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Eat The Rich (Part 1)by Colin WyersJanuary 08, 2009  I try not to be surprised when people tend to their own self-interests in the name of the greater good, so it did not exactly surprise me that someone worth over $1.5 billion thinks that the economic distress of people who are not in fact billionaires means that monopoly power should be used in order to keep his costs of labor down. (I never said I wouldn't be disgusted, just not surprised.) But the Mark Teixeira signing has a lot of people that aren't Drayton McLane pining after a salary cap, or at least some sort of brake on the enormous salaries we're seeing this offseason. Leave a little money for the little guy, huh? Love of the game and James Earl Jones voiceovers for everyone! The reality is that MLB is a business like any other, and if they end up with price controls on their main source of labor, it doesn't seem likely that they'll turn around and lower ticket prices out of the kindness of their hearts. It's a nifty little trick ownership has pulled, however; in a battle between millionaires and billionaires it seems everyone is ready to side with the billionaires. So let's go ahead and ask a question: How much is a baseball player worth to his team, in cold, hard coin of the realm? Logically, it would proceed that a player's value to his team—economically, at least—is tied up into how much additional revenue he brings in. There are three different sorts of revenue a team earns:
Our best source of publicly-available revenue data is currently the Forbes team financial estimates. I would be remiss if I didn't mention that there is some controversy surrounding the Forbes estimates, with MLB teams referring to them as utter fabrications. (It also should be noted that this was essentially the reaction from the US Congress to MLB's own published revenue figures.) In this instance, I'm chosing to stick with the Forbes numbers, mostly because it's all I have. (I also believe that Forbes is at least trying to be wholly truthful with their figures, which I'm not convinced is true regarding MLB's periodic disclosures.) For the years between 2002 and 2007, Forbes only breaks revenue down into two categories: gate receipts and other revenue, lumping our first two categories together. This is unfortunate, but again, we're at the mercy of the data we have. Taken alone, the Forbes data tells us little about how teams happen upon those revenues, so we want to add some data to the mix. For the time being, I've taken team performance data from the Baseball Databank, and mixed in population data from the U.S. Census. (Unfortunately, that means excluding Canadian teams.) Let's keep it simple to start with, and let's see how well population, win percentage, runs scored, and runs scored correlate with team revenue:
Population is, at least among those four figures, the single-biggest factor in determining how much revenue a team will make. This conclusion will probably be regarded as somewhat obvious, and so I won't belabor the point. Just looking at the figures real quick, though, and something pops out at you—and it may be regarded as obvious as well, but I'll go ahead and belabor this point as it seems to fly in the face of sabermetric orthodoxy: scoring runs seems to get you more money than preventing them, perhaps more than winning. I'm sure we've all heard the cliche "chicks dig the long ball," but it's another thing to see it carried out to three significant digits. Running a quick little linear regression, and it really drives the point home: from 2002-2007, a marginal run scored on offense was worth $231,480, and a marginal run saved on defense was worth $86,490. It's long been a point of contention that teams overvalue a player's offensive contributions relative to his defensive contributions. It's plausible, however, that teams aren't so much ignorant as responding to market conditions. So now let's extrapolate out from our regression to a year-by-year basis, using yearly revenue:
2008 and 2009 are estimated based upon an 8 percent inflation rate year-to-year. So if Tex is 50 batting runs above replacement level, then his salary value based upon his offense is roughly $16 million in 2009. Accounting for defense and position and you get to shave roughly $700,000 off that value. Why are the Yankees paying him $20 million for 2009, then? There are several things that are being missed in our simple model:
We'll examine those issues in Part II. References and Resources Thanks to Rodney Fort for his collection of the Forbes data. Population data comes from 2007 estimates from the US Census. Team data courtesy of the Baseball Databank. John Beamer looks at some of the problems with the Forbes numbers and provides some suggestions on how to better estimate a baseball team's finances. Colin Wyers knows exactly how much of a nerd he is. He is very interested in hearing about any other concerns you may have; you can reach him by e-mail, and he will try his best to respond in a timely fashion. He also blogs at Statistically Speaking. Commenting is not available in this weblog entry. Do you have a general question or comment for one of THT's writers? Send it in to our weekly mailbag We also welcome unsolicited op-ed pieces of approximately 500 words for consideration. We reserve the right to edit for length, clarity and consistency of style. Please include your whole name and location to be considered. If you have a comment about this specific article, please email the writer. Next Article: This annotated week in baseball history: Jan. 4 - Jan. 10, 2000>> <<Previous Article: Hall of Fame, Hall of Mirrors (Part 2) | |||||||||||||||||||||||||||||||||||||||||||||||
