Discussing Pirates’ 2015 Revenue, 2016 Payroll, and 2017’s CBA

There was a minor kerfluffle when this graphic was disseminated around the Internets a couple of weeks ago that showed what each MLB club spent on payroll as a percentage of revenue:

This wasn’t a huge surprise to me, as one year ago I put out an article on revenue/salary that was well ahead of this discussion. In that piece, I posited that the Pirates generated around $230M of revenue in 2014. Two months later, Forbes magazine independently corroborated that estimate when they estimated the Pirates at $229M of revenue. What’s a million dollars between friends? Last January, I used a rule of thumb that 50% of revenue should be dedicated to payroll, meaning the Pirates could have spent $115M on 2015’s payroll. The Pirates’ 2015 Opening Day payroll was actually $90M, as per Cot’s Contracts, so theoretically the Pirates could have dedicated $25M more to payroll.

I say ‘theoretically’ because we don’t know for dead certain what the Pirates’ actual revenues were. Because baseball is a closed cartel business model, their books are not released to the public. Except when Deadspin obtained the leaked financial statements for the Pirates and other teams back in 2010 (of their 2007/2008 seasons). It’s probably high time that some other disgruntled accountant or secretary leak a new set of documents so that we can update our data, right?

The Pirates did add $12M of prorated salaries throughout the course of the season through their various trades. It was for this reason, plus the additional step of revenue from the recent national TV deal, that lead me to estimate in October that 2016’s payroll would be $105M. Club President Frank Coonelly stated this would be the figure to Rob Biertempfel in mid-December. This $105M figure, though, probably still lags in the 40%-ish range for the upcoming season, as you have to assume that the Pirates’ 2015 revenues were in the $240M range, due to excellent attendance and more national TV monies.

So what could the Pirates have done with an extra $15M this offseason, assuming that the 50% rule of thumb on the presumed $240M of revenues applies? They could have kept Neil Walker and his approximate $10M+ arbitration figure and not traded for Neise and his $9.5M salary, essentially washing out the salaries. Now the infield is set with Walker at 2B, Mercer at SS, and Harrison at 3B (until Kang returns). The Pirates probably don’t bring back Sean Rodriguez, so that would free up his $2.5M commitment.

To fill the #3 spot in the rotation, the Pirates could have used the $15M towards an attempt to procure Scott Kazmir on a 3 yr/$48M deal similar to what he signed with the Dodgers (minus the large amount of deferred money). Then Rodriguez’s $2.5M could have been lumped in to get a relief pitcher (whether through trade or free agency) that would cost around $6.5M/year — Neftali Feliz’s odd $3.9M salary plus this $2.5M allocation. Having $15M extra to spend could have solidified 3 roster spots (keeping a quality 2B, getting a solid #3, bolstering a bullpen spot).

But here’s a few things about that — whether it is a Pirate-induced version of Stockholm Syndrome or not, I don’t think that Neal Huntington wants to run the Pirates that way. I think his basic risk-averse nature precludes him to prefer to diversify risk throughout the roster. You can see this with signings of Ryan Vogelsong, Juan Nicasio and Neftali Feliz, all with some recent history of having pitching issues, and the low-cost pickups of Kyle Lobstein and Trey Haley. Huntington simply doesn’t want to put all his eggs in one basket (or, in this case, player) and overspend on the deep end of the free agency pitching market.

Additionally, every business in the world has to work under a budget of some sort. When my boss gives me a budget of ‘x’ dollars for operations, I can state my case for a little extra wiggle room, but at the end of the day the budget is the budget. I’ve shown a few times that you can only squeeze so much revenue out of the Pittsburgh market. There’s no local TV deal paying $100M+ per year like for the Dodgers and some other teams. The Pirates don’t own their own regional sports network, they don’t have exorbitant ticket and food prices, and don’t get a cut of parking revenues.

The Pirates at one time had a very large debt-to-revenue ratio that affected their bottom line. With revenues mushrooming around the league, that ratio may have gone down, but perhaps that bulk amount of debt remains. Also, this isn’t communist China. Teams and owners are allowed to extract a little profit for their time and efforts. Remember when you look at a balance sheet, it is the operating income (or Earnings Before Income and Taxes) figure that is the true “profit” of a team.

The ballooning of revenue into the game of baseball, thanks to local and national TV deals, but also due to ancillary sources like MLB Advanced Media’s BAMTech spinoff, is giving the appearance to some that owners are just stuffing all this extra cash under their mattresses. As Matt Schwartz detailed in this March 2014 article at the Hardball Times, the huge influx of revenue is skewing the revenue-payroll percentages. As you can see from this graph, the trendline has been decreasing from around 50% down to 40% in recent years.

This quote is very telling, though:

Most other major sports leagues have salaries close to half of league revenues, and baseball players were actually doing slightly better than until the last 10 years, when suddenly they started getting a smaller share. Although revenue has gone up so fast that even a smaller share of a rapidly growing pie has kept players happy, understanding why this has happened will be important if revenue growth falters or if the Major League Baseball Players Association (MLBPA) wises up to how much owners are earning nowadays.

Baseball’s current Collective Bargaining Agreement (CBA) expires after the 2016 season. There’s a whole host of issues that will be on the table, but neither the owners or players will want to risk a labor stoppage and kill this golden goose that is happening right now. But restoring a higher percentage of revenue to player payroll, probably through either raising or eliminating the $189M luxury tax threshold that currently holds back some teams (like the Angels) from spending higher, is probably near the top of the list.

It will be a delicate balancing act, though, because there is a feeling that the local TV deal bubble is ready to burst. With more and more people becoming “cord-cutters” and ditching cable TV packages, there are fewer viewers watching live sports. ESPN’s ratings have dropped precipitously in the past two years and some have estimated that it has resulted in the loss of $1B (with a ‘B’) in the past two years alone. This has a trickle-down to local TV, as well. As we discussed in our BAMTech article, MLB has positioned themselves to reap the financial windfall from those who may want to stream games in the future, rather than watch on TV, a rather ingenious hedge while collecting scads of money from ESPN/FOX/TBS.

Fans love to gripe about the Pirates, in general, and the payroll, specifically. But the bottom line…well, aside from the actual bottom line…is that the Pirates have made the playoffs the past three years in a row. Only the Dodgers and Cardinals can lay claim to that feat in all of MLB. The Pirates are also well-positioned in 2016 to make the playoffs, as well, especially when you consider that fully 1/3 of the NL is taking the year off to rebuild (Brewers, Reds, Rockies, Phillies, Braves).

The playoffs and the World Series are a crapshoot. He who spends the most money very infrequently wins. Typically, it’s a team that made a series of small strategic moves throughout the year and weathered injuries the best that ends up hoisting the trophy. Would it be great if the Pirates spent $15-20M more per year on payroll? Yes, because it feels like Huntington is playing a game with one hand tied behind his back. But the results are speaking for themselves in terms of wins.