As Shyam Das begins hearing the MLBPA's case against contraction, and on the verge of the winter meetings, it's time to review a few things we need to keep in mind when it comes to baseball and finance. The Bud on the screen during baseball coverage on SportsCenter has changed from Smith to Selig, so we need to look at economic stats, rather than hitting or pitching stats. Let's take a look at what's been said, and what remains unsaid.

Fun with financial reporting
Different businesses have very different goals when it comes to communicating with the public about their financial performance. For public companies, the goal is to maximize their market capitalization. They want their stock to go up, and they're subject to all sorts of transparency rules in terms of their financial reporting to the Securities and Exchange Commission (SEC) and to their shareholders. There can be exceptions, but by and large, they try to look as profitable, optimistic, and forthcoming as possible.

Privately owned enterprises, like, for example, Major League Baseball clubs, often have very different goals. They may want to convince the local municipality to pay for capital improvements for their business. Businesses of all stripes do this all the time; it's not just the Minnesota Twins looking for a new stadium at taxpayers' expense. It's the local pipe manufacturer looking for an extension of a public water project to make it $35 million cheaper to build a new plant. It's the high-tech manufacturing concern that wants $100 million in tax discounts to put a fabrication site in a particular city. It's easier to make a case for these sorts of subsidies in the arena of public opinion (always the home field for local politicians) if your enterprise doesn't look totally flush with cash. Furthermore, it's never a good idea to attract the attention of any tax authorities with too many extravagances. Even if you're doing nothing wrong, explaining budgetary line items to tax auditors of any stripe is costly and time consuming.

One way that privately owned businesses minimize the appearance of excessive profits is through the creation of multiple corporations. An MLB club could, for example, have separate corporations to handle different parts of the business. Let's look at a hypothetical example. The Kenosha Vintners Baseball Club, Incorporated might only take in $75 million in revenue from ticket sales and broadcasting contracts, while two other businesses, Vintner Parking, Inc. and Prieb Concessions Group, might pay the Vintners $250,000 annually for the rights to sell $6 million worth of parking passes, or $35 million worth of hot dogs and wine at Vintners' games. The owners of these three businesses may be the same group of people, but the businesses can look very different on paper, depending on your goals in a given year.

Another extremely popular method of making profitable ventures look unprofitable is shifting profit to salary expense. For example, let's say you are the sole owner and CEO of a movie multiplex. If your multiplex brings in a profit of $15 million in a given year, you can, after taxes, keep that profit for yourself. But if you don't want the business to look profitable, you can simply pay yourself a salary of $14 million for the year, reducing the profit for the company to $1 million. The "salary and benefits" line item expense is $14 million higher, but the same person (you) still ends up getting the money. This is a common practice throughout many industries -- by no means is it limited strictly to baseball or entertainment in general.

Do escalating player contracts increase ticket and concession prices?

"The negative bottom line for so many teams adversely affects the fans in the form of ticket prices, concessions and parking prices. The owners are not in a great system right now and in order to compete and make money, it seems like some franchises will start careening towards the $29 hot dog."
-- Larry Lucchino

Several writers were quick to point out the basic lessons of Econ 101, and point out that clubs set ticket and concession prices based on what the market will bear, not on their payroll needs. Scott Davis, Principal of Strategic Marketing Decisions and Professor of Pricing at UC Berkeley's Haas School of Business, says it's not that simple. "Player salaries probably are involved with how clubs determine prices for tickets and concessions. But owners are probably costing themselves money by setting prices that way. The optimal pricing for tickets, parking, and concessions would be very involved to figure out precisely, and there probably is some element of 'cost-plus' pricing going on in terms of tickets and concessions. Most businesses don't price all their products optimally."

So there may be a connection between salaries and your $6 beer, but there probably shouldn't be, from the perspective of both the fan and the owner.

The brass ring: A salary cap
There are basically two big, shiny brass rings for the owners. One ring is the publicly financed stadium. Let's take a look at the other -- a salary cap.

The value of a baseball team is calculated pretty much in the same way as any other business. The more profit a team makes, the more money its owners make, both in terms of cash coming in, and in appreciation when they sell the club to the next ownership group. Baseball salaries are the largest expense for most ballclubs; keeping salaries systematically down would result in a dramatic increase in the value of all MLB franchises.

Owners will likely never give up their quest to get a salary cap in place. The potential gain for them is tremendous, both in terms of cash flow, and, more importantly, appreciation of franchise value. Owners have failed to gain a salary cap concession from the MLBPA through collective bargaining thus far, but they'll never give up the fight. It costs very little for ownership to continually try to generate leverage to squeeze such a concession out of Don Fehr and the Players Association, and the potential gain is simply too great to ignore. After all, how much does it cost to have a press conference and announce vague contraction plans? It costs very little to keep asking for a cap and trying to find a way to get the players to cave on this issue, and the potential return is monumental.

