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Are the owners overplaying their negotiating hand?

status quo has been very good for them, but

MLB: Lockout The Palm Beach Post-USA TODAY NETWORK

Three months into the MLB lockout, the calendar finally dictates that it’s crunch time after a long period of the phony war. Though the first week of the season was ostentatiously cancelled last week, today is much more of an inflection point. A complete season is on the table with a deal, and if not, more games get cancelled, and it gets to the point where a shortened season is a reality.

Let’s be clear about one thing at the outset: the loss of any games is ultimately on MLB and the owners. They imposed the lockout in the first place to maximize their leverage when there was no immediate threat of a strike. Any version of the deals being discussed broadly maintains a very favourable system for them, so choosing to disrupt the season to pursue smaller agenda items is very much a choice they’re making and are accountable for.

What I find particularly intriguing is the broad backdrop to these negotiations. Even though the players have become increasingly disgruntled with baseball’s economic system, the MLBPA has not pushed major structural changes that had many expecting a major fight in this round of bargaining. As shown below, the history of negotiations shows how difficult it is to dislodging or upend the status quo, giving the owners the upper hand strategically from the outset.

Having this high level advantage, there was a very clear path to a deal that would have given the players relatively minor concessions while securing and entrenching the system that has served the owners so well. That is, tactical concessions while maintaining the long term strategic initiative. Instead, they seem determined to go to the mat and grind out every last inch. In so doing, I wonder if they’re on the verge of overplaying their hand in a manner that could backfire and leave them exposed if negotiations break down.

It is a maxim of negotiating that it is easier to reach a satisfactory agreement when the overall pie is growing (meaning industry revenues are growing). When the pie is not growing, negotiations turn into a zero-sum game where one side’s gain is necessarily the other side’s loss. It’s even worse when the pie is shrinking, and that’s when negotiations tend to get most bitter.

But when the pie is growing, both sides can end up better off even if the benefits are disproportionate, even highly disproportionate. One side may get a lot more of the pie, but the other side still has more than they had before in absolute terms. That makes it hard to demand sacrifice and walk away on a principle of fairness.

These were the dynamics that prevailed in MLB collective bargaining before the 1994 strike. The combination of players gaining salary arbitration in the 1972 agreement and free agency in the 1976 agreement (negotiated after the Seitz decision shattered the reserve clause) resulted in salaries spiralling upward at 30% a year. Player salaries increased from about 20-25% of revenue before to a peak of approaching 50%.

Needless to say, the owners were not happy about this and spent most of the 1980s trying to roll back these gains. Yet in each of 1980, 1981 (two-month strike), 1985 (two-day strike) and 1989 (lockout in spring training), they ultimately folded without achieving any meaningful structural changes.

Part of this was due to divisions within their ranks, the hardliners in the smaller markets at odds with the larger markets. But more fundamentally, that lack of cohesion was because the flood of TV money pouring in meant that owners were collectively doing fine despite vehement claims of broken economics and financial ruin. They were the ones seeking fundamental change, and when the rubber met the road, it didn’t make sense to stop the gravy train.

This dynamic changed in the early 1990s. The national TV deals with CBS and ESPN struck in 1989 that provided almost $14-million per team were up after 1993, but the recession had hit the media industry hard and the rights fee for 1994 was expected to be cut in as much as half. Amidst the same recessionary backdrop, attendance had flatlined, so in-stadium revenues weren’t growing either.

The prospect of a shrinking pie galvanized the owners, or at least some of them. So in December 1992, they narrowly voted 15-13 to reopen the collective agreement a year early, rather than until it in place until the end of December 1993. The purpose was not to lock the players out in 1993 (when the money was still flowing), but so they’d be positioned to impose major changes such as a salary cap for 1994. Otherwise, most of the offseason spending would have already happened before expiry at the end of the calendar year.

This gambit essentially ended up blowing up in their face. The bulk of the TV money wasn’t received until after the playoffs (and unless they were played), and most teams were counting on it. That gave the players leverage and the prospect of an August strike, only forestalled by the owners agreeing not to impose a new agreement that offseason. Hence the 1994 season started, and it was only MLB’s determination to declare an impasse and impose a new system that led to the strike that summer.

Since 1995, though, especially in the last 20 years, the economic landscape has swung dramatically toward the owners. This wasn’t due to massive structural changes to the collective agreement that owners had sought, but a confluence of three factors, only one related to the CBA.

First and foremost was the professionalization of front offices. Part of the reason for settling on six years of service time to qualify for free agency (never changed in 45+ years) was Marvin Miller was an economist and believed too many free agents each offseason would be suboptimal. Restricting the supply of free agents would drive up the price, and those market values would bootstrap to the younger players via arbitration.

That proved correct for the first few decades of free agency, partly due to teams overvaluing experience and thus “overpaying” for free agents. Instead of overbidding for expensive free agents, teams replaced them with cheaper young players.

Buttressing the above development has been an underlying shift in player aging, concentrating more player production in those control years. Players now peak on average in their mid-20s instead of their late-20s, and likewise, the decline phase starts earlier. Some this is better development and explicit selection for “old player” skills like drawing walks that previously offset declines elsewhere. Another factor is likely the ban of PEDs like amphetamines (which is thus largely overlooked as representing an economic coup for owners).

