Thursday, May 15, 2008

Baseball as a War of Attrition

(www.bluejayway.ca)

There is a new shift in the market taking place: more and more teams are locking up players over their arbitration years, often extending into free agency. For example, look at some of the recent signings teams have made (most of which for players who haven’t hit arbitration): Ryan Braun, Scott Kazmir, Evan Longoria, Aaron Hill, Alex Rios, Troy Tulowitzki, James Shields, Justin Upton, Chris Young, Hanley Ramirez, Ian Kinsler, Robinson Cano, Adam Wainwright, Curtis Granderson, and Brandon Phillips. There seems to be a divergence from free agent contracts, which have become very expensive, in part because baseball is awash in cash, and also because teams feel they may be one piece away from putting themselves over the top. Eighteen seems to be the new magic number to lock up star players, as most of the highest paid players hover around 18 million per year (+/- 1): Wells, Zito, Zambrano, Matsuzaka (incl. posting fee), Hunter, Lee, Jones, Ichiro, Soriano, Peavy, Cabrera, and Beltran. That of course excludes Santana and Rodriguez, who are both exceptional cases.

Thus, teams are trying to maximize their young superstar’s years before they hit free agency. What sort of affects will this have on team construction in the future? For one, so many young players locked up means fewer will hit free agency, and that may be part of the reason why the last few years have had such a dry crop of free agents. Second, teams are building up to be competitive for a long time, because they control the core of their young player’s contracts for a long time. Another advantage is that players tend to peak in their late 20’s, whereas many free agents are being signed for their decline years, in their 30’s.

Third, there will be more sunk cost contracts in the future. Tying up Scott Kazmir for potentially 4/$40 million is a potentially incredible steal. But if he blows his arm out, then they are looking at a $28 million loss (which is what is currently guaranteed). Fourth, it is smart to trade for prospects who are late bloomers and thus are not incorporated into their teams’ long-term plans, such as Carlos Quentin (who’s killing the ball in Chicago right now). If I were another GM, I’d be eyeing Adam Lind on the cheap right now. Conversely, teams should be wary of overvaluing a rookie who got off to a hot start. But if there is a consensus of positive evaluations from the scouts, then it is a safer bet to lock up a young star.

Some other nuances are worth noting. Even the arbitration process is not immune to inflation. Ryan Howard won an arbitration case this year for $10 million in his mere first year of arbitration. Since players make what comparable players make, there will be an increase in other arbitration salaries in the ensuing years. Nevertheless, it remains a fraction of what the inflation on the free agent market is worth. Second, I am predicting a more aggressive approach by teams to give out major league deals in the draft this year. For example, Jonathan Mayo of MLB.com predicts the Pirates (yes, that’s right, the Pirates) will draft Pedro Alvarez, since he is both the most expensive player they can get, and also, the best one.

Finally, where do the Jays stand? Marcum and McGowan are the front runners to be locked up long-term. They are both a bit on the older side, so perhaps a pitcher’s injury might be a bit less of a risk. As well, Travis Snider is a good candidate to start well in the majors and hopefully be a Jay masher for a long-time. But he’s still extremely young.

Wednesday, May 7, 2008

The Blue Jays Off the Field

(www.bluejayway.ca)

A recent article on THT (1) tackled the issue of how to increase the value of a baseball franchise. While we are all familiar with how the Jays are on the field, I thought it would be interesting to see how the Jays stand as a profitable franchise, and how that relates to fan experience.

The third variable the THT article tackles is “building success and payroll.” I will spend the least amount of time on this subject, because you can look no further than the forums to see ample discussion on how to make the Blue Jays a winning team. But the payroll is a nice transition into the first variable THT mentions, which is:

“Where is the revenue ceiling?”

In other words, is money being maximized? The payroll, which stands in the mid-90 million’s this year, is about 12th in MLB, whereas the recent Forbes team valuations (which are in a sense somewhat crude, but useable numbers) put the Jays 22nd overall in value, at $352 million. Revenues come in at $160 million, with $42 million of that coming from gate receipts. (2) So on the one hand, it would seem that Blue Jays ownership really cares about making a winning team.

Two other columns are of interest in the Forbes report. One is operating income, which is “earnings before tax, depreciation and amortization.” The Blue Jays lost $1.8 million last year in terms of cash flow. As THT says,

“Five years ago, 16 teams lost money. In 2007 only three teams--Blue Jays ($1.8 million), Red Sox ($19.1 million), Yankees ($47.3 million)--posted an operating loss. But even those losses are misleading. For the owners of the Yankees and Red Sox, the huge dividends they get from their unconsolidated cable networks more than make up for the teams' losses. Meanwhile Rogers Communications, which owns the Blue Jays, their stadium and the cable channel that televises its games, derives huge benefits from owning the Blue Jays not reflected on its team's P&L statement.”

