Big Free Agent Contracts: A Different Approach

I think these two statements are very instructive as to the nature of our fundamental disagreement. I disagree that there is one singular goal for a baseball franchise at the MLB level as you identify, as it ignores the reality that they operate as businesses.

No, it doesn’t. What it does say is that success as a club is not measured by the traditional models that success as a business is measured, and the value of a club is often related to its on-field and playoff success. Even the big market teams are prey to shifting trends, and when a team like the Blue Jays remains uncompetitive for a sustained period, it has a much stronger effect on their bottom line than an unprofitable season. Plus, playoffs are a fractional boost in terms of financial value to the club, but are valued as a significant achievement by their consumers. You haven’t suggested how that should be valued out, and I’d be more inclined to suggest that your approach undervalues or ignores the achievement of a playoff appearance because an objective value is far harder to determine in either the financial short term or the long term.

If I had to say that one was more important than the other, I’d go with the financial side, because quite frankly, most owners will not try to win at the expense of big short-term losses . That said, you do see some owners who want to win championships, and in the long-run championship teams increase revenues, so I see them as more or less equal. But to conclude that a MLB organization has failed if it doesn’t win a championship is a false premise. From the fan’s view, perhaps, but certainly not for the organization, especially when the ownership is corporate (I’ll return to this below).

I should point out that you’re skewing the argument here. The Yankees aren’t suffering short term losses to win now. They may be overpaying for talent against the market, but in doing so, they successfully compete on a sustained basis while maintaining profitability as a business. They could make more money if they were more diligent and efficient in their acquisition strategy, but it isn’t making them unprofitable in the method they are competing with.

And again, here’s where the business parallel breaks down with baseball, because the value of the brand, so to speak, is normally based on its relative success. The Blue Jays, following 18 straight years of not reaching the playoffs have gone from one of the most valuable franchises in baseball to one of the middle to least valuable franchises. There has been a sustained loss in relative value that is directly related to the on-field performance. The most financial efficient club will not be able to grow their value without a measure of success as determined by the consumer. I think we can say safely, at this point, that the Toronto Blue Jays market in general views anything less than a playoff berth as a failure, and that continued growth is unlikely to come without a stronger measure of competitive success.

My problem is, your approach stops here, and I don’t think that’s a complete or sufficient analysis because it ignores the corporate organizational objective. We have to ask, does it actually make sense to give yourself the increased shot at the playoff? In other words, does the added revenue justify the added costs. This is what my analysis is trying to do, though it does it indirectly, because we don’t know the Marginal Revenue Product of individual contracts (you’ll recall this from our previous discussion). But fundamentally, you have to a financial cost/benefit analysis, because putting a better team on the field won’t necessarily increase revenues.

Again, a strict year by year ROI is the wrong way to assess it, I feel. I’ve certainly seen Silver’s graph on the relative value of wins, but I think it ignores the fact that there is a very concrete measure of success in a team by their customers, and that’s a playoff berth. The Jays have sat in the mid-80s in wins with a relatively efficient $/WAR as a team for over a decade, and has eroded their value significantly. So from a corporate organizational objective, responding to what their market values is exactly what they should be doing to maximize value if contention is that dominant deliverable.

My approach is the same as it was from the start, which is that every contract needs to be looked at in relative terms to the market value against the production, to the market realities in the point that it was offered, to its relative status as part of the team’s payroll, and to the additional factors of value that may or may not be informed in the decision. I’m not looking for a clean, universally applied statistical model because I don’t think it exists, as the base concept of ‘value’ is not objectively determinable across baseball. When you’re assessing a contract, you have to look at the way that ownership values the contract and their structure and position.

So, for me, at the end of the day, to analze a contract. we have to balance the baseball objective, and the financial objective. I would submit that even if the A-Rod contract passes a baseball test, it fails the financial objective, because the Yankees will only get 50% of the cost back in terms of performance (and therefore as revenue, using the $/WAR proxy), it’s a financial failure. That means, for me, it’s somewhat ambiguous – it’s neither necessarily good, nor necessarily bad. then we’d have to look at how the particularl team stresses each objective. The Yankees clearly care about winning, but the Steinbrenners clearly care about increasing their wealth.

