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David Berri

David Berri

Posted: August 25, 2010 10:03 AM

Small children are often given "participation trophies" when they play sports. Win or lose, every child gets a prize. As children grow up, though, they quickly learn that participation trophies aren't often given to adults. And this is especially true in a capitalist society. Capitalism is designed to reward winners and punish losers. Consequently, people have an incentive to try harder.

Perhaps nowhere is the capitalist ideal more strongly enforced than in the world of professional sports. Winners get to feel the thrill of victory. And losers get to feel the agony of defeat.

At least, that's true for the players. For the owners, participation prizes are apparently still available.

Consider the recent revelations about the Pittsburgh Pirates from the Associated Press. The Pirates have not had a winning season since 1992. For eighteen years the fans of Pittsburgh have been treated to the agony of defeat in every single season. Despite all this agony, the owners of the Pirates are still making a profit. In fact, the combined profits from 2007 and 2008 exceeded $29 million.

How was this possible? Across these two seasons, the Pirates received more than $133 million from Major League Baseball, a figure that includes more than $69 million from MLB's revenue sharing program. In addition, the Pirates play in a magnificent stadium that was built with a $200 million gift from taxpayers. With all this money flowing into the Pirates, who needs to worry about the quality of the team?

Now the profit this team receives is not very large relative to he value of the franchise (Forbes says the Pirates are worth nearly $300 million). But it is not the size of the profits that is the point. When players take the field they are not guaranteed success. And just as players and fans suffer the agony of defeat, we do not expect an owner could make any money off an organization that fails year after year.

To illustrate, imagine if you went to a restaurant and discovered the waiter was rude and the food was awful. We would expect that such a restaurant would ultimately fail. But in sports -- as the Pirates illustrate -- a team can offer an inferior product to their customer and still see positive profits.

One should note that the Pirates story is hardly unique in the history of professional sports. Perhaps the most famous case was the Tampa Bay Buccaneers. The Buccaneers were one of the worst teams in the NFL in the 1980s. The Buccaneers, though, were also one of the most profitable franchises from this decade.

How did the Buccaneers achieve this success? The blueprint is simple. Keep player costs low. And even if your team fails on the field, revenue sharing will keep your bottom line in the black.

The Pirates appears to be following this blueprint. Of course, there is an alternative plan the Pirates could follow. The Pirates could spend more on players. And if that spending resulted in better players wearing a Pirate uniform, the team would be more successful on the field and therefore generate more gate revenue.

This alternative plan, though, is risky. As we noted in The Wages of Wins and in Stumbling on Wins (and at the Wages of Wins Journal) more money doesn't always lead to more wins. Team payroll only explains about 20% of the variation in team wins. This is primarily because player performance in baseball is hard to predict. Therefore it is possible to spend money on players who you think will be better, only to find these players not offering much in the future.

So the Pirates have two paths to making a profit. They can not spend money on players, and simply rely on baseball's revenue sharing plan to turn a profit (and gifts from taxpayers). As the Pirates have demonstrated, this is a fairly sure bet. Or the Pirates can spend more money on players. This latter path could also lead to profits if the Pirates choose the right players. But if they choose poorly, the team will lose money.

Given these two choices, it appears the Pirates are choosing to keep spending low. The only problem is that fans are being told a different story. Fans are being told -- despite 18 years of evidence to the contrary -- that the Pirates are doing everything to field a winner. But some of the revenues this team is receiving from Major League Baseball are not being re-invested into the club. Instead, these revenues are being returned to the owners as profits. In other words, the Pirates might be trying to stop the losing on the field, but not if that results in the owner actually suffering financial losses.

In essence, the owners of the Pirates are similar to a player who doesn't run out a ground ball. From the player's perspective, a ground ball to second is almost certainly an out. But because there is a chance of an error, players are told to keep running and they are penalized when they stop trying. The effort from the owners of the Pirates, though, seems similar to the few players who stop running. The owners of the Pirates might be trying, but just not as hard as the fans of this team expect.

The owners are simply not willing to risk their "participation prize" to field a winner. And ultimately, I think that is the problem with a perennial loser turning a profit. Capitalism does not work very well when firms are guaranteed a profit. Major League Baseball, though, has set up a system where even big losers make money. In such a system there may be an incentive to say you are trying. But there is not much of an incentive to actually try.

If we look back at the Buccaneers story, there is a solution that baseball can implement. The NFL instituted a payroll minimum in the early 1990s. Since that minimum was established, the Buccaneers became a competitive franchise. Perhaps if baseball forced the Pirates to spend the money the league is giving the team on players, the agony of defeat might end in Pittsburgh. Until that happens, maybe fans of this team can be happy to know that the Pirates will keep receiving baseball's "participation trophy."

There is more on this story at The Wages of Wins Journal.