Michael J. Haupert, University of Wisconsin — La Crosse
“The reason baseball calls itself a game is because it’s too screwed up to be a business” — Jim Bouton, author and former MLB player
The origin of modern baseball is usually considered the formal organization of the New York Knickerbocker Base Ball Club in 1842. The rules they played by evolved into the rules of the organized leagues surviving today. In 1845 they organized into a dues paying club in order to rent the Elysian Fields in Hoboken, New Jersey to play their games on a regular basis. Typically these were amateur teams in name, but almost always featured a few players who were covertly paid. The National Association of Base Ball Players was organized in 1858 in recognition of the profit potential of baseball. The first admission fee (50 cents) was charged that year for an All Star game between the Brooklyn and New York clubs. The association formalized playing rules and created an administrative structure. The original association had 22 teams, and was decidedly amateur in theory, if not practice, banning direct financial compensation for players. In reality of course, the ban was freely and wantonly ignored by teams paying players under the table, and players regularly jumping from one club to another for better financial remuneration.
The Demand for Baseball
Before there were professional players, there was a recognition of the willingness of people to pay to see grown men play baseball. The demand for baseball extends beyond the attendance at live games to television, radio and print. As with most other forms of entertainment, the demand ranges from casual interest to a fanatical following. Many tertiary industries have grown around the demand for baseball, and sports in general, including the sports magazine trade, dedicated sports television and radio stations, tour companies specializing in sports trips, and an active memorabilia industry. While not all of this is devoted exclusively to baseball, it is indicative of the passion for sports, including baseball.
A live baseball game is consumed at the same time as the last stage of production of the game. It is like an airline seat or a hotel room, in that it is a highly perishable good that cannot be inventoried. The result is that price discrimination can be employed. Since the earliest days of paid attendance teams have discriminated based on seat location, sex and age of the patron. The first “ladies day,” which offered free admission to any woman accompanied by a man, was offered by the Gotham club in 1883. The tradition would last for nearly a century. Teams have only recently begun to exploit the full potential of price discrimination by varying ticket prices according to the expected quality, date and time of the game.
Baseball and the Media
Baseball and the media have enjoyed a symbiotic relationship since newspapers began regularly covering games in the 1860s. Games in progress were broadcast by telegraph to saloons as early as the 1890s. In 1897 the first sale of broadcast rights took place. Each team received $300 in free telegrams as part of a league-wide contract to transmit game play-by-play over the telegraph wire. In 1913 Western Union paid each team $17,000 per year over five years for the rights to broadcast the games. The movie industry purchased the rights to film and show the highlights of the 1910 World Series for $500. In 1911 the owners managed to increase that rights fee to $3500.
It is hard to imagine that Major League Baseball (MLB) teams once saw the media as a threat to the value of their franchises. But originally, they resisted putting their games on the radio for fear that customers would stay home and listen to the game for free rather than come to the park. They soon discovered that radio (and eventually television) was a source of income and free advertising, helping to attract even more fans as well as serving as an additional source of revenue. By 2002, media revenue exceeded gate revenue for the average MLB team.
Originally, local radio broadcasts were the only source of media revenue. National radio broadcasts of regular season games were added in 1950 by the Liberty Broadcasting System. The contract lasted only one year however, before radio reverted to local broadcasting. The World Series, however has been nationally broadcast since 1922. For national broadcasts, the league negotiates a contract with a provider and splits the proceeds equally among all the teams. Thus, national radio and television contracts enrich the pot for all teams on an equal basis.
In the early days of radio, teams saw the broadcasting of their games as free publicity, and charged little or nothing for the rights. The Chicago Cubs were the first team to regularly broadcast their home games, giving them away to local radio in 1925. It would be another fourteen years, however, before every team began regular radio broadcasts of their games.
1939 was also the year that the first game was televised on an experimental basis. In 1946 the New York Yankees became the first team with a local television contract when they sold the rights to their games for $75,000. By the end of the century they sold those same rights for $52 million per season. By 1951 the World Series was a television staple, and by 1955 all teams sold at least some of their games to local television. In 1966 MLB followed the lead of the NFL and sold its first national television package, netting $300,000 per team. The latest national television contract paid $24 million to each team in 2002.
