Organizational Structure
After the 1919 Black Sox scandal, in which players for the Chicago White Sox were caught taking bribes from gamblers to throw the World Series, baseball managers realized stronger self-regulation was needed, and the modern structure of MLB was formed. A commissioner serves as CEO under an agreement with broad powers to act in “the best interest of the national game.” Member teams agree to be bound by the commissioner’s decisions as arbiter, as well as not sue the commissioner or each other. There’s also an eight-person executive council elected by owners, and all team owners vote on approval of labor agreements, media deals, and more recently, sharing of revenues between larger and smaller market teams. The MLB constitution divvies up franchise territories by city and outlying counties — the Yankees even get a corner of Connecticut bordered by two highways shared with the Mets’ Shea Stadium.
Baseball teams generate most of their revenues locally through tickets, concessions, and merchandise sales; but the New York-based commissioner’s office also brings money into a so-called Central Fund by negotiating TV and radio deals for nationally broadcast regular, All-Star, and post-season games — plus royalties from other copyrighted baseball broadcast material. The Central Fund also pays for player pension plans, accountants and lawyers for player relations, a multi-million-dollar reserve fund, and the commissioner’s office. The balance is distributed among the MLB teams at year’s end.
See also: The Revenue Model.
Legal Monopoly Status
Thanks to some odd legal decisions, baseball enjoys a presumed exemption from antitrust law. MLB can limit the number of major league teams and require players who sign with one of its franchises to play for only that employer for several years — and at noncompetitive wages.
See also: The Labor and R&D Formula.
When a competing Federal League started in 1914, MLB first blocked it from hiring away players by threatening blacklists. It then bought out the league’s owners with payments or MLB franchises, notes Andrew Zimbalist in May the Best Team Win: Baseball Economics and Public Policy. The Federal League’s Baltimore Terrapins rejected a settlement offer, however, suing under federal antitrust laws regulating interstate commerce.
In 1922 the case went to the U.S. Supreme Court, which unanimously ruled against the challenge. Under a narrow definition of interstate commerce in effect at that time, Justice Oliver Wendell Holmes concluded that while teams had to cross state lines to play, professional baseball games were still “purely [intra]-state affairs.”
Over the decades, the so-called Federal Baseball decision has been challenged but never overturned, Zimbalist writes, even after conceptions of interstate commerce changed and the NFL was declared subject to antitrust laws in 1957. In 1972, baseball won the argument again, with the Supreme Court conceding the exemption was an “aberration confined to baseball” but letting it stand as entrenched tradition.
Baseball’s monopoly status is a key to MLB’s recent business model in at least one major way. In dozens of cities, MLB has been able to leverage its artificially limited number of teams and locations to extract government subsidies worth billions of dollars, using them to finance attractive new theme park–style stadiums, and thus selling more tickets and generating millions of dollars more in additional advertising, concessions, and merchandising revenues.
Revenue Sharing
While MLB may not face competition from rival baseball leagues, there’s still plenty of competition among the teams within MLB to beat each other on the field. Winners gain fans and generate more locally retained revenues. However, since MLB franchises are based in disproportionately sized metro markets, there is not a level playing field for the amount of revenues teams can generate, even by winning. A winning team based in Chicago takes in much more revenue than an equally winning team based in Milwaukee.
In the 32 years since veteran players won the right to put their services out to bid — also known as free agency — there has been increased competition by teams to buy talent. Better talent costs money, however, and that created an imbalance: Bigger market teams, with their much larger revenues, could seemingly buy their way to a winning team. Smaller franchise owners began to fear declining attendance, as fans grew bored with perennial losers. (Though this never seemed to faze Chicago Cubs devotees.)
In the last decade, these concerns led to MLB’s biggest step in self-regulation: the sharing of billions of dollars of revenue between higher-revenue teams and lower-revenue teams in smaller markets. Revenue sharing is designed to help the latter afford talent to field competitive teams, thus promoting MLB’s ultimate product, and any sport’s secret sauce: the entertainment of unpredictable outcomes.
See also: The Revenue-Sharing Formula.
The Sweet Spot
Now is a great time to own a baseball team. Based on data from Forbes, baseball franchises have seen annual gains of 9.4 percent since 1998, compared to just 7.2 percent average annual gains for the S&P 500 Index. In the 2007 fiscal year, 27 teams turned profits; while five years ago, only 14 teams were profitable, Forbes reports.
In addition to record ticket sales, new ventures like baseball’s Internet arm — MLB Advanced Media — have added hundreds of millions in new revenue from services like subscriptions to streaming game video, plus equity for its 30 team-owners. At the same time, in an age of increasingly fragmented media and entertainment outlets, baseball is now a prime advertising venue — both at the now-packed ballparks and on TV. It generates even more revenue as a content provider for team-owned cable networks. While baseball itself may be over a century old, the business behind it is strikingly modern.
