Baseball is Broken, Please Fix

The owners are mad at Steve Cohen.

Why? This is why.

That is a chart of free agent spending by team in this offseason (as of this writing -- i.e., post Correa signing but pre whatever ends up happening with his injury status). You'll notice that the New York Mets, Cohen's team, are pretty far out front of everyone else. In fact, they've spent 1.4x the next-highest team (the Yankees, who, among other things, signed MVP and home-run-record-with-an-asterisk-holder Aaron Judge, which is why no one's mad at them) and over 2x as much as #3.

Why'd he do it? And why are they mad? And the third, more interesting question, what is the financial structure of the MLB, how does it compare to other major sports leagues, and how could (should, must) it be better?

Let's explore these questions. Are you excited? Because I am.

Why Did Cohen Do That Thing?

Because he could.

See, the MLB doesn't have a salary cap; i.e., there's no hard limit to team spending. It has a luxury tax, which it calls the "Competitive Balance Tax," because God knows we don't have enough things already that are abbreviated CBT. Essentially what the CBT (ugh) does is charge owners who exceed it a tax that they have to pay the league, which is distributed out to the owners. The more you exceed the tax, and the more regularly you do so, the more the league punishes you financially (here are the details, if you care). The fourth tier of the CBT, set at $290 million, is nicknamed the "Steve Cohen tax," because it was specifically instated to stop Steve Cohen from doing the thing where he pays his players way more than everyone else.

It obviously did not work.

Why not? Well, here is a (slightly inaccurate and over-simplified) chart of MLB team owner net worths:

Essentially, by billionaire standards, Cohen is rich and everyone else is poor.

But he's not JUST rich. He's also one of the few MLB owners (possibly one of one) who actually wants to spend as much money as he needs to to make his team a contender.

Last year's Mets won 101 games (tied for third in baseball). They've since signed Carlos Correa ($315m), Brandon Nimmo ($162m), Edwin Diaz ($102m), Justin Verlander ($86.6m), Kodai Senga ($75m), Jose Quintana ($26m), Omar Narvaez ($15m), Adam Ottavino ($14.5m), David Robertson ($10m), and Danny Mendick ($1m). The Mets are going all in, and Cohen has the money to pay these contracts, the luxury tax, and more without breaking a sweat.

In short, what we're seeing here is the first time in quite a while that an owner is trying to buy a championship.

How Do We Feel About Cohen Doing That?

This might initially seem like a strange reaction to the sentence "an owner is trying to buy a championship," but my feelings about Cohen's campaign are overwhelmingly positive. Owners should be trying to buy championships. That is the POINT of owners. They spend money to hire good personnel and sign good players and they try to build competitive teams. Cohen is simply the only owner in baseball who's playing the money game the way it's meant to be played, optimizing his decisions within the financial context of the MLB (be assured, even if he's running at a loss year-over-year, the growth of the Mets brand and valuation will far outpace it), and the other owners are mad about it. They're so mad that they're threatening to punish Cohen through colluding, presumably to deny him trades and access to their personnel. (I'm linking to an image of a reddit post there because I will never pay money to read mediocre sports journalism and I won't ask you to either.)

So Why Are The Owners So Mad?

This is where we take a brief intermission to describe the financial structures of a couple American professional sports leagues, in order to explain why the MLB is so fucked up and why the other owners are so mad at Cohen. Please bear with me. I promise this stuff is really interesting if you're autistic.

Okay, so the NFL is the best sports league. Why? Aside from being the best sport, it has a hard salary cap, which comes with a hard (ish) salary floor, and the two figures are close. Here are some numbers: The current NFL salary cap is $208,200,000, and the salary floor is complicated but averages about 90% of the cap, which would place it at $187,380,000. (The actual details are a little more complicated than that, but it gives you an idea.) What this means is that NFL spending is extremely high-parity, and teams are thus incentivized to spend their money as well as they possibly can -- that is, every team will spend around $208 million, give or take, and they will compete to sign the best players at the best prices, manage their money the most efficiently, and win the most games (in the short- or long-term; i.e., teams may tank in order to increase future performance, but no team in football is deliberately minimizing payroll to maximize profit for ownership). They will try to compete because, expenditures being (roughly) equal, team performance is the best way to increase revenue (not to mention keep your job, if you're a GM, a player, or a coach).

How does this compare to baseball? Well, here is a graph of NFL team total cap (essentially payroll, with some extra complexities).

And here is a (slightly out-of-date) graph of MLB team payrolls.

You see the problem? The Baltimore Orioles spent just under $45 million on payroll this past year. The LA Dodgers, on the other hand, spent over $270 million, meaning they paid out over 6x the salary to their players. For comparison, the highest-spending NFL team is paying their players about 1.25x the lowest-spending team, and both teams are outliers; the second-highest-spending NFL team is paying only 1.1x as much as the second-lowest spending team.

Why does this huge payroll disparity exist in the MLB and nowhere else? The extraordinarily naive answer is revenue disparity: there are big-market teams and small-market teams, and small markets like Miami (6.1 million metro population) just can't hope to compete with big markets like San Diego (3.2 million metro population).

We don't have accurate revenue information from MLB teams, because if they ever released it their fans would eviscerate them. But reputable sources, as well as pseudo-reputable guys I've never heard of, all tend to imply that every MLB team (with the possible exception of Cohen's Mets) is running at a profit, and generally a profit in the nine figures. Consensus among knowledgeable fans is that every team could probably pay out at least $150 million a year in payroll, and probably closer to $200 million. TV deals alone are said to bring teams $100 million a year before any tickets are sold (not to mention concessions, merch, video game licensing fees, etc., etc.). There is no reason that any team should be paying their players less than $100-$150 million, and the fact that they are points to nothing other than sheer greed.

