FanPost

A Business Case For A Much Higher Payroll

Dan Hamilton-USA TODAY Sports

FanGraphs recently ran a pair of articles about the Blue Jays. One, written by Dave Cameron, suggested they should rebuild, and the other by Jeff Sullivan, who thinks they should give it another go. Both have sound baseball reasons for their argument, and they know a lot more about baseball than me. But both miss the point, as it’s a financial decision, and not a baseball decision. The Blue Jays have no choice. They need to keep winning. If they don’t, baseball history shows that they’re likely to risk tens of millions of dollars.

So, while most (not all – Scott Lauber of ESPN thinks it will go up) blogs and beat reporters suggest it's likely that the player budget won’t change much from last year, I think the smart money is on the Blue Jays player budget going up. Way up.

A historic increase in fan interest

We know that before the 2012 season Paul Beeston promised Blue Jays fans 2-3 playoff appearances in the next five years. We now can say he (and those that followed) delivered on that promise. What we don’t know is what he promised his bosses at Rogers about the financial performance of the club. But we can surely guess that whatever he promised, it vastly underestimated what was delivered.

While the Blue Jays have excelled on the field in 2015 and 2016, the only trophy they’ve won is the revenue increase trophy. They have killed revenue. Comparing 2016 to 2014, average attendance at Rogers Centre was up 43%, or over 1,000,000 fans for the season. Compared to 2011, they’re up 87%, or over 1.5 million fans. How rare is this? Let’s set the bar a bit lower, at two-year growth of 35% and 750,000 fans. If we control for strike years and new stadiums, it’s happened about 20 times in the last 40 years. So, it’s harder than, you know, winning the World Series.

We also know that the Blue Jays averaged over 1M viewers a game on Sportsnet this year, up from just under 600K in 2014. Winning is clearly good for their business.

Rogers now knows the benefits of winning

Among MLB teams, the Blue Jays revenue may be the most sensitive to the performance of the team. They are the only team which owns 100% of their regional TV network and they own the team’s stadium. Where many teams have stable, long-term TV deals with fixed fees, the Blue Jays TV revenue is entirely variable based on how much people are willing to pay for advertising. Advertising fees are based on the number of eyeballs exposed to the ad, which appears to be driven by team success. We can also assume they get a greater share of stadium revenues than most.

So, for all those Jays fans who get upset that the team is owned by a corporation, there’s a flipside to that coin. Big companies aren’t generally run by stupid people. They may not make all the decisions you'd want them to, but they are generally trying to be rational. A reasonable case could have been made before the 2016 season that the attendance and viewership spike in the second half of 2015 was a blip, and that if the team didn’t perform the fans would go away. We’ll never know the answer to that, since the team did (mostly) perform in 2016. What we do know now with near certainty is that if the team is good, fan interest will follow. So, while last year’s somewhat timid off-season would have been a justifiable business decision, a similar approach this off-season would be a colossally stupid business decision. No matter how you "hate" Rogers, they're not idiots.

Sudden spikes in fan interest are highly volatile

Given the number of analysts at Rogers, they have no doubt asked the same question I did: When a team’s fan interest spikes as much as the Blue Jays recently, what happens next? What if the team is only average next year – will the fans stay?

The answer, based on my research, is very definitely "no." Of the 20 teams to experience a similar surge in fan support, it will not be surprising to hear that all 20 were due to a sudden improvement in the team’s on-field performance. 9 of those teams subsequently played better than .525 ball the next two years, and those teams added, on average, another 350K fans. Another 9 lost more games than they won the next two years. They lost almost 750K fans on average, or about 70% of their gains. All but one lost at least 450K fans from their peak. The other two of the 20 are the 2015 Kansas City Royals, on whom the jury is still out, and the 1993 Houston Astros who were subsequently hurt by the 1994 strike despite being quite good. It’s perhaps a small sample size, but the result is not surprising – sudden and dramatic increases in attendance due to a sudden on-field improvement are highly volatile; the fans will stay only if the team keeps winning.

One more interesting finding: if the team does continue to win for a while, they can become insulated against a few bad years in the future. The 1991 Atlantas, 2003 Angels, 2002 Twins, 1987 Giants and 1996 Padres were all able to keep their fans longer after they stopped winning than the teams that had an immediate performance decline.

