September 7, 2005

Lies, Damned Lies

The Tiger Plan, Revisited

by Nate Silver

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A year ago at about this time, I wrote a column entitled the Tiger Plan, which argued that the Detroit Tigers deserved credit for their aggressive behavior in the free-agent market before the 2004 season, even though the free agents they acquired would have little to no chance of propelling the team to a playoff spot. The article was built around two arguments:

• Going from being very bad to merely below-average should have some benefit in terms of team revenues;

• Even if the ultimate goal is to contend seriously for a pennant, it's tough to build momentum toward that goal from a 100-loss starting point.

I want to rethink these arguments in light of some recent research that I've done in connection with an upcoming BP book project. I don't want to steal the thunder from this project too much, but given that I already spilled the beans on this past weekend's radio show, I'm going to go ahead and let you in on one of its most important conclusions.

There is a very substantial, and very non-linear, increase in local revenues that a team can expect as a result of making the playoffs. More specifically, this increase is felt over the longer term. A single playoff appearance can result in a meaningful increase in both attendance revenues and local broadcasting revenues for as many as 10 years.

I don't think this finding should be all that surprising. Most baseball clubs either implicitly or explicitly make reaching the playoffs their goal, preferably in the near term, or if that isn't possible, at least in the medium term. Most fans want to see a competitive baseball club, and there's no better evidence that a team is competitive than that it's able to compete for its fair share of pennants.

As Will Carroll quickly pointed out to me, however, this finding creates some problems for the Tiger Plan. One of the implications of my research is that if wins are especially valuable when they provide a materially increased likelihood of reaching the playoffs, they are necessarily less valuable when they don't. Going from 50 wins to 60 is not as important as going from 80 wins to 90.

Before we go any further, let's check in with the Tigers and see how they're doing at the box office. The table below provides the Tigers' won-loss record in each season from 2002 to the present, along with their per-game attendance, average ticket prices as provided by Team Marketing Report and estimated gate receipts.

Year           W-L    Attendance     Ticket Price     Gate Receipts
2002         55-106   18,795/game        $20.44       $31.1 million
2003         43-119   16,892/game        $19.68       $27.2 million
2004         72-90    23,667/game        $17.90       $34.3 million
2005 (proj.) 76-86    26,863/game        $18.48       $40.2 million

Gate receipts are figured as average attendance times average ticket price times 81 home dates. The 2005 estimate may be too generous; the Tigers' per-game attendance is likely to decline some from here on out with the team out of the pennant race, the kids going back to school and the Lions trading practice red for Honolulu Blue. Nevertheless, it's clear that the Tigers have benefited from being more competitive. Gate receipts grew by some $7 million last year, as more fans purchased walk-up tickets. This season, those gate receipts have increased further, supplemented by season-ticket sales made this winter in light of the Tigers' improved prospects. There shouldn't be much doubt that improved on-field results, even if the improvements are fairly incremental, will translate into improved revenues.

That isn't the most important question, however, in the case of a team like the 2003-2004 Tigers. Rather, the question is whether the increase in revenues is substantial enough to make spending on premium free agents like Ivan Rodriguez a good investment. Although the Tigers will benefit some from a free agent who provides them with additional wins, my research suggests that a team like the Angels or the Phillies, which is much closer to a playoff spot, will benefit a lot more. And because the free agent usually goes to the highest bidder, the Tigers will be paying the Angels' price, even if they do not reap the Angels' benefit.

This gets back to the second philosophical plank of the Tiger Plan, which concerns long-term planning. In the near term, investments in free agents by second-division clubs are not likely to produce a favorable return, because they are unlikely to result in a playoff appearance, which is where the big marginal revenues kick in. Perhaps, however, a team will never have an opportunity to make those profitable investments if it doesn't make some more marginal investments first. Perhaps it first needs to lift itself out of baseball's semi-permanent underclass before it can dream bigger.

