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With baseball’s revenues growing at a blistering rate, it has become more and more difficult for analysts to accurately dissect big-money, multi-year signings. What we thought we knew just two years ago seems to be obsolete, with the market shifting upwards at breakneck speed.

Yes, we’ve seen this before. Culminating with the infamous winter of ’01, Major League payrolls rose between thirteen to nineteen percent annually for five consecutive years. Overall, teams spent almost four and a half times as much on player salaries in 2001 as they did in 1990.

With Armageddon warnings seemingly plastered on every team’s office walls, sensibility (or perhaps collusion) eventually resurfaced. Payrolls rose only moderately in 2002 and 2003, and actually declined a bit in 2004. The bubble had burst, leaving teams that had signed players to mega-deals in previous years shaking their heads, and/or calling Brian Cashman for a little relief.

And yet here we go again. The free agent market is once again a sellers’ paradise. Players with short resumes and questionable credentials are scoring long term deals, as the market keeps rising. But how much farther can payrolls increase before owners overstep their means, as they seemed to do in the late 1990s and early 2000s?

Before we can answer that, we have to look a bit deeper into what caused the last bubble, and how it eventually popped.

After a brief down period following the 1994 strike, baseball, with its newfound labor peace, boomed in the late ‘90s. Revenues returned to pre-strike levels in 1996, and grew another twenty percent in 1997. The industry continued to see significant gains until 2002, when labor issues once again arose and the country went into recession.

Almost as a rule, as revenues rise, so do player salaries (good enough for an r-squared coefficient of .95 since 1982). Logical enough. But for every dollar taken in, how much can teams spend on player salaries and still turn a profit? For this answer, we need to look at the percentage of total revenues allocated to player salaries (RAS).

During the post-strike period, with revenues soaring, RAS hovered around 45 percent. But by 2001, teams were spending over half of their operating income on player payrolls, and well over that mark on total player costs. According to Forbes, the sport was in the red from ’01 to ’03, after turning a profit every previous year since the strike. They had simply gone beyond their means.

For comparison’s sake, in 1974, or the last year BC (Before Catfish), RAS was under 18 percent. When it hit 40 percent for the first time in the mid-‘80s, the owners’ ultra-creative response was to collude. In one sense, collusion did work for a while, as RAS dropped to about thirty percent. But this low level isn’t really efficient either, since owners can use those excess profits to build a better roster, enhance their brand, grow revenues, and increase their franchise value.

(Since free agency began, franchise values have increased at the same incredible pace as revenues. When George Steinbrenner bought the Yankees from CBS for $10 million in 1973, the network was actually selling at a loss. Fast forward three decades, and the team is now worth $1.2 billion according to Forbes, not including the new Yankee Stadium to be opened in 2009, nor the YES Network.)

So where is the happy medium? Actually, we very well may be there now.

Despite the seemingly outrageous contracts handed out the past two years, revenues have actually risen at a faster rate than payrolls every year since the previous labor agreement was reached in late 2002. In both 2005 and 2006, player salaries represented just forty-two percent of total revenues, right smack in the middle of what should, in theory, be the owners’ comfort zone.

This, in fact, proves to be quite prescient. Clubs turned significant profits in each of the last two seasons, and should continue to do so this year. Even if revenues completely flatten (an unlikely proposition considering the sport’s recent growth), RAS would be forty-five percent, or right about the edge of reason.

Looking further into the future, the outlook appears to be bright. Baseball’s marginal revenue generally comes in one of two forms: new sources of income, or increased gate intake. The sport will see attendance records broken once again this season, and teams are taking further advantage of this increased demand by delving into the secondary ticket market. Meanwhile, MLB.tv has become a superior product, and should only become more popular (and lucrative) in the coming years. Not to mention the MLB Network, which is set to launch on cable and satellite in 2009. The station should generate hundreds of millions, if not billions, of dollars for the sport’s owners, as it will be carried in almost 50 million homes.

Later on we’ll get into forecasting in greater detail, but for now the simple answer to original question is no, we are not in the midst of another salary bubble waiting to burst. In fact, barring a major recession, salaries should continue to grow at least until the newest collective bargaining agreement expires after the 2011 season. And if baseball’s brain trust is as creative in the next five years as it has been in the last five years, contracts signed the past two winters could look positively mild by the time they expire.

DATA SOURCES: Rod Fort’s indespensable site, as well as the USA Today salary database.

Feedback? Write a comment, or e-mail the author at shawn(AT)squawkingbaseball.com

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  1. on September 25th at 04:08 am
    Maury said:

    Good stuff. Projections are for revenues to pull back slightly from the incredible 11 percent annual growth rate to something more like 8 to 10 percent. Television and other media sources (specifically MLBAM) have created streams that had not been available prior.

    It was interesting that Drayton McLane recently mentioned in a Q&A with the SBJ that it was almost a league-wide model to try and keep RAS at or below 50 percent. What seems to be more and more frequent is not just the increase in salaries but the backloading of contracts, which Selig has been none too pleased with the ownership brethren about.

    What appears now to be a moderate escalation in salary growth at the median for RAS, will increase when balloon payments at the latter ends of the contracts come calling. Jim Hendry has been quick to point out that the Cubs really haven’t increased player payroll in ‘07 that much, but he never seems to mention that he’s robbing Paul to pay Peter… he did, after all, sign $300 million in contracts this year.