JSE: Zimbalist on salaries and revenues

The second article in the February, 2010 issue of "Journal of Sports Economics" is "Reflections on Salary Shares and Salary Caps," by Andrew Zimbalist.

It's an overview of the recent history of revenues and salaries in the four major sports. I say "overview" because Zimbalist implies there's a lot of detail that went into the numbers that wouldn't fit in the article. Zimbalist starts off by quoting some incorrect numbers that appeared in the press, and says,

"... it helps to get the numbers right before plowing ahead. ... Special knowledge of the real world, even though it may sometimes be proprietary or may entail diligent digging, can help sharpen and deepen research by sports economists ..."

The main question in the paper is: what percentage of revenues is paid to the players in salaries? Zimbalist touches on some of the issues involved in figuring that out. In three of the sports (MLB is the exception), there's a salary cap that's based on a percentage of revenues. You'd think it would be as simple as looking at the union agreements to see what the percentages are. But what counts as revenue? The details are different for the different leagues, as defined in their respective contracts. For instance, the New York Knicks and the MSG network that broadcasts their games are both owned by the same company (Cablevision). In order to avoid having MSG pay a too-low price for the broadcast rights (thus artificially lowering the Knicks revenues), the contract contains a clause that values the TV contract at the same price as the Lakers' contract (which is a transaction between unrelated parties).

Also, NHL revenues are defined to include the value of complimentary tickets; NBA revenues are not. And so forth.

Anyway, here are the numbers, as Zimbalist calculates them:

In the NFL, salaries from 2001-2006 fluctuated in the range of 54 to 60 percent of total revenues. Before that, from 1994 to 2000, they were higher, between 60 and 65% all seasons but one.

In the NBA, salaries from 2001 to 2006 were 57% of "basketball-related income" in all seasons but one (60% in 2002-03). In the six preceding years, they ranged from 53% to 65%.

Zimbalist doesn't give data for the NHL, perhaps because the salary cap is so recent. But the agreement calls for salaries to comprise 54% to 57% of revenues, with the higher numbers applying when revenues are high.

Finally, for MLB, Zimbalist's numbers fluctuate a fair bit. Here they are from 1990 to 2007:

1990-94: 42%, 47%, 54%, 54%, 63%
1995-99: 62%, 58%, 59%, 56%, 59%
2000-04: 56%, 61%, 67%, 63%, 55%
2005-07: 53%, 51%, 51%

Those numbers don't include minor-league salaries. If you add those in, the 2007 figure rises from 51% to 57% (since MLB pays minor league salaries but doesn't participate in minor-league revenues). The same principle holds for the NHL, but to a much lesser degree (since there are fewer minor-league players, and some NHL teams own their affiliates outright). With minor leagues included, the NHL ratio rises to 58%.

If you're interested in some of the issues behind these estimates, I definitely recommend Zimbalist's article. There aren't a lot of hardcore details, but there is a discussion of some of the many issues that have to be considered to get accurate numbers.

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Generally, it looks like all four sports have about the same ratios, between 55 and 60 percent. Zimbalist expresses a bit of surprise at this, since MLB doesn't have a salary cap, while the other three leagues do. You might have expected the MLB ratio to be higher, because of that, but it doesn't work out that way.

I guess it shouldn't be that much of a surprise -- if the MLB ratio was too much higher, the teams would be demanding a cap, and that doesn't seem to be the case. To me, logic seems to suggest that MLB should be the healthiest of the four leagues: it spends the same ratio of revenues on player compensation, but the big-market teams pay more, and the small-market teams pay less. This lets all the teams make a decent profit, and puts the best teams where there are the most fans.

With a cap, the Yankees would have to spend the same as everyone else. They'd be an average team, and, since the Yankees are the biggest market, their revenues would drop more than the revenues of other teams would rise. And so the league as a whole would be worse off -- they Yankees would make less, and, with a salary floor like in the NHL, lots of small-market teams might start losing money.

Except ... well, as I wrote before, I wonder if, in the long term, the fans will be willing to put up with a system that virtually guarantees the Yankees and Red Sox so many more pennants than the Royals and Marlins. I guess time will tell. For my part, I much prefer the long-term competitive balance promised by the other three leagues.