SBJ/December 5-11, 2011/Opinion

Print All
  • MLB moving in the right direction with cap and tax system

    Scott Boras doesn’t like the amateur draft cap and tax plan in MLB’s new collective-bargaining agreement. He says that it will promote competitive imbalance and that the system will need to be modified. Boras seems to have persuaded a gaggle of sports journalists that he is right. He is not.

    The Boras argument goes something like this. The small-market teams cannot compete with the large-market teams in the free agent and trade markets for major league players, so the only way they can compete is in the market for amateur players. Accordingly, the small-market teams outspend the large-market teams in order to sign the best amateur players and, thereby, improve the competitive strength of their teams. The new rules limit their spending in the amateur (Rule 4) draft and set a stiff penalty (75 to 100 percent, and potential loss of picks) for exceeding the cap limit. This cap and tax plan, says Boras, wipes out the existing advantage of the small-market teams in the amateur player market and will only serve to increase the relative strength of the large-market franchises.

    Boras and his messengers then point to their empirical evidence. The small-market Pittsburgh Pirates spent $17 million in signing their 2011 Rule 4 draft picks, more than any other team. The lowly Pirates, of course, have not finished above .500 since 1992, but this past year they finished above both the Cubs and the Astros in the NL Central. The hope is that under the smart leadership of Frank Coonelly at president and Neal Huntington at general manager, the team will take advantage of its early picks in the amateur draft and begin to challenge for a postseason berth in the coming years. Alas, says Boras, that hope is now dashed by the cap and tax plan.

    What’s wrong the Boras argument? Let me count the ways.

    First, there is nothing unexpected to see a small-market team, like the Pirates, outspend big-market teams in amateur draft signings. After all, MLB has had a reverse-order draft since 1965 wherein the lower finishers are given the top draft picks, and the top amateur picks in the first round command the most money. Such an outcome is as much a product of having to spend more money to sign the early picks as it is of team strategy.

    Second, that said, the Pirates draft spending in 2011 is not representative of the general pattern. The team with the highest draft spending over the last three years is the large-market Washington Nationals; on average, they outspent the Pirates by $4 million a year. The Nationals, of course, though in a large market and new stadium, were in a position to spend a lot because they had lowly win percentages and early picks each year.

    Boras’ hypothesis would predict a strong inverse correlation between a team’s market size and its draft spending. In fact, in none of the last three years is there a statistically significant correlation between the two variables. The third-highest draft spenders over the last three years were the larger-market Red Sox, while the smaller-market Marlins, Twins and A’s were all among the lowest spenders (each spending less than $5 million a year).

    Third, the cap and tax plan is based upon a progressive structure of different caps for each team. The team with the lowest win percentage the prior year is allocated the highest cap, while the team with the highest win percentage is given the lowest cap. For 2012, the per team caps run from $4.47 million to $11.49 million. These levels will increase annually at the rate of growth of aggregate industry revenue. It is therefore not surprising that Pittsburgh’s Coonelly has stated that he has no worries that the Pirates will be able to continue to sign their top picks — and now with the added benefit of spending less money to do so. Further, this outcome will diminish the probability that small-market teams won’t be able to sign their top picks, a problem that has undermined the balancing intent of MLB’s amateur draft.

    A significant problem is that spending on the top amateur picks has accelerated over the last five years. Small-market clubs have often skipped the top-rated players for fear that they wouldn’t be able to sign them. These players are then drafted later by large-market teams and signed for big bonuses. This has pushed up the value of the higher picks. If the growth of amateur signing bonuses continued at its 10 percent annual rate between 2006 and 2010, the small-market clubs would not be able to remain competitive in this market.

    Fourth, for the first time, baseball has added a competitive balance lottery for six extra picks between the first and second rounds and between the second and third rounds. These picks will be allocated via lottery to the 10 teams with the lowest local revenues and the 10 teams with the smallest markets. And, for the first time, these picks will be tradable (for players, not cash).

    Fifth, similar changes are being made with the international signing of players wherein each team will have a restricted signing bonus pool. Teams will have different pool allotments, inversely related to win percentage, and varying between $1.7 million and $4.6 million in 2013. These allotments will also be tradable.

    Sixth, the cap and tax system is being instituted instead of a rigid slotting system. The system allows for more flexibility in allocating signing bonuses. Together with the new provisions for trading, the new system rewards managerial intelligence and ingenuity.

    To be sure, the draft system is but one part of the overall CBA. Many other parts also relate to competitive balance and, I believe, will also support greater parity.

    While baseball will gain from the new CBA, Scott Boras will not. His ability to get large signing bonuses for his domestic and international amateurs will be curtailed.

    The new system is not perfect, but it is a step in the right direction.

