing profits for so many years. Teams’ values have grown at a far quicker rate than players’ incomes. What the players see as disrespect for their contributions to the game, epitomized by stagnant salaries and a sluggish free-agent market, has festered for years. This is the comeuppance.

As much of a hammer as the league holds with the schedule, the union is not without weaponry of its own. It’s true: Players must play if MLB schedules games. Individuals sitting out without permission would be placed on the restricted list and not receive service time, per the March agreement. Players not reporting en masse would likely be deemed an illegal strike. Where the players can strike is at a pair of MLB weaknesses: money and marketing.

In its proposal, the union showed a willingness to accept the league’s plan of expanding playoffs from 10 to 14 teams not just for the 2020 season but for 2021 as well. MLB’s desire for more playoff inventory and the potential financial windfall that would accompany it is a chip the union can play at its behest.

Further is the ancillary harm players can cause by separating baseball and Major League Baseball. They have too much self-respect to allow baseball, on field, to suffer. In the absence of a deal, players would be exceedingly motivated to make Major League Baseball suffer. In-game microphones worn by players to enhance TV broadcasts? No chance. Interviews with MLB Network? Unlikely. Meeting with a sponsor, if ever stadiums reopen to fans? Sorry, just too busy. It would be a clinic in passive-aggressiveness, with players saying that if the game does not want to invest in them, it will simply return the favor.

Compromise occurs if owners recognize, or simply acknowledge, that the union is not operating from an entirely weak position. It occurs if they adhere to the notion of investing now and winning later — of recognizing that a 48-game season runs the risk of being farcical when the possibility of 82 games still exists, even if the logjam burns daylight on the regular season.

It takes two parties, and the hard-headedness of players is not to be underestimated. The principle around which they’ve rallied, one person involved with the union said, is not the elevated risk of COVID-19 to which they could be exposed during a season, but MLB’s “attempt to devalue us.” This isn’t just about 2020, sources said. The MLBPA is standing firm in an effort to project strength going into 2021, when the current labor agreement expires. Said one player in leadership of the union’s fixed stance: “You have to look at it in a vacuum.”

Do you, though? This, it seems, would be the worst time to look at it in a vacuum. The pandemic. The real festering wound of racial injustice. The unemployment. The nation buckling as the national pastime fights a dogmatic, ideological fight over a few hundred million dollars. Both sides are acting like baseball, a sport with a waning national audience, sagging ticket sales and difficulty making stars — a sport vulnerable enough that the NBA is considering changing its entire schedule so its playoffs overlap with MLB’s summer months — is immune to consequences of actions seen by even rabid fans as oblivious and blinkered.

It’s all obscuring the simple reality of this being a $326 million problem. One source said it was more like a $500 million problem, since the difference in local TV revenue between 48 and 82 games is $499,800,000, and the owners would want a cut of that gain for the extra games played. This is the fight. This is always the fight. Every dollar, let alone hundreds of millions of dollars, counts, even when it is late enough in the negotiations to acknowledge there is a middle, one that makes sense, one with multiple iterations of a deal. Neither side wants to move there, lest the other pounce with malevolent intent.

So here it is, right in between the $460.8 million in losses for the full pro rata at 48 games and the $787.2 million at 82 games: $624,000,000. The players can have a choice: They can get full pro rata at 65 games and make $1,632,930,000 in total salary or they can take an 8.6% pay cut off full pro rata at 82 games and make $1,882,830,000. If the full pro rata is really important enough to the players that they would literally leave $250 million on the table just to make a point, hey, more power to them. Principle, right?

Both options leave the league $624 million in the red on game days. “There’s no way the owners will do a cut of under 10%,” one front-office source said. Not even if the players could add the extra postseason games this year and next, agree to be miked up as part of an effort to sell baseball amid a crowded sporting landscape and create an event like an offseason Home Run Derby, all of which the union offered in its proposal? The postseason games alone are worth hundreds of millions of dollars over the two seasons. Perhaps they’re enough by themselves for the MLBPA to hold firm at full pro rata for even longer than 65 games.

Say this year alone the wild-card round amounts to $100 million in national TV revenue. That would take the losses down to $524 million. The difference between that and the 50-game pro rata losses: around $64 million. Or roughly $2 million a team.

“The owners are not going to agree to more losses,” said one person familiar with their thinking, and that’s the sort of thing owners say in the middle of a negotiation. They have grown used to winning, and their position, as of now at least, is as rigid as the players’: They’re happy to play 48 games.

The players believe they’re bluffing — that the specter of a forced season, of further labor discord going into 2021, of this sport so broken it couldn’t figure out how to split up billions of dollars during a pandemic, will bring the league back to the table. If MLB calls the union’s bluff, players will make a total of $1,205,856,000. They could take a 40% pay cut on their full pro rata at 82 games and still make more than they would over those 48. Here stands the union nevertheless.

Not all members are on board with the tack. Some just want to play, recognizing that more games equals a better opportunity to build up statistics. Others prefer the union not forsake 2020 in service of 2021. Even if the two are intertwined, the thinking goes, solve the present-day problems before worrying about the future.

“This is the end,” one owner said. “You pick a path. Everybody’s got to move a little.”

In these negotiations, an inch would amount to a mile. The clock isn’t ticking anymore. The damn thing broke. They blew a soft June 1 deadline already. Baseball has taken so long to return that Texas is ready to allow fans into stadiums. Which could go a ways to undercutting MLB’s main argument about lost revenues.

This, one might suppose, is just baseball. Simple? Nothing is simple. Not a solution that agents and general managers agreed this week they could hammer out in a day. Not the lingering feeling that accompanies a sport blowing whatever goodwill it might have left. Yeah, this is baseball, like in the old days: its own greatest enemy.

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