MLB Contends Prorated Salaries To Result In $640K Per Game Loss
In an initial step toward negotiating the thorny issue of player compensation, MLB informed the union that paying players' prorated salaries over the course of a shortened 82-game season would result in an average loss of $640,000 for each game, according to a 12-page document obtained by SBJ. The prospect of paying players' prorated salaries, a compensation structure that the union maintains was agreed upon in March, would yield what a source familiar with owners' thinking called a "devastating" economic scenario for the sport. The document, titled "Economics of Playing Without Fans in Attendance" and dated May 12, details how the proposed prorated salary structure would result in players taking nearly 90% of revenue. A source familiar with teams' thinking told SBJ: "It is not economically feasible to start the season playing without fans while paying players their full prorated salaries because the economic losses would be staggering, and clubs would not have enough revenue to keep non-players employed. There is also the risk that a postseason cannot be played because of a second wave, depriving clubs of revenue to support player salaries. That was the clubs' position in March and it remains their position today."
GRIM PICTURE: Details in the document, which were first reported by the AP, help paint a grim economic picture of a baseball season played without fans. Several baseball sources familiar with owner-level thinking, all of whom spoke on condition of anonymity to discuss specifics, said the season would be in jeopardy if the union does not budge from its stance of insisting on prorated salaries. One source said: "The easiest way to think of it is, at a minimum MLB is losing nearly $3 billion this year under any scenario, and the losses just go up from there."
ECONOMICS 101: If player salaries are prorated for an 82-game regular season, the Yankees would have $312M in local losses when calculating their earnings before interest, taxes, depreciation and amortization. The Yankees' figure includes about $100M toward bonds that financed new Yankee Stadium, money that already has been paid for '20. The Dodgers were second with $232M in local losses, followed by the Mets at $214M, Cubs at $199M and Red Sox at $188M. The Tigers would have the lowest negative EBITDA -- an accounting measure used to assess profitability -- at $84M. Figures exclude distribution from the central office, which projects to collect $1.34B in media revenue. Most of MLB's revenue this season is expected to come from an expanded postseason, which would include 14 teams instead of 10. But several baseball sources concede that even by choosing not to play the postseason later in the fall (it is still expected to be played in October), there is no guarantee that it will not need to be canceled or cut short because of government restrictions based on a potential second wave of COVID-19. Without the postseason revenue, a baseball source familiar with the league-wide economic structure said, "We're all in a really bad situation."
REVENUE'S IMPACT: National media revenue is dependent on MLB's ability to stage a postseason and provide national broadcasters with agreed-upon games during the abbreviated regular season. For the regular season, that totals $553M in media money. For the postseason, it is $787M. The document details the breakdown among media partners for the postseason: $370M from Fox; $310M from Turner; $27M from ESPN; $30M from MLB Network and $50M from international and other. RSNs are only contractually obligated to pay rights fees for each game that is delivered after clubs fail to deliver the minimum number of games (between 140 and 150). Revenue from RSNs drops in proportion to the lost games, from $2.3B to $1.2B and an average of $980,000 per game for both teams, according to the document. Club rights fees will be reduced further because MLB must pull games from clubs to satisfy the requirements of ESPN "Sunday Night Baseball" and Fox contracts. Clubs do not receive additional rights fees if ratings are higher than expected or if advertising income for the RSN is higher than expected.
NEGOTIATING TACTICS: According to the document, MLB's '19 revenue was 39% local gate and other in-park sources, followed by 25% central revenue, 22% local media, 11% sponsorship and 4% other. Baseball sources are optimistic but cannot guarantee that small groups of fans will be permitted to return to some ballparks later in the '20 season. Clubs project to increase their debt from $5.2B last year to $7.3B in '20. MLB's central office increased debt by $550M to support clubs and is seeking $650M more credit. After owners voted Monday to propose a 50-50 split with players of revenue, MLBPA Exec Dir Tony Clark told The Athletic that the concept was a non-starter because the union equates revenue sharing with a salary cap. Owners were surprised by Clark's characterization, according to a source, who described the two sides as "ships passing in the night." The source added that owners are trying to "find a way, a construct that is fair to negotiate rather than going in and saying, 'Look, we don't have the revenue and losses are through the roof so players have to take less.'" The revenue-sharing concept was aimed to characterize it in a "positive way," being business partners and sharing revenue. The union has requested a myriad of documents pertaining to finances from MLB.
STAYING STEADFAST: Clark has been steadfast that negotiations regarding player compensation are complete. The union has said that the two sides made an agreement in late March regarding return-to-play stipulations, agreeing that player salaries would be prorated based on the number of games played in '20. Owners feel that the issue is subject to re-negotiating because the calculus has now changed since fans will not be permitted to attend games at least initially. "The traditional MLB team model, we're not going to have it for some period of time because we won't have fans in the stands," one club executive told SBJ. "There obviously has to be compromises made by everybody in that situation -- the teams and the players. We all have to share the collective pain."
MIDDLE GROUND? Several baseball sources said the possibility of deferring some payment to players (with interest) is not a feasible middle-ground solution between owners as players because owners do not view the economic crisis as a one-year issue. They said there remains great uncertainty over what operations for 2021 will look like and a salary deferment plan merely takes the economic issues from this year and moves them to next year and beyond. "Deferrals just don't get you anywhere," a source said. "Owners just don't have the revenue."