Revenue Sharing and the Royals

When it comes to winning, a low revenue team like the Royals faces a tough question.  With the current revenue sharing system in place, it would seem almost wise to just keep running in place.  By not winning, you can collect a nice check at the end of each season because your franchise failed to generate much revenue.  On the other hand, if a team starts to win, they likely start to generate more revenue; which means the check at the end of the year gets smaller and smaller.  

You would hope this is not how most owners look at the situation.  But it is somewhat understandable if a low revenue, small market owner looks at it this way.  Due to the new revenue sharing rules, the threshold for a low revenue owners to actually start losing money on the deal is high though.  For a team like the Royals, they would have needed to see their revenue jump by at least $44 million from 2010 to 2011 to start losing money in the revenue sharing game.  Is it possible for the Royals to reach that threshold?

In 2006, revenue sharing was changed for the better by making the marginal tax rate on revenue the same for all thirty franchises.  Before this change, high revenue teams were only taxed at a 40% rate, while low revenue teams were taxed at a 48% rate.  Now, all teams are taxed at a 31% rate.  Seems fair right?  Wrong.  The system will never be perfect, but it still isn't as well oiled a machine as it could be.  Take the Yankees for example, by their tax rate dropping from 40% to 31%, they saved themselves $39.69M in 2009.  A low revenue team like the Royals though, only saw their amount taxed decrease by $26.35M due to the changed rates, doesn't seem fair does it?

With the new rate in place, teams were taxed $1.902 billion from the $6.137B they collected in revenue during the 2010 season.  That taxed money is evenly divided among all thirty teams, which means each team received a revenue sharing check for $63,415,666.67 going into the 2011 season.  This sounds great, except for the thirteen teams in baseball that lost money on the deal last year; which saw a spike from 2009, when only eight teams lost money.  The threshold in 2010 for losing money in the revenue sharing agreement was $204,566,666.67 in revenue.

For a team like the Royals, that 63.4M million dollar check was a nice thing to receive.  Unfortunately, it is not pure profit for teams beneath the revenue threshold that make money from revenue sharing.  For the Royals, the amount they actually gained from revenue sharing in 2010 was $13.82M.  Low revenue teams like the Royals are also awarded some money from the national TV contracts MLB has with FOX, TBS, and ESPN.  

Those contracts, under their current form, bring in $722,071,428.57 dollars a year.  The money is not just split evenly among the teams though.  Under the current agreement, only some teams receive money from these contracts.  If the leaked 2008 financial documents of the Rays are any indicator of what a low revenue team receives from these contracts, it can be estimated the Royals got another $8M from the national TV deals.  So, in total, the Royals likely made somewhere in the range of $21.82M last year from revenue sharing and national TV deals combined.

While revenue sharing is helping to promote competitive balance, a salary cap and salary floor would be the most beneficial.  The 2011 season painted a bleak picture when it comes to salary disparity, as the ratio of top seven payrolls to bottom seven payrolls was 3.26:1.  The Blue Ribbon Panel, an independent board appointed by MLB to look into revenues in baseball in 2000, declared that a ratio of 2:1 is optimal.

The Royals would've probably been hurt by the salary floor this year, but since it wasn't in place, they have gained quite a lot of money in the last twelve months.  By reducing their payroll from a bloated $74.9M in 2010, the Royals saved themselves $36.8M this past season.  If you add their revenue sharing and national TV contract money from last year, the Royals gained $58.62M.  The new revenue sharing check soon to be coming will likely make the Royals around the $13.82M they saw last year.

From the $58.62M the Royals have pocketed from various means in the last twelve months, $16M has to be deducted due to spending on the 2011 amateur draft and signings on the international market.  The number would be higher if not for the contract given to Bubba Starling, which was a three year deal instead of lump sum bonus contract.   Even with that large deduction, the Royals still have $42.62M at their disposal for the upcoming years.

So, if the Royals start winning, is it possible that they would cross the revenue threshold and start losing money in the revenue sharing deal?  The easiest measure to look at would be attendance.  If the Royals were to start winning, it can be assumed that attendance would rise.  For this exercise, we will put Kauffman Stadium at 84% capacity during the course of the regular season as a season of sell outs is unlikely.  With this number, the Royals would be averaging 32,069 fans a game.  Not completely unreasonable to expect from a winning team in Kansas City, as attendance like that would've put the Royals 14th in that category this past season.

If the Royals were to average 32,069 fans a game in 2011, that would mean 873,139 more tickets in 2012 than 2011 had been sold.  Using the estimated $40 an average fan spends at a baseball game, this increase in ticket sales would lead to $34,925,560 in new revenue.  When looking at revenue from 2010, this would put the 2012 Royals somewhere around $195M in revenue.  If this were the case, the Royals would be adding $60.45M to the revenue sharing pool and be dangerously close to the threshold where they would start losing money from the revenue sharing system.

When looking at how close the Royals are to losing money from revenue sharing under this scenario of having a winning team, it is interesting to imagine what David Glass would decide to do.  If the team starts winning, payroll will have to go up, fan interest will go up and cause overall revenue to rise, which will actually cause a negative shift in the bottom line.  He can still make money, but he'll actually make less money by spending more and winning.  I think he's in the midst of making the right choice, we can all hope that is the case.

This FanPost was written by a member of the Royals Review community. It does not necessarily reflect the views of the editors and writers of this site.

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