Monday, November 15, 2004

The Myth of Big Markets

Ok, I'll admit that even the title to the blog is a bit misleading. How can I say that there is no correlation with market size and the current salary structure in Major League Baseball? Well, just like the manager is the first to get the blame, so is the size of the market.

Now, I'm not saying that the Yankees don't have a HUGE advantage. In the 2000 census, the New York MSA had over 21 million people listed. Kansas City and Milwaukee, on the other hand, were both under two million, which puts New York at ten times the size of the smallest markets. Even if you factor in a second team in the New York MSA, and that the MSA is divided equally between the Mets and Yankees, it is still five to six times bigger than the smallest markets. Truthfully, that is about the multiple you see between the smallest and largest salaries as the Yankees spend over 180 million dollars and the smallest payroll is just a shade under 30 million. The Yankees are the 800 pound gorilla - they can do whatever they want as they have history, success and a population base. I looked at the past five years and did some averages - wins, salary and attendance. The Yankees were first in every one. However, when you look at average revenue (average attendance over the past five years times the average ticket price) they fall to second. Let's get to the numbers.

First, I wanted to look at the most simple analysis - how do salaries rank according to the population of the MSA of the team? I decided to divide up metropolitan areas 50/50 as to the population base that supports the team. Yes, it is a little arbitrary - but I feel it puts those cities more in tune with the smaller MSAs. So, even though Chicago is the third largest MSA and San Francisco is the fifth, they fall into the middle range of population since they have two teams. Since New York and L.A. are so big, even with two teams each, they still tower over the other MSAs. With this change, I found that five (Yankees, Mets, Dodgers, Red Sox, Rangers) of the largest average MLB payrolls over the past five years are in the top 10 of the MSA populations. None of the smallest average payrolls were in the top 10 MSAs. In the bottom 10 MSAs, there was 1 of the highest average payrolls (St. Louis) and seven of the lowest (Minnesota, San Diego, Tampa Bay, Pittsburgh, Cincinnati, Kansas City and Milwaukee.) (Montreal, per the Canadian 2001 census, has a metropolitan population of 3.4 million, putting them over Phoenix into the middle population range.) So, obviously, there is something here, but I don't think we're seeing the whole picture.

Next, I looked at attendance per population. Of the top 10 MSAs, there were four of the highest attendance amounts (Yankees, Dodgers, Orioles and Astros) and one of the lowest (Tigers). In the bottom ten, there were two of the top ten attendance figures (Colorado, St. Louis) and five of the lowest (Minnesota, Tampa Bay, Pittsburgh, Kansas City and Milwaukee). There is a lower correlation here, but still there is something.

Then, I looked at average ticket revenue per average payroll. (Average ticket revenue was calculated using the average ticket price for the last five years and multiplying by the average attendance.) Here, if you look at the top 12 average payrolls, you get ten of the highest revenues. If you look at the top 15 average payrolls, you get 14 of the highest revenues. The only exception are the Angels who are thirteenth in average payroll and 20th in revenue. This is where you see the highest correlation - if fans come to the game, and ticket demand is high (taken into account with the average price - e.g. the Red Sox are 11th in attendance due to the confines of their stadium, but with the highest average ticket price, they are first in average revenue) then the team makes money. Now, the attendance doesn't correlate exactly with population, so I decided to look at the major component - winning.

Looking at winning and attendance figures, we see something clearer. The top ten teams as far as average number of wins per year (in order) are the Yankees, A's, Braves, Cardinals, Giants, Mariners, Red Sox, Dodgers, Twins and Astros. (Jon - you'll be happy to know the White Sox are 11th.) Six of these teams are in the top ten in attendance. The Twins are 26th, the Braves are 12th and the A's are 20th. In the bottom ten of average wins, there is one of the highest attendance averages (the Orioles) and six of the lowest (Brewers, Detroit, Pittsburgh, Kansas City, Tampa Bay and Montreal). (I think that you can look at stadiums and expectations as the reasons the A's and Twins are so low, the Orioles are so high and the Braves, for all of their success, are in the middle of the road.)

The thing that everyone cares about though, is how much higher payrolls contribute to wins. I saved this for last. The top ten in average salaries are the Yankees, Red Sox, Dodgers, Mets, Braves, Rangers, Arizona, St. Louis, Seattle and Cubs. Six of these teams were in the top 10 in wins (in order, Yankees, Braves, Cardinals, Mariners, Red Sox and Dodgers.) The Diamondbacks were 13th, Cubs 17th, Mets 19th, and Rangers 20th. The bottom ten in average salaries are Cincinnati, San Diego, Oakland, Pittsburgh, Tampa Bay, Milwaukee, Montreal, Kansas City, Minnesota and Florida. In the bottom ten, two of them were in the top 10 in wins (A's and Twins) and seven were in bottom 10 (Reds, Padres, Montreal, Pittsburgh, Kansas City, Milwaukee and Tampa Bay).

There are going to be differences from year to year - right now the Diamondbacks and Rangers are divesting themselves of the bigger contracts as they try to make salaries more in line with revenue. Expectations change so that the amount spent changes. I think looking at five years for the success, the attendance and salaries, it gives a good idea of how the organization works and smooths out the impact of new stadiums and one year pushes.

So - if I may summarize, there is some factor in the size of your market on salaries, but even more important is attendance and ticket demand. People want to go Wrigley and Fenway. People love to follow the Cardinals, Cubs, Red Sox and Yankees. Therefore, you can have higher ticket prices. That means higher ticket revenue. Which leads to higher payrolls. If 14 of the 15 highest payrolls also have the highest revenues - that is a strong correlation. That comes from high attendance and high demand. Those come from history. History comes from winning. (Well, there are other factors, but I would say that is the largest - though stadiums come into play like at Wrigley Field and Camden Yards.) By the way, the 16th highest salary was the 15th largest revenue (Colorado).

What is the cause of winning? You could say spending has a part (as seen above) but, I would put forth that management is the bigger key. Signing the right players - if you do it for a million or fifteen million - is very important. Without good players, you can't win. If you don't win, people don't come to the stadium. If people don't come to the stadium, you don't bring in revenue. If you don't bring in revenue, you can't sign good players. So, there is some intercorrelation. But, if your team's management makes shrewd moves, they can succeed, albeit with a much smaller margin of error than the 800 pound Steinbrenner. Like the case with managers, don't blame your market size - it is the easy excuse. Take it to your GM - for his drafting, his minor league development and his roster choices. It is a tough job, but that is where the buck should stop.


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