The subtle changes that helped the small-money Royals spend big

The answer came from the Royals executive with the kind of chuckle that lets you know he is joking, but also the kind of pause that lets you know he’s not completely joking.

The question: how can the Royals, owners of baseball’s third-smallest market and worst local television contract, afford a payroll close to $130 million including two new $70 million contracts?

The answer:

“We can’t.”

Their internal projections are that the club will lose money in 2016 without a postseason appearance, will make a profit with another deep playoff run, or will break even with something in between.

But the story of how the Royals — and we don’t really need to bring up all the anecdotes about how cheap they used to be, do we? — are able to play an entirely different financial game now is more complicated.

Now, the biggest reasons for the Royals’ success are the development and talents of their players, smart decisions by the front office, increased commitment from owner David Glass and the requisite good fortune of all championship clubs. Most of this has been covered.

What hasn’t been discussed as much is the financial side, about how one of the sport’s lowest revenue clubs has grown into a power — and part of the top half of spenders. This involves increased ticket revenue, of course, but also bigger revenue sharing and a counter-intuitive spending pattern across the majors.

It’s enough that in separate and recent conversations, sources with the Royals, a rival big-money club, a rival small-market club, and the players union all agreed the team’s success has depended on this changing landscape in addition to the baseball side.

Even with their rotten local TV deal — the Royals expect their annual take to more than double when the current deal expires in 2019 — their ticket revenue has nearly quadrupled in the last 10 years to around $80 million per year.

Along with that, the league’s revenue sharing has continued to increase. Some of that is with Major League Baseball’s forward-thinking decision to split all online revenue equally. MLB’s Advanced Media is widely considered the best of its peer group, and continues to expand with partnerships with other businesses and leagues, including the NHL.

In the last three rounds of collective-bargaining negotiations, players and owners spent more time on revenue sharing than anything else. The result has been, generally speaking, more help for the clubs with the smallest revenues.

Baseball’s annual revenue has grown from $1.4 billion in 1995 to $9.5 billion in 2015. A disproportionate amount of the growth has come from big-market clubs, but revenue sharing has allowed small-market teams to keep pace.

The 10 clubs in baseball’s biggest markets who are disqualified from receiving revenue sharing have gone from an average of about $37 million payroll in 1995 to more than $160 million in 2015. That increase is roughly the same as the 10 clubs in baseball’s smallest markets — $26 million in 1995 and nearly $100 million in 2015. Last year, the difference between the two groups was about 40 percent, a number that has remained steady since the late 1990s.

Glass has been, for the last 10 years, a model small-market owner. He has refused to expose himself to much risk of yearly operating losses and stands to make a fortune if and when he decides to sell the club. But he has also been consistent in putting most of the profits back into the club, allowing for infrastructure and talent improvements at all levels.

That last part has been buoyed by baseball’s financial structure, which provides clubs such as the Royals more support, something that first required the big-money clubs to be convinced that their revenue sharing payments were in effect investments to grow the game.

One other factor that isn’t discussed as much, and will likely surprise some fans, is that in relative terms baseball players are not actually being paid more now. Last year, for instance, players made about $3.8 billion, which was about 40 percent of the league’s revenue. That last number — the percentage of the players’ take — has been pretty consistent for most of the last 10 years.

There are many factors that go into revenue and spending, of course, and baseball has never been structured to guarantee or limit players to a certain share of the revenue. But it stands to reason that if player salaries on the whole have been relatively steady, then increased spending by a club like the Royals could have more of an impact.

The biggest reasons for the Royals’ run of success are the things we talk the most about: Alex Gordon’s steadiness, Lorenzo Cain’s awesomeness, the progress of Eric Hosmer and Mike Moustakas, the dominance of the bullpen, and the energy and relentlessness personified by Sal Perez.

Those are the types of things that separate the Royals from other small-market clubs, who obviously benefit from the same changes in the way money is spent and distributed around the sport. The Royals aren’t the only small-market team spending — the Reds gave Joey Votto an extension worth more than $200 million — they’re just spending smarter.

But the Royals also have taken advantage of a financial structure that is much different now than 10 or more years ago. Revenue sharing has continued to increase, and support for small-money teams exists in ways that were once only talked about.

It’s all come together in a way that is changing the sport. Depending on how you look at the Marlins, the Royals are the first small-money team to win the World Series since the 1994 strike and — regardless of how you consider the Marlins — the first to win consecutive pennants.

The players deserve most of the credit for that, and the front office should get most of the rest. But don’t forget a chunk for the changes in how the money is distributed, which has given us a sport in which the Royals win a World Series and then spend $70 million on a No. 3 or 4 starter to defend their championship with a higher payroll than teams from New York, Chicago, and Toronto.

It took all sides.

This story was originally published January 30, 2016 at 6:35 PM with the headline "The subtle changes that helped the small-money Royals spend big."