Transaction Analysis: ... (12/20)
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December 20, 2011 BizballHow Television Money and International Sponsorships Allowed the Rangers to Win the Yu Darvish Posting Fee Derby
Congratulations, Texas Rangers; you’ve won the right to enter into contract negotiations with Japanese pitcher Yu Darvish. You got the word late last night, and now the question is, are you waking up with a hangover this morning? For those watching the baseball landscape, understanding the posting system and the large sums of money attached to the posting fee are still a bit of a mystery. I’m not here today to say whether the Rangers have just made a good or a bad investment (for the record, I see the posting process as highly flawed). For one thing, no contract has been met; Darvish and Texas now have 30 consecutive days to reach a deal. How, or if, that deal is reached will allow one to make a better determination as to whether the deal makes complete sense, if at all. But the posting fee has been made, and you can talk about that. “Is it good? Is it bad? You paid how much?!?” Yeah, it’s something like that. But to look at Darvish and the Rangers is to look at the “how” and the “why”; two things that have changed dramatically in the past two years. Let’s start with the “how.” The Rangers have been as active as any club in the free agent market due to their television rights deal with FSN. When it was reached shortly after Nolan Ryan and former owner Chuck Greenberg won the auction for the club, it was reported that the 20-year deal was worth $3 billion. And then, for some reason, that changed to between $1.5-$1.6 billion, which has now circulated about enough to become “fact.” But, in speaking with two sources that were close to the negotiations on the television deal yesterday, they say that the original figure of $3 billion is closer to the truth… and possibly then some (the sources would not elaborate as to the total but said that based upon certain escalators in the deal, the package could be worth more). The sudden glut of television money explains how the Rangers were very aggressive in attempting to retain Cliff Lee (even though he ultimately left for more of a “comfort level” with the Phillies) and the Adrian Beltre signing. Coming back to Darvish, though, the Rangers didn’t submit the large sum of $51.7 million as the posting fee for him on a whim. The fact is, the Rangers thought he might become available last year and were prepared to bid for him then, so the club has had more than a year to determine how the posting fee and contract work monetarily. The posting fee conversation means looking at how it’s assigned. It’s not considered part of player payroll; only the contract salary that is still to be negotiated will be. That means not a single penny counts toward the luxury tax total. And while you can’t write off the posting fee as part of the Rangers’ revenue-sharing obligation, the posting fee still counts as an expense which will be written off for tax purposes elsewhere. If the Rangers get a contract done with Darvish, within four days after the agreement, the entire reported $51.7 million posting fee has to be delivered to the Nippon Ham Fighters, and with it, the Rangers will get a tax break, absorbing a percentage of the hefty fee. It’s international marketing, though, that the Rangers see as a way to lessen the total cost, and this isn’t local or national money; it’s international money by way of sponsorships from Japan. One of the key hires by former owner Chuck Greenberg was to bring in Joe Januszewski from the Red Sox as the Executive VP of Business Partnerships and Development. Januszewski had spent the previous eight years with the Boston and was part of building international sponsorships during the time the club reached their deal with Daisuke Matsuzaka. What the Rangers will be doing is bringing in incremental new revenues from Japanese sponsorships that have never been available to the club. If they pull in, say $20-$30 million in new sponsorship money, it continues to lessen the total outlay for Darvish. Combining the three, we can see how the massive influx of revenue from the $3 billion television rights extension and the hire of Januszewski that is coupled with bringing in new incremental revenues through international sponsorships has enabled the Rangers to push for Darvish. All this aside, there’s something even larger at play, something so big it’s going to alter MLB’s landscape, and this gets into the “why”. The AL West is becoming the AL East where the Angels and Rangers have become the Yankees and Red Sox. It’s an arms race based on a huge competitive advantage through lucrative television deals that put the Mariners, Athletics, and shortly, the Astros, at a massive disadvantage in the free agency market. The similarities are striking. The Rangers have a deal that is worth approximately $3 billion. The Angels have reportedly negotiated a deal worth (yes), $3 billion. The Rangers trade for Cliff Lee, then aggressively push to retain him, bring in Adrian Beltre, but lose C.J. Wilson to the Angels. The Angels sign Albert Pujols to a 10-year, $254 million contract, and the Rangers go out and win the right to bring in Darvish. And one shouldn’t expect it all to stop now or in years to come. Meanwhile, only the Mariners seem to be making any noise (and ultimately, it could be just that) to land Prince Fielder. The A’s are stuck in neutral with their stadium efforts mired in a territorial battle with the Giants, and the Astros—while a year away from moving into the AL West—are a few years, at best, from being competitive as the roster was stripped to the bone to allow for the $680 million sale from Drayton McLane to Jim Crane work. Yu Darvish could be a bust. He might not translate to MLB. He could become injured. Anything is possible. But, the Rangers, now flush with cash, are taking on less risk monetarily due to the TV money. In the end, what everything in sports all boils down to is assessing risk and looking at anything that will place you at a competitive advantage. Numbers are spun. Scouting is done. And when extra money comes your way, you look to direct it to your advantage. That has been part and parcel with the Yankees and Red Sox for years. Wake up, baseball. Welcome the AL East in the West.
Maury Brown is an author of Baseball Prospectus.
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Maury, do you eventually see the small market owners in MLB start to cry foul as loud at the small market NBA owners? This seems to be starting down the same road.
Good question. And nice article, Maury!
One of the more difficult problems in MLB has been how the use of revenue-sharing dollars is spent. There have been tweaks to the model in an attempt to, not thwart spending, but incentivize low revenue-makers to do more in the free agency space as more centralized money has become available.
The posting system is outside of all of that. It's design clearly prevents low-revenue makers from competing.
But, the Rangers TV may change things more than expected. The large deals will, in fact, trickle to low-revenue makers as deals with RSNs are considered net local revenues, and therefore part of the revenue-sharing equation.
I'd watch, however... what will always happen is what I call behavioral spending -- a case where a rapid influx of revenues makes owners spend differently (read: aggressively) when they otherwise wouldn't. The Marlins are a good example. I expect the Dodgers to do so when new ownership takes over, and the same for the Mariners in 2017 when their TV deal comes up for renewal. Money that lands rapidly can change strategy overnight. Just ask the Texas Rangers.
What we seem to be seeing right now, and possibly in the near future with the Dodgers, is that with the large markets gaining these massive TV deals they have so much more spending power than cities such as Cleveland or Cincinnati or Milwaukee. Therefore, most marquee free agents gravitating to the large markets.
Will RSN's for the smaller markets provide them with enough spending power to keep their marquee free agents? Or will they always be at a disadvantage when it comes to acquiring talent?