Baseball Business: What is Revenue Sharing? Why Do MLB Teams Share Money with Each Other?

Welcome to Baseball Business

Welcome to our series on Baseball Business! In these articles, we delve into the financial intricacies of Major League Baseball (MLB). We will explore various subjects such as player contracts, ticket sales, and our focus today—revenue sharing. These articles aim to enrich the understanding of young fans regarding the off-field activities that make baseball games a reality.

What is Revenue Sharing?

Revenue sharing refers to the practice whereby teams in MLB distribute a portion of their earnings amongst one another. Revenue represents the income generated by a business before accounting for its expenses. For baseball teams, this revenue is derived from sources such as ticket sales, television broadcasting deals, merchandise sales (including hats and jerseys), and concession sales at games.

Teams located in major metropolitan areas, such as the New York Yankees or the Los Angeles Dodgers, frequently generate greater revenue compared to teams in smaller cities like the Kansas City Royals or Milwaukee Brewers. Revenue sharing plays a crucial role in leveling the playing field.

How Revenue Sharing Works

Here’s an analogy to clarify how revenue sharing operates:

Consider two lemonade stands. One stand operates on a bustling street (akin to the Yankees) and earns $100 daily. The other stand is situated on a quieter street (similar to the Royals) and only manages to bring in $40 each day. Through revenue sharing, the more successful stand might allocate $20 to support the quieter one. Consequently, the bustling stand would retain $80 while the quieter stand benefits from $60.

In the context of MLB, teams contribute a percentage of their local revenue into a communal fund. This pooled money is then evenly distributed among all 30 teams, enabling smaller-market teams to accumulate enough financial resources to attract talented players.

Why Do Teams Share Money?

Competitive Balance

The foremost reason for implementing revenue sharing is to maintain equilibrium and fairness within the league. Without this mechanism, wealthier teams could acquire all the top talent, resulting in the same few teams dominating year after year. This scenario would undoubtedly diminish the overall enjoyment for fans!

For instance, when a small-market team such as the Tampa Bay Rays nurtures a standout player like Randy Arozarena, revenue sharing aids them in retaining him, rather than succumbing to the overtures of a wealthier franchise.

Growing the Game

Revenue sharing facilitates the expansion of baseball in a wider array of cities. If franchises situated in smaller urban areas are unable to compete effectively, it may dissuade fans from engaging with the sport. MLB aspires for supporters in every location to perceive their teams as contenders with a legitimate shot at success.

Better Competition

When a greater number of teams can attract proficient players, the matches become significantly more thrilling! For example, envision the Minnesota Twins utilizing shared revenue to acquire a pitcher capable of striking out the Yankees' top hitters. This dynamic undoubtedly enhances the quality of baseball played!

Does Revenue Sharing Work?

Though revenue sharing is not without its flaws, there are divergent opinions regarding the approach. Some critics argue that smaller teams should allocate a greater portion of the shared funds toward acquiring players. Conversely, others contend that the system should redistribute an even larger share of revenue.

Nonetheless, we have witnessed smaller franchises, such as the Oakland Athletics and the Cleveland Guardians, reaching the playoffs while operating with fewer financial resources than their larger counterparts. This suggests that revenue sharing plays a role in fostering a degree of balance within the league.

Fan Fairness

Revenue sharing is also rooted in the principle of fairness for fans. A child growing up in Cincinnati should have the same opportunity to witness competitive baseball as a child in New York. By engaging in revenue sharing, MLB endeavors to ensure equitable conditions for all fans, regardless of their geographic location.

In baseball, much like in school or on your own team, sharing resources creates opportunities for everyone to succeed. This fundamental quality underscores not only the business aspect of baseball but also its status as America's pastime, meant to be enjoyed by all.