In other words, the Jays are a huge promotional vehicle for the Rogers brand, saving tons of money in national advertising. The Jays have historically had a strong audience on TV, especially since Toronto is the 5th biggest city in North America, and has a national audience. (3) But this doesn’t have to affect the way the Jays market and over-advertise at the game. (“It’s time for the Rogers home phone to the bullpen.”) Rogers mere ownership of the team and station is giving it tons of free advertising on TV. I also found it interesting that in 2006, the Jays had one of the highest operating incomes, in the $30 million territory. I haven’t looked at that year’s valuations, but the 2006 valuations probably refer to the 2005 year, when the payroll was in the $50 million range still. Rogers decided to put that money in the green into player payroll.

Nonetheless, when you go to a game, it is apparent the Jays are throwing as many ads at you as possible. The Jays seem to be marketing to families and children, because the hard core fans will spend money either way, they believe, whereas if you hook a kid at a young age, you will hook them for life. Seems like a weird business model, considering business usually doesn't look down the road 20 or 30 years, but for maximization of profits right now.

The other column in the Forbes table is debt to value. (4) Debt to value basically “indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.” (5) The Jays are one of 3 teams to have a zero debt to value ratio, along with the Cubs and the Braves, who are both (surprise!) owned by publicly funded corporations. But if you look at these teams, one has been ultra competitive for years, and one has a fantastic atmosphere at the games, so the publicly-funded ownership angle really shouldn’t come into play as an excuse (though I can see it being the main argument for why the team shouldn’t sign Barry Bonds). As a result, it seems the Jays are being financed with a very anti-aggressive approach, a typically Canadian mark on an American game.

The second factor of increasing the value of a team is building a new stadium. New stadiums tend to bring in fans for the novelty, and estimates are that actual profit (which is over and above revenue) increases by at least $5 million per year in the first 3 years once the new stadium is built. (1) They are also often paid for in part by the government. I’d argue that now is the time to strike for a new stadium. In just a few years, the Rogers Centre will be one of the oldest stadiums in baseball, in which you can count on one hand. With the new developments on the Toronto waterfront, and the Toronto Bills playing 8 games over the next 5 or so years, now is the perfect time. Engineers could design a stadium with a lakeshore or city view, a dome for the weather, and natural grass. The horrible artificial turf is going extinct, only being used by a handful of stadiums now. However, the recent upgrades in the Rogers Centre tell me that the stadium may be around for a few more years. Especially because “the Jays have been one of baseball’s biggest revenue-sharing receivers in recent years because they are permitted to deduct their hefty stadium expenses from revenues in the league's revenue-sharing formula.” (2)

Toronto is I believe the 5th biggest city in North America, and has the only baseball team in Canada. Even if this is a hockey town, it has a good sports market. The city itself is great, for example being ranked 4th in terms of neighbourhood on the SI.com stadium rankings. (6) That's right no stickups when you go to see a Blue Jays game. La-dee-da. (But this is why I don't understand why JP Ricciardi says free agents are hard to get to come here. Now that the dollar is back up, the only thing is the weather, but that's the case in a lot of cities. Also, I don't really buy the argument that free agents come here for any special reason other than they were all paid top dollar to, or that they hate Tony LaRussa.) Atmosphere is 26th, and on a side note, food is 27th (seriously, did they get their menus from a convenience store?). There’s no reason why the Jays can't be the Yankees of the next decade. If it were me, I’d turn things on its head from a business standpoint. Build a new stadium, and start improving fan experience. Stop the barrage of ads and gimmicky promotions to bring in and breed fair-weather fans in the stadium. If they are having fun at the game, then that will really hook the youngsters.

Things can be improved on the field as well. In part, the bigger following of the Jays in recent years is from signing bigger names. But these are expensive free agents that give marginal wins, which are not enough to put this team over the top. So, I’d knock down the major league payroll by $10 million, and pour that into drafting and development. In other words, I’d splurge on the Rick Porcello’s of the world, as the Detroit Tigers just did, who are in a smaller city, with no better attendances than the Jays before they got their new park and GM.

As well, only a small portion of revenue sharing is part of the commissioner’s discretionary fund, which he sees fit to distribute. For example, years ago the Jays received a couple of extra million in equalization payments for the weak Canadian dollar. I doubt that they currently still receive it. Otherwise, the Jays aren’t in Bud’s pocket any more than any other team, and if anything, they are being good owners by spending their revenue sharing money on team payroll, instead of pocketing it like the Marlins. When all is said and done, baseball is a sport about winning, so toeing the company line when great opportunities present themselves to win (ie: drafting over slot) should be taken, especially when your very own rivals are doing it (Yankees and Tigers).

There is relatively good parity in baseball, but the Jays are unfortunate enough to be in the one division that is uber-rich and uber-smart. Baseball is not going to change and make an expanded playoff system just for them. So it’s up to the Jays to bring success to themselves, and make their business strategy a bit more aggressive.

