Who is right?

By Ron Kuchler

From the beginning of the suspension of sports due to COVID-19, I have said that when professional baseball resumes in America there will be a 54-game season. With each passing day, this prediction appears more likely. In fairness, I also predicted that MLB would restrict its’ games to two geographical markets, Arizona and Florida. With state governors caving in to pressure from their political donors, it appears that games will be played in the teams’ local markets. So, in this battle of wills between billionaires and millionaires, who is right?

The base argument for each side is a straightforward narrative. For the owners, they will lose money this season regardless of the number of games played. They say we are merely trying to minimize those losses. For the players, they say it is all about precedent. We are requesting to be paid according to what our contract states. Two simple, straightforward arguments, right? Wrong!

Let us start with the owner’s side first, as it will be easier to dissect and quicker to explain. First, remember this is only about economics. We are not discussing the health risks associated with returning to play.

As someone who has owned multiple businesses, the owner’s position will be simple to explain. Using a hypothetical company, assume the business generates in a normal year $1 million a year in revenue. The company distributes 50% or $500,000 of the revenue to wages. Suddenly, a catastrophe strikes, call it a hurricane, earthquake, or tornado. The business is unable to open for 6 months. It is not generating revenue to pay operating expenses for 6 months. It still has operating expenses, except employee wages.

Finally, the government says the business can resume operations. But due to the catastrophe, 40% of its customers will no longer be buying from the business. It now has lost an additional 40% of the revenue it requires to run the business. It has two choices – reduces overhead, meaning laying off employees, or request employees to take a pay cut. The third choice, the nuclear option, is reducing employee hours. But this is only a last resort as it will further decrease the business’s revenue as the business will need to reduce hours it is open.

Here is a breakdown of the revenues and expenses a company has to operate. Normal year revenue $1,000,000

2020 Missed Revenue due to catastrophe <$500,000> (business was closed for 6 months.)

2020 Missed Revenue due to 40% loss of customers <$200,000> (40% of 6 months revenues)

Remaining revenue to pay the overhead for 12 months and 6 months of wages $300,000

If employees insist on full pay for the remaining 6 months <$250,000>

Balance left to business to 12 months of operating expenses $50,000

In a decent year, the business earns a profit of 20%, equaling $200,000.

Exclusive of wages, this equates to overhead costs of $300,000. If the business fixed costs are $300,000 and employees receive their full pro-rated wages, the business loses $250,000.

Extrapolate $1 million to $10 billion (the estimated annual revenues MLB generate leaguewide.). The losses total $2.5 billion! If there are no games, the owners openly acknowledge they lose a comparable amount.

The players’ side is more difficult to explain. For starters, their initial argument was ‘precedent.’ When it was proffered in public that the owners were going to propose a 50/50 revenue sharing plan, the players’ swift public reaction was to reject such an outlandish proposal. Why? Because it would set a ‘precedent.’ What precedent? A salary cap. And the players will never agree to a structure where there is a salary cap.

Forget for the moment that MLB is the only professional sports league in America without a salary cap. And the average age of its fan is the highest of all professional sports. But those two items are beside the point. The players say NO salary cap.

When MLB ultimately made its economic proposal there was no salary cap. With no salary cap proposed, there can be no precedent. Consequently, they requested players to accept less in wages since there would be no fans in the stadiums and 40% of the league’s revenue is generated from fan’s attendance at games.

How was it received? The players flatly rejected the offer by not even acknowledging it and sending their unhinged proposal.

Why? Because the March agreement between MLBPA and MLB laid out compensation upon return to play. So MLBPA and their members thought…

The agreement states and subsequent emails between negotiators for both sides validate, that when play resumes and there is a chance that there will be an absence of fans present, then the two sides acknowledge that the agreed-upon economics will need to be revisited. In other words, renegotiated. The players continue to refuse to acknowledge this compensation agreement. They say they already agreed to a pay cut and will not agree to an additional pay cut.

Pay cut? Oh yes. The league, in good faith, advanced the players’ $170 million (an average of $218,000 per player) while the league was shut down due to the COVID-19 pandemic. It is noteworthy that the CBA (collective bargaining agreement) states clearly that the league is under NO obligation to pay players in case of an act of god or similar economic calamity. Covid-19 qualifies as an act of god or such.

But MLB desires improved relations with the players, so it voluntarily advanced monies to the players. So, what about that pay cut? The average pay of $218,000 per player is not distributed equally. It is based on a sliding scale, which neither you nor I care much about except that $218,000 represents nearly 4 times the annual average household income in America.

