Lessons from the business of baseball

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Ignore the snow and the cold. Even though it’s only February, the hope of spring is upon us. That is, the hope that comes with Major League Baseball’s Spring Training.

It’s been a long three-plus months since the St. Louis Cardinals beat the Texas Rangers in the World Series. But pitchers and catchers are reporting for the 2012 season in either Arizona (Cactus League) or Florida (Grapefruit League), with the Seattle Mariners opening on February 11 and the remaining 29 teams following on February 18-22.

At this point, at least some anticipation exists among fans that their respective teams have a shot at a winning season and the playoffs, unless you happen to be a New York Mets fan, I suppose.

But there aren’t just on-the-field issues to discuss and debate over a few beers. Developments on the business of baseball warrant attention as well.

Good news came in December with the approval of a new five-year collective bargaining agreement between team owners and the MLB Players Association. That means the sport will have at least 21 consecutive years of labor peace. That’s a dramatic change given that baseball suffered five strikes and three lockouts over the previous 24 years.

As for the CBA, three details jump out as significant. The first comes on the revenue-sharing front. Baseball has a so-called “luxury tax,” whereby when a team’s payroll exceeds a certain level, it pays a percentage on that excess to the league, with the funds redistributed to smaller market, lower payroll teams.

Make no mistake, this revenue sharing system is overwhelmingly directed at the New York Yankees, with their notoriously high payroll. The “tax” threshold level for 2012 and 2013 will be unchanged from last year’s $178 million. In 2014, 2015 and 2016, the threshold rises to $189 million.

Over the past three seasons, according to Baseball-Reference.com, the Yanks’ annual payroll averaged $203.5 million, with 2012 projected at $209.8 million. The next highest estimated payroll for 2012 is the Phillies’ at $167.8 million.

For the first year a team exceeds the threshold, the “tax” is 17.5 percent, rising to 30 percent in the second year, 40 percent in the third, and 50 percent in the fourth. But those have to be consecutive years, so if a team dips below the threshold for a season, the “tax” is reset.

The idea is to improve competitive balance. That, of course, would be better achieved by a hard salary cap, which has created parity and greater fan interest in football, making the NFL a sports business juggernaut. But neither the owners nor the players in baseball are willing to go down that path. From the perspective of competing for entertainment dollars by expanding fan interest, MLB’s “luxury tax” is better than nothing.

The second noteworthy change for the sport is moving the Houston Astros from the National League to the American League in 2013. That will mean shifting interleague games from a few set weeks each season to being played throughout the season. It remains to be seen if this increases fan interest, or merely becomes too commonplace.

Third, the big change will be the addition of two more playoff teams. Currently, four teams — three division winners and a wildcard — make the postseason in each league. The new format will add another wildcard from each league, with the two wildcard teams facing off in a one-game playoff.

Adding two more teams to the postseason obviously boosts fan interest. At the same time, 10 out of 30 teams making the playoffs should not diminish the importance of the regular season. For good measure, the risk of a one-game playoff amplifies the importance of a team winning its division, while also ramping up the excitement regarding which wildcard team advances.

Overall, this CBA is a plus for baseball, especially given the recent labor woes in the NFL and NBA. It makes sense then that MLB Commissioner Bud Selig was rewarded in January with a contract extension through 2014.

While there have been problems, Selig’s tenure as commissioner since 1992 should be acknowledged as a general success. Indeed, given the changes and challenges in the market, he arguably could be ranked as the game’s top commissioner.

Baseball is not known as a sport of change. On a certain level, such as appreciating the game’s history, that’s a strength. At the same time though, the ability to change when required is critical in business.

Selig was quoted on MLB.com: “I am a purist, but my view of that is you have to do what you think is best for sport. This is 2012. You just can’t do things like we did before… You have to be careful and walk a very thin line. You don’t want to make changes just to make a change.” He went on to note the successes of revenue sharing and the wildcard. Selig added that nine different teams have won the last 11 World Series, and 24 teams have made the postseason over the past decade.

That’s all been good for the game, for the fans, and therefore, for the business of baseball.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.