Archive for Business

Where Will A-Rod Land?

I’ve told you how much I expect A-Rod to get, and now that it looks like the Yankees are out of the picture, I wonder where he will go. No, this isn’t a contest—there are only so many places he can play—I just think that most of the predictions by the media are a bit too focused on big markets. For example, Bruce Jenkins lists his candidates in the San Francisco Chronicle: Giants, Angels, Dodgers, Mets, White Sox, Cubs, Tigers, and Red Sox. All of these clubs have relatively large payrolls (all over $90 million in 2007) and play in relatively large markets.

Why are we assuming that only big-market teams can purchase A-Rod? Small-market teams still do quite well, and the boost in revenue from having the talent and star-power of A-Rod could mean quite a lot to a team. I’m looking at a young teams on the rise with low-payroll stars who make far below their contributions to team revenue thanks to the CBA rules. In the latest ESPN Magazine, Buster Olney suggests that the Marlins may be in the market for A-Rod. The Marlins have a new stadium on the way (supposedly), some good young and cheap players with a farm that seems to keep producing them, and a payroll so low that adding A-Rod would double the team’s total salary expenditure yet still keep the team below the league average. I like Olney’s reasoning.

I’m not saying that Rodriguez will necessarily sign with such a team, but I think his list of suitors is less limited than most people think. After all, it was Texas, not the Yankees, who inked A-Rod to his first record free agent contract.

More on Boras

Like week I suggested that Scott Boras’s reputation is partly a function of his ability to attract clients, and that his success begets more success in attracting the best players. Today, Tyler Cowen offers his own reasons why Boras may be exceptional.

Here is a summary of his hypotheses.

1. The super-agent manages an otherwise incompetent or unruly player.
2. A super-agent, especially if he has repeat business with teams, may credibly certify the unobservable qualities of players, even star players.
3. Boras may be very good at marketing his players to management and getting owners to open up their pocketbooks.
4. If Boras represents multiple stars, clubs will be reluctant to cross him.
5. Robert suggests that some (non-super) agents may in fact be in league with the owners, not the players.

He also asks for other suggestions in the comments.

Is Scott Boras That Good of an Agent?

In Sunday’s AJC, Thomas Stinson profiles Scott Boras. The article provoked a thought that I have been having for some time: is Scott Boras really that much better than other sports agents? He is not bad at his job, but I’m not certain that he is really any better at negotiating than many other agents.

I’d love to do a study on this, but data on who represents whom in sports is too annoying for me to aggregate. But, after thinking about this, I suspect that Boras gets so much flack simply because he represents the top players in the game. Of course, his clients are going to get big salaries. His negotiation tactics are often reported to be shrewd, but what negotiation isn’t contentious? When I read about negotiations involving other agents, teams are often bitter with the other side.

I think the real difference with Boras is that he has built up a reputation that allows the best to be drawn to him. And he doesn’t seem to hide from the press. In fact, his best talent may not be negotiation, but in convincing players to hire him. And if I’m a player who has no idea what my talents will bring, having a familiar name with a reputation for snagging big contracts is going to be a big comfort.

I have also wondered if Boras offers players guaranteed minimums in order to get them to be his client. For example, he might say, “I know you will take $5 million, but this team will pay you $7 million. Let me play hardball, and I will give you $5 million myself if the contract falls through.” Over a period of time, if he wins out he wins enough to payback any losses he incurs.

Ichiro and Hafner: A Tale of Two Organizations

In The Baseball Economist, one of the things I do is examine how baseball franchises are managed. I examine how much value players bring versus how much the club pays out in salary. I then rate the organizations according to their performance on the field and the efficiency with which they purchased players. Cleveland (which will reportedly ink Travis Hafner to a four-year extension today) and Seattle (reportedly about to sign Ichiro Suzuki to a five-year deal) finished at the top and bottom of the American League in my rankings.

I believe the signings of these two players illustrates the differences in managerial skill between the two organizations. Using my method for valuing players in a given season, along with some rough adjustments for increases in player salaries, aging, and defensive value—this is not necessary for Hafner, who is primarily a DH—I’ve projected the dollar values that these players are worth over the course of their new contracts.

Hafner gets a $9 million raise for this season and next along with $48 million over the following four years. Analyzing the deal is a bit complicated since the Indians could have had Hafner for about $9 million over the next two years, but the deal is so good for the Tribe, it looks good no matter which way I slice it. Let’s just say the Indians get Hafner for four years at $57 million. From 2009–2012 I have Hafner worth about $87 million ($21.75 million per year); that’s an expected $30 million in value the Indians get that they don’t have to pay for.

