FanPost

In Defense of Nutting, by Jack O'Hara


I've been a Pirate fan since the early 50's. I remember driving from my home in Brookline to Oakland and paying a buck to park in someone's front yard to attend a game at Forbes Field. I still have images of Roberto making his underhand flip to the infield after making his patented basket catch in right field. Those were the days!

These days, the new economic realities of baseball are changing the makeup and viability of the Pirates as it is in most small market teams in MLB. Case in point: In the 2017 off-season, the Pirates traded McCutchen and Cole ostensibly to save about $20 million in salary for the '18 season. Since those trades were made, it reinforced the opinion that the Pirates have no intention of ever putting a championship team on the fields. "Nutting in cheap" is the prevailing sentiment of frustrated fans and there is distrust vitriol directed at the Pirate ownership.

The fact that I am a long time Pirate fan does not qualify me to sit in the front office and run the ball club but it doesn't preclude me from offering an opinion and a possible solution to the current plight of the Pirates and of major league baseball in general. I have a feeling that my opinion will be somewhat accepted but my proposed solution will be dismissed as far too radical. But, hear me out.

In 2017, MLB generated roughly $9 billion in revenue. For perspective, that is almost twice the revenue of just 10 years ago. The average revenue per team in 2017 was about $300 million with the Yankees leading MLB with over $600 million. In stark contrast, the Pirates generated $258 million in revenue that year.

Roughly 30% of team revenue comes from ticket sales. The rest of the revenue comes from parking, concessions, merchandise and the TV contract. Ticket prices are certainly a factor in revenue. The Cubs, Red Sox and Yankees have an average ticket price of $55 - $60. The Pirates are a bargain with an average price of $24. (Ever wonder why there are so many Cub fans at PNC for the Cub series?)

Each year MLB teams collectively spend in excess of $4 billion on player salaries. But, there is a huge difference between the salary structure of "large market" teams and "small market" teams. Pittsburgh is obviously in the small market category. The large market teams have higher revenue because they have a larger fan base and can take advantage of higher ticket revenue, parking and concessions as well as TV contracts. Obviously the small market teams do not have the same advantage so there is a limit to what these teams can allocate to payroll each season.

As almost everyone knows, there is no salary cap in baseball and there is no salary floor. This is unlike other professional sports where the labor agreement calls for a payroll ceiling and floor. In the NHL for example, the team salary cap is about $80 million per season and most teams are between $75 - $80 million in payroll. The small market Penguins have the same salary constraint as Rangers and Bruins so there is a level payroll playing field.

MLP doesn't operate that way. The large market teams can spend $200 million on player salaries and the small market teams will hover around half that figure. In 2017, the Pirates opening day payroll was at $101 million, roughly $37 million below the average team payroll. In 2018, with the loss of McCutchen and Cole and the failure to sign a single free agent, the payroll was down to the $85 million range and ranked #27 of the 30 MLB teams.

Why doesn't MLB have a salary cap (and floor)? Although the owners have tried to negotiate some salary constraint with the players association, the union will never agree to a salary cap as it exists in other professional sports. If the owners take a stand and insist on a salary cap, there would certainly be a work stoppage and a lost season and the owners would lose boatloads of revenue. Losing a season of revenue is just not an option for the owners and the players are certainly aware of that so it is easy for the players to take an unyielding position. There is currently a penalty that is applied to excessive team payroll spending called the competitive balance tax but it is largely ineffective especially when you consider that the Yankees have exceeded the limit every season since the constraint was put in place 15 years ago.

Perhaps the most glaring example of the payroll difference between large and small market teams occurred in 2017. The opening day payroll for the Dodgers was $242 million and the Brewers opened with $63 million. That's a gap of $179 million!

There are countless examples of large market overspend but I would like to focus on one in particular. In 2012, after 11 seasons with the Cardinals, Albert Puhols was awarded a 20 year contract with the Angels. The first 10 years as a player for $240 million and then 10 years at $100 million for "personal services". Albert was consistently the most dominant player in baseball at the time of the signing but he was 32 years old and it is pretty common knowledge in baseball that his performance would begin to decline at that age.

As predicted, Albert had a couple seasons with the Angels that were respectable, then the decline started over the next 5 years. In 2018, he finished the season on the disabled list and his stats were well below what could be considered average for his position. Over the next 3 seasons he will earn a total salary of $87 million and his contribution to the team will likely be far less than what a minor leaguer would bring to the team. The contract that he signed in 2012 can now be referred to as the "Albertross".

