March 4, 2010

Squawking Baseball

LA Story

by Shawn Hoffman

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Did you hear? The Dodgers are getting cheap. Really cheap. By 2018, they'll be spending less than the Royals on payroll, all while pocketing about $300 million in profit. If the team doesn't do well, so be it—people will come to the games anyway, because in the history of sports (and particularly in Los Angeles, where there's little else to do), there's nothing that fans enjoy more than a rich team that doesn't spend.

Now back to reality, where the only thing more ridiculous than that scenario is that the LA newspapers actually seem to think it's plausible.

Here's the quick back story: last week, Jamie McCourt included some documents in a court filing that detailed a pitch the Dodgers made to some Chinese investors that would have resulted in a wide-ranging partnership, including the Dodgers, a Chinese soccer team, and an English Premier League team. Within that pitch were some financial projections going as far out as 2018, when, supposedly, the Dodgers plan on spending $125 million on player payroll—or about $7 million less than they did last year. This despite anticipated revenue growth of over 80 percent between now and then.

Before I get into all the ways that those numbers are preposterous, let's first look at some interesting things that we actually did learn from these documents:

• The Dodgers spent $128 million on player compensation in 2007, and $123 million in 2008. These figures were supposedly 46 and 42 percent of annual revenues, respectively. Doing some quick math, that means the Dodgers pulled in $278 million and $293 million the last two seasons. (For what it's worth, Forbes had them at $224 million and $241 million in those years. If the Dodgers' figures are pre-revenue sharing, and Forbes's are post-revenue sharing, it's possible that their estimates are at least somewhat close.)

• The Dodgers' average ticket price was $29.40 in 2007. They sold 3.86 million tickets, meaning ticket sales accounted for about $113 million, or 41 percent of that year's total revenue. Forbes had their gate receipts at $103 million, and total MLB gate receipts at 36 percent of the teams' revenue.

• We know that the Dodgers' attendance declined by about 130,000 from '07 to '08, which, if ticket prices were held constant, would have resulted in a loss of about $3.8 million. And yet, revenue was actually up for 2008, which means that if everything else stayed constant, the team made somewhere around $20 million during their playoff run that season. (The Dodgers didn't make it in '07, but went to the NLCS in '08.) Don't take that estimate too seriously though, as we have no idea how their other businesses did in those years.

• The Dodgers modeled in a $53.50 average ticket price in 2018, which, assuming four million in attendance, results in $214 million in gate receipts. That's 40 percent of their projected $529 million, or about the same as it was in 2007—meaning they expect all of their other businesses, including MLB's central fund, to grow at the same 80-percent rate.

Now, on to the ridiculous parts. Based on their "projections," the Dodgers will be spending 25 percent of their revenue on payroll in 2018. For comparison's sake, that's about what the Marlins have been spending lately, based on Forbes's estimates. Not only would they get absolutely destroyed for this politically, it doesn't even make economic sense; there's a reason teams generally spend about half of their revenues on major-league players, instead of just cutting costs and pocketing whatever they can. There are huge rewards for fielding a competitive team, both in terms of operating profits and franchise value, particularly in a market like LA.

That's why you see so few teams keeping their payroll constant over a long period of time. In the 25 years for which we have reliable payroll information, only 11 teams have had a lower payroll than they did 10 years previously, and the great majority of these have been bad teams from the last few years (a slow growth era) who were competitive in the late '90s (a boom era). No surprise that the 2006-08 Marlins take the top three spots, as they were three of the leanest teams, relative to their competition, in modern history:

Note that of those eleven teams, only the 2001-02 A's made the postseason, and we know the story with them. Remember that league revenue more than doubled in both the '90s and this past decade, so teams that stayed flat over a 10-year period were essentially cutting their payroll in half, in real dollars. If MLB really does grow by 80 percent, as the Dodgers project, they would likely be in the bottom five in payroll by 2018.

Can you imagine the Dodgers spending less than the Royals and the Pirates? Me neither.

I've written this umpteen times already: big-market teams are smart to spend lots of money on players, since their potential returns are so high. This is even baked into our GM rankings; given their incredible earning capacities, teams like the Yankees and the Dodgers would get hammered if they didn't have high payrolls.

Needless to say, it would be a terrible business decision for the Dodgers to do this, and I'm inclined to believe that that the invisible hand wouldn't even allow them to: unless they're really terrible, the marginal gain of spending that extra 15-20 percent of revenue on player payroll will always exceed the marginal cost. And I'm sure they know this. Unless they're all on some kind of psychoactive drug cocktail, or possibly preparing for the next round of MLB collusion, there's no way those projections are anything but a sales tool, pitching an investor on what they think he'll want to hear.

Shawn Hoffman is an author of Baseball Prospectus. 
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