The players cannot make a precedent argument. Can they? The players continue to argue that their March agreement states full compensation upon return to play, even though MLBPA leadership acknowledges if there are no fans at games that the agreement raises the point of revisiting pay. Therefore, what are MLB payers hanging their hat on now to objecting to the owners’ proposals? The economics of owning a business. What? Bear with me as this will require a bit to explain. It is the only persuasive argument the players produce when it comes to the fans.

The players and agents (ahem, Scott Boras) state that there are risks with owning a business. Players point 1, when the revenues of the business (in this case, the major-league franchise) rise, players’ salaries do not increase. That seems like a reasonable argument in the Twittersphere. Too bad it is false.

When major-league franchises have added revenues, it allocates capital to paying players more. You  look at the New York Yankees as exhibit A. Due to their lucrative local  market television contract, the Yankees generate a tremendous amount of liquidity to direct to player’s compensation. In year’s past, the Yankees’ luxury tax was greater than the payroll of some small-market teams like the Tampa Bay Rays. So, the argument that when a franchise has greater revenues does not mean the player’s salary increase is not true.

Players point 2, when the value of the franchise increases, player salaries do not.

To begin with, the valuation of a business is hypothetical until it is sold. The value is purely what someone is willing to offer for the business and that business may include more than a sports franchise depending on the corporate structure. It could include a local television network. It could include the stadium and/or property around the stadium. Many variables contribute to the VALUE of a franchise. But, putting aside all those variables, the argument that when a franchise’s value increases player salaries do not is false. The franchise’s value is the owner’s borrowing power. It is their home. When your home increases in value, your ability to borrow against your asset, your home, increases. Therefore, providing you with access to more capital, if you necessitate it.

The same goes for sports franchises. As a major-league baseball franchise increases in value, it provides the owner with an asset from which he/she/it can borrow and reinvest into the business, including paying higher salaries. NEXT!

Player’s points 3 and 4, you are a bad business owner for not saving for a rainy day and it is not our job to bail out your poor business decisions.

First, it is one thing to save for a rainy day and a different thing to save for the simultaneous onslaught of a category 10 earthquake, category 6 hurricane (which does not exist), and an EF-5 tornado. That is not a rainy day and is exactly the economic impact the COVID-19 pandemic had on our economy and the sports world.

It has been rumored that agent Scott Boras has remarked privately that there are owners who leveraged debt to purchase their teams or went into debt to offset operating capital shortfalls. And he is rumored to go onto say that it is not the player’s responsibility to bail out the owners, point 4.

This argument makes as much sense as criticizing you for taking out a mortgage to buy a home and not having a crystal ball to see someday that an economic catastrophe might strike planet earth and eliminate your source of income for an indefinite period.

Now that we have analyzed both sides of the equation. Who is right and who is wrong? In the eyes of the public, it will be whoever forges the most influential emotional connection.

Do fans side with the millionaire players who merely want to get paid what their contracts say, ignoring once-in-a-century events? Or do the fans side with the owners and show sympathy for the owner’s attempt to minimize the impact on seasonal and salaried employees who will suffer greatly if their wages are cut?

Overwhelmingly, the public views both sides as greedy. The players rely on the talking heads at ESPN to sway public opinion in their favor. The owners? Well, no one in the media is in their corner. The best they can expect is neutrality from the beat writers.

Where do I stand? If you followed the entire column, you probably have the impression that I am firmly in the owners’ corner. But, to be honest, I lean towards the owners’ side. We are not privy to the conversations between the negotiators, so we do not precisely understand all the possible parameters that were discussed.

It is my opinion that the proposal should have been a revenue share for the 2020 season based on projected revenues. PLUS, the players may request an audit of the revenues once the season was over. If the revenues are higher, the players receive added compensation. If the revenues are lower, the owners absorb the hit. Fair and square.

As I noted at the beginning of the column, I believe a 54-game season is the likely end game. The season will be a sprint compared to a traditional 162-game season. It will be fun to watch. It will be grand to see pitchers trotted out every 4 days instead of every fifth day.

Teams with the best starting pitching should prevail. This does not foretell well for the Yankees whose staff is built on the strength of the bullpen. In a competitive NL East, the Nationals should emerge, and the Dodgers should repeat in the West for which seems like their 20th division title in a row. The NL Central is a toss-up so let’s go with the Cardinals, but the Reds starters look stellar so they could surprise. In the American League, this could be the Rays year to capture the title in the AL East while the Astros claim the AL West’s top spot. In the AL Central, it’s the Indians with a nudge from the Twins. All of this could be upended by the players who decide to sit out the season. Play ball!

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