Buying out free agent years in advance is a strategy the Indians are known for, and it usually pays off. Hafner gets security, while the organization can diversify its risk that the contract goes bad in many other ways (e.g., signing other players to similar deals). Yes, some long-term deals go bad, but if you sign several deals like this, the good and bad ought to cancel out. The team benefits from players taking less than their expected value in order to minimize risk.

Ichiro reportedly has agreed to sign a five-year, $90–100 million deal. Ichiro is particularly difficult to value because he is a good defensive player (I include only a rough value of defense), excels at stealing bases (something I don’t include in my model), and may generate revenue through his ties to Japan. I’ll go with what I have and acknowledge its weaknesses. Over the next five years I have Ichiro valued at about $80 million—$10–20 million less than his reported contract. But, acknowledging the potential problems with the estimate, let’s assume that the Mariners valued him properly and that he is a $20 million per year player. (I think kicking in $20 million is pretty generous.) At best the Mariners are getting what they pay for, at worst they are losing money.

Compared to what the Indians did with Hafner, this is an example of why the Indians excel and where the Mariners fail. Why wait until he is nearly a free agent and having a good first half (he’ll slip in the second)? If management considered Ichiro to be part of the future plan, why didn’t the organization lock him up a few years earlier and take advantage of risk averseness? That extra cash could be used to improve the team in other ways. This is part of the reason why I expect more success from the Indians than the Mariners in the next few years.

What Will A-Rod Get?

That was the question that Anthony McCarron of the NY Daily News asked me. Here is what I said.

J.C. Bradbury, a professor at Kennesaw State University and the author of “The Baseball Economist”, said an average annual value of $30 million “isn’t unreasonable.”

“I don’t envision him breaking $40 million, but somewhere in the mid-30s is probably his ceiling,” Bradbury said.

Where did that number come from? Using the method that I detail in The Baseball Economist (along with a modification to include defensive value), I calculated A-Rod’s potential contributions to team revenue over the next few years—as league salaries rise and his skills decline with age. In the end, I concluded that a five-year, $175 million contract ($35 million per season) was about right. I guess we’ll have to wait until the offseason to see what happens.

Business of Baseball Roundtable

I contributed to a baseball economics roundtable at Business of Baseball.

Here is the lineup and topics discussed.

* Andrew Zimbalist – Author of several books, including In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig and The Bottom Line: Observations and Arguments on the Sports Business, sports consultant and Robert A. Woods Professor of Economics at Smith College specializing in sports economics
* Rodney Fort – Author and Professor at Washington State University who has specialized in sports economics
* Roger Noll – Professor Emeritus of Economics, Stanford University
* Vince Gennaro – Author of Diamond Dollars: The Economics of Winning in Baseball
* JC Bradbury – Author of The Baseball Economist: The Real Game Exposed, and founder of the Sabernomics blog
* Nate Silver – Author, and Executive Vice-President of Baseball Prospectus
* Maury Brown – Former Co-Chair of SABR’s Business of Baseball committee, author for Baseball Prospectus, Founder and President of BizofBaseball.com

We’ll be talking five different topics:

* The latest CBA
* How regional sports networks impact MLB’s economic landscape
* The value of marquee players and the value of club brand
* Comments on whether MLB should implement a player payroll floor
* The panelist picks a topic of their liking

Thanks to Maury Brown for putting this together and asking me to participate. :-)

Deadspin on the Marlins

Yesterday, Deadspin ran its preview of the Florida Marlins. I enjoy reading Deadspin commentary, but I have to say I disagree with analysis of the organization by guest contributor Dan Lewis.

The moral of the story: The Marlins are probably going to suck, but could accidentally make the playoffs.

Lewis is involved with a lot of cool sports stuff on the net, but I think he’s underestimating the Marlins a bit. It’s possible that I’m misinterpreting his humor as actual digs at the Marlins, but I’ll use his commentary as my foil for today’s book promotion because I think discounting the Marlins is all too common. While we often hear about the ability of the Oakland A’s and Minnesota Twins to win on a small budget, the Marlins are rarely mentioned in the conversation.

When thinking about the Marlins organization, it’s easy to be distracted by their antagonistic relationship with the Miami community. I don’t admire this aspect of the franchise, but I am amazed at the efficiency with which the Marlins operate. In The Baseball Economist, I develop a organizational-rating method that reveals the Marlins as MLB’s best-managed franchise in baseball. Over the past four seasons the Marlins have won an average of 84 games with an average payroll of only $41 million, which is about 40% less than the MLB average payroll. Over this same period, this is 5 games more than Lewis’s beloved New York Mets, who averaged a payroll of $104 million—that’s about 40% more than the MLB average. Maybe the Mets should use their budget to target Marlins executives instead of free agents.

The moral of the story: the Marlins winning ways are no accident. This is a well-run organization that knows how to manage its resources. That this front office doesn’t get more attention for its excellence is surprising.