MLB Television Revenue, Ticket Prices and Average Player Salary 1964-2002
(real (inflation-adjusted) values are in 2002 dollars)
|Year||Total TV revenue(millions of $)||Average ticket price||Average player salary|
|1964||$ 21.28||$ 123||$ 2.25||$13.01||$ 14,863.00||$ 85,909|
|1965||$ 25.67||$ 146||$ 2.29||$13.02||$ 14,341.00||$ 81,565|
|1966||$ 27.04||$ 149||$ 2.35||$12.95||$ 17,664.00||$ 97,335|
|1967||$ 28.93||$ 156||$ 2.37||$12.78||$ 19,000.00||$ 102,454|
|1968||$ 31.04||$ 160||$ 2.44||$12.58||$ 20,632.00||$ 106,351|
|1969||$ 38.04||$ 186||$ 2.61||$12.76||$ 24,909.00||$ 121,795|
|1970||$ 38.09||$ 176||$ 2.72||$12.57||$ 29,303.00||$ 135,398|
|1971||$ 40.70||$ 180||$ 2.91||$12.87||$ 31,543.00||$ 139,502|
|1972||$ 41.09||$ 176||$ 2.95||$12.64||$ 34,092.00||$ 146,026|
|1973||$ 42.39||$ 171||$ 2.98||$12.02||$ 36,566.00||$ 147,506|
|1974||$ 43.25||$ 157||$ 3.10||$11.25||$ 40,839.00||$ 148,248|
|1975||$ 44.21||$ 147||$ 3.30||$10.97||$ 44,676.00||$ 148,549|
|1976||$ 50.01||$ 158||$ 3.45||$10.90||$ 52,300.00||$ 165,235|
|1977||$ 52.21||$ 154||$ 3.69||$10.88||$ 74,000.00||$ 218,272|
|1978||$ 52.31||$ 144||$ 3.98||$10.96||$ 97,800.00||$ 269,226|
|1979||$ 54.50||$ 135||$ 4.12||$10.21||$ 121,900.00||$ 301,954|
|1980||$ 80.00||$ 174||$ 4.45||$9.68||$ 146,500.00||$ 318,638|
|1981||$ 89.10||$ 176||$ 4.93||$9.74||$ 196,500.00||$ 388,148|
|1982||$ 117.60||$ 219||$ 5.17||$9.63||$ 245,000.00||$ 456,250|
|1983||$ 153.70||$ 277||$ 5.69||$10.25||$ 289,000.00||$ 520,839|
|1984||$ 268.40||$ 464||$ 5.81||$10.04||$ 325,900.00||$ 563,404|
|1985||$ 280.50||$ 468||$ 6.08||$10.14||$ 368,998.00||$ 615,654|
|1986||$ 321.60||$ 527||$ 6.21||$10.18||$ 410,517.00||$ 672,707|
|1987||$ 349.80||$ 553||$ 6.21||$9.82||$ 402,579.00||$ 636,438|
|1988||$ 364.10||$ 526||$ 6.21||$8.97||$ 430,688.00||$ 622,197|
|1989||$ 246.50||$ 357||$ 489,539.00||$ 708,988|
|1990||$ 659.30||$ 907||$ 589,483.00||$ 810,953|
|1991||$ 664.30||$ 877||$ 8.84||$11.67||$ 845,383.00||$ 1,116,063|
|1992||$ 363.00||$ 465||$ 9.41||$12.05||$1,012,424.00||$ 1,296,907|
|1993||$ 618.25||$ 769||$ 9.73||$12.10||$1,062,780.00||$ 1,321,921|
|1994||$ 716.05||$ 868||$ 10.62||$12.87||$1,154,486.00||$ 1,399,475|
|1995||$ 516.40||$ 609||$ 10.76||$12.69||$1,094,440.00||$ 1,290,693|
|1996||$ 706.30||$ 810||$ 11.32||$12.98||$1,101,455.00||$ 1,263,172|
|1997||$ 12.06||$13.51||$1,314,420.00||$ 1,472,150|
|1998||$ 13.58||$14.94||$1,378,506.00||$ 1,516,357|
|1999||$ 14.45||$15.61||$1,726,282.68||$ 1,864,385|
|2000||$ 16.22||$16.87||$1,987,543.03||$ 2,067,045|
|2001||$1,291.06||$ 1,310||$ 17.20||$17.45||$2,343,710.00||$ 2,378,093|
|2002||$ 17.85||$17.85||$2,385,903.07||$ 2,385,903|
Notes: 1989 and 1992 national TV data only, no local TV included. Real values are calculated using Consumer Price Index.
As the importance of local media contracts grew, so did the problems associated with them. As cable and pay per view television became more popular, teams found them attractive sources of revenue. A fledgling cable channel could make its reputation by carrying the local ball team. In a large enough market, this could result in substantial payments to the local team. These local contracts did not pay all teams, only the home team. The problem from MLB’s point of view was not the income, but the variance in that income. That variance has increased over time, and is the primary source of the gap in payrolls, which is linked to the gap in quality, which is cited as the “competitive balance problem.” In 1962 the MLB average for local media income was $640,000 ranging from a low of $300,000 (Washington) to a high of $1.2 million (New York Yankees). In 2001, the average team garnered $19 million from local radio and television contracts, but the gap between the bottom and top had widened to an incredible $51.5 million. The Montreal Expos received $536,000 for their local broadcast rights while the New York Yankees received more than $52 million for theirs. Revenue sharing has resulted in a redistribution of some of these funds from the wealthiest to the poorest teams, but the impact of this on the competitive balance problem remains to be seen.
Baseball has been about profits since the first admission fee was charged. The first professional league, the National Association, founded in 1871, charged a $10 franchise fee. The latest teams to join MLB, paid $130 million apiece for the privilege in 1998.