Going back to 2003, the average player salary was $2.37 million. That's not too bad but in 2018, the average salary was $4.52 million which is a 91% increase in 15 years. What other industry has a 91% payroll increase in 15 years? However, in the past 2 years, the total increase is less than 3% which would seem to indicate that there is a leveling off of the salary escalation. There have been rumblings in the players association that there is collusion in the ownership group to restrict the payroll growth but quite possibly, sanity is starting to prevail in baseball.

That now brings me to the subject of this article, Bob Nutting. As the majority owner of the Pirates, Mr. Nutting is first and foremost a businessman, and like any businessman, he runs the Pittsburgh franchise to make a profit. In order to make a profit, his revenue (ticket sales, TV contract etc.) must exceed his expenses (primarily player salaries). The wider the gap between revenue and expenses, the greater the profit.

As noted above, there is no salary floor in MLB so Nutting is free to establish the salary budget at whatever level he determines to be suitable to meet the desired profit level for the year. Major League Baseball has given him this prerogative. He is operating his business within the rules that have been given to all 30 of the MLB franchise owners.

At the end of the 2017 season, 3 of the managers of the 10 playoff teams were fired. The 3 terminations happened to be in 3 large market teams; Boston, New York and Washington. In the press conference that was held to announce the terminations, two of the front office representatives expressed the need for the team to go in a "new direction". The fact that these managers had guided their teams to the playoffs was not enough to save their jobs.

Also, at the end of the 2017 season, the ownership of the Pirates awarded the manager and the general manager with 4 year contract extensions. This was done in spite of the fact that not only did the team not make the post-season, the performance of the team had continued to spiral downward from 98 wins in 2015 to 78 wins in '16 and then 75 wins in the 2017 season.

Apparently the "direction" of the Pirates was acceptable to Mr. Nutting. Why is that? Obviously the general manager was willing to live within the confines of the payroll budget as dictated by ownership and the manager was willing to live with the low-cost talent that was hired by the GM. The manager and GM just did their jobs, didn't complain about the lack of salary flexibility, and tried to be competitive.

Shortly after the trades of McCutchen and Cole, Bob Nutting was interviewed about the apparent salary dump that had become so typical of the Pirates. When asked what it will take to change this cycle, his response was:" I think you'd have a fundamental redesign of the economics of baseball,,, that's not what we're going to have". Loosely translated: as long as there is no salary ceiling or floor, large market teams will continue to dominate the signing of the high value players and the small market teams, with restricted salary budgets will continue to sign the lower cost players.

It is very telling indeed when Nutting stated: "that's not what we're going to have", probably meaning that the owners, as a group, do not intend to change the disfunction that currently exists. They're all making money, some more than others but, the value of all of the franchises continue to grow so why mess with a good thing.

In 2019, the Pirates will celebrate the 40th anniversary of their last World Championship. Since that glorious '79 team, the Pirates were able to put a competitive team on the field in the early 90's but that's been it. Over 25 years have now passed since the Bonds / Van Slyke / Drabeck teams and they haven't come close to putting a team on the field that could reasonably compete for a world championship. Clearly, the "economics of baseball" has prevented and will continue to prevent this storied franchise from producing another championship team.

In 2018, the Pirates finished the year with a decent record and with a reasonable cause for optimism for 2019. However, the 2018 attendance was the lowest in PNC Park history - even worse than the horrid teams of the incredible 20 season long losing streak from 1993 to 2012. The 2014 and 2015 Pirate teams that participated in the wild card games drew almost 2.5 million fans in each of those seasons which would seem to indicate that the fans will show up to support a competitive team. Three years later, in 2018, the home attendance was less that 1.5 million. That's an incredible 40% drop in attendance from just 3 years ago. I guess the only gut-wrenching question for Pirate fans at this point is: What will be the consequences of the attendance decline on the 2019 salary budget.

The Pirates are not alone in the attendance decline. MLB in general in 2018 has seen over a 4% drop in attendance and marks the 3rd consecutive year of decline. The 2018 attendance figure of 69.6 million is the lowest figure since 2003. That figure represents a $94 million drop in ticket sales. Further, attendance is down about 7 % in the past 6 years so this is not just a recent phenomenon.

John Smoltz has recently commented on the competitive imbalance in baseball and the resulting attendance decline. Smoltz is never afraid to speak his mind and is not afraid to wade into controversy. He acknowledged the decline in baseball attendance and offered his opinion of the current situation: "The way it is now, 75% of teams leave spring training with no chance to win and no desire to win so they can build for the future. You look at the American League, it's self-sufficient on 4 teams".