References
(1) http://www.hardballtimes.com/main/article/how-can-gms-increase-the-value-of-their-franchise/
(2) http://www.forbes.com/lists/2008/33/biz_baseball08_The-Business-Of-Baseball_Rank.html?boxes=custom
(3) The stats are pending, as the THT writer forgot to put in one team in this section of the article, being the Blue Jays. I may update this if the information gets emailed to me.
(4) I also want to bring up an interlude here. I don’t have a business background, generally being an artsy person in school (but I was good at math!). I may be wrong here and there, but the general purpose of these articles is to spur on discussion on the Jays. So feel free to discuss on the forums what you will, and point out any business details I may have messed up.
(5) http://www.investopedia.com/terms/d/debtequityratio.asp
(6) http://sportsillustrated.cnn.com/baseball/mlb/specials/fansurvey/2008/index.html?eref=T1

The Best Names in Baseball History

(http://www.bluejayway.ca/)

Baseball is as much about its tradition as it is about the sport. For generations, it has attracted the weirdest, and most typically baseball names. Why is this information useful? It’s not! But I’m going to write about it anyway! Actually, if you ever need to make a chant, or you don’t know who to draft in the last round of your fantasy draft, then it always helps to know some good baseball names. So, without further adieu, here is a list of some of the best Blue Jay, and non-Blue Jay names in the history of the game.

Toronto Blue Jays:
Unintimidating names

Phil Roof
Dennis Lamp
Bob File
Robert Person (these last 4 names are the least scary names…ever)
Lance Painter
Cliff Politte
Pedro Swann

Won’t fit on the back of the jersey names

Lee Gronkiewicz (this category should be named after him)
Mark Rzepczynski (probably the hardest name I’ve ever seen)

Intimidating names

Butch Edge (sounds pretty dangerous)
Tom Lawless
Ron and Jeff Musselman
Mark Bomback

Throwback names

Willie Upshaw
Hosken Powell
Mickey Klutts (Look me straight in the eye, and tell me this isn’t David Eckstein’s long lost father).
Doyle Alexander
Bud Black
Huck Flener
Tanyon Sturtze

Funny names

Mookie Wilson (makes a great chant)
Mauro Gozzo (is this guy asking for some gauze in another language?)
Howard Battle (Battle could have been intimidating, if it wasn’t accompanied by the least threatening first name ever)
Tim Crabtree
Tilson Brito
Ben van Ryn (points for uniqueness)
Homer Bush
Geronimo Berroa
Buck Coats
Marco Scutaro (MARCO???)
Alfredo Griffin
Candy Maldonado

Non-Blue Jays:
Unintimidating names

Taylor Teagarden (okay, we may have two things that are less threatening than lamp and roof)
Johnny Wockenfuss
Rocky Roquet (wasn’t this a name of a doll for girls?)

The Lee Gronkiewicz award

Tim Spooneybarger (played in a rock band called Mad Ink with A.J. Burnett in Florida)

Intimidating names

Antonio Bastardo and Alberto Bastardo (both are playing in the minor leagues right now, and no, they aren’t related, we think)

Throwback names

Lance Broadway
Catfish Hunter
Rollie Fingers
T.J. Beam
Baron Frost
Winter Polo (a personal favourite)
Houston Summers
Dusty Napoleon
Al Alburquerque
Zelous Wheeler

Funny names

Callix Crabbe
Rocky Cherry (an alcoholic beverage needs to be named after this guy)
Benito Beato (I get heartburn just thinking of this guy’s name)
Rowdy Hardy (I think he wrestled in the WWF in 1990)
Jetsy Extrano (I was going to put this in the throwback names category, but it sounds too futuristic)
Tobi Stoner (must have been friends with…)
Jung Bong
Kosuke Fukudome (If you went to a Cubs game, you’ll know why Cub fans hate the Rogers Centre)
Duane Below (LOOK OUT!)
Noochie Varner
Mayobanex Acosta
Sugar Ray Marimon
Mark Hamburger
Gonzalo Gonzalez
Pete Lacock (sorry, these last 4 had to be put in here somewhere)
Dick Cox
JJ Putz
Jorge Poo Tang

And…..the top 5 baseball names of all time

5. Rusty Kuntz (it’s pronounced koonts)
4. Wonderful Terrific Monds III (this was a college player who never made it to the big leagues. Extra points for being “the third.”)
3. Cirilo Cumberpatch (points for its absurdness)
2. Urban Shocker (enough said. You don’t mess with this guy)
1. Billy Jo Robidoux (Remember that Simpsons episode, where another Homer walked into Moe’s bar, and said it was Joey Jo-Jo Juniour Shabadoo? Well any name that sounds like that one has to be the best name in baseball history)