Sunday, October 28, 2012

Chasing the Money on a Lazy Sunday

As you’re sitting down with your morning cup of coffee to enjoy this Lazy Sunday, I am currently walking around downtown Washington D.C. with approximately 100,000 of my closest friends, hoping to spot one person in a crowd of 30,000. Why you ask? Well, my 55-year old father is running the Marine Corps Marathon, his first effort at the famed 26.2 mile distance. He’s run a half-marathon before and was up over 20 miles in training, so he expects to finish and finish well. Meanwhile, I spent my “training” period plotting the best way to smuggle a 6-pack of Great Lakes into the city without being noticed. So while I’m feeling extremely lazy this morning watching the old man run farther in 3+ hrs than I’ve run in the last month, I also feel extremely proud. With that said, let’s get to what you really came here for today, and that’s the goings on in and around the Indians this past week…

Like it or not, much of the Indians-related discussion from the fanbase this time of year revolves around the club’s payroll and what pieces might be added in the offseason. As usual, the Indians project to be much more active on the trade front than in free agency due to budget limitations, even with a significant chunk of change coming off the books this winter. Revenue sharing only goes so far, and reports that the LA Dodgers have found a loophole in the system which could generate upwards of $100 million per year in unshared dollars for the franchise that was just purchased for $2.15 billion. The loophole lies within the creation of a regional sports network (RSN) similar to YES, NESN and yes, STO, that the club would decide how to distribute the equity gained from the club-owned RSN. YES and NESN generate hundreds of millions of dollars per season in subscriber fees for their respective teams, even if that’s not reported as actual baseball revenue. STO lags well behind these networks due to the sheer number of subscribers, something that’s not going to change anytime soon. Baseball Prospectus’ Maury Brown breaks it down here far better than I can:
This is a real issue, not only in terms of the Dodgers but others as well. After all, the capacity to really make club-owned RSNs work means a combination of a large market and, more often than not, a storied franchise. Alone, these two things already give a club advantages over smaller market teams. The club-owned “loophole” just adds to it. League officials would never say as much, but if you could get them alone in a room, it’s possible that even they see the flaw.
Focus on this out of the Bloomberg piece: the Dodgers are going to pay revenue-sharing on every penny that comes into their coffers through media rights. They wouldn’t, however, have to pay revenue-sharing on any equity should they start an RSN with a partner such as FOX or TWC. Consider this “proliferation”—another big-market, storied franchise being able to move money from one hand to the other. After all, the Yankees and Red Sox have been doing it for years.
So while the Indians will be collecting significant dollars through MLB’s revenue sharing program, those dollars go to every team around baseball. Meanwhile, “storied franchises” in “large markets” will continue to exploit a growing loophole around these revenue sharing agreements, further widening the gap between the haves and have nots around the game of baseball.In a later article, Brown breaks down the payrolls around baseball and discusses how much of an advantage a big payroll really is. He comes to a similar conclusion that has been alluded to in this space by both Paulie and myself in the past; money helps cover up mistakes, but does not in and of itself assure success.
What money really gives you is flexibility. It allows you a greater chance of being competitive now and sustaining that competitiveness in subsequent years.
The problem has always been the ability of each of the 30 clubs to have a steady flow of revenues to work from. Yes, everyone is pulling in record revenues, but not all at the same rate. The key is "cost certainty." Clubs that have generational fan bases—Yankees, Red Sox, Phillies, Cubs, etc.—will, for the most part, generate a fairly steady flow of ticket revenues. When you throw in media rights (see recent television deals for the Rangers, Angels, and soon the Dodgers), it becomes a formidable force that the likes of Tampa Bay, Pittsburgh, and Kansas City can’t compete with. Those teams have to rely on the draft process, and certainly the Rays have shown that you can actually be competitive for more than a season or two under these constraints, but it isn’t easy and it’s not something to expect from every club. A club has to be smart. A club has to be positioned to spend when it can spend. And for heaven's sake, a club can’t be in a lengthy rebuilding process to do it. In other words, if a club is in the cycle, it can’t make too many mistakes that inhibit its ability to spend what little it may have available in the free agency space when the opportunity presents itself.
Cost certainty is a theme that’s been pushed by the Indians front office since the negotiations with C.C. Sabathia. It’s a theme that was re-enforced after the Hafner contract, and as you’ll see later in this article, it’s a theme that the club continues to stress to this day. It’s something that the Indians just don’t have, because they have neither a large generational fan base nor significant dollars flowing in from media rights. And when you compare the Indians to some of the teams that have both of those inherent advantages, it helps illustrate why the team simply can’t compete in the free agent market. It puts the onus squarely on amateur talent acquisition, and all but requires the team to be leaders in the international market as well as the Rule 4 draft.

