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Ladies and gentlemen, we may not have seen anything yet.Bud Selig

The Milwaukee Journal Sentinel reported today that baseball’s revenues will top $6 billion for the first time this year. We also learned that the sport brought in about $5.4 billion in 2006 (about $300 million more than Forbes’s estimate), which means that the industry saw eleven percent growth this season.

A month ago, we concluded that baseball’s player market is not in the midst of another bubble, pointing to a couple very simple facts: revenues have grown faster than salaries every year since 2002, and the percentage of revenues allocated to salaries has been much lower than it was from 2001 to 2003.

Depending on the source, salaries have risen anywhere from 3-7 percent this year. Even assuming the high end, revenue growth has completely crushed salary growth in 2007.

In other words, despite what most analysts thought was a completely irrational spending spree last winter, the owners are rolling in discretionary income. Prepare yourselves; this winter could get wild.

Consider this: in the last four years, revenues have grown almost fifty-five percent. That is staggering. And that also means that each player’s marginal revenue product has risen a similar amount.

Thinking about it in a different way, the average team is now bringing in $200 million. If forty percent of that goes to player salaries next year, the average payroll will be $90 million. In 2003, it was $66 million. The definition of a $10 million player is now drastically different.

This all bodes well for Alex Rodriguez and co. this offseason. It’s still nearly impossible to guess how much individual players will get, since in essence free agency is a limited bidding structure. Even so, I’m more confident now than ever that A-Rod will get a hefty raise well into the mid $30 million range, barring an unlikely decision to give the Yankees a home town discount.

But with all this said, it’s still important for teams to price in a possible U.S. recession in the coming year or two. Handing out backloaded long-term contracts is a very dangerous strategy, and could lead to tremendous cost increases come 2010 or so. MLB has obviously had an incredible year, even overcoming recent advertising trends. But if the gravy train stops, or even slows, the sport could be getting itself back in trouble.

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

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  1. on October 28th at 07:41 pm
    melissa said:

    According to reports released this morning the Yankees have offered A-Rod $30 million over 5 years. While I expect him to get this kind of money don’t necessarily expect owners across the league to increases spending above the 5 to 7% range. In the past MLB has put pressure on owners to limit spending regardless of the increase in revenue, we saw it last year. Selig came out and criticized the Cubs specifically for over-spending on Soriano, Lilly and Marquis, money they have to spend mind you. There may be individual players that will receive offers that seem above market average but baseball owners have shown in the past that they will engage in collusion to limit the players portion of the pie. I fully expect the owners and Selig to keep the profit as opposed to investing it in salaries.

  2. on October 29th at 02:50 am
    squawkingbaseball said:

    This is a really interesting point Melissa, but these pressure tactics aren’t all effective barring actual collusion. Think about the point you made. Selig criticized the Cubs for spending all that cash. But that was never going to stop them, since they felt they could compete this year (which they did). If a team feels it’s close to competing for a playoff spot, they’ll go for it, since most teams recognize the value of winning. And there are a bunch of teams that will be sitting on a pile of cash this winter.

  3. […] baseball’s revenues soaring, we figured this year’s free agents would do very well for themselves on the open market. And, well, we […]