THE BOOK--Playing The Percentages In Baseball

I wish somebody would have told the Pirates this before these last two games against the Cardinals.

The more I read about all this stuff, the more I find myself asking—How would the league survive if the Yankees, Red Sox, etc, weren’t paying the small payroll teams to help them stay afloat? There’d be contraction all over the majors, because I don’t think several teams could live without “the tax”. Which instantly makes me think… it’s a good thing the Yanks are paying HUGE for free agents, so they can also keep the leagues going. Maybe I’m off here, but that’s what I think I’m seeing.

It’s a shame that Phil brought up the $5 million per win detail, because that is what many people will - and are - focus(ing) on, rather than his actual thesis.

Great article.  Somebody with a Slate account should respond to KDL regarding what the 5 million dollar per win number means, he has it dead wrong and it would be a shame if people got the wrong idea.  Why do people have to speak so assertively when they are 100% wrong?

I don’t think it’s any kind of sin to still be able to turn a profit while being a losing team. If they were operating at a loss, there’s a good chance the team would be in Charlotte of someplace. However, it’s quite a different thing if they are deliberately losing in order to maximize the profit. Despite what Nick feels, I want to see the Pirates beat the Cardinals, and anyone else. It’s nice to go to the ballpark and see a game, but I will come a lot more often if they are winning.

Unfortunately, many people equate spending money with winning. Dave Littlefield could spend money, but it was on guys like Randa, Oliveras and that rightfielder who was ready to retire until the Pirates waived money at him. Then they waived the player in August. Many of ym friends complained about trading Bay, McLouth, Sanchez, etc, but I answered that they were a losing team with those players and they were only getting older and more expensive. Paying those guys more to stay would not have improved the team.

I am optimistic now that the team has spent almost $12 million last week to sign what could be the three best teenage arms in North America - Taillon, Allie & Heredia. It might take them three or four years to get to Pittsburgh, barring injury, but I want to see that kind of foundation being built.

Uh, this article seems to assume that the only costs for a baseball organization are MLB player salaries.  Turns out, the Pirates have been dumping money into draft pick bonuses, foreign player signing bonuses, and Latin American development facilities more than any other team over the past couple years.  Most businesses would recognize that the proper way to rebuild a failing company is to focus on funding long term “R&D” over spending on quick fixes that will produce better numbers for the current year.  I have no idea whether the Pirates strategy will pay dividends, but it certainly is not outrageous.

As for the Red Sox and Yankees getting kudos for saving the day and sharing the revenue, folks forget a few points.

MLB is a monopoly, made up of big market and small market teams.  It is the exemption from the anti-trust regulations that prevent small market teams from moving into the Boston and NY area to share the market pie.  If I were the Pirates, I would move to Boston or NY, but the MLB monopoly won’t let them.  In return, the Red Sox and Yankees pay a cost to keep their market relatively competitive free.

Revenue sharing is in the Red Sox and Yankees interest, especially if they can force the smaller market teams into behavior which is not in their best interests.  Forcing them to
spend it on marginal FA, and having bonus guidelines on draft picks that can enforced on smaller market teams by threatening to reduce MLB revenue sharing serves that purpose.

However, having these teams take that revenue sharing money and invest it in FA who would make a marginal value on their revenue or WP% makes no business sense for these teams.  The way to build revenue is by fielding a winning team, and to do that, you need a strong player development system stocked with top prospects. 

The Pirates are on the hit list for violating MLB guidelines on bonuses for draft picks, which lets them pick whomever they want and get them signed without fear of the prospect walking away and waiting for next year knowing teams like the Red Sox will surpass these guidelines.

The Marlins are targets for not spending enough on FA which would take away what they can spend on player development. 

Now MLB revenue sharing comes up for discussion.  Message?  Adhere to the bonus guidelines, and spend on marginal FA to keep the MLBPA off MLB’s back, or risk losing revenue sharing.

On the subject of profitability, I can only say corporations are driven more to increase revenue and value than profits (which are taxable).
A 66-96 Rays team may be more profitable, but has less value.  You are better off to be less profitable while increasing revenues and value than remaining profitable with stagnant or declining revenue and value.

"As a result, Tampa Bay’s regular-season operating income declined from $22 million in 2007 to less than $1 million in 2008—which means it cost the team $21 million to transition from cellar dwellers to World Series participants.”

