Baseball is one of America’s favorite national pastimes, and the drama of Major League Baseball (MLB) captures minds across the nation each year. MLB, like most other premier professional sports leagues, is a huge part of American economy — and a part of it that must be acknowledged no matter the controversies arising around spending in high level sports around the globe.

The shocking absence of top-spending MLB teams such as the Mets, Padres and Yankees from the post-season has sparked a fresh round of debate over the fairness and justification of payrolls in baseball. Together, these three teams spent a huge $1.8bn last year, and yet fell on their faces against mid- and low-spending teams in the league.

Former Marlins president, David Samson, commented on how difficult the revenue disparity makes it for the 30 MLB teams to stand on equal footing. However, to gain a full understanding of where this disparity comes from, it’s important to first delve into the finer details of the economics in MLB. This article will explore the potential revenue streams and the financial challenges faced by both the large-market and smaller market teams.

The revenue system in MLB

MLB is a multibillion-dollar industry, and it’s a complex web of streams that drive the revenue backing each team in the league. Understanding these sources is the key to understanding where the fundamental disparity lies between the big-name teams in the league and those left on the fringe.

Television contracts

Television broadcasting is a huge chunk of MLB’s revenue. Massive networks such as ESPN, Fox and TBS fight tooth and nail for the rights to broadcast games, with a special focus on the dynamic face-offs between giants that are likely to produce lucrative rewards for themselves. Billions of dollars change hands for the stakes on the biggest games.

Ticket sales

It’s a no-brainer that bigger teams are going to make more money from ticket sales. The revenue from fans flocking to the stadium to watch their favorite team is a substantial part of MLB revenue and is strongly influenced by popularity and team performance. 

Merchandising and licensing

Merchandise sales are huge in MLB with players snatching up everything from jerseys to hats, trading cards and video games. Merchandise and the licensing agreements with developers that come with it make up the foundation of MLB revenue streams.

Sponsorships and advertising

Both MLB teams and the league itself secure lucrative sponsorship deals with a wide range of companies — from fast food chains to MLB betting sites. The advertisements during games also generate a reliable income stream.

Player salaries and the “luxury tax”

MLB is one of the highest paying professional sports leagues globally, and the league suffers from disproportionately high salaries for star players and snowballing signing bonuses. MLB sought to combat this by introducing a “luxury tax”, which is also known as the competitive balance tax.

The tax penalizes teams that go above a certain threshold for player salaries and redistributes the excess to lower-revenue teams. It’s a great idea in concept and does help to reduce the disparity in income between upper- and lower-revenue teams, but MLB has been gradually nudging up the threshold and many teams accept the tax in order to acquire top talent.

Revenue sharing and small-market teams

Another method the MLB has instituted to bring increased revenue to smaller market teams is revenue sharing. A portion of each team’s revenue is pooled then redistributed to smaller-market teams.

Revenue sharing has been instrumental in helping smaller teams remain financially viable and competitive in the larger leagues, but it’s still contentious among team owners. Star teams like the Yankees and Dodgers contribute billions each season to the pool but argue that smaller teams are reinvesting poorly and not actually increasing the competitiveness of the league.

The challenges of small-market teams

It’s clear that the small-market teams face a set of economic challenges which top teams don’t have to contend with. It’s a snowballing effect as by having smaller local markets and fewer corporate sponsorships, their revenues are much lower, and they have far less money available for player contracts and team facilities. With this frugality, they struggle to remain competitive in a league of big-hitters and fail to attract a larger fan base and more financial backing.

Small teams must seek innovative strategies to stay in the game. Player development is an important aspect of this. Instead of signing high-priced free agents, teams like the Tampa Bay Rays hone their internal talent and consistently field a competitive team despite their limited budget.

The global reach of MLB

The economics of MLB don’t stop at America’s shores. It’s an internationally acclaimed league and one that fields a number of economic initiatives to globalize the game. Between international leagues such as the World Baseball Classic and increased efforts to sign international players into the MLB, the league is leaning on baseball’s global appeal in order to mine further reaching markets, expanding its fan base and loading up a new revenue stream.

Challenges and controversies

It’s clear that the economics of MLB, as is the case of many financially successful institutions, suffers from a plague of increasing disparity of wealth that is inherit to the way the system functions. From rising mega-contracts and competitive imbalances, a number of controversies are affecting the health of the league today.

In 2022, several labor disputes were ongoing between players and owners. This was triggered by a lock-out by team owners in order to increase their leverage in pay and contract negotiations. However, this resulted in strikes and work stoppages by the players as they sought to improve working conditions and salaries for smaller-market teams, in addition to free-agency rules. Baseball, in its history, has been rife with disputes like this, more than any other major American sports league.

A lot of this comes down to the competitive imbalance propagated by financial disparity. MLB has aimed to combat this with revenue sharing mechanisms, but large-market teams are still at a significant advantage as they have the financial resources behind them to score the star free-agents.

With the stakes behind player salaries increasing, fans have been experiencing an increase in ticket prices. This, as well as a greater degree of competition from other forms of entertainment, has led to decreasing attendance at games — a phenomenon experienced more acutely by smaller-market teams. MLB teams are trying innovative ways to combat this by enhancing the in-stadium experience.