December 17, 2000|By Steve Walters and John Burger
ORIOLE LAND IS deeply divided. Half its citizens want to tar-and-feather Peter Angelos for losing ace pitcher Mike Mussina to the despised Yankees; the rest are less forgiving.
Ever the able lawyer, Mr. Angelos has defended his decision not to top the Yankees' $88.5 million, six-year deal by arguing that baseball's salary structure borders on insanity. And he placed a good part of the blame on the $15-million-a-year deal the Los Angeles Dodgers struck with Kevin Brown in 1998. "That contract," noted Mr. Angelos, "made every pitcher who has ability equivalent to Brown think he deserves to make the same kind of money."
Quite so. In baseball's annual free-agent auction, each new contract seems to raise the bar for subsequent negotiations. And now that the Texas Rangers have thrown $252 million at Alex Rodriguez, it'll be harder than ever for fans to credit owners' claims that they just can't afford to hold on to their hometown heroes.
But what most fans don't understand -- and what Mr. Angelos has evidently learned through painful experience -- is that a player's value differs greatly from one market to another.
After carefully analyzing teams' revenues in order to quantify these differences, we conclude that baseball's salary structure is not so much insane as imbalanced, reflecting real variation in the size of teams' markets. Now, the idea that baseball's mega-salaries are economically rational seems hard to swallow -- especially in Baltimore, where Albert Belle is living, breathing proof that some players are grossly overpaid.
But Mr. Belle may be the exception that proves the rule; on average, stars' contracts are fully justified by the revenues they bring to their teams. In a nutshell, team revenues are strongly related to team wins because extra wins convert some potential fans into actual ticket-buyers and telecast-watchers. And extra wins that can put a team in the post-season playoffs are especially lucrative, for that is when fan spending reaches a fever pitch.
The unfortunate fact of life is that some markets just have more potential ticket-buyers and telecast-watchers than others, so a win generates far more revenue in, say, Los Angeles than in Kansas City. We have not one standard by which to judge a player's market value, but one for each city.
According to our calculations, the Yankees (who share 20 million potential fans with the New York Mets) should value a given player at least 37 percent more than the Orioles (with a fan base of 7.3 million). This is because each extra Yankees win puts about $3.7 million in George Steinbrenner's wallet while each extra Orioles victory yields $2.7 million for Mr. Angelos.
Assume, for example, that Mr. Mussina adds about four wins to his team (i.e., a team of average players might have a record of 81-81, while a team of average players plus Mike Mussina might go 85-77). Four more wins are worth $14.8 million in New York -- almost exactly what the Yankees are paying Mr. Mussina -- but only $10.8 million in Baltimore.
That the Orioles stopped bidding at $12 million per year actually suggests they were willing to pay Mr. Mussina more than his "fair market value" -- in Baltimore. Mr. Angelos (wisely) just wasn't willing to pay New York prices.
Which brings us back to Albert Belle, who won his $13 million-a-year deal a couple of years ago by inviting the O's to match a pending Yankees bid.
Mr. Angelos had previously opined that no player was worth more than $10 million or $11 million, and he was absolutely right, at least in the Baltimore market. Matching the Yanks' bid ensured that the O's would pay Mr. Belle more than he could ever generate in revenues (even before his hip injury reduced his productivity). Mr. Angelos has learned from that mistake; as a result, the loss of Mike Mussina was both rational and inevitable.
Of course, that big-market teams will almost always win the bidding for available stars is rightfully troubling to fans and should be to owners and players. Competitive imbalance damages industry profitability in the short run (e.g., the Subway Series pulled record-low TV ratings) and endangers the sport's viability in the long run.
But if the field-leveling devices used in other sports, like salary caps, are impossible to slip past the players union, perhaps there's another option: Cut the biggest markets down to size by dividing them among more teams.
Don't move the moribund Montreal Expos and Minnesota Twins to similarly tiny markets. Move them to northern New Jersey or Long Island. Once three or four clubs share New York's bounty of fans, each team's economic base might be comparable to that of the Orioles, Tigers or Red Sox. And then the fans of every city might suffer the heartbreak of star-napping far less often.
Steve Walters and John Burger teach economics at Loyola College in Baltimore.
