Spring Break
Moneyball: Major League Baseball CFO Discusses Career and the Economics of Baseball
Will Boland (NA), Contributing Writer
Issue date: 2/11/08 Section: News
|
On January 28, the Business of Sports Club hosted one of professional sports' most influential executives when Jonathan Mariner, Executive Vice President and Chief Financial Office of Major League Baseball (MLB), entertained a classroom of HBS students with a discussion on the economics of baseball and his career within MLB.
Mr. Mariner's talk focused on the economics of professional sports and how league executives are persistently challenged by the careful balance between profitability and labor relations. Over the past 20 years, each of the four major sports leagues has experienced work stoppages, including the MLB Players Association strike in 1994 that led to the cancellation of 938 games and the World Series.
Mr. Mariner discussed the difficult financial position MLB faced leading up to labor contract re-negotiations in 2002. At the time, only three of the 30 MLB teams had positive EBITDA, and the league collectively lost nearly $500 million. No form of salary cap existed, and debt was cheap and widely available. To remain competitive, many teams took on heavy debt-loads to attract players with exorbitant salaries. After months of negotiations, Mr. Mariner and MLB agreed to a new collective bargaining agreement (CBA) with the players' union in late 2002 to provide greater financial stability for league owners.
Mr. Mariner highlighted three key provisions of the CBA that were critical to MLB's efforts to become a profitable enterprise. First, the league's revenue sharing arrangement, whereby each team contributes a portion of their local revenues to a league-wide pool that is divided evenly across the 30 teams at year's end, was increased from 20% to 30% of local revenues. This arrangement was designed for smaller market clubs to become more competitive with large market teams such as Boston and New York. Second, the new CBA installed a luxury tax, which was intended to slow rapid growth in player salaries. Under the luxury tax, teams that spend more than a pre-established threshold amount on player salaries are assessed a 15% to 40% tax. Third, MLB implemented a debt service rule that required teams to maintain a debt load of less than ten times their average EBITDA over the prior three years. Since many teams were generating negative EBITDA, the three-year look back significantly limited league-wide indebtedness.
Be the first to comment on this story