ESPN’s Jim Bowden takes a predictably broad look at “how theTigers were built,” focusing on five key personnel moves that helped the Motor City Kittes to the World Series. What’s really interesting is that the Tigers, who are one of the few teams around baseball who are deficit spending and there are some truly special circumstances there, are not a team built on free agency. Prince Fielder was one of the few Tigers contributing to this year’s team who was acquired via free agency. The other four moves Bowden discusses are either shrewd trades or draft picks (Verlander). Now, the Tigers were fortunate that Verlander “fell” to the #2 pick in the draft back in 2004, but still give them credit for making the right pick. The move that really sticks out for me is the trade that netted the Tigers Doug Fister. The Indians of course made a deal for a starting pitcher at that time as well, dealing more than the Tigers gave up for a pitcher who has performed far, far worse than Fister since he made his way to Detroit. The Fister deal is the type of trade the Indians used to make with Seattle. Instead, Ubaldo made his way to the North Shore at the cost of the Indians top two pitching prospects. Pomeranz and White aren’t exactly setting the world on fire out in Colorado just yet, but the reality is that those were the Indians top two trade chips at the time, and there’s nothing to show for them. I agree with the premise behind the Ubaldo deal, as the Indians had a chance to make a push for the playoffs and needed an ace. But the execution was beyond terrible, as the team acquired a player who was and remains broken, for whatever reason(s).  

Getting away from the business side of things and more to the scouting side for a bit, both Let’s Go Tribe and Baseball Prospectus published great articles looking at the Indians Carlos Santana. LGT has been cranking out their usual outstanding postseason looks at the Indians roster, and all of them are well worth your time if you haven’t been keeping up. But being the catcher honk I am, I’ll focus on the Santana piece. They compare Santana’s ugly 1st half of the season with his outstanding 2nd half, pointing out that he tweaked his approach and began making much more productive contact when the rest of the lineup was doing much the opposite down the stretch. Jorge Arangure Jr. from Baseball Prospectus follows on with an outstanding piece on how Dominican-born players are brought up prior to signingcontracts with major league clubs, focusing on how Santana’s selectiveness at the plate is much more the exception than the rule. It’s a great article for any coach or young player to read, and I’d encourage you to read the entire piece and not just the parts pertaining to young Carlos.

Most of you have likely already seen it by now, but FoxSports Ohio’s Pat McManamon published a long interview with Indians team president Mark Shapiro on Thursday. The whole thing really is worth a detailed read, but I’m going to skip the questions about Shapiro’s childhood as an Orioles fan here and post some excerpts that I think you’ll find particularly interesting. First, in an exchange about the Indians teams from the mid-90’s and how those teams were constructed in a radically different economic reality than the Indians are facing today, Shapiro provides some enlightening but depressing notes on attendance and just how much ticket revenues actually drive spending (bold for my emphasis):

That was a decade and a half ago, really. Fifteen years. Do you think people, the general populace still judges in those terms?

A: I think it frames that very guttural reaction, like, "Hey, if you win it's already been shown people will come." That's what you hear all the time.

