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Thursday, November 08, 2007

Baseball's Losing Formula

This article, "Baseball's Losing Formula" in the New York Times has garnered some attention recently and Will Carroll posted a nice interview with the author Michael Lewis (no, not that one). The crux of Lewis' thesis is the following:

The problem is that transfers are based on local revenues. Teams that receive money are encouraged to invest it in their payrolls. But if a team actually attracts fans by fielding a winning team, its revenue-sharing receipts will be reduced.

To create a more balanced playing field, revenue-sharing payments should be increased for teams that attract more fans. I have devised an approach for doing this based on a statistical analyses of teams’ payrolls, winning percentages and attendance. It takes into account the size of the team’s local population, to acknowledge that teams in places like New York and Chicago have greater financial incentives to invest in players than teams in places like Milwaukee and Kansas City do.

Here’s how my formula would have affected the revenue-sharing payments to the Pittsburgh Pirates, which last year filled only 60 percent of its seats but received $25 million in revenue sharing. If the team could have increased its attendance rate to 70 percent, its payments would have grown to $29 million, and if attendance had gone up to 80 percent, the payments would have reached $33 million. My formula would have had even more significant consequences for the Devil Rays. Based on the team’s 38-percent attendance rate, its revenue-sharing payments would have been reduced from $33 million to $13.5 million.
While the study won't be published for a few months this synopsis makes me wonder how he takes into consideration the differences in the sources of local revenue between teams. It seems fine to remove the disincentive to attracting more fans and looking at local population and attendance levels seems like a way to get this done. But clearly a large part of the disparity in local revenues has to do with media market size, which incidentally, also influences attendance. Lewis made mention of media market size in the Carroll interview but didn't focus on it as I would have expected since there is a real disparity between the teams. If the Yankees can bring in over $90M in local media revenues while a team like the Royals might fall somewhere between $5M and $10M, there would have to be a portion of the revenue sharing that reflects only these differences and is unaffected by his plan.

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