You see, every dollar an owner doesn't have to pay a player is a dollar he gets to take home as profit. If the Baltimore Orioles (payroll of $45m last year) took home, at a conservative estimate, $150 million in revenue, their owner made about $100m in profits, give or take. Although given that the Orioles seem to charge about $30 a ticket and sold about 17k tickets per game, coming to about $41 million from tickets alone, as well as potentially nine figures in revenue sharing before we even get into TV revenue, it's possible that the number is substantially higher.

This is the real reason why the owners are mad at Cohen, and why you get the thinly-veiled threat to collude to punish him for breaking the $300 million barrier. When you stand to pocket hundreds of millions in profit by paying a bare-bones team $40-50 million a year and a guy like Cohen shows just how much money there is to be spent in baseball, that makes you look bad. It makes your fans mad that you aren't spending money. It makes them not want to go to your games, buy tickets, buy concessions, and buy jerseys. It makes them call for your head on social media. You want your fans to make defenses for you, to say that you can't possibly afford that kind of spending. But when teams like the Mets, and, to a lesser extent, relatively small-market teams like the Padres are at/near the top of the league in spending, your arguments fall flat.

Every owner in baseball could furnish a payroll of $150-200m, minimum. And as a fan of one of those teams that spent $0 in free agency this year (sigh), I'm very much on board with the angry fans, who are using Cohen as an example of how an owner SHOULD be.

Here's the problem. Yes, Cohen's spending makes virtually every other owner look like a greedy miser (and rightly so). But there is still no financial incentive for them to change. Remember the CBT? That money gets distributed back to the owners, meaning those "poverty" franchises paying virtually the minimum possible amounts to their players are actually making more money as a result of Cohen's spending, which means more profits to line the owners' pockets. And in the absence of a major push by either fans (logistically and socially impossible) or players (financially improbable), nothing is likely to change anytime soon. The most likely change would be measures against Cohen severe enough that he sells the Mets or stops spending like this, and the owners get to go back to comfortably making huge profits by underspending on players.

What Should Happen?

But suppose that wasn't the case. What if, somehow, we ended up being able to change the financial formula that is tearing the MLB apart, and has led to a staggering lack of parity in the league? What would we want that to look like?

My first suggestion, obviously, is a salary cap with a high floor. Peg it to league revenue (jack up revenue sharing if you have to; otherwise peg it to team revenue, but with some intense third-party evaluation to stop teams from cooking the books), and force teams to spend within a relatively narrow window. The average payroll in 2022 was $150 million, which is probably between 50% and 60% of average revenue, so let's call it 55% and peg that to year-to-year revenue. Then set a cap at +5% and a floor at -5%, which would come out to a $157.5m cap and a $142.5m floor. We could even be nice to the owners and go +/- 10%, which would give us a $165m cap and a $135m floor, although I suspect, given the culture of MLB owners, we'd see a lot of teams come in right at that floor. For any amount below the floor, do what the NFL does and redistribute the money to the players, plus maybe a punitive hit to revenue sharing (a kind of inverted CBT, if you will).

You'd have to apply it over a number of years or grandfather in big contracts, but it would certainly work. Total money paid out to players would be about the same, and owners would still make about as much revenue and profit as they ever did. The only difference is that now it would be distributed evenly among owners and teams, and the level of parity in the league would drastically rise.

The other element to consider is a max contract, which the NFL doesn't have but the NBA does. (The MLB, to its credit, doesn't either.) The effect of this is that, in the NBA, superstar players get offered virtually identical contracts by every team, and choose based entirely on caprice; where are my friends playing, where do I want to live, where would I get the most control over front office choices. This has two consequences: First, money gets spread around more widely to non-max-contract players (because the NBA, like any sane league, has a salary cap... although a complicated one). And second, it means the NBA has virtually no parity, since winning titles is largely about convincing the right combination of max-contract players to play for you instead of your opponents. Max contracts are an interesting financial phenomenon, but they're terrible for parity. (A max contract length, on the other hand, might reduce financial trickery around paying a player a relatively low average value over a relatively large number of years... but that's a different discussion. The NFL doesn't have to do this because careers aren't that long.)

So that's the formula. A salary cap pegged to revenue with a commensurately high salary floor, and no max contract. It's what the NFL does, and the NFL is generally considered the highest-parity major pro sports league. This cap is pegged to revenue, and specifically about the percentage of revenue which is already paid to players, which the owners' suggested salary floor in the last CBA negotiations didn't do. It's also narrow, forcing teams to spend about the same amounts, which increases parity, decreases the number of owners trying to maximize profit through underpaying, and solves the problem of a few teams trying to spend as much as possible and a few trying to spend as little as possible. It resolves the Cohen situation neatly, keeps the revenue split equal, and keeps player salaries from diminishing. The only costs to owners are less profits for the cheapest owners, and less competitive advantage to the most willing to spend.

It would also simply make a better product. With a hard salary cap and floor, the competitive edge is far more strongly determined by factors like scouting and drafting, player development, offering smart contracts (a $300 million contract becomes a hell of a lot less palatable when it eats up a fifth of your cap for the next decade), dumping bad contracts, and making good trades. These are all already factors in the game, but they're often offset (one way or the other) by owner willingness to spend. A salary cap would essentially remove that from the equation and increase the importance of strategic management decisions and good coaching, which are the things that should determine baseball games.

It's probably not going to happen, because there's no real financial incentive to either side to push for it (and a big chunk of owners -- the highest and lowest spenders -- would strongly oppose it), but it COULD, and it should. The only better thing would be if there were no owners at all.

Then again, Real Madrid is fan-owned, and its president literally chaired the abortive (and elitist) European Super League, so obviously fan ownership is not a perfect solution either. I don't know. Maybe just end capitalism?