Early Ownership Patterns
The value of franchises has mushroomed over time. In the early part of the twentieth century, owning a baseball team was a career choice for a wealthy sportsman. In some instances, it was a natural choice for someone with a financial interest in a related business, such as a brewery, that provided complementary goods. More commonly, the operation of a baseball team was a full time occupation of the owner, who was usually one individual, occasionally a partnership, but never a corporation.
This model of ownership has since changed. The typical owner of a baseball team is now either a conglomerate, such as Disney, AOL Time Warner, the Chicago Tribune Company, or a wealthy individual who owns a (sometimes) related business, and operates the baseball team on the side – perhaps as a hobby, or as a complementary business. This transition began to occur when the tax benefits of owning a baseball team became significant enough that they were worth more to a wealthy conglomerate than a family owner. A baseball team that can show a negative bottom line while delivering a positive cash flow can provide significant tax benefits by offsetting income from another business. Another advantage of corporate ownership is the ability to cross-market products. For example, the Tribune Company owns the Chicago Cubs, and is able to use the team as part of its television programming. If it is more profitable for the company to show income on the Tribune ledger than the Cubs ledger, then it decreases the payment made to the team for the broadcast rights to its games. If a team owner does not have another source of income, then the ability to show a loss on a baseball team does not provide a tax break on other income. One important source of the tax advantage of owning a franchise comes from the ability to depreciate player salaries. In 1935 the IRS ruled that baseball teams could depreciate the value of their player contracts. This is an anomaly since labor is not a depreciating asset.
Table 2: Comparative Prices for MLB Salaries, Tickets and Franchise Values for Selected Years
|year||Salary ($000)||Average ticketprice||Average franchisevalue ($millions$)|
|Real values (2002 dollars)|
|year||Salary ($000)||Average ticketprice||Average franchisevalue ($millions)|
The most significant change in the value of franchises has occurred in the last decade as a function of new stadium construction. The construction of a new stadium creates additional sources of revenue for a team owner, which impacts the value of the franchise. It is the increase in the value of franchises which is the most profitable part of ownership. Eight new stadiums were constructed between 1991 and 1999 for existing MLB teams. The average franchise value for the teams in those stadiums increased twenty percent the year the new stadium opened.
The Market Structure of MLB and Players’ Organizations
Major League Baseball is a highly successful oligopoly of professional baseball teams. The teams have successfully protected themselves against competition from other leagues for more than 125 years. The closest call came when two rival leagues, the established National League, and a former minor league, the Western League, renamed the American League in 1900, merged in 1903 to form the structure that exists to this day. The league lost some of its power in 1976 when it lost its monopsonistic control over the player labor market, but it retains its monopolistic hold on the number and location of franchises. Now the franchise owners must share a greater percentage of their revenue with the hired help, whereas prior to 1976 they controlled how much of the revenue to divert to the players.
The owners of professional baseball teams have acted in unison since the very beginning. They conspired to hold down the salaries of players with a secret reserve agreement in 1878. This created a monopsony whereby a player could only bargain with the team that originally signed him. This stranglehold on the labor market would last a century.
The baseball labor market is one of extremes. Baseball players began their labor history as amateurs whose skills quickly became highly demanded. For some, this translated into a career. Ultimately, all players became victims of a well-organized and obstinate cartel. Players lost their ability to bargain and offer their services competitively for a century. Despite several attempts to organize and a few attempts to create additional demand for their services from outside sources, they failed to win the right to sell their labor to the employer of their choice.
Beginning of Professionalization
The first team of baseball players to be openly paid was the 1869 Redstockings of Cincinnati. Prior to that, teams were organized as amateur squads who played for the pride of their hometown, club or college. The stakes in these games were bragging rights, often a trophy or loving cup, and occasionally a cash prize put up by a benefactor, or as a wager between the teams. It was inevitable that professional players would soon follow.
The first known professional players were paid under the table. The desire to win had eclipsed the desire to observe good sportsmanship, and the first step down the slope toward full professionalization of the sport had been taken. Just a few years later, in 1869, the first professional team was established. The Redstockings are as famous for being the first professional team as they are for their record and barnstorming accomplishments. The team was openly professional, and thus served as a worthy goal for other teams, amateur, semi-professional, and professional alike. The Cincinnati squad spent the next year barnstorming across America, taking on, and defeating, all challengers. In the process they drew attention to the game of baseball, and played a key part in its growing popularity. Just two years later, the first entirely professional baseball league would be established.
National Association of Professional Baseball Players
The formation of the National Association of Professional Base Ball Players in 1871 created a different level of competition for baseball players. The professional organization, which originally included nine teams, broke away from the National Association of Base Ball Players, which used amateur players. The amateur league folded three years after the split. The league was reorganized and renamed the National League in 1876. Originally, professional teams competed to sign players, and the best were rewarded handsomely, earning as much as $4500 per season. This was good money, given that a skilled laborer might earn $1200-$1500 per year for a 60 hour work week.
This system, however, proved to be problematic. Teams competed so fiercely for players that they regularly raided each other’s rosters. It was not uncommon for players to jump from one team to another during the season for a pay increase. This not only cost team owners money, but also created havoc with the integrity of the game, as players moved among teams, causing dramatic mid-season swings in the quality of teams.
