Economies of baseball
Roger Clemens will make $1 million per game. Crunching the numbers shows he just may be worth it, says Fortune's Tim Arango.
NEW YORK (Fortune) -- The realm of baseball economics and the ways in which teams ascribe value to individual players has always been polarizing territory, dividing those who approach it with gut instinct and those who prefer to crunch numbers.
Michael Lewis' best-selling "Moneyball" -- the tale of how the Oakland Athletics is able to annually contend for the postseason despite the team's small-market status - altered the dynamic somewhat, but the debate within baseball circles endures. Economists, MBAs and consultants have flooded baseball front offices, but the old school way of thinking, which relies on experience and instincts rather than hard numbers, persists.
Into this fray steps Vince Gennaro, who retired from Pepsico to turn his hobby of analyzing baseball finances into a business. In the 1970s, Gennaro, who recently published "Diamond Dollars: The Economics of Winning in Baseball," was ahead of his time. As a graduate student at the University of Chicago (a choice owed to his affection for Milton Friedman) he jiggered a model to estimate a player's dollar value to a team. He got some interest - The Sporting News published an article and he got a meeting with Nolan Ryan's agent - but a cool reception from Major League Baseball. It was on to Pepsico.
Now, Gennaro advises the Cleveland Indians. "I just like having a seat at the table" in Major League Baseball, Gennaro said this week over lunch.
Two central questions that Gennaro and his ilk try to answer: What is the relationship between profits and winning? And how do you measure the impact of a particular player on revenue and profit? The latter data could be key for teams deciding which free agents to shower with big bucks.
Which brings us to Roger Clemens. With typical Yankees bluster, the team announced his signing last Sunday at Yankee Stadium by having the pitcher grab a microphone during the seventh inning stretch. When the numbers trickled out they were astonishing: a pro-rated salary of $28 million, amounting to $18.7 million for his abbreviated season. Break that down and you get $4.5 million a month and about $1 million per game started.
The deal elicited predictable outrage from some. A blogger on Google complained the Yankees are "destroying baseball through irrational spending." The New York Times proclaimed the Yankees were "paying dearly in desperation."
Sure it's a lot of money, but was it really irrational? Fortune asked Gennaro to apply his analysis to the Clemens deal, as if he had been advising the Yankees front office about whether or not to sign the pitcher.
Clemens will cost the Yankees $26.1 million this year - his salary of $18.7 million plus a $7.5 million tax the team will pay MLB for exceeding a certain salary threshold, the so-called luxury tax. Gennaro estimates that Clemens will add six wins to the team. The model is based on the assumption Clemens will perform as he has in the recent past - an admittedly iffy proposition for a soon-to-be 45-year-old pitcher.
Those six wins, by Gennaro's model, would catapult the team from a projected 90 wins to 96, a jump that could very well mean the difference between going home in October and going to the postseason. A 90-win team has just a 31 percent chance of going to the post season in the American League, while a 96-win team has an 81 percent shot.
In other words, the deal elevated the Yankees' chances of reaching the postseason this year by 50 percent. Still think the signing was irrational?
Gennaro's estimate of the revenue impact from signing Clemens is $24.1 million, factoring in things like ticket sales, concessions, television ratings, sponsorships and postseason revenue. This doesn't necessarily mean that an extra $24 million will flow in to the Yankees coffers from Clemens taking the mound, but Gennaro said, "the Yankees do stand to lose this much if they don't make the post season."
So Gennaro's estimated revenue boost is $2 million less than the cost of Clemens. But what this analysis does not consider is the added importance to the Yankees of making the postseason this year and next, as they prepare to open a new ballpark in 2009. How the team does now will impact how much the team can jack up ticket prices in the new stadium, Gennaro says, a factor that could add millions to the payoff for signing Clemens.
The Boston Red Sox were also vying for Clemens, and reportedly offered $8 million less than the Yankees. Gennaro's estimate of the impact Clemens would have had on the Red Sox is just 4 marginal wins (he would be replacing a better pitcher in Boston than he is in New York) and a $13.7 million revenue impact.
"Fans and sponsors will reward the Yankees with more dollars for the expected results of Clemens' contribution, than they would the Red Sox," Gennaro says. "The fact that the Yankees outbid the Red Sox is supported by the expected higher return on investment accruing to the Yankees."