That’s not what Tampa’s income statement says (see document 3).  The club earned operating income $21.6 million in 2007, and $14.2 million in 2008.

Plus, since we don’t have data for 2009, we have no idea what their suite sales, sponsorship and advertising, and radio and tv revenues look like for the NEXT season.  Tampa’s run was essentially out of the blue in 2008; we absolutely should not have expected these revenues to increase that season, but they should see a bump in 2009.

"As a result, Tampa Bay’s regular-season operating income declined from $22 million in 2007 to less than $1 million in 2008—which means it cost the team $21 million to transition from cellar dwellers to World Series participants.”

That’s not what Tampa’s income statement says (see document 3).  The club earned operating income $21.6 million in 2007, and $14.2 million in 2008.

Plus, since we don’t have data for 2009, we have no idea what their suite sales, sponsorship and advertising, and radio and tv revenues look like for the NEXT season.  Tampa’s run was essentially out of the blue in 2008; we absolutely should not have expected these revenues to increase that season, but they should see a bump in 2009.

Devon/2:

I think you’re assuming that the cost of salaries would be fixed without the Red Sox and Yankees.  It is as high as it is precisely because of the exact market structure which generates that price.  There wouldn’t be contraction without the big market teams, but the auction value of a win would come down with fewer bidders willing to pay that price.

Mitch/8: the $14.2 million includes about $11 million in earnings attributable to the post season.  I was breaking out *regular season*.

Fair point about the TV income perhaps increasing next year, though.

Looking more closely at the 2007 and 2008 numbers, the Rays “lost” about $17 million in profits in regular season 2008 income because of their increased expenses.

+11 tickets
+6 concessions
-4 central fund
-4 revenue sharing
-20 salary
-6 all other (mostly sales & marketing)

Please note: I’m excluding scouting and player development.

Now, of course, they made those additional expenditures to increase revenues (which happened, though perhaps not to the extent expected) and also in an attempt to make the playoffs (which also happened, and earned them about $11 million in additional profits).  They also made those expenditures with the expectation that future revenues would increase (season tickets, luxury boxes, sponsorships, etc) if the team was competitive.  Again, this may or may not have been a smart economic decision, but that is likely related to the Rays market in particular and not to the structure inherent in Major League Baseball.

As pointed out above by #7, there are also different incentives at work.  The Rays partners may not have earned as much in operating income in 2008 (though it is unclear how much, if anything, they pay in distributions), they almost certainly increased their franchise value.  MLB seems to work off a revenue multiple, and with revenues increasing 20%, the franchise would have to have been worth less than $100 million for the partners to not see an increase in the value of their shares that more than offsets the drop in income.  I doubt that it’s unreasonable to assume most teams make a relatively small amount of cash income while striving to increase the resale value of their franchise in order to achieve large capital gains.

But 14.2 minus 11 = 3.2, not “less than $1”. Plus, that ignores the team increased expenditures on player development (by $1.9 million), which should have no effect on your analysis of regular season earnings.

#7

excellent points about MLB’s territorial rights policy.  one pretty much beside the point question. is it the anti-trust exemption that allows MLB to restrict franchise movement?  MLS has no explicit congressional exemption, but they have total control over their franchises locations.  taco bell presumably maintains the right, without congressional approval, to restrict the relocation of it’s delicious franchises. 

but either way, financial statements aside, all the franchises are in it together, so they all have to put up with with “unfair” circumstance in different ways.

Phil/13: Right, that’s a point.  To get the $1 million, I ignored all those other categories (including player development) ... I was concentrating on things that were directly related to the improvement (tickets/concessions/transfers/salaries). 

The reason I did that is that the question I was trying to answer was how the success affected the operating income *all other things being equal*.  I should have said that explicitly.

I can’t make your numbers add (or subtract) to $1 million using the financial statements posted on the Web. Look at post #12 above.  Can you please show your work?

(See also post 15.)

Add up the differences in the lines on the statement of income.

$11MM tickets, 6MM concessions.  Subtract $8MM transfers.  Subtract $30MM salaries. 

That’s minus $21MM.  Last year’s operating income was $21.6MM.  That leaves less than $1MM if you keep everything else equal and ignore rounding errors.  I kept everything else equal mostly because I wanted to count only things that depend on the team’s success.