Beginning of the Reserve Clause, 1878-79
During the winter of 1878-79, team owners gathered to discuss the problem of player roster jumping. They made a secret agreement among themselves not to raid one another’s rosters during the season. Furthermore, they agreed to restrain themselves during the off-season as well. Each owner would circulate to the other owners a list of five players he intended to keep on his roster the following season. By agreement, none of the owners would offer a contract to any of these “reserved” players. Hence, the reserve clause was born. It would take nearly a century before this was struck down. In the meantime, it went from five players (about half the team) to the entire team (1883) and to a formal contract clause (1887) agreed to by the players. Owners would ultimately make such a convincing case for the necessity of the reserve clause, that players themselves testified to its necessity in the Celler Anti-monopoly Hearings in 1951.
In 1892 the minor league teams agreed to a system that allowed the National League teams to draft players from their teams. This agreement was in response to their failure to get the NL to honor their reserve clause. In other words, what was good for the goose, was not good for the gander. While NL owners agreed to honor their reserve lists among one another, they paid no such honor to the reserve lists of teams in other organized, professional leagues. They believed they were at the top of the pyramid, where all the best players should be, and therefore they would get those players when they wanted them. As part of the draft agreement, the minor league teams allowed the NL teams to select players from their roster for fixed payments. The NL sacrificed some money, but restored a bit of order to the process, not to mention eliminated expensive bidding wars among teams for the services of players from the minor league teams.
The Players League
The first revolt by the players came in 1890, when they formed their own league, called the Players League, to compete with the National League and its rival, the American Association (AA), founded in 1882. The Players League was the first and only example of a cooperative league. The league featured profit sharing with players, an abolition of unilateral contract transfers, and no reserve clause. The competing league caused a bidding war for talent, leading to salary increases for the best players. The “war” ended after just one season, when the National League and American Association agreed to allow owners of some Players League teams to buy existing franchises. The following year, the NL and AA merged by buying out four AA franchises for $130,000 and merging the other four into the National League, to form a single twelve-team circuit.
This proved to be an unwieldy league arrangement however, and some of the franchises proved financially unstable. In order to preserve the structure of the league and avoid bankruptcy of some teams, syndicate ownership evolved, in which owners purchased a controlling interest in two teams. This did not help the stability of the league. Instead, it became a situation in which the syndicates used one team to train young players and feed the best of them to the other team. This period in league history exhibits some of the greatest examples of disparity between the best and worst teams in the league. In 1899 the Cleveland Spiders, the poor stepsister in the Cleveland-St. Louis syndicate, would lose a record 134 out of 154 games, a level of futility that has never been equaled. In 1900 the NL reduced to eight teams, buying out four of the existing franchises (three of the original AA franchises) for $60,000.
Western League Competes with National League
Syndicate ownership was ended in 1900 as the final part of the reorganization of the NL. It also sparked the minor Western League to declare major league status, and move some teams into NL markets for direct competition (Chicago, Boston, St. Louis, Philadelphia and Manhattan). All out competition followed in 1901, complete with roster raiding, salary increases, and team jumping, much to the benefit of the players. Syndicate ownership appeared again in 1902 when the owners of the Pittsburgh franchise purchased an interest in the Philadelphia club. Owners briefly entertained the idea of turning the entire league into a syndicate, transferring players to the market where they might be most valuable. The idea was dropped, however, for fear that the game would lose credibility and result in a decrease in attendance. In 1910 syndicate ownership was formally banned, though it did occur again in 2002, when the Montreal franchise was purchased by the other 29 MLB franchises as part of a three way franchise swap involving Boston, Miami and Montreal. MLB is currently looking to sell the franchise and move it to a more profitable market.
National and American Leagues End Competition
Team owners quickly saw the light, and in 1903 they made an agreement to honor one another’s rosters. Once more the labor wars were ended, this time in an agreement that would establish the major leagues as an organization of two cooperating leagues: the National League and the American League, each with eight teams, located in the largest cities east of the Mississippi (with the exception of St. Louis), and each league honoring the reserved rosters of teams in the other. This structure would prove remarkably stable, with no changes until 1953 when the Boston Braves became the first team to relocate in half a century when they moved to Milwaukee.
Franchise Numbers and Movements
The location and number of franchises has been a tightly controlled issue for teams since leagues were first organized. Though franchise movements were not rare in the early days of the league, they have always been under the control of the league, not the individual franchise owners. An owner is accepted into the league, but may not change the location of his or her franchise without the approval of the other members of the league. In addition, moving the location of a franchise within the vicinity of another franchise requires the permission of the affected franchise. As a result, MLB franchises have been very stable over time in regard to location. The size of the league has also been stable. From the merger of the AL and NL in 1903 until 1961, the league retained the same sixteen teams. Since that time, expansion has occurred fairly regularly, increasing to its present size of 30 teams with the latest round of expansion in 1998. In 2001, the league proposed going in the other direction, suggesting that it would contract by two teams in response to an alleged fiscal crisis and breakdown in competitive balance. Those plans were postponed at least four years by the labor agreement signed in 2002.