The Steinbrenners clearly care about increasing their wealth, and they understand that a Yankee’s team that is a perennial contender is a big part in maintaining the massive profits that YES generates. They also want to protect their brand and know that the more luster they can gob on it, the overall value of the organization increases. So they aren’t just paying for A-Rod’s production. They’re paying for his 700HR in Yankee pinstripes. They’re playing for a 40+ to be chasing Bonds record. Just like they’re paying for Jeter to retire as a Yankee. These things make plenty of business sense for the Yankees as a business, even if their ROI has to be measured by decades.

So I find your assessment of the financial objective flawed because it only measures value against the market for the duration of the contract. A few of these big agent signings have a much longer impact and generate revenue long after the contract has ended, which again, is almost impossible to apply an objective measure to.

So finally, this bring me back to the corporate ownership angle. The reality is, for owners like Rogers, the organizational is categorially not to win championships, it’s to make money. If winning a championship makes more money, great. But at the end of the day, for Rogers’, the financial component dominates. So, while the analysis I did was not specifically focussed on the implications for the Jays, I think it certainly must inform our understanding of how the Jays are likely to approach big free agent deals.

I think that’s making assumptions about Rogers in a general sense as well. Not all corporations operate under the same model, and the acquisition of the Toronto Blue Jays was not made with the same considerations that a typical business acquisition would be measured. The Jays represent specific content generation for Rogers, and as a result, their bottom-line effect of Rogers business actually takes place outside of the bounds of the baseball organization itself and across the company as a whole. I watch viewership numbers very carefully, because the revenue Rogers generates across their multiple platforms is significant. Since 2007, there’s been a slow growth in the market, and it’s jumped a decent level in the last two years. However, there is a leveling effect that takes place once you’ve maximized a team’s value proposition to the fanbase, and if you want to grow the sector, you need to take steps to push past that value to a new plateau to expand further. That’s playoffs, and I’d imagine that Rogers is particularly keen on the Jays making the playoffs because that translates into growth and increased revenue from all of their business lines.

So, I’ll disagree with you on your financial conclusion with Rogers. The goal of Rogers ownership of the team is to make money, yes, but it’s also to maximize the growth of the market sector to the largest potential possible. Which is exactly why corporations like Rogers will sustain unprofitable regions and business segments for a time because they feel the long term growth significantly outweighs the short term loss. I don’t think Rogers is going to become the Steinbrenners, but Rogers has very clearly seen the financial effects of maintaining a non-competitive team in this market, which is the long term erosion of value in the market.

But that’s the critical point in my view. If the Athletics could afford Prince Fielder, would adding him increase their chance of making the playoffs? Very little, because they’re so far away. You have to think on the margin, and can’t use an after the fact justification.

Okay, so let’s look at specifics. My position is the following; A-Rod’s contract, massive and overpaid as it might be, can’t be considered a bad contract because of the following factors. The Yankees were paying top dollar to retain an elite player in a position in which they had no incumbent prospect in the system, had no acceptable cheaper free agent option, had no configuration of upgrades across the rest of the diamond to balance the loss, and valued their top trade pieces as more valuable than the financial cost of retaining him to trade for a quality 3B replacement. A-Rod’s value to the organization was also considered past just his on-field production, as the contract will in all likelihood carry him into retirement.

While I do consider Hal Steinbrenner to be genuinely dim, I still have troubling believing that the Yankees looked at that contract as said ‘yes, we feel we will absolutely get market value from his on-field production from this’. I think they paid a premium because the value of retaining A-Rod until the end of his career, especially at the time and with the options available, seemed like the best option. What’s the dollar value of the likely all-time HR champ being in a Yankee uniform in the HoF? To them, it was clearly worth the difference between his production and the value of his contract.

More broadly, as I said above, I think in practical terms it is difficult to apply the test, at least in terms of how I think you’d have to approach it to make the analysis meaningful. I recognize you approached it a little differently, and said that it’s only 15%, so it’s not as big a deal as it would be for other teams.

To be fair, it’s not the only way I approached it, but in the broadest terms, I think the more money that a team has available in their budget, the less importance that $/WAR has in making a contract a bad contract, because the margin for error is so much greater. If the Yankees have a self-imposed financial limit, then yes, their team pattern of overspending for WAR is going to hurt them, but until it translates into them being unable to consistently compete, I don’t think you can infer anything about their financial flexibility.