For instance, sales expenses and stadium operations went up.  Was that to sell more tickets, or is that just normal fluctuation?  To give the argument the benefit of the doubt, I ignored them (they would have pushed the profit even lower).  Same with revenue from MLB properties, and TV/radio.  Those would have weakened the argument, adding another $1MM to profit.

Agreed that I should have said that in the article, that the $1MM assumes everything else was the same as in 2008.

Why are you subtracting $30 million in salaries? They paid an additional $20.4 million (56 minus 35.6 = 20.4) in salary in 2008.

Yes, $20MM.  The 30 was a typo.

In which case they earned--holding everything else constant--$11 million less than the year prior in regular season profits.  Not insignificantly, that is the same amount they earned in additional postseason profits.  Which means that--again holding everything else constant--they earned the SAME amount in 2008 as in 2007.

Hmmm ... what the **** did I do to get the $1 million?  Let me see if I have my notes ...

No idea.  I’ll verify after lunch.  I didn’t use $30MM for salaries, because the article has it correct at $20MM.  Did I use operating income and subtract post season?  That would give $3MM, not $1MM.

WTF did I do?

That’s what I was wondering! It looks like you wrote $20mm but subtracted $30mm.  And, of course, when you’re talking about $20mm in profits, $10mm is kind of a big deal.

It’s possible that’s what I did.  It’s also possible that I used their $14 million and started subtracting post-season stuff, and I subtracted something else. 

If I had to do it again, I’d explain what I did, wind up with $11 million, and say they broke even but only because of post-season ... and that’s if you assume that the extra sales and marketing were not required to get the extra sales, and the extra stadium operations weren’t caused by the extra fans.

Anyway, I e-mailed Slate, told them that I don’t think I can reproduce the $1MM figure, and the correct number is $3MM, which is the easy calculation, the operating income minus the post-season component.

Crap.  Sorry about that, and thanks for the catch.

I think the most correct number would be $5mm in “regular season” income, thus holding scouting and development expenses constant while letting the increased Sales & Marketing, Team Expenses, and Stadium expenses flow through (since it is reasonable to think that at least the sales and stadium expenses are related to higher attendance).

"It is the exemption from the anti-trust regulations that prevent small market teams from moving into the Boston and NY area to share the market pie.”

Pittsburg’s population is just under half of Boston’s, and the population of western Pennsylvania is just about half of Massaschussetts.

Now as it happens, I think that Pittsburg/ Western Pennsylvania really may be too small a market for a MLB team.  When the team was established there, the area played a much more important part in the U.S. economy.  Much of the world’s oil was drilled in western and central Pennsylvania, and refined in Cleveland.  Now times have changed, and maybe this area can’t support a team in Pittsburgh and another team in Cleveland, no more than Texas could have supported two teams in 1900.

However, the Red Sox can compete with the Yankees not because of the New England market, but because they have become a national brand.  The Steelers, for that matter, are a national brand.  The NFL teams seem to have done better in turning themselves into national brands than MLB teams.

Not every team can turn themselves into a national brand, but this approach seems to be underutilized in the MLB.  Look at the contrasting histories of the Yankees and the Mets, who share the same local market.

Let’s compare the market size of Florida to Montreal, and conclude anything about the hockey market.

It’s not just pop size.  It’s the TARGET MARKET size, as well as available disposable income.  In that respect, Boston is like LA.

Of course, even if the Rays lost money in ‘08 compared to ‘07, that’s just the short-term impact.  Isn’t the idea that you put winning teams on the field and thereby build a fanbase from which you can then extract sweet, sweet profit for decades to come?

>“Isn’t the idea that you put winning teams on the field and thereby build a fanbase from which you can then extract sweet, sweet profit for decades to come?”

I’ve often wondered about that.  Sometimes it seems to me that once a team wins, it’s not a big deal any more.  The Jays, for instance ... they drew well when they were bad, and they drew well when they were good, but once they won a couple of World Series, they didn’t draw any more.  Even this season, when they’re decent (although pretty much out of the wild card race), attendance is mediocre.

I wonder if part of the lure of the Cubs and Red Sox is that they haven’t (hadn’t) won in so long.  The Sox are still raking it in, but maybe that’s because they’re playing well.  If they have a string of .500 seasons, what will happen?

Serious question.  I don’t know the answer.