Advice for Adam

According to the AJC, Adam LaRoche has requested $3.7 million to play in 2007, while the Braves are offering $2.8 million. Should the sides not agree on a salary, the parties will have one of these offers selected by a panel of arbitrators following a hearing in February. Final offer arbitration requires that the panel choose one of these two offers.

LaRoche is entering arbitration at a good time. He just had a very good year during an offseason when salaries are rising. However, I think LaRoche has selected a number that gives him very little bargaining power. I think he should settle as soon as possible, and the Braves have little reason to do anything but wait until February.

I estimate that LaRoche generated $9.79 million in revenue last year Assuming that Adam’s 2007 is identical to his 2006 campaign, and that salaries escalate by 10%—as they have for the past 20 years—LaRoche will generate approximately $10.77 million. This is well above what Adam is even asking, but arbitration-eligible players usually earn far less than their worth on the free agent market.

Recent history indicates that arbitration-eligible hitters typically earn about 77% less than their gross marginal revenue products. For LaRoche this means a projected salary of about $2.5 million, and this number is based on some pretty rosy assumptions. Don’t think that the Braves don’t know this.

If I were Adam, I’d stay close to the phone and take the first compromise the Braves offer. The Braves have a strong case, and I see very little that could sway a panel to award him $3.7 million.

Addendum: I figured I should  look at the Braves other arbitration candidate, Oscar Villarreal, as well. Villarreal ought to be worth about $5.08 million in 2007 according to my estimates. Arbitration-eligible pitchers tend to get 78% less than their gross MRPs. This puts his projected salary at $1.12 million. He is asking for $1.3 million, the Braves are offering $860,000. Those are more reasonable offers for arbitrators to deliberate over, but I give a slight advantage to Oscar. However, his nickname “The Vulture” can’t help. ;-)

Moral Hazard and Free Agents

Keith Law of ESPN writes on how GM moral hazard may have contributed to the size, length, and structure of free agent contracts this offseason.

The problem is that the best way to keep a GM job when you know you’re in danger of losing it is to produce results in the short term, sometimes in the very short term. This idea of trading a dollar in the future for 10 cents in the present often manifests itself in moves like trading prospects or young players for “proven” veterans, signing well-known free agents whose name value exceeds their on-field value, and backloading deals to maximize disposable payroll in the current year without regard to the payroll consequences for future years.

Keith kindly asked me to comment on some potential ways that owners might try to limit this type of behavior.

Solving this problem is not easy, and it’s one that plagues owners of all kinds of businesses. Professor J.C. Bradbury of Kennesaw State University, the author of the upcoming book “The Baseball Economist” and the man behind the Sabernomics blog, points out how difficult it is to overcome the moral hazard issues inherent in the GM role:

“Whether it’s through tying bonuses to stock options or hiring outside auditors, it’s something that owners can only hope to mitigate, not solve. I wouldn’t be surprised if owners began to give bonuses that are good even if you’re fired. If you sign a free agent or draft a certain player who reaches a certain level, you get a share of that, whether you are with the team or not. This would encourage the GM to focus on the long-term.”

Some teams could choose to give their GMs ownership stakes, as Oakland has done with Billy Beane, but doing so also represents a much more firm commitment to the GM than most teams are willing to make.

Because it’s an Insider article I don’t want to quote too much, but Law discusses the specific clauses of several contracts that may be influenced by the win-now-or-be-fired attitude of some GMs.

How Much Is Too Much?

In today’s New York Times, Murray Chass expresses his feelings about free agent contracts signed during this offseason.

Matthews, at 32, is too old to be called a child, but he is a poster child for the latest economic excesses of the owners. Gil Meche is on the poster with Matthews, and there’s enough room on it to include a bunch of others as well.

The owners are out of control and, as usual, they have no one to blame but themselves….

Like workers in other industries, professional athletes should be able to earn as much as they can, with no artificial restraints, like payrolls caps, limiting their pay. Rock singers and rappers can do it. So can actors and television anchors. Why not athletes?

But in their desperation to add a lusty hitter or an effective pitcher, the owners lose all perspective and spend exorbitantly and foolishly.

So, my question to Chass is this: How much should Gary Matthews and the other players mentioned in the article—Gil Meche, Ted Lilly, Vicente Padilla, Jason Marquis, and Daisuke Matsuzaka—be paid? If you know that these contracts are too high, then you ought to know what the right contract is. So please, share that information with us.

I understand that these contracts are much higher than we’ve seen in recent history, and I can’t say that any of these contracts are optimal. However, MLB has experienced an increase in revenue growth, so the up-tick in salaries is expected. How much of a rise is a difficult question to answer; therefore, stating that these salaries are foolish, without any support for why, is a bit of a stretch.