Comparing the Revenue and Profit Effects of Winning and Having a Star Player for a Major League Baseball Team
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Comparing the Revenue and Profit Effects of Winning and Having a Star Player for a Major League Baseball Team Haverford College Economics Department Thesis Advisor: Anne Preston 2006 By Jon Kelman 1 Abstract This thesis studies the revenue and profit effects of winning and having a star player for Major League Baseball (MLB) teams over the period of 2000-2004. Regression analysis is used to determine the revenue and expenditure effects of having a star player and winning; the two are then compared to gauge profits. The analysis also attempts to find the value of stars and winning for teams from different sized cities, as well as the marginal revenue product of star players as the number of stars on a team increases. The findings are used to determine the best financial strategies for MLB teams. 2 Table of Contents Introduction………………………………………………………………….....5 Previous Research……………………………………………………………...7 Dependent Variables……………………………………………………….....14 Independent Variables………………………………………………………..17 Revenue Findings……………………………………………………………..24 Effect of City Size on Revenue……………………………………………….32 Marginal Revenue Product of a Star………………………………………….36 Expenditures and Profits from Star Players and Winning…………………....41 City Population Effects on Expenditures for Star Players and Winning……..45 Marginal Expenditures for Star Players………………………………………51 Summary of Findings…………………………………………………………54 Team Strategy Implications…………………………………………………..56 Bibliography……………………………………………………………….....58 3 I firstly want to thank my parents for their amazing support in all of life’s endeavors. I also would like to acknowledge the kind people at ‘Baseball Prospectus’ who helped me obtain most of my data, and my thesis advisor Anne Preston, who is always helpful and graciously dealt with my numerous last-minute meetings. 4 Introduction It is often forgotten that all major professional sports teams are businesses. Although there are owners who use their team for leisure purposes, perquisites, political power, and tax sheltering, the goal of most professional sports teams is to maximize profits. One would think that the most obvious way to maximize revenues is to field a winning team, but winning teams can be very costly, and thus do not necessarily maximize profits despite maximizing revenues. A team can be unsuccessful in winning, but very successful as a business. An example is the Los Angeles Clippers of the National Basketball Association (NBA); the Clippers are known as the least successful franchise in major professional sports. The team has never won an NBA championship, and is almost always near the bottom of the league in winning percentage. The team’s lack of success is no accident, however, as the owner strives to make profits at the expense of winning. By playing in a large market, the Clippers are able to attract fans despite their lack of success. The owner of the team, Donald Sterling, recognizes the situation and thus seeks to minimize payroll to reduce costs. The team is known to earn over $10 million in profits annually, a substantial figure for an NBA franchise. The financial success of the Clippers indicates that factors other than winning can drive revenues. The primary sources of revenue for a professional sports team are game attendance, media (television and radio) contracts, sponsorships, concessions (all purchases within a stadium, including food, beverage, and parking), and merchandise (team memorabilia purchased outside of the stadium). Concessions and attendance are inexorably linked, as are sponsorships, media contracts, and attendance. These revenue sources depend on several factors, including team success, geographic location, and team facilities such as a new stadium. For example, a large part of the Clippers financial success stems from their location in Los Angeles. Teams from 5 larger cities have a larger fan base to draw attendance from, and also have larger television audiences. Interestingly, the Clippers are not the only NBA team in Los Angeles, yet are still able to attract more fans than a smaller market team that wins more games. Teams with new stadiums have also shown increased attendance for a few years after the stadium is built (approximately five years in Major League Baseball). Teams from larger cities are more able to field winning teams and build new stadiums, however, so it is difficult for teams from smaller cities to compete. Another source of revenue for a professional sports team may be having a ‘star’ player (a star player being one with great skill or popularity). A star player can result in improved competitive success; a winning team can market itself as successful, whereas a losing team has much more limited marketing opportunities. A star player can also give the team a marketing platform regardless of team success; that player will become ‘the face of the