As Smolz had correctly pointed out, by mid-August in the 2018 season, with about 25% of the season remaining, 9 of the 15 American League teams had virtually no chance of making the post-season. There were 6 teams left that were competing for the 5 remaining playoff spots. How can the fans of these excluded 9 teams have any realistic expectation of seeing their teams make the post season. How can the fans be inspired to watch the battle for 2nd or 3rd place in the division. Bobble head nights and firework displays will not offset the mediocre performance of the home team.

To summarize:

>attendance will continue to decline

> 2019 will probably mark the final year of the mega-contracts(Harper, Machado) with perhaps Mike Trout as the exception in 2021

> Ticket prices will stagnate and likely decline

> Average player salaries will start to decline

> The players will NEVER agree to a salary cap

> The large market teams will continue to sign the high-value players

> Small market teams will continue to serve as the development league for the large market teams

> Owners will rarely sell their franchises because of the appreciation of the investment

> Over the next 10 years, the "economics of baseball" will continue to widen the gap between the large market and small market teams.

Now comes the part that will no doubt generate controversy. I suggest that the large market/small market disparity should be openly recognized by Major League Baseball and I recommend that a drastic league realignment should take place that will take into account the current demographics of baseball. In my book: "The Instinctive Manager", I have written that: "You are riding a dead horse when you recognize that a specific change needs to be made but you fail to take action". Major League Baseball should face reality, recognize that the current structure needs to be changed, and quit riding what appears to be a dead horse.

Accordingly, I have developed a framework for the new baseball realignment that takes into account market size and annual revenue. There would continue to be 2 leagues but the composition of the leagues would be completely changed and include 2 new franchises. For the sake of this example, the 2 new franchises would be Montreal and Las Vegas. Here is the new realignment:

National League (small mkt.)

East conf.,div. 1 West conf. div.1

Montreal Oakland

Baltimore San Diego

Tampa Bay Las Vegas

Miami Arizona

division 2 division 2

Cleveland Kansas City

Cincinnati Chi Sox

Milwaukee Colorado

Pittsburgh Minn.

American League (large mkt.)

East conf. div 1 West conf. div 1

NY Yankees LA Dodgers

NY Mets LA Angels

Boston San Francisco

Toronto Seattle

Division 2 Division 2

Philly Texas

Atlanta Houston

Detroit Chi Cubs

Washington St Louis

- two new franchises (Montreal & Las Vegas)

- each team would have to prevail over 3 other teams in their division to reach post season

- all of the teams in each league would be reasonably close in market size and revenue (and probably payroll)

-the division winner in each conference would play to advance to league champ and then to the world series

- there would be 5 or 7 game playoffs at each level and the much-despised wild card game is eliminated (think of the 2015 Pirates with the second best record in baseball eliminated after losing 1 wild card game)

- most games are intra-league with some inter-conference activity just as there is today

To make this more amenable to the players association, the designated hitter would be installed across all of MLB and the ridiculous competitive balance tax would be eliminated. Also, the addition of the 2 new franchises would add 50 more major league jobs.

It would be likely that the payroll structure for the large market teams would continue to increase as the ownership groups in this conference try to out-spend their competition. It is also quite possible that the small market tams recognize that they have a realistic chance of being competitive and commence to increase payroll - especially if fan interest and attendance grows.

There are 3 potential obstacles to the realignment:

1. The players association may not be willing to risk a disruption in the current system. A 90% salary increase over 15 years is pretty hard to ignore despite the apparent recent leveling off.

2. The ownership group is satisfied with the status quo and may not be willing to make such a radical realignment

3. The TV networks and sponsors are interested in seeing a match-up like Boston vs. Los Angeles each year in the World Series. They may not be thrilled with seeing any of the small market teams in the Championship.

I am absolutely convinced that the commissioner of Major League Baseball is aware of the widening gap between large and small market teams. I am also convinced that he knows there are some severe talent imbalances in baseball that will continue to stifle the small market fan interest. For example, the Tampa Bay Rays, despite having an excellent 2018 season, will never be able to compete with the Yankees or Red Sox for the American League east championship. Same goes for the Orioles. So why not try to do something about it!

It is also apparent that the commissioner recognizes that interest in baseball is starting to wane. That is likely the reason to improve the pace of play by limiting visits to the pitcher's mound. Lets face it, if that is to be the extent of the adjustments that are made, then Major League Baseball is in serious trouble.

I know this is a drastic change. I know there will be significant resistance because owners and players will not be willing to adjust until something just hits them in the face and maybe at that point it will be too late. If they cannot decide on a proper course of action that recognizes the current imbalance between small and large market teams, I think what MLB should do is put this article in a ten-year time capsule and in the year 202

9, open it up and maybe see what they should have done ten years ago!

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