Table 3: MLB Franchise Sales Data by Decade
|Decade||Average purchase price in millions (2002 dollars)||Average annual rate of increase in franchise sales price||Average annual rate of return on DJIA (includes capital appreciation and annual dividends)||Average tenure of ownership of MLB franchisein years||Number of franchise sales|
Note: 2002 values calculated using the Consumer Price Index for decade midpoint
Separate professional leagues for African Americans existed, since they were excluded from participating in MLB until 1947 when Jackie Robinson broke the color barrier. The first was formed in 1920, and the last survived until 1960, though their future was doomed by the integration of the major and minor leagues.
As revenues dried up or new markets beckoned due to shifts in population and the decreasing cost of trans-continental transportation, franchises began relocating in the second half of the twentieth century. The period from 1953-1972 saw a spate of franchise relocation: teams moved to Kansas City, Minneapolis, Baltimore, Los Angeles, Oakland, Dallas and San Francisco in pursuit of new markets. Most of these moves involved one team moving out of a market it shared with another team. The last team to relocate was the Washington D.C. franchise, which moved to suburban Dallas in 1972. It was the second time in just over a decade that a franchise had moved from the nation’s capitol. The original franchise, a charter member of the American League, had moved to Minneapolis in 1961. While there have been no relocations since then, there have been plenty of examples of threats to relocate. The threat to relocate has frequently been used by a team trying to get a new stadium built with public financing.
There were still a couple of challenges to the reserve clause. Until the 1960s, these came in the form of rival leagues creating competition for players, not a challenge to the legality of the reserve clause.
Federal League and the 1922 Supreme Court Antitrust Exemption
In 1914 the Federal League debuted. The new league did not recognize the reserve clause of the existing leagues, and raided their rosters, successfully luring some of the best players to the rival league with huge salary increases. Other players benefited from the new competition, and were able to win handsome raises from their NL and AL employers in return for not jumping leagues. The Federal League folded after two seasons when some of the franchise owners were granted access to the major leagues. No new teams were added, but a few owners were allowed to purchase existing NL and AL teams.
The first attack on the organizational structure of the major leagues to reach the US Supreme Court occurred when the shunned owner of the Baltimore club of the Federal League sued major league baseball for violation of antitrust law. Federal Baseball Club of Baltimore v the National League eventually reached the Supreme Court, where in 1922 the famous decision that baseball was not interstate commerce, and therefore was exempt from antitrust laws was rendered.
Early Strike and Labor Relations Problems
The first player strike actually occurred in 1912. The Detroit Tigers, in a show of unison for their embattled star Ty Cobb, refused to play in protest of what they regarded as an unfair suspension of Cobb, refusing to take the field unless the suspension was lifted. When warned that the team faced the prospect of a forfeit and a $5000 fine if they did not field a team, owner Frank Navin recruited local amateur players to suit up for the Tigers. The results were not surprising: a 24-2 victory for the visiting Philadelphia Athletics.
This was not an organized strike against the system per se, but it was indicative of the problems existent in the labor relations between players and owners. Cobb’s suspension was determined by the owner of the team, with no chance for a hearing for Cobb, and with no guidance from any existing labor agreement regarding suspensions. The owner was in total control, and could mete out whatever punishment for whatever length he deemed appropriate.
The next competing league appeared in 1946 from an unusual source: Mexico. Again, as in previous league wars, the competition benefited the players. In this case the players who benefited most were those players who were able to use Mexican League offers as leverage to gain better contracts from their major league teams. Those players who accepted offers from Mexican League teams would ultimately regret it. The league was under-financed, the playing and travel conditions far below major league standards, and the wrath of the major leagues deep. When the first paychecks were missed, the players began to head back to the U.S. However, they found no jobs waiting for them. Major League Baseball Commissioner Happy Chandler blacklisted them from the league. This led to a lawsuit, Gardella v MLB. The case was eventually settled out of court after a Federal Appeals court sided with Danny Gardella in 1949. Gardella was one of the blacklisted players who sued MLB for restraint of trade after being prevented from returning to the league after accepting a Mexican League offer for the 1946 season. While many of the players ultimately returned to the major leagues, they lost several years of their careers in the process.
The first organization of baseball players came in 1885, in part a response to the reserve clause enacted by owners. The National Brotherhood of Professional Base Ball Players was not particularly successful however. In fact, just two years later, the players agreed to the reserve clause, and it became a part of the standard players contract for the next 90 years.
In 1900 another player organization was founded, the Players Protective Association. Competition broke out the next year, when the Western League declared itself a major league, and became the American League. It would merge with the National League for the 1903 season, and the brief period of roster raiding and increasing player salaries ended, as both leagues agreed to recognize one another’s rosters and reserve clauses. The Players Protective Association faded into obscurity amid the brief period of increased competition and player salaries.