team’ and be featured on every team publication and printed item, as well as all advertisements. Not only will a star player draw more attention to a team, and thus cause higher attendance, greater concession sales, larger media contracts, more sponsorships, and will significantly boost merchandise sales. The value of a star that extends beyond his contribution to winning must be measurable, but what is the value of a star player? The central problem with this specific question is that star players are generally on winning teams. Not only do winning teams create star players by giving the player more fan and media exposure, but star players are also better players, and thus help their teams win. In Major League Baseball (MLB), there has been research performed within the past decade that has tried to measure the exact athletic value of each player. Whereas the exact value of a player in a dynamic team sport such as the NBA is seemingly impossible to measure, the value of an MLB 6 player is estimable as is the degree of responsibility for the team’s success. The potential for star players to have value beyond their contribution to team success leads to the question of what is the value of a star player beyond contributions to team success in relation to the value of winning? The study will have great implications for MLB, as it can be used to judge player personnel decisions and overall front-office philosophies. Previous Research Previous research has generally neglected to value the revenue impacts of individual players. The only author performing any work on the specific topic is Nate Silver, a writer for Baseball Prospectus. Silver has written multiple articles trying to evaluate an individual player’s revenue value by finding how many games he causes a team to win, and then translating those wins into revenue gains. In his series of articles for Baseball Prosepectus “Lies Damned Lies”, Silver (2005b) details the positive revenue effects of the Florida Marlins trading away most of their highest paid players in an effort to increase profits during this past/current season. Although fans are frustrated that their team is essentially committed to being a losing team next season, Silver finds that selling talent was in the best interest of the Marlins organization. His basic premise is that the marginal value of a few more wins that are brought by a star player are not cost effective to a team that will not make have a significant chance of making the playoffs or winning a championship. The Marlins situation is very similar to that of the Los Angeles Clippers, who also do not stand to gain from building a more competitive team. Another piece by Silver (2005a) from his series “Lies Damned Lies” studies the value of MLB free agents from the 2005 off-season in relation to the contracts they received. Silver uses two measures developed by ‘Baseball Prospectus’ (2006), Value Over Replacement Player (VORP) ratings, 7 and a system called PECOTA, which projects future player performance. ‘Baseball Prospectus’ (2006) defines VORP as ‘a statistical measure of the number of runs contributed by a player beyond what a replacement-level player at the same position would contribute if given the same percentage of team plate appearances; VORP scores do not consider the quality of a player's defense’. VORP ratings are similar to Wins Above Replacement Player (WARP), which translates the runs into wins. The PECOTA rating system uses a number of factors to predict player performance on a yearly basis, including VORP. Simply, player performance is predicted by comparison to past players who had similar profiles. Silver’s article takes the first step toward evaluating an individual player’s total value by determining the number of a wins a player is worth and how much money a win is worth. Silver, however, does not discuss the fact that wins can be worth different amounts to different teams, nor the marketing value of players beyond contributions to team success. He notes at the end of the article that teams are paying $2.14 million per win, which may mean that all players are being overpaid in that free agent class. Silver’s (2006) most recent article, “Is Alex Rodriguez Overpaid” is the most interesting. Silver uses the revenue figures obtained from the Cleveland Indians 1997 season, when the team went public for a year and thus released detailed financial records, as well as financial data from all MLB teams during 1997-2004. Silver uses the data to find the revenue from marginal wins, and in his ‘Linear Model’ finds one win to be worth $1.196 million. By using WARP, he is able to find the revenue added by the wins created by the player. Silver also creates a ‘Market-Price Model’ and ‘Two-Tiered Model’. The ‘Market Price Model’ finds the value of one win by using the salary paid in the free agent market, and the ‘Two-Tiered Model’ improves upon the ‘Linear Model’ by accounting for each additional win’s value in increasing the likelihood of a playoff 8 appearance.