Q: Do you believe that?

A: I think more people will come. But the challenge is 2.2 million instead of 1.6 million doesn't change the way we operate. Even that extra 500,000, 600,000 people, even if that's $10-to-15 more million in revenue a year . . . one win in free agency is $9 million. So you're not going to change the context. Again, I don't think people want to intellectualize baseball, and I don't believe you should have to intellectualize baseball . . . and we've made a conscious decision in most of our interviews not to get into these topics and just stay positive and talk about what our aspirations are.

But that revenue swing between 1.5 million in attendance and 2.2 million in attendance . . . meaningful dollars but not dollars that will have us plan dramatically different.

Q: It wouldn't change the amount of money spent?

A: It would change the amount of spent to 15 million dollars a year. What does that buy you in free agency? Very little. One and a half wins.

Q: How is that figure determined?

A: Our analysts can put a value on what it costs in free agency to sign a player and what that means in Wins Above Replacement and what those players end up costing in free agency and that changes every year. They measure all the players signed in free agency and what their history has been and what they offer going forward and they place a value. The challenge in free agency is you're often paying for that in the first year of a contract, and in the out years of a contract the players WAR usually goes down because he's usually past his prime. So it becomes a less efficient contract over time. That's why free agency is never the best way to build. It's a good way to supplement but not build.

The Indians drew approximately 1.6 million fans last season. The last time they drew over 2 million was back in 2008, on the heels of 2007’s ALCS collapse. But as Shapiro details, even if the Indians win, and even if that winning translates to a 30-40% increase in ticket sales, that does not give the club resources for a spending bonanza. And I don’t think many of us are predicting a significant bump in attendance next year, let alone another 30%. If and when that attendance bump does occur, it provides revenue to augment the existing roster in the season after the increase in ticket sales, much like we saw in 2008 with the signing of free agent closer Kerry Wood. But it’s never going to result in the club becoming a significant player in the free agent market. By definition, free agents are usually paid more than they are worth because of the bidding process on the open market. Because of that, one bad deal (see Hafner, Travis) can really destroy any ability a club like the Indians has to augment the roster with even medium-sized pieces. And even a deal that’s “fair” when it is signed will generally become an albatross by the end of the deal, which is why the Indians were so reluctant to offer Josh Willingham a third year in free agency. Speaking of Willingham, Shapiro talks about him as well:

Q: This is the hot guy and the topic now, so I'll admit that. But a guy like (Josh) Willingham. Did he over-perform what you expected?

A: Yeah, he had the best year of his career, so he over-performed what anyone expected him to do this year (2012).

Q: You couldn't know because it was a unique year, but had you guessed that would you have been more willing to . . .

A: Well we offered him more than he signed for. We just didn't offer three years.

Q: And what was the thinking in not offering the three years?

A: Just our adversity to risk, probably. Our understanding of what a poor performing contract can do to our ability to operate and maneuver.

That understanding was earned the hard way, through the free agent signings of Hafner and Westbrook, two guys who promptly went out and hurt themselves significantly after signing their guaranteed contracts. Not to beat the free agent horse to death, but there’s one more section of the interview that I found particularly illuminating with respect to how this front office is going to operate for the foreseeable future:

Q: From my point of view the perception that the team may be fighting is created as much by trading Cy Young winners two years in a row. That generates feelings of, "Geez they can't keep these guys, they can't compete." More so than almost the ‘90s thing

A: We're not going to be able to sign these guys to extensions. We're not trying to hide from that. That creates circumstances where we have to make decisions about when the right juncture is to either let them walk away or to trade them. It doesn't mean we won't continue to try to sign guys. Periodically it doesn't mean that occasionally we won't be able to do it. It's going to take always some sharing of the risk and some desire for a guy to want to be here and placing a premium on that. If a guy places a premium on wanting to be here and we feel it's the right kind of guy, it's still a possibility. But as a general premise when guys reach free agent years it's going to be a challenge. We're not running from that. We're going to have him for six years at a minimum, maybe longer, and we have to have more talent coming up.