    Andrew Zimbalist (azimbali@smith.edu) is the Robert A. Woods Professor of Economics at Smith College. His latest book is "Circling the Bases: Essays on the Challenges and Prospects of the Sports Industry."

    Print | Tags: Opinion
  • Cartoon: Saving Christmas

    Print | Tags: Opinion
  • Keys to startup success: Motivation, discipline, support team

    Motivation, self-discipline and a strong support team are vital attributes of successful marathoners, such as those who recently completed the ING New York City Marathon. Without these traits, the hopes and dreams of personal accomplishment often rest closer to the starting line than the finish line.

    The same can be said of entrepreneurs. Today’s economic challenges, general disdain for corporate governance, and the fragile nature of family life/work balance have many wondering if they should go out on their own. Sure, there may be an immediate adrenaline rush of entrepreneurial grandeur, such as creating the next Under Armour, being the next Cuban, Jobs or Knight, or simply collaborating with former industry colleagues — but that’s just eye candy for the uncommitted.

    The reality is that you start out as a jack-of-all-C-suites for your NewCo, with an untested brand name. Can you stomach uncertainty, uneven income, constant No’s, and the continual need for working capital? It’s not for everyone. In fact, the vast majority of new businesses fail within the first five years.

    Before you spend your own money on a URL, lease stylish offices, or build out a website, there are several factors to consider when you examine a startup opportunity.

    Motivation

    First, analyze your desire to develop a startup or join a new business venture. It seems obvious, but knowing who you are and what makes you happy is a critical first step. Find the “passion point” that bonds your emotional, physical and financial investment together. Sometimes it’s an extraordinary opportunity and a moment that you can’t afford not to consider. Or maybe it’s the joy of creating something new and bringing it to market, or making a positive difference in people’s lives with a rewarding solution.

    Make sure your entrepreneurial motivation is positive and consistent. It should be a resource when the hard times arise (and they will). As always, lean on your personal board of directors for timely assessments on any career changes or entrepreneurial considerations.

    Discipline

    Athletes are prime examples of how discipline can create or diminish careers. They devote themselves to lofty goals that occur in a transient life stage with the hope that it provides for a lifetime. Their value proposition is always there for us to see during competition. When their enthusiasm wanes, their effort and decision-making suffers. This is no different from what we witness in our jobs and those of potential entrepreneurs — though perhaps at a different pay grade and with less media coverage. You must be willing to invest 100 percent of your personal resources and reputation, all the time, to have any chance to achieve your goals.

    A reliable measuring stick of self-discipline is when you’re on your own. The entrepreneurial world can be a lonely place, but a confident self-starter doesn’t require corporate structure to succeed. It helps knowing where and when you do your best work.

    Staying within your strengths is also important. You may not be the best athlete, but success usually follows a hustler — one who gives his or her all every day. Are you prepared to pick up the phone and cold-call? Are you ready to admit what you don’t know and seek help?

    Lastly, if an opportunity looks to be too good to be true, it probably is. Resist shortcuts, such as easy financing, relying on family members or friends “just doing you a favor,” or hiring former colleagues looking for any type of work, etc. They all may be legitimate, but you need partners and team members who complement your skills and business concept and share your personal commitment. There are no E-ZPass lanes to entrepreneurial success.

    Support team

    As an aspiring entrepreneur, I have learned quickly that you shouldn’t go about this journey alone. There will always be someone to report to: investors, a board, customers and your spouse (not necessarily in that order!). Make sure you have the support of your spouse and that basic living expenses are covered before you start out.

    Take time to identify and “test drive” potential partners. He or she doesn’t have to be a former work colleague but may be a vendor, direct agency/client contact or past business school classmate. It needs to be someone you trust and respect and that you have a history with, both in good and not-so-good times. Forming a partnership is like a marriage and a lifetime decision. Take your time to vet through the business strategy and management structure, financial expectations and partner compatibility. Be prudent in any addition to a potential equity structure and clarify what everyone contributes to the startup stage and sustainability of the business.

    There’s a big gap between thinking about a new business opportunity and being a successful entrepreneur akin to a driver vs. passenger seat perspective. If you feel the urge to be a startup, talk to those who have ventured out and/or are still planning to do so. There are various business models and structures to consider as well as an abundance of books to help you along your way. The opportunity must be built on positive motivation, discipline and a support team in order to have any chance to compete in what will be a once-in-a-life experience.

    Glenn Horine (ghorine@handhconsulting.net) is the executive director of Iona College’s Center for Sports and Entertainment Studies, a business development consultant, an industry career counselor/lecturer and an aspiring entrepreneur.


    Print | Tags: Opinion
Video Powered By - Castfire CMS Powered By - Sitecore

Report a Bug