Look at the Mets. Last winter, they might have figured that they were a 76-win team without signing any free agents. However, they had the opportunity to sign Carlos Beltran and Pedro Martinez, each of whom are seven-win players. If they had signed only Beltran or only Martinez, they could expect to win 83 games, which would provide for some additional revenues, but wouldn't be enough to put them in playoff contention. By signing Beltran and Martinez, however, they could expect to win 90 games, in which case they very well could reach the playoffs and get a handsome return on their investment. Sometimes a larger investment will be profitable where a smaller one will not be.

The story becomes a little bit more complicated in the case of the Tigers. Winning 78 games instead of 68 in 2005 won't necessarily make it any easier for them to win 88 games in 2006, although there probably is something to the notion that a free agent won't want to sign with a club he perceives to be truly terrible, making marginal improvements more costly.

It may be worth reintroducing the concept of success cycles here. My research indicates that it's more profitable to have a pattern like this:

Year 1                75-87
Year 2                84-78
Year 3                95-67
Year 4                88-74
Year 5                70-92

…which includes one or two playoff appearances, than one like this:

Year 1                83-79
Year 2                82-80
Year 3                85-77
Year 4                79-83
Year 5                83-79

…which includes the same number of wins on average, but almost certainly does not produce a playoff appearance. (Offer not valid in 2005.)

The problem is that success cycles can be difficult to coordinate, as the Tigers' behavior this winter would seem to indicate. The Tigers probably went into this winter thinking something like this:

We won 72 games last year. We'll add Magglio Ordonez, who is a seven-win player, and Troy Percival, who is a five-win player. We think we're going to get another three wins out of the young talent on our club. And Dmitri Young will be healthy all season, which should be worth another three wins or so. That gets us to 90 wins. We think the Twins are going to have a down year, that the White Sox are going in reverse, that the Royals are hopeless. The Indians? Meh, we'll take our chances. Playoffs and September sellouts, here we come!

Needless to say, that analysis gets it wrong on a number of levels: overestimating the value of the free agents the team had targeted, failing to account for the effects of the Plexiglass Principle, underestimating the competition. These are, of course, exactly the sorts of things that baseball teams get wrong all the time. The Plexiglass Principle is especially pernicious. Even the best-run baseball clubs tend to overestimate the value of their own stock of talent; the Tigers, for example, probably saw themselves as building from a baseline of 72 wins, without accounting for the fact that guys like Rodriguez and Carlos Guillen were likely to decline, or that while Young would stay healthy, Percival would get hurt.

I've made a mess of the Tiger Plan, but there are a couple of important messages to take away from all of this.

1. Before considering what it will pay for free-agent talent, a team needs to be honest with itself about what its baseline is. Figuring that you're an 88-win club when you're an 83-win club could lead to some multi-million dollar valuation mistakes; the thinner your playoff chances, the less room for error. Similarly, behaving like you're an 83-win team when in fact you're an 88-win team (think of the Twins, say) could lead to some tragically missed opportunities.

2. To the extent that a team decides to spend top dollar for free agents when these free agents aren't likely to produce a playoff appearance in the near term, it needs to have good reasons for doing so. Perhaps you sign Ivan Rodriguez now because he's available now, and you like what you see in the free-agent market next winter. Perhaps you sign him because the local TV contract is expiring and you want to extract more leverage. The most important part of the Tiger Plan is that it's, well, a plan.

3. A strong farm system always helps. If you have the talent in-house to win 75 games without making any major free-agent acquisitions, that's a much more favorable position than having 55-win homegrown talent, and it gets you to the competitive and financial promised land much more quickly. The most optimal long-term strategy for a middle-market club is to spare no expense when it comes to scouting and development, which tend to produce a favorable return, and then make some surgical strikes in the free-agent market when the time is right.

4. Finally, and perhaps most importantly of all, it's better to teach a man to fish than to give him a fish. Developing the organizational processes to accurately value baseball players can feed a team's coffers for a lifetime.

Nate Silver is an author of Baseball Prospectus. 
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