Commissioner Rob Manfred is working on behalf of the owners to rework the financial makeup of Major League Baseball. (Photo by Kevork Djansezian/Getty Images)
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This is the first in a multi-part series regarding the MLB labor negotiations.
We have hit the halfway point in the MLB season, which means we may have only half a season of baseball left for the foreseeable future. If the owners stand by their latest salvos in the recently-started CBA negotiations, the anticipated December lockout could be a long one.
Major League Baseball is the only major sport that does not have a salary cap, much to the dismay of their owners. There is a reason for this: each and every time the topic is raised, the players lock arms and refuse to budge. This was a main reason for the 32-game work stoppage in 1990, when fortunately no games were missed but spring training started late. And, this was the issue in 1994 when the players went on strike for 232 days, 938 games were missed, and the World Series got canceled.
If the latest proposals are any indication, 2027 may look a whole lot more like 1994 than 1990. The owners are pushing for a salary cap for, in essence, to accomplish three goals: (1) cost certainty; (2) to protect themselves from themselves; and (3) attempting to even the playing field for all 30 teams. Today we will address the first issue.
The good news: The value of MLB teams has more than doubled in the last decade. But, according to Steve Greenberg, a sports banker at Allen & Company with experience advising baseball teams in their potential sales, MLB team valuations have been stagnant for the last five years. Further, per Greenberg, “The values of MLB teams on a multiple basis have lagged, and lagged by 50 percent if you compare it to NBA, NFL.” MLB teams sell at an average revenue multiple of roughly 7x, trailing the NBA (13x), NFL (10x), and NHL (8x). Major league owners want to fix that, and they believe that a salary cap is the way to go. By utilizing Occam’s razor and the transitive property, the idea is that if each of these leagues have a salary cap, and each of these leagues have teams selling at a higher premium, then by imposing a salary cap, MLB teams will join their ranks and increase their values.
The thinking is that if a team owner knew, within a few million dollars, what he/she would be spending on payroll each season – and knew as a percentage of revenue – then their club would be worth more. It is hard to argue with that premise, in a vacuum. However, this assumes that all teams are, and should be, treated as equal. Baseball is unique in that it is a regional sport with regional television rights deals (something Commissioner Rob Manfred hopes to change before the 2029 season) and that each team has 81 home games over six months, meaning 81 opportunities to fill their parks with fans; and to sell parking, concessions, merchandise, and advertising for television. Baseball is, in a word, different.
Further, salary caps can make it more difficult for teams to stay or become competitive, as they are limited in what they can spend to improve. History has shown that winning is a major factor in increasing franchise valuations.
According to Stout, a global advisory firm specializing in corporate finance and valuations (among many other services), a successful team can impact various revenue streams and can increase the value of broadcast rights and sponsorships. Further, a winning team “will generally sell more tickets and have greater demand for sponsorships in the near term.” While the impact is less for teams with a long history of high attendance, teams that don’t have that track record can leverage their success into increased demand for their product, and “can see a significant impact on franchise value.”
But capping what a team can spend can delay or even thwart their ability to compete in the short and long term, thus potentially making the franchise less valuable. Of course, this does not necessarily apply to teams in large media markets (think Dodgers, Yankees, Mets, Cubs), or teams with large stadiums to fill (think Dodgers, Diamondbacks, Mariners), but it sure will hurt teams in small media markets (think Kansas City) or teams with smaller ballparks (think Kansas City).
And for the owners, be care what you wish for. In order to achieve a salary cap, the owners would need to agree to a salary floor. In their first proposal to the players in late May, the owners offered up a hard cap at $245.3 million and a floor at $171.2 million. At this moment, using current salaries, at least 12 teams live below that number. The Commissioner ostensibly got sign off from all (most?) of the owners before making this initial offer, but it would be a heavy lift to get the Miami Marlins ($85 million) to more than double their payroll to reach the floor; or the Cleveland Guardians ($101 million) to go up more than 70%; or the Tampa Bay Rays to add 58% to their player pool while they try to build a new stadium in St. Pete.
In addition, cost certainty means different things to different owners. To use some of the above examples, cost certainty for Guggenheim Baseball Management, who own the Dodgers with assets valued at approximately $5.5 billion, is wholly different than cost certainty for John Sherman, who owns the Royals with a net worth just over $1.2 billion.
The players have died on the salary cap hill before, and if Bruce Meyer is to be believed, they are prepared to do so again. If the owners crave cost certainty to such a high degree, they could run their businesses in a different manner – a topic to be addressed in future columns.