Baseball Inc.: The Genesis

Organizational Structure

After the 1919 Black Sox scandal, in which players for the
Chicago White Sox were caught taking bribes from gamblers to throw the World
Series, baseball managers realized stronger self-regulation was needed, and the
modern structure of MLB was formed. A commissioner serves as CEO under an
agreement with broad powers to act in “the best interest of the
national game.” Member teams agree to be bound by the commissioner’s
decisions as arbiter, as well as not sue the commissioner or each other. There’s
also an eight-person executive council elected by owners, and all team owners
vote on approval of labor agreements, media deals, and more recently, sharing
of revenues between larger and smaller market teams. The MLB constitution href="http://www.bizofbaseball.com/docs/MLConsititutionJune2005Update.pdf">(PDF) divvies up franchise territories by city and outlying counties — the
Yankees even get a corner of Connecticut bordered by two highways shared with the
Mets’ Shea Stadium.

Baseball teams generate most of their revenues locally
through tickets, concessions, and merchandise sales; but the New York-based
commissioner’s office also brings money into a so-called Central Fund
by negotiating TV and radio deals for nationally broadcast regular, All-Star,
and post-season games — plus royalties from other copyrighted
baseball broadcast material. The Central Fund also pays for player pension
plans, accountants and lawyers for player relations, a multi-million-dollar
reserve fund, and the commissioner’s office. The balance is
distributed among the MLB teams at year’s end.

See also: href="http://www.bnet.com/2403-13502_23-210671.html">The Revenue Model: Why Baseball Is Booming.

Legal Monopoly Status

Thanks to some odd legal decisions, baseball enjoys a
presumed exemption from antitrust law. MLB can limit the number of major league
teams and require players who sign with one of its franchises to play for only
that employer for several years — and at noncompetitive wages.

See also: href="http://www.bnet.com/2403-13502_23-210690.html">MLB’s Labor and R&D
Formula.

When a competing Federal League started in 1914, MLB first
blocked it from hiring away players by threatening blacklists. It then bought
out the league’s owners with payments or MLB franchises, notes Andrew
Zimbalist in May the Best Team Win: Baseball Economics and Public Policy.
The Federal League’s Baltimore Terrapins rejected a settlement offer,
however, suing under federal antitrust laws regulating interstate commerce.

In 1922 the case went to the U.S. Supreme Court, which
unanimously ruled against the challenge. Under a narrow definition of
interstate commerce in effect at that time, Justice Oliver Wendell Holmes
concluded that while teams had to cross state lines to play, href="http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=CASE&court=US&vol=259&page=200">professional baseball games were
still “purely [intra]-state affairs.”

Over the decades, the so-called Federal Baseball decision
has been challenged but never overturned, Zimbalist writes, even after
conceptions of interstate commerce changed and the NFL was declared subject to antitrust
laws in 1957. In 1972, href="http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=407&invol=258">baseball won the argument again,
with the Supreme Court conceding the exemption was an “aberration
confined to baseball” but letting it stand as entrenched tradition.

Baseball’s monopoly status is a key to MLB’s
recent business model in at least one major way. In dozens of cities, MLB has
been able to leverage its artificially limited number of teams and locations to
extract government subsidies worth billions of dollars, using them to finance
attractive new theme park–style stadiums, and thus selling more
tickets and generating millions of dollars more in additional advertising,
concessions, and merchandising revenues.

Revenue Sharing

While MLB may not face competition from rival baseball
leagues, there’s still plenty of competition among the teams within MLB to beat each other on the field. Winners gain fans and generate more
locally retained revenues. However, since MLB franchises are based in
disproportionately sized metro markets, there is not a level playing field for
the amount of revenues teams can generate, even by winning. A winning team
based in Chicago takes in much more revenue than an equally winning team based
in Milwaukee.

In the 32 years since veteran players won the right to put
their services out to bid — also known as free agency —
there has been increased competition by teams to buy talent. Better talent
costs money, however, and that created an imbalance: Bigger market teams, with
their much larger revenues, could seemingly buy their way to a winning team.
Smaller franchise owners began to fear declining attendance, as fans grew bored
with perennial losers. (Though this never seemed to faze Chicago Cubs
devotees.)

In the last decade, these concerns led to MLB’s
biggest step in self-regulation: the sharing of billions of dollars of revenue
between higher-revenue teams and lower-revenue teams in smaller markets.
Revenue sharing is designed to help the latter afford talent to field
competitive teams, thus promoting MLB’s ultimate product, and any
sport’s secret sauce: the entertainment of unpredictable outcomes.

See also: href="http://www.bnet.com/2403-13502_23-210897.html">MLB’s Rev-Share
Formula.

Record Sales

Now is a great time to own a baseball team. Based on data from
Forbes, baseball franchises have seen annual gains of 9.4 percent since 1998,
compared to just 7.2 percent average annual gains for the S&P 500
Index. In the 2007 fiscal year, href="http://www.forbes.com/lists/2008/33/biz_baseball08_The-Business-Of-Baseball_Rank.html">27 teams turned profits; while five
years ago, only 14 teams were profitable, Forbes reports.

In addition to record ticket sales, new ventures like
baseball’s Internet arm — MLB Advanced Media —
have added hundreds of millions in new revenue from services like subscriptions
to streaming game video, plus equity for its 30 team-owners. At the same time,
in an age of increasingly fragmented media and entertainment outlets, baseball
is now a prime advertising venue — both at the now-packed ballparks
and on TV. It generates even more revenue as a content provider for team-owned
cable networks. While baseball itself may be over a century old, the business
behind it is strikingly modern.