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Baseball Business 2012: Royals' Payroll Rising, But So Is Their Financial Disadvantage

Major League Baseball team payrolls and market values continue to rise, but in the case of the Kansas City Royals, their financial gap with the rest of baseball also is growing.

Kauffman Stadium, home of the Kansas city Royals
Kauffman Stadium, home of the Kansas city Royals

When baseball historians look back on the state of Major League Baseball at the beginning of the 21st century, it might appropriately be designated as the new golden - or, perhaps even better, green, as in the color of money - era of baseball.

In Forbes' annual report on the value of each of the 30 Major League Baseball franchises, the average value of a major-league team rose 16 percent in 2012 compared with a year ago. Information obtained by Forbes from Major League Baseball showed that team payrolls on opening day this season increased just one percent from last year, from approximately 2.76 billion to 2.78 billion, while average net revenue (discounted for payments to cover stadium debt) was up three to four percent over the previous season, to an average of $212 million.

The Kansas City Royals' 2012 opening-day team payroll of $61 million is 70 percent higher than it was at this time last season, when the Royals had the lowest team payroll among the 30 major-league teams at $36 million. The 2011 figure was the team's lowest payroll total since 35.6 million in 2001 and 24.3 in 2000. Even with a payroll increase close to double what it was just a year ago, the Royals still are the fourth lowest in the major leagues, ranking just ahead of tail-enders Houston ($60.6 million), Oakland ($55.3 million) and San Diego ($55.2 million).

The Royals' highest paid player is designated-hitter Billy Butler, who is making $8.5 million this season. By comparison, what Butler earns in a season is less than 10 members of both the New York Yankees and Philadelphia Phillies and eight players on the Boston Red Sox roster will make this season. Starting right-fielder Jeff Francoeur is the next highest-paid Royal, at $6.75 million.

Twelve Kansas City players earn over $1 million a year, with an average annual Royals' salary of $2 million. A number of the talented young players the team is counting on to be big contributors this season and into the future, such as first baseman Eric Hosmer, third baseman Mike Moustakas and outfielder Lorenzo Cain, are considerably below $1 million at this early stage in their careers. This is great news now, but it could well reverse itself when Hosmer, Moustakas and the Royals' other promising young players reach free-agency status not too many years from now.

This economic reality has always been a problem for small-market teams like Kansas City, and it always will be until Major League Baseball decides to get more serious about revenue sharing and changes its compensation structure. Sadly, the chances of that happening to the extent that teams like the Royals can compete on an equal keel with teams like Minnesota, Milwaukee, Colorado, Cincinnati and Arizona, let alone the high-rollers in the Northeastern United States, don't appear imminent anytime soon.

The New York Yankees, the team many baseball fans and experts refer to as the best team money can buy, lead the major leagues for a 12th consecutive year with a total team payroll of right at $200 million, which surprisingly is one of those team salaries that is down (but only by less than one percent) from last season. The team the Royals are facing on the current home stand, the Detroit Tigers, beefed up their payroll by 25 percent this year, to $132 million, adding the 2011 American League home-run champion and former Milwaukee Brewer, Prince Fielder, to an already potent starting lineup. The Royals and Indians ($71 million, a 45 percent increase over 2011) are the only teams in the AL Central with team payrolls below the $100 million level.

And so the saga continues, and it's only getting worse, not better, insofar as Kansas City's MLB franchise is concerned. Even as the Royals step up their spending and what they pay out in player salaries, the financial gap in revenue generation, profitability and franchise value between Kansas City and the rest of Major League Baseball is sadly growing wider. The reason for this increasing disparity can be spelled out in three simple words: local TV contracts.

Team values and the ability of the clubs, especially those in larger markets who can command and are receiving record-setting rights fees through contract renegotiations with the networks and cable companies, are being driven by what the teams can sell their local TV rights for. And the teams are striking multi-year agreements with sizeable revenue streams, which is enabling teams in large and small markets to acquire and/or hold on to talent they would otherwise not be able to afford.

The Royals not only are in one of MLB's smallest markets (Kansas City is the 31st largest TV market, according Nielsen Designated Market Areas data), but they also have one of the smallest TV contracts in baseball, a very bad combination when it comes to baseball economics and financial growth potential. According to information obtained by The Kansas City Star, the Royals TV contract calls for less than $20 million a year for the next eight seasons.

Acceptance of that brutal fact might be a necessary evil were it not known that Cincinnati, considered to be baseball's smallest market (35th in the Nielson market index; Milwaukee is 34th), is receiving almost twice the revenue that Kansas City receives for the Reds' local TV rights agreement. Largely because of this, the Reds were able to retain their All-Star first baseman and 2011 National League MVP, Joey Votto, signing him to a $225 million contract extension this season.

The same can be said for how the Angels were able to sign former St. Louis star Albert Pujols for $25.4 million and left-handed pitcher C.J. Wilson, from the Texas Rangers, for,$15.5 million.

On Thursday, we'll look at how sky-rocketing TV rights deals are also the catalyst behind growing major-league team values, including the Kansas city Royals.

In Part II of "Baseball Business 2012," on Thursday, I will go into more depth on the 2012 Forbes report on MLB team values and how baseball stacks up with the values of other major sports franchises.