What about revenue sharing?
Some clubs complain that they can't compete with the "big boys" in the game because the "salary structure" is too high. So, quite logically, they would like a salary cap. If the Yankees weren't allowed to spend more than the Royals on talent, then the Royals and Yankees could put teams on the field on a more equitable basis.

The owners have tried to address this, albeit halfheartedly, with a limited revenue sharing program. This has caused some bad blood among different owners, some of whom are annoyed because certain recipients of shared revenue are simply pocketing the money as profit, and not reinvesting it in their club. Still other owners are upset that some clubs are reinvesting the money in their club, and are beating the pants off those clubs who are generating the revenue in the first place.

Increasing the amount of revenue sharing is a very difficult proposition. As noted above, the value of a franchise is directly related to how much money it brings in. If revenue sharing increases, the value of large-market clubs like Baltimore, Boston, and New York dramatically drops, because they're making less money. Baltimore owner Peter Angelos paid more for his club than Ken Hofmann and Steve Schott of the A's precisely because his club brings in a bunch of money. Why should the Orioles take a nine-digit financial hit so that the Expos can retain Jose Vidro when he becomes a free agent?

If the owners are serious about preventing disparity in the quality of the teams on the field due to uneven financial distribution, they have the power to do it without a salary cap. They can go to an NFL-type model, with near universal revenue sharing, and compensate owners whose franchise value is reduced by such a change in the rules. Of course, that means coming up with several hundred million dollars to give to George Steinbrenner and the other owners of financially robust teams, and it's much cheaper to keep trying to wring a salary cap from the MLBPA, so don't bet on something like this happening any time soon.

What about cost certainty and game continuity?
Cost certainty is already in the hands of the owners. Larry Lucchino claims that the "owners don't have to offer the money" statement is unfair. But is it really? Owners have more cost certainty than almost any other business out there. In business, the price of raw inputs (in baseball, this is on-field talent) varies, and businesses have developed methods to reduce that risk. In baseball, owners never have to offer a contract to a player. If a player is eligible for arbitration, he only gets in front of an arbitrator with his case if the owner chooses to make such an offer.

As for game continuity, it's kind of difficult to argue that a team should be entitled to keep a player forever. Many players move for reasons above and beyond just raw dollars. As fans, we want to see the players we grow to know and love stay with our favorite team, particularly if they're great players who help our team win. But if we really grew up with a player, we usually get to see them for six years before they're a free agent -- that's a long time in MLB, and perhaps we need to readjust our expectations.

If change is so difficult, what can teams do?
They can educate themselves on the availability of substitutes for expensive players. One of the great revelations of all the research done by analysts over the years is that a single player in baseball is far more replaceable than believed. Only the truly amazing superstars are worth more than perhaps 5 or 6 wins a season over an average player, and there aren't many of those around. It makes some sense to go ahead and pay the big money for an Alex Rodriguez; what kills your team is not that, but paying tens of millions of dollars to players that are completely replaceable. For the money that Pittsburgh's Cam Bonifay paid to Derek Bell, Pat Meares, Terry Mulholland, and Kevin Young, he could have signed a top-tier free agent who's actually worth the money, and found guys like Frank Menechino, Chad Bradford and Robin Jennings to fill out the roster more effectively for less money.

Players that make the really big money get it in part because the risk of their performing poorly is low. Owners can learn to minimize that risk in other ways, like having a stable of solid replacements available at AAA. Ownership, as a whole, doesn't appear to be in bad financial shape. Revenue is growing faster than salary expense. Attendance is doing very well, when you adjust for the rapid increase in ticket prices. International interest in the sport is strong. It's possible that some small number of clubs might be losing money on a snapshot basis, but only one club, Montreal, appears to be in dire enough straits to require any sort of systemic change. There are more previous owners trying to get back into ownership than new investors looking for something new.

For many years, we've been told a fairly consistent story by MLB owners in terms of the economics of the game, and their doom and gloom has never come to pass. With revenues growing faster than player salaries, and only selected financial information available, it's difficult to believe them when they continue to claim financial woes. And, most importantly, even if some of those financial woes are real, it doesn't mean they have to be.

The players, government, and fans shouldn't be in the business of bailing out people who make bad business decisions, be it investing in a portfolio of Enron and drkoop.com, or signing Marty Cordova to a three-year contract. The baseball industry hasn't been any worse than other industries in terms of selectively sharing their financial information in an attempt to shape public opinion. It just hasn't been any better, and when the product in question is something as revered and tremendous as baseball, we expect, and for that matter deserve, better.

Gary Huckabay, who received his MBA from UC Davis, is a member of the Baseball Prospectus team of writers. You can email him at huckabay@baseballprospectus.com.