Failure and Consequences of the American Baseball Guild
In 1946 the foundation was laid for the current Major League Baseball Player’s Association (MLBPA). Labor lawyer Robert Murphy created the American Baseball Guild, a player’s organization, after holding secret talks with players. Ultimately, the players voted not to form a union, and instead followed the encouragement of the owners, and formed their own committee of player representatives to bargain directly with the owners. The outcome of the negotiations was changes in the standard labor contract. Up to this point, the contract had been pretty much dictated by the owners. It contained such features as the right to waive a player with only ten days notice, the right to unilaterally decrease salary from one year to the next by any amount, and of course the reserve clause.
The players did not make major headway with the owners, but they did garner some concessions. Among them were a maximum pay cut of 25%, a minimum salary of $5000, a promise by the owners to create a pension plan, and $25 per week in living expenses for spring training camp. Until 1947, players received only expense money for spring training, no salary. The players today, despite their multimillion-dollar contracts, still receive “Murphy money” for spring training as well as a meal allowance for each day they are on the road traveling with the club.
Facing eight antitrust lawsuits in 1950, MLB requested Congress to pass a general immunity bill for all professional sports leagues. The request ultimately led to MLB’s inclusion in the Celler Anti-monopoly hearings in 1951. However, no legislative action was recommended. In fact, the owners by this time had so thoroughly convinced the players of the necessity of the reserve clause to the very survival of MLB that several players testified in favor of the monopsonistic structure of the league. They cited it as necessary to maintain the competitive balance among the teams that made the league viable. In 1957 the House Antitrust Subcommittee revisited the issue, once again recommending no change in the status quo.
Impacts of the Reserve Clause
Simon Rottenberg was the first economist to seriously look into professional baseball with the publication of his classic 1956 article “The Baseball Players’ Labor Market.” His conclusion, not surprisingly, was that the reserve clause transferred wealth from the players to owners, but had only a marginal impact on where the best players ended up. They would end up playing for the teams in the market in the best position to exploit their talents for the benefit of paying customers – in other words, the biggest markets: primarily New York. Given the quality of the New York teams (one in Manhattan, one in the Bronx and one in Brooklyn) during the era of Rottenberg’s study, his conclusion seems rather obvious. During the decade preceding his study, the three New York teams consistently performed better than their rivals. The New York Yankees won eight of ten American League pennants, and the two National League New York entries won eight of ten NL pennants (six for the Brooklyn Dodgers, two for the New York Giants).
Foundation of the Major League Baseball Players Association
The current players organization, the Major League Baseball Players Association, was formed in 1954. It remained in the background, however, until the players hired Marvin Miller in 1966 to head the organization. Hiring Miller, a former negotiator for the U.S. steel workers, would turn out to be a stroke of genius. Miller began with a series of small gains for players, including increases in the minimum salary, pension contributions by owners and limits to the maximum salary reduction owners could impose. The first test of the big item – the reserve clause – reached the Supreme Court in 1972.
Free Agency, Arbitration and the Reserve Clause
Curt Flood, a star player for the St. Louis Cardinals, had been traded to the Philadelphia Phillies in 1970. Flood did not want to move from St. Louis, and informed both teams and the commissioner’s office that he did not intend to leave. He would play out his contract in St. Louis. Commissioner Bowie Kuhn ruled that Flood had no right to act in this way, and ordered him to play for Philadelphia, or not play at all. Flood chose the latter and sued MLB for violation of antitrust laws. The case reached the Supreme Court in 1972, and the court sided with MLB in Flood v. Kuhn. The court acknowledged that the 1922 ruling that MLB was exempt from antitrust law was an anomaly and should be overturned, but it refused to overturn the decision itself, arguing instead that if Congress wanted to rectify this anomaly, they should do so. Therefore the court stood pat, and the owners felt the case was settled permanently: the reserve clause had once again withstood legal challenge. They could not, however, have been more badly mistaken. While the reserve clause never has been overturned in a court of law, it would soon be drastically altered at the bargaining table, and ultimately lead to a revolution in the way baseball talent is dispersed and revenues are shared in the professional sports industry.
Curt Flood lost the legal battle, but the players ultimately won the war, and are no longer restrained by the reserve clause beyond the first two years of their major league contract. In a series of labor market victories beginning in the wake of the Flood decision in 1972 and continuing through the rest of the century, the players won the right to free agency (i.e. to bargain with any team for their services) after six years of service, escalating pension contributions, salary arbitration (after two to three seasons, depending on their service time), individual contract negotiations with agent representatives, hearing committees for disciplinary actions, reductions in maximum salary cuts, increases in travel money and improved travel conditions, the right to have disputes between players and owners settled by an independent arbitrator, and a limit to the number of times their contract could be assigned to a minor league team. Of course the biggest victory was free agency.
Impact of Free Agency – Salary Gains
The right to bargain with other teams for their services changed the landscape of the industry dramatically. No longer were players shackled to one team forever, subject to the whims of the owner for their salary and status. Now they were free to bargain with any and all teams. The impact on salaries was incredible. The average salary skyrocketed from $45,000 in 1975 to $289,000 in 1983.
