Mariner talks MLB business

Selected to be the first speaker in Business Today's annual Princeton Seminar Series, Jonathan Mariner spent over two hours on Wednesday infecting his audience with baseball fever.

Mariner, the Executive Vice President and Chief Financial Officer of Major League Baseball, produced this effect naturally while detailing the ins and outs of his profession. Thus, economics majors and baseball fans alike had reason to be pleased by his discussion of the business behind America's national pastime.

The presentation centered on the collective bargaining agreement that MLB reached with the Players' Association in 2002, which assured that a repeat of the 1994 players' strike would not take place. Mariner opened with a look at the dire straits in which baseball found itself that year, before he switched to an illustration of just how far baseball has come since then and laid out plans for the future.

To demonstrate baseball's struggles before the agreement, Mariner compared baseball's underlying business model to what he called, "the gold standard in terms of economics in sports, which is the NFL." In 2002, baseball had a net operating income of minus 15 percent, meaning that costs were far surpassing revenue. The NFL, meanwhile, was in the black, with a net operating income of plus six percent.

In addition, the NFL is well-known for having achieved parity among its teams. While bar graphs from 1999 showed remarkable equality in terms of the payroll and revenue of football teams, baseball teams varied widely in both categories, with many teams losing a considerable amount of money. Mariner could not help making joking references to the wealthy New York Yankees, referring to them only as "the big red bar all the way to the left."

To solve baseball's problems, Mariner and other officials from the Commissioner's Office modeled their goals for the collective bargaining agreement after the NFL system.

To begin with, MLB officials knew greater revenue sharing would be necessary. In 2002, one major difference between the baseball and football leagues was that while 59 percent of the NFL's total revenue was made by the league as a whole and then shared among its teams, only 21 percent of MLB revenue was of this kind, and the rest was generated locally by individual teams.

To eliminate some of the economic disparity this system inevitably generates, a "straight pool" was developed, into which each team put 34 percent of its local revenue so that it could be redistributed equally among all the teams, thereby increasing parity.

The second goal was also aimed at achieving competitive balance. While unwilling to create an NFL-style salary cap, MLB officials instituted a luxury tax, which Mariner calls "our little speed trap." Now, when a team's payroll crosses a certain threshold, the team is fined a certain percentage of its payroll. That fine increases incrementally for each additional year the team crosses the limit.

"Labor," Mariner said, "is the most important cost component for a major sports franchise."

Thanks to the luxury tax, the league is already observing changes in how its teams spend their money. Based on 2001 salaries, the league estimated that six teams would break the threshold in 2002. However, when salary totals were finalized that year, only one team had to pay the luxury tax.

"We all love the fact that the Yankees are competitive," Mariner said about that one 2002 offender, "but you do want some balance."

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Demonstrating the success of the measures intended to lower costs while simultaneously creating parity, player salaries have gone from eating up 69 percent of team revenue in 2002 to just 52 percent today. As a result of this and other changes, the league's net operating income has risen out of the red and stands at plus three percent.

Mariner even feels the gap is starting to close between the rich teams and the poor. As proof, he cites the Florida Marlins' 2003 World Series triumph over the Yankees, whose total payroll of $156 million dwarfed Florida's $58 million.

"This time of year, with Opening Day just a few days away, the feeling is that every team should have hope and faith going into the season. It's just like in the NFL — the idea of 'any given Sunday.'"

Predicting the future

Moving into the future, Mariner is confident that baseball can continue to find new sources of revenue that can go toward achieving further competitive balance. He feels that new kinds of technology, combined with some administrative creativity, hold the solution.

Modifications to baseball's persona can already be seen in the way it approaches one of its largest existing income sources: television. MLB has convinced its players to agree to conduct interviews during the game from inside the dugout. New on-field cameras bring fans closer to the game than ever before.

"If you are an advertiser looking for a place to put your advertising dollars," Mariner said, "we are confident that we can consistently generate ratings. Sports are the original reality TV show. It has all the drama, suspense and uncertain outcomes that people look for in reality TV."

Furthermore, Mariner points to the significance of the fact that sports are "Tivo-proof . . . unless you're walking around all day with your ears covered, saying 'Don't tell me the score, don't tell me the score.'"

The idea that drew the most positive response from the seminar audience was one that involved drawing more fans to games through the use of cellphone technology. Some teams, in fact, are already employing the new technique, which allows them to sell tickets to fans and to bill them over the cell phone, then send them a bar code which, when brought up onto the phone's display screen, can be scanned at the stadium in place of a paper ticket.

At the end of the day, after all, gate receipts — what Mariner calls "butts in the seats" — are the largest single source of baseball's revenue. Judging from the seminar he gave on Wednesday, Mariner seems to have the expertise and ingenuity that is needed to keep those butts from going anywhere else in the future.