Revisiting the Costas revenue sharing plan

July, 13, 2011
7/13/11
11:27
AM ET
Arnovitz By Kevin Arnovitz
ESPN.com
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Revenue sharing continues to linger in the background of the labor negotiations over a new collective bargaining agreement.

And, to some extent, that makes sense. Before owners can engage in a meaningful debate about the redistribution of revenue across the league's 30 teams, there has to be some consensus about what revenue will actually look like in the context of a new deal.

As a disclaimer, I'm a skeptic of revenue sharing as a means to achieve competitive balance. It's a strategy that hasn't succeeded in baseball -- the Pittsburgh Pirates being the prime example. Not only has the payout to the Pirates from "richer" clubs not resulted in the kind of investment by the team the revenue sharing plan was designed to incentivize, but there's also a fundamental illogic to the whole scheme because the formula is based on actual revenue (from which "wealthier" franchises cut checks and "struggling" franchises deposit them) rather than projected revenue. To wit, the Seattle Mariners, despite losing 101 games in 2008, paid $16.1 million into the revenue sharing pool, then ended up losing more than $4 million on their bottom line! Meanwhile the Pirates pocketed the cash and, until their somewhat competent half-season in 2011, continued to founder.

Parity and competitive balance are the most oft-cited reasons for instituting revenue sharing. I'm not convinced that parity is either achievable or even desirable in team sports (but that's a different conversation for a different day). Barring the abolition of free agency and a reinstitution of the reverse clause, which stipulated that teams got to hang on to the rights of their existing players even after those players' contracts expired, there's little guarantee that the playing field can truly be balanced.

Despite my wariness of a revenue sharing system that forces profitable franchises to underwrite the losses of unprofitable ones -- losses very often born out of mismanagement or indiscriminate spending -- I am a sucker for sound, principled arguments, even if they challenge my general beliefs.

In 2000, Major League Baseball was undergoing a similar self-examination. A blue-ribbon panel was convened and its wise men issued a report that said that, between 1995-99, the 30 major league teams teams lost more than $1 billion. According to the findings, only the New York Yankees, Cleveland Indians and Colorado Rockies turned a profit over that period.

Broadcaster Bob Costas has always been a self-appointed guardian of baseball. He's a rational, erudite guy with a passion for the game. Costas applied his uncommon ability to combine pragmatism with his love of baseball to author a book called "Fair Play," subtitled "A Fan's Case for Baseball."

Costas set out to address many of the structural problems that existed in major league baseball -- along with a few of his pet issues like the designated hitter (blech) and interleague play (yawn).

Among the meatier issues was revenue sharing in a sport where the most profound gap in revenue between the haves and have-nots were local broadcasting revenue. At the time, the Yankees earned approximately $58 million per year, while Jonah Keri's Montreal Expos generated only $3 million -- hardly enough to pay Youppi.

To his credit, Costas is unmoved by revenue sharing proposals based on abstract notions of "the longterm health of the game," even as he supported leveling the playing field. In his vision, if you're going to put forward a blueprint for redistribution, it must stand on a foundation of principle.

And in his eyes, the idea that the Yankees should keep every dollar of their local television revenue didn't make a lot of sense, and here's why:
You don't have a game without two major league teams. The New York Yankees make $58 million a year in local broadcasting revenues, but the money comes because they're playing games against other major league teams. Yankee intrasquad games are not broadcast, and wouldn't be watched in such numbers if they were.

Costas' proposal was this: Since the Yankees can't generate eyeballs -- and, in turn, ratings -- unless teams like the Kansas City Royals or Oakland Athletics or Toronto Blue Jays are in the other dugout, those franchises have a legitimate claim to the Yankees' local television revenue. Fifty percent of the Yankees' massive haul from their local media deal should be placed into a pot that will be divided equally among the league's teams. As Costas writes, "[N]otice that the principle is not mere charity."
The 50/50 team/league split of local broadcasting revenues has the virtue of being connected to a rock-solid principle that doesn't have anything to do with altruism. Instead, it's based on a sound understanding of the cooperative nature of leagues.

This is the only way to equitably spread the wealth and help balance the playing field. Any other plan that I've seen either goes too far toward complete revenue sharing (reducing the incentive for teams that is crucial for this to work) or uses the ends to justify the means (arbitrarily robbing from the rich and giving to the poor, without recognizing that there is some room for fluctuation in the identities of "poor" and "rich" teams.

When we consider the nine-figure deal struck between the Los Angeles Lakers and Time Warner, the Yankees' $58 million ($29 million of which would go into Costas' pool) seems quaint. But the underlying principle holds:

Very few people are going to watch the gold jerseys vs. the purple jerseys live from the Lakers' practice facility in El Segundo. When Kobe Bryant scores 81 points, it's impressive because the Toronto Raptors (an NBA team, at least nominally, at that moment) were on the floor in a (nominally) non-exhibition game.

There's a reason Delaware State gets a nice payday when it travels to Ann Arbor to face Michigan at the Big House on a Saturday in September. Michigan can't whoop up on a cupcake opponent and stoke their fan base without the Hornets of Dover.

In a similar spirit, visiting NBA teams have a rightful claim to profits home teams derive from that appearance (at the turnstile as well, another proposal Costas puts forward).

Competence and frugality will always be essential for small-market NBA teams to prosper, but it's myopic -- even for revenue sharing skeptics like me -- to ignore the fact that the Milwaukee Bucks could go 68-14 next season, capture the attention of every man, woman and child from Racine to Superior and into the Iron Range of Minnesota, and never achieve a fraction of the broadcast revenue the Lakers will milk from Time Warner over the next 20 years.

At the same time, proponents of willy-nilly revenue sharing must ground that conviction in cold, rational logic. An insistence that wealthy hobbyists need welfare from luckier wealthy hobbyists to solve the league's structural issues needs to be accompanied by a firm case.

Costas' 11-year-old idea provides a strong one.

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