Finally was the introduction of luxury tax/competitive balance tax. While the MLBPA adamantly fought any salary cap, in 1996 they did concede to a limited luxury cap. By 2002, real concerns about competitive disparities finally gave the smaller markets (or perhaps non-marge markets) the upper hand internally among the owners, resulting in a far more robust revenue-sharing system as well as the competitive balance tax (CBT) to restrain spending at the high end.

That round of negotiations was the closest baseball has come to labour disruption since 1994, with a late-August agreement coming on the eve of the MLBPA’s strike deadline. Each of the three agreements since has strengthened the CBT, both in terms of the penalties and lowering the thresholds in real terms (relative to MLB revenues, not general inflation).

The combined effect is that the CBT now functions as a de facto salary cap, increasingly affecting a dozen or so teams rather than preventing a couple of mega markets from lapping the field in spending. As Joe Posnanski observed recently, the players may have won the battles while losing the war when it comes to a salary cap.

Despite this, and without any significant offsetting concession(s), there’s never been any real threat of strike action by the MLBPA. Why not? Simply, the players were still going fine at the end of the day. Average salaries increased most years and doubled from $2.14-million in 2001 to $4.38-million in 2016. The owners may have been accruing the lion’s share of the significant growth (manifesting in the exploding franchise value), but in absolute terms, plenty was still trickling down. The shoe was on the other foot.

Until the last five years under the just expired agreement, anyway. Despite continued healthy revenue growth, average salaries flatlined and even declined. Multiple offseasons turned into “cold stoves” as premium free agents sat on the market while quality players were non-tendered onto a depressed and glutted market with few committed buyers. This austerity in a time of plenty galvanized the players, with open talk of seeking structural changes to roll back some of the shift in the last generation.

For MLB, that would be tantamount to a declaration of war, and thus the widespread expectation that a significant portion of the 2022 schedule would in jeopardy when the time came. Then along came the pandemic. Beyond inflicting significant real economic damage (which MLB naturally, couldn’t help but exaggerate), one drastically shortened season seems to blunted any impetus by the players for any type of major push that would almost certainly lead to another big chunk of a season lost.

Indeed, it’s become clear over the past couple months that the players weren’t digging in for fundamental changes like reducing the years of service to free agency or fundamental changes to the CBT. Instead, their bottom line amounts to modest increases to the minimum salary, increasing the CBT thresholds to account for revenue growth, blunting the egregious cases of service time manipulation, and some modest anti-tanking measures (which is in baseball’s best interests anyway).

Of course, MLB has goals of their own they want to achieve at minimal cost. While we don’t have to like it, as a matter of realpolitik, it’s understandable that they are exerting the leverage they have.

In that respect, it’s been pretty clear to me that MLB doesn’t care about losing April, just following the money and financial incentives. In-stadium revenues tied to attendance are weakest in April. The national TV contracts are mainly tied to the playoffs, so that revenue is unaffected. The last piece was Jeff Passan’s report last week that teams generally don’t lose revenue from their local TV contracts as long as there are 138 to 150 games.

Whereas on the flip side, player salary is proportionate to games. Applying the lessons of 1993-94, it’s far better to lose games in April than potentially have the players go on strike late in the season when the bigger stakes would give them more leverage. Hence imposing the lockout when there was otherwise no (immediate) threat to the season.

More broadly, the owners are perceived as having more leverage to begin with by the virtue of having deep pockets to wait things out. By contrast, the players have short careers to begin with, and losing a prime earning year is a proportionately larger sacrifice. At least in the short run, this is undoubtedly true. Taken all together, the owners occupy the commanding heights on the negotiating battlefield.

But strong positioning is not destiny, and history is replete with cautionary tales wherein pursing maximalist objectives ends ruinously or even sub-optimally. With how far the system is already tilted in their favour, just (largely) preserving the status quo and giving it more precedent weight would already amount to a major strategic victory for the owners. And I wonder if they aren’t close to overplaying their very advantageous hand.

At this point, they are the ones cancelling games over what at brass tacks amounts to pretty small potatoes for them (perhaps $100-million in a ~$10-billion industry, or 1%). The danger is that if the players figure they’re going to lose a bunch of salary regardless, they decide it may as well make it worth something and take a stand on principle. Then you get a protracted standout that could stretch well beyond April.

If that happens, I think the leverage starts to shift, perhaps considerably. While the owners are wealthy, the teams are still businesses that have to stand on their own revenues at the end of the day. They have debt (per Manfred, more than $8-billion) that has to be serviced. Even at 3%, that’s almost $10-million per team per year in interest. They still have player development expenses for the minor league system. Amateur signing bonuses. Overhead like front office salaries, the business side, facilities, etc.). All told, the cash burn rate is probably well above $10-million a month during the season.

For their part, while losing salaries would undoubtedly hurt the players, in absolute terms, most of them are very well off. Like any union, the MLBPA has reserves to help replace income, especially for the players who haven’t had major paydays and would be the most precariously positioned. But fundamentally, they don’t have the carrying cost of keeping a business running without revenue.

What’s on the table is broadly very good for the owners. With the lockout, they’ve flexed the considerable leverage they have, to the point that the player demands are quite modest. Pushing further carries big potential risks for small gains, and they’d be well advised take the big win picture win rather than risk the golden goose over relatively trivial stakes.