Table 4: Maximum and Average MLB Player Salaries by Decade
(real values in 2002 dollars)
|Period||Highest Salary||Year||Player||Team||Average Salary||Notes|
|1892||King Kelly||Boston NL||$ 3,054||
|1907||Honus Wagner||Pittsburgh Pirates||$ 6,523||
|1913||Frank Chance||New York Yankees||$ 2,307||
|1927||Ty Cobb||Philadelphia Athletics||$ 6,992||
|1930s||$ 84,098.33||$899,852||1930||Babe Ruth||New York Yankees||$ 7,748||
|1940s||$ 100,000.00||$755,000||1949||Joe DiMaggio||New York Yankees||$ 11,197||
|Average salary calculated using 1949 and 1943 seasons plus 139 additional observations.|
|1950s||$ 125,000.00||$772,500||1959||Ted Williams||Boston Red Sox||$ 12,340||
|Average salary estimate based on average of 1949 and 1964 salaries.|
|1968||Curt Flood||St. Louis Cardinals||$ 18,568||
|1977||Mike Schmidt||Philadelphia Phillies||$ 55,802||
|1989||Orel Hershiser, Frank Viola||Dodgers, Twins||$ 333,686||
|approx 6500 observations|
|1999||Albert Belle||Baltimore Orioles||$1,160,548||
|approx 7000 observations|
|2001||Alex Rodriguez||Texas Rangers||$2,165,627||
Real values based on 2002 Consumer Price Index.
Over the long haul, the changes have been even more dramatic. The average salary increased from $45,000 in 1975 to $2.4 million in 2002, while the minimum salary increased from $6000 to $200,000 and the highest paid player increased from $240,000 to $22 million. This is a 5200% increase in the average salary. Of course, not all of that increase is due to free agency. Revenues increased during this period by nearly 1800% from an average of $6.4 million to $119 million, primarily due to the 2800% increase in television revenue over the same period. Ticket prices increased by 439% while attendance doubled (the number of MLB teams increased from 24 to 30).
Strikes and Lockouts
Miller organized the players and unified them as no one had done before. The first test of their resolve came in 1972, when the owners refused to bargain on pension and salary issues. The players responded by going out on the first league-wide strike in American professional sports history. The strike began during spring training, and carried on into the season. The owners finally conceded in early April after nearly 100 games were lost to the strike. The labor stoppage became the favorite weapon of the players, who would employ it again in 1981, 1985, and 1994. The latter strike cancelled the World Series for the first time since 1904, and carried on into the 1995 season. The owners preempted strikes in two other labor disputes, locking out the players in 1976 and 1989. After each work stoppage, the players won the concessions they demanded and fended off attempts by owners to reverse previous player gains, particularly in the areas of free agency and arbitration. From the first strike in 1972 through 1994, every time the labor agreement between the two sides expired, a work stoppage ensued. In August of 2002 that pattern was broken when the two sides agreed to a new labor contract for the first time without a work stoppage.
The first player to become a free agent did so due to a technicality. In 1974 Catfish Hunter, a pitcher for the Oakland Athletics, negotiated a contract with the owner, Charles Finley, which required Finley to make a payment into a trust fund for Hunter on a certain date. When Finley missed the date, and then tried to pay Hunter directly instead of honoring the clause, Hunter and Miller filed a complaint charging the contract should be null and void because Finley had broken it. The case went to an arbitrator who sided with Hunter and voided the contract, making Hunter a free agent. In a bidding frenzy, Hunter ultimately signed what was then a record contract with the New York Yankees. It set precedents for both its length – five years guaranteed, and its annual salary of $750,000. Prior to the dawning of free agency, it was a rare circumstance for a player to get anything more than a one-year contract, and a guaranteed contract was virtually unheard of. If a player was injured or fell off in performance, an owner would slash his salary or release him and vacate the remainder of his contract.
The End of the Reserve Clause – Messersmith and McNally
The first real test of the reserve clause came in 1975, when, on the advice of Miller, Andy Messersmith played the season without signing a contract. Dave McNally also refused to sign a contract, though he had unofficially retired at the time. Up to this time, the reserve clause meant that a team could renew a player’s contract at their discretion. The only changes in this clause that occurred since 1879 were the maximum amount by which the owner could reduce the player’s salary. In order to test the clause, which allowed teams to maintain contractual rights to players in perpetuity, Messersmith and McNally refused to sign contracts. Their teams automatically renewed their contracts from the previous season, per the reserve clause. The argument the players put forth was that if no contract was signed, then there was no reserve clause. They argued that Messersmith and McNally would be free to negotiate with any team at the end of the season. The reserve clause was struck down by arbitrator Peter Seitz on Dec. 23, 1975, clearing the way for players to become free agents and sell their services to the highest bidder. Messersmith and McNally became the first players to challenge and successfully escape the reserve clause. The baseball labor market changed permanently and dramatically in favor of the players, and has never turned back.
Current Labor Arrangements
The baseball labor market as it exists today is a result of bargaining between owners and players. Owners ultimately conceded the reserve clause and negotiated a short period of exclusivity for a team with a player. The argument they put forward was that the cost of developing players was so high, they needed a window of time when they could recoup those investments. The existing situation allows them six years. A player is bound to his original team for the first six years of his MLB contract, after which he can become a free agent – though some players bargain away that right by signing long-term contracts before the end of their sixth year.