A few specific cautionary tales are the 2006 White Sox, 2007 Tigers and the 2012 Rangers. All big market teams, all recent, and all had massive attendance declines even though they just became average, and not really that bad, for a couple of years. The 2012 Rangers made three straight playoffs after a 10 year drought, spiking at 3.5 million fans. After a pretty decent 2013 and a terrible 2014, they fell to 2.7 million fans. They’ve been hard to win back, as this year’s 95-game winning team still only drew 2.7 million. Even a temporary drop in performance after a sudden spike in fan interest can cost money, even if the team gets back to winning later.

The recent spike is probably worth a ton of money

The Blue Jays would know all of this, and so they’d know that not being competitive in 2017 would likely come at a huge financial cost. We don’t know exactly how much 1M fans and 400K average viewers are worth, and we don’t know the impact of these on ancillary revenue streams like merchandising and corporate sponsorship. But let’s make some easy estimates. If we assume that the $36M allocated "on paper" for Sportsnet to pay the Blue Jays for their TV rights in 2014 was appropriate, then it would make sense that, with 70% more viewers than in 2014, those rights could have been worth $25M more in 2016. This puts it in line with around the 10th most lucrative TV deal in MLB, which seems reasonable. And if we use a lazy number of $50USD for every additional fan in 2016, with some of that accounting for sponsorship and merchandising, that’s another $50M. So, conceivably, on-field performance with this back-of-the-envelope math drove $75M in incremental revenues. And a logical person, reviewing history of both the Blue Jays and MLB, would have to assume it would mostly go away if the team becomes mediocre again.

The only reasonable business decision: Spend money and try to keep the fans

This brings us to the player budget, and back to Jeff Sullivan. In his article, he estimated that the current roster is worth about 82-83 wins and costs about $125M. And we should be clear about the farm system – they may have decent long term pieces, but unless someone pulls a Roberto Osuna, there is minimal help coming from there in 2017. Let’s assume that same system won’t produce much in the way of trades either. If most analysts are right, and the player budget stays around $140M, the Jays can buy about 2-3 more wins in free agency. So, an 84-85 win team that, if everything breaks right, might sneak into the wild card.

There’s no way that happens. Mark Shapiro has an incredibly strong business case to say that this approach risks tens of millions of dollars in revenue. He can say convincingly that if the team can keep winning, and his newly built and incredibly capable executive team can build a farm system to deliver cheap wins in a few years, they may be able to sustain that revenue long term, and limit the increase in payroll in the future. But that takes time, and if the team doesn’t keep winning now, it might take years just to get back to where they are today. The logical business decision is to invest heavily in the next 2-3 years, give the front office time to build the farm system, with the goal of building a more robust fan base that will make it through down years in the future. If it all fails, Shapiro also has a team more than capable of selling the pieces if they have to.

The risk of not investing in 2017 and 2018 is much higher than doubling down. And let’s not forget the Jays have been a top 5 team the last two years, and a payroll of $170-180M would put them in the 5-8 range, and let them buy another 5-6 wins (at the standard estimate of approx. $7M per WAR). This would project them at around 87-88 wins, which is what the top two AL teams, the Astros and Red Sox, were projected by Fangraphs to win in 2016. Why doesn’t that make sense? Obviously spending money is no guarantee of success, but there's so much downside of not contenting, it seems like a logical risk.

You may say something here about it being an aging team with long-term contracts to older players. That free agency will bring more old players. OK, that’s true. But what’s your plan? Those are the players we have, and they’re also really good players. You can’t just exchange them for equally good younger players. Eventually some will be bad contracts, but that happens, and the only reasonable plan is to improve the farm system to deal with that then. For now, it’s a good team that projects to win with a bigger budget. And Shapiro and Atkins were good at free agency last year, with the terrific Estrada and Happ contracts. Sticking to a $140-150M budget, barring another Donaldson-type magic trade, projects the Jays to be mediocre.

Spending $40-50M in free agency to build a projected first division team and sustain fan interest is the only reasonable business decision. If the team succeeds and wins the coin-flip that is the MLB playoffs, the upside is much higher. And given the flexibility of trading players in baseball, the downside is manageable. Let’s assume they’re not stupid, and let the fun continue.

Editor's Note: This is a FanPost written by a reader and member of Bluebird Banter. It was not commissioned by the editors and is not necessarily reflective of the opinions of Bluebird Banter or SB Nation.