As soon as a player makes it to the corner of Carnegie and Ontario, that clock starts ticking. The club has a 1-3 year window to make a decision on whether or not they want to try and buy out a player’s arbitration years, usually with a year or three of free agency as well. But if that doesn’t happen, and if the player develops into the star everyone wants him to be, the Indians are going to have to trade or lose the player to free agency. That is a harsh admission for the team president to make, and it’s a difficult reality for most fans to accept. It really drives home the “cheering for laundry” philosophy, and that hurts fans attachment to the players and the organization, which in turn lowers revenue from ticket and merchandise sales which makes it less likely for the organization to be able to keep the next free agent. It’s a vicious circle, one that I just don’t see changing without radical alterations in revenue sharing and/or the implementation of a salary cap. Also, it's tough to read that response without thinking about one S.S. Choo, who may not be long for this organization as the Boras client is all but assured to "test the waters" in free agency.

Moving on from free agency, the interview looks at talent acquisition in both the trade market, international signings and of course the amateur draft:

Q: Are you satisfied with the way player evaluation has gone, for the past five years, let's say.

A: You know, the context for evaluating those things is very difficult. It's very hard to do in one moment in time. You've almost got to take a business look. And you can't ask that question so broadly.

For example, I think the last three years, our drafts based on the expected value of our picks have been very good. The prior five to six years before that, certainly we did not have good drafts. And we're suffering for that now to some extent.

Yet you evaluate our trades compared to other trades, we were very successful in our trades. Among the more successful teams. Internationally we've done well.

We need to do very well on every side of player acquisition. We can't do well in two out of three.

I think we've made adjustments to the way we draft, the way we strategize. And I think we've had more successful drafts the last three years. If our drafts continue to be as successful and productive and we get players from those drafts playing in the big leagues as quick as the guys we have right now contributing, and we continue to do that, then we'll be in much better shape going forward.

Shapiro’s assessment that the team’s Rule 4 drafts were pretty bad, but have picked up in the past three years pretty much mirrors the assessment that I put forth back in August. I think that the club did a terrible job acquiring amateur talent when Doug Mirabelli ran the show, and think they’ve done a much, much better job since Brad Grant took over. Unfortunately, even as the drafts were getting better, the trades were getting worse. Instead of flipping less-significant pieces for major building blocks (Benuardo for Choo and Asdrubal, Blake for Santana etc), the club got less than full value for two Cy Young Award winners, and then of course made the well-intentioned but ill-fated Ubaldo Jiminez deal. As Shapiro himself says (and it bears repeating), “We need to do very well on every side of player acquisition. We can't do well in two out of three.” Also significant is the number Shapiro used…three. As he sees it, there are only three real options for player acquisition, and one of them is not free agency.

Much as we started on a personal note, I’m going to close on one as well. I have a late-Sunday night flight out of DC to London-Heathrow where I will spend the next 3 or so weeks on a work trip. I’d like to promise you a Lazy Sunday for those three weeks, but the facts are I just don’t know how much free time I’m going to have to write. So while I’ll do my best to get something up every week, there’s a possibility that one or more of those Sundays won’t have the usual post. Please stick with me either way, as I’ll be back in mid-November and be on a much more regular schedule at that time. And if there’s anything I can pick up for you in the UK, drop me a line!


Jeff said...

Thanks for the great read...the Shaprio comments can be tough to read, but in an odd way I find them strangely calming. I always appreciate an honest approach to the problems/challenges in a situation, and I think Shaprio is now doing his best to be as transparant as he possibly can be to the fanbase (even if we don't necessarily want to hear it).

Al Ciammaichella said...

Thanks Jeff! I agree. There are some hard truths in there, but I much prefer the honesty and transparency.

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