During that six-year period however, players are not bound to the salary whims of the owners. The minimum salary will rise to $300,000 in 2003, there is a 10% maximum salary cut from one year to the next, and after two seasons players are eligible to have their contract decided by an independent arbitrator if they cannot come to an agreement with the team.
After their successful strike in 1972, the players had increased their bargaining position substantially. The next year they claimed a major victory when the owners agreed to a system of salary arbitration for players who did not yet qualify for free agency. Arbitration was won by the players at in 1973, and has since proved to be one of the costliest concessions the owners ever made. Arbitration requires each side to submit a final offer to an arbitrator, who must then choose one or the other offer. The arbitrator may not compromise on the offers, but must choose one. Once chosen, both sides are then obligated to accept that contract.
Once eligible for arbitration, a player, while not a free agent, does stand to reap a financial windfall. If a player and owner (realistically, a player’s agent and the owner’s agent – the general manager) cannot agree on a contract, either side may file for arbitration. If the other does not agree to go to arbitration, then the player becomes a free agent, and may bargain with any team. If arbitration is accepted, then both sides are bound to accept the contract awarded by the arbitrator. In practice, most of the contracts are settled before they reach the arbitrator. A player will file for arbitration, both sides will submit their final contract offers to the arbitrator, and then will usually settle somewhere in between the final offers. If they do not settle, then the arbitrator must hear the case and make a decision. Both sides will argue their point, which essentially boils down to comparing the player to other players in the league and their salaries. The arbitrator then decides which of the two final offers is closer to the market value for that player, and picks that one.
Collusion under Ueberroth
The owners, used to nearly a century of one-sided labor negotiations, quickly grew tired of the new economics of the player labor markets. They went through a series of labor negotiators, each one faring as poorly as the next, until they hit upon a different solution. Beginning in 1986, under the guidance of commissioner Peter Ueberroth, they tried collusion to stem the increase in player salaries. Teams agreed not to bid on one another’s free agents. The strategy worked, for awhile. During the next two seasons, player salaries grew at lower rates and high profile free agents routinely had difficulty finding anybody interested in their services. The players filed a complaint, charging the owners with a violation of the labor agreement signed by owners and players in 1981, which prohibited collusive action. They filed separate collusion charges for each of the three seasons from 1985-87, and won each time. The ruling resulted in the voiding of the final years of some players contracts, thus awarding them “second look” free agency status, and levied fines in excess of $280 million dollars on the owners. The result was a return to unfettered free agency for the players, a massive financial windfall for the impacted players, a black eye for the owners, and the end of the line for Commissioner Ueberroth.
Average MLB Payroll as a Percentage of Total Team Revenues for Selected Years
Economist Andrew Zimbalist calculated the degree of market exploitation for baseball players for the years 1986-89, a decade after free agency began, and during the years of collusion, using a measure of the marginal revenue product of players. The marginal revenue product of a player is a measure of the additional revenue a team receives due to the addition of that player to the team. This is done by calculating the impact of the player on the performance of the team, and the subsequent impact of team performance on total revenue. He found that on average, the degree of exploitation, as measured by the ratio of marginal revenue product to salary, declined each year, from 1.32 in 1986 to 1.01 in 1989. The degree of exploitation, however, was not uniform across players. Not surprisingly, it decreased as players obtained the leverage to bargain. The degree of exploitation was highest for players in their first two years, before they were arbitration eligible, fell for players in the 2-5 year category, between arbitration and free agency, and disappeared altogether for players with six or more years of experience. In fact, for all four years, Zimbalist found that this group of players was overpaid with an average MRP of less than 75% of salary in 1989. No similar study has been done for players before free agency, in part due to the paucity of salary data before this time.
Negotiations under the Reserve Clause
Player contracts have changed dramatically since free agency. Players used to be subject to whatever salary the owner offered. The only recourse for a player was to hold out for a better salary. This strategy seldom worked, because the owner had great influence on the media, and usually was able to turn the public against the player, adding another source of pressure on the player to sign for the terms offered by the team. The pressure of no payday – a payday that, while less than the player’s MRP, still exceeded his opportunity cost by a fair amount, was usually sufficient to minimize the length of most holdouts. The owner influenced the media because the sports reporters were actually paid by the teams in cash or in kind, traveled with them, and enjoyed a relatively luxurious lifestyle for their chosen occupation. A lifestyle that could be halted by edict of the team at any time. The team controlled media passes and access and therefore had nearly total control of who covered the team. It was a comfortable lifestyle for a reporter, and spreading owner propaganda on occasion was seldom seen as an unacceptable price to pay.
The major labor issue in the game has shifted from player exploitation, the cry until free agency was granted, to competitive imbalance. Today, critics of the salary structure point to its impact on the competitive balance of the league as a way of criticizing the rising payrolls. Many fans of the game openly pine for a return for “the good old days,” when players played for the love of the game. It should be recognized however, that the game has always been a business. All that has changed has been the amount of money at stake and how it is divided among the employers and their employees.
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