Fire Everyone! - The Whole Damned System

This is the tenth installment in a 12-part series.

We've been parceling out the blame for this dreadful season among Cleveland Indians management, coaches, and even fans. Let's turn our scolding fingers to the economic environment the Indians operate in.

Any discussion about baseball economics has to include the New York Yankees, the highest-valued franchise in Major League Baseball, and one of the highest-valued sports franchises in the world. They share the largest media market in the United States with the National League Mets, but even a split New York market dwarfs most other markets in baseball. And the Yankees have used every bit of their market size to their advantage. This is not a recent phenomenon, as the Yankees were paid a disproportionately high percentage of the revenue from early national TV contracts. However, the recent explosion of local cable revenue via team-owned networks has increased the revenue inequality between franchises, as even though teams like the Indians have their own captive RSNs, the potential revenue is ultimately based on market size. Furthermore, this arrangement allows teams to "hide" revenues that would otherwise go into the current revenue sharing plan.

This revenue disparity naturally shows through when it comes to payrolls. According to Cot's, the Yankees' 2009 payroll is roughly $207M. That's about $66M higher than the second-highest payroll (naturally, the New York Mets), and double the payrolls of twenty Major League Baseball clubs. This payroll allows the Yankees to not only keep the star players that they do develop, but also sign top free agents on a regular basis. So not only will Yankees fans see future Hall of Famers Derek Jeter and Mariano Rivera in pinstripes their entire careers, but also the cream of other teams' farm systems. The high payroll also allows the Yankees to recover easily from player evaluation mistakes, whether they be bad contracts (Carl Pavano, Hideki Irabu) or failures in player development. The Yankees can also throw their financial weight around in the First-Year Player Draft, where they snap up talented amateurs that fell because of salary demands.

Although the Yankees haven't actually won a championship since 2000, they've missed qualifying for the postseason only once since 1995. The MLB postseason may be a crapshoot, but the Yankees are always there at the table rolling the dice. That consistent competitiveness is a draw to fans, further augmenting  purchasing power through increased ticket revenue. Having a good player-development system isn't a requirement for a large-market club, but it is a necessity for medium and small-market clubs, for only through developing their own pre-free agency talent can they compete with the big payrolls of baseball. And that supply line of talent has to be consistently producing in order to replace the home-grown talent that inevitably leaves for large-market teams via free agency.

The Indians, fortunately, compete in the AL Central, and don't face the type of payroll disparity that, say, the Tampa Bay Rays face in the AL East. However, they do have to compete with the Yankees, Red Sox, and other large-market clubs in player procurement, whether that be in free agency, international amateur signings, or the First-Year Player Draft. The Indians have very rarely won a bidding war in any of these arenas with a large-market club, and because of this, they generally allow their home-grown free agent stars to leave, or trade them away while still under their control. Although this practice is rational, it has a nasty side effect: it suppresses attendance, which drives revenue lower, and if the club's decisions don't turn out correctly, the cycle continues, with losing taking the place of trades as the cause of lower attendance. The Indians are currently facing this dilemma. Because their player development system didn't deliver enough young talent to the majors, they were forced to trade several of their star players to make up for it. Trading a popular player like Victor Martinez is never going to be a popular move, and it's extremely likely that attendance will again fall in 2010.

We're seeing firsthand what happens to a medium-market team when they make poor player-development decisions. The Yankees have likewise had trouble developing starting pitching; however, they were able to fill that gap not by trading established stars for prospects, but by signing the top two free agent starters on the market.  The Yankees and Red Sox making the postseason is considered good for baseball, at least in the short term, so the economic system that encourages their success will remain in place as long as MLB revenues continue to grow and enough small-market teams make runs in the postseason.

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