I want to clarify something that I wrote in my Baseball Analysts piece. Here’s how I broke down the process of how teams determine what they’ll pay for a free agent:

[C]ompanies will hire employees up until the point when marginal revenue equals marginal cost. So if the A’s project that Rafael Furcal will bring them $15 million in additional revenue next season, they should be willing to pay him up to $15 million. This number is his marginal revenue product (MRP).

Sounds simple enough, but a player’s MRP is tied to many different factors. The most obvious, of course, is the player’s production. In our hypothetical, the A’s could project that Furcal is worth five additional wins, and each of those wins is worth $3 million, making his MRP $15 million.

But what if the A’s, worried about the economic climate, decided to do a whole new set of revenue forecasts for 2009, and found that ticket sales were likely to take a huge hit? Or that demand for playoff tickets (should the team get that far) would be much lighter than normal, resulting in lower prices? All of a sudden, the rewards of winning 5 more games and possibly reaching the playoffs are much smaller. This, in turn, means that Furcal’s marginal value to the team is much less, so his MRP (or the salary the team would have been willing to pay him) goes down as well.

All of this is very true, but it’s a bit too theoretical. Obviously, teams don’t go into an offseason and arbitrarily sign one player based on his projected MRP, then arbitrarily sign another player, and another, and so on. They go in with a plan, expecting to sign or trade for one or multiple players to fill holes in their roster.

For example, let’s say the Yankees went into the offseason with what they expected to be an 82-win team (accounting for all the players lost to retirement or free agency). If C.C. Sabathia is worth 4 marginal wins next season, his MRP to the Yankees wouldn’t seem that high, since the monetary difference between an 82-win season and an 86-win season is very small.

But the Yankees didn’t just sign Sabathia, obviously. They also signed Mark Teixeira and A.J. Burnett, who could add another 8 marginal wins (these are all theoretical numbers, not based on any real forecasts). This brings them from 86 to 94, and an enormous jump in terms of earnings potential (possibly around $60 million, if the Yankees are calculating correctly).

The MRP calculation I discuss above is more implicit in this process than explicit, unless that player is the final piece the team is adding. A team will set its payroll budget based on how many games it feels it can win with that figure. A smart team will set multiple budgets, depending on whether they land Player X or Player Y, and do their best to hit the optimal combination (i.e. the projected win total that allows for the highest earning potential, with the lowest payroll capable of achieving it).

This is also very much related to my thoughts on one-size-fits-all MRP systems, which don’t acknowledge that every team will inevitably value the same player differently. If anything, this does flatten things out a bit, particularly in good economic times (teams with excess earning potential may set their budgets higher than they can even spend, making the free agent market an all-out bidding war). But especially at times like today, a player’s MRP is extremely variant, team-to-team.

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This is some really cool stuff.

I’ve said a thousand times, if I was running MLB Advanced Media, the first thing I would do is open up the video vault and flood the internet with embeddable baseball clips. MLB.com could make a killing off of advertising against these clips, either through pre-roll sponsorships or mid-roll text/graphic ads. And that doesn’t even take into account the massive viral marketing presence the videos would create.

MLB obviously sees the value in old videos, since they’re stacking the network’s lineup with them. Maybe they feel that “giving them away” on the internet is somehow different than airing them on cable. But there’s a billion dollar business sitting there, and they’re not acting on it.

It’s certainly not a trivially easy process. People tend to use their televisions more for background noise, making MLB Network a great place for MLB’s long-form content. But on the internet, the clips have to be a bit more engaging, which usually means shorter. It would take a lot of work, but MLBAM and MLB Productions could team up to create thousands of short videos, which would be embeddable on third party sites and, eventually, remixable. The ROI would be far higher than it is for World Series DVDs, and many of MLB Productions’ other projects.

More than anything, MLB Network is further proof that MLB views itself as a major content creator, and not just a live events company that licenses out its television and radio rights. And as such, MLB will eventually have to do what all other content creators are doing in this new era of media: open up.

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Or, at least, losing for the sake of winning in the future. I think it has, and the Pirates are the latest example.

The Rays, of course, are the new prototype. The team lost, and lost, and lost… until they won. The difference wasn’t so much in the core of the roster, but in the marginal aspects: the defense, bullpen, and bench. Josh Wilson, and Greg Norton turned into Willy Aybar and Cliff Floyd. Gary Glover, Brian Stokes, and Shawn Camp turned into Dan Wheeler, J.P. Howell, and Grant Balfour.

This wasn’t an accident. There are a lot of smart people in Tampa’s front office, who knew exactly what they were getting when they brought in Josh Wilson. I’m sure they also knew the relative values of going 67-95 or 81-81, and chose the former.

This is smart business, as long as the team can withstand the lean years financially. And this seems to be the approach the Pirates are taking.

I wrote last year that the Pirates were right to do nothing, despite Jason Bay’s frustration (the only move I suggested was to trade Freddy Sanchez, in a sell-high move). Now, Jack Wilson is complaining, saying that the Bucs need “more players” in order to compete.

He’s right, obviously. But free agency isn’t the way to acquire those players; the draft is, and the only way to get high draft picks is to lose. And the Pirates are doing a solid job of that.

Consider: this past spring, Dan Fox introduced a defensive metric on Baseball Prospectus that rated Luis Rivas as one of the worst defensive middle infielders in the last fifty years. Weeks later, Fox was hired by the Pirates. And yet Rivas played over 400 innings at second or short for the Pirates last year, with predictable results.

Like the Rays, the Pirates have some pretty smart people in their front office. They didn’t expect Luis Rivas to turn into Cal Ripken, nor do they think Derrick Turnbow will suddenly become Mariano Rivera. They seem to be purposely filling the margins in poorly, in order to keep picking up high draft picks until the very moment they feel they can compete.

As anti-competitive as it sounds, it’s a fantastic strategy, when executed correctly. There is no value in being mediocre, as the Kevin McClatchy/Cam Bonifay/Dave Littlefield Pirates clearly showed. For so long, they  seemed to be shooting for .500, just so they could end their string of losing seasons (now at a record 16 years and counting). When they failed to do even that, management decided to keep spending as much on the Major League payroll as possible, while never going above slot on draft picks. If anything, this was anti-competitive.

The Pirates finally seem to be on the right track, under Frank Coonelly and Neal Huntington. It’s easy to take what the Rays did for granted, so let’s not assume that the Pirates will be able to be so successful so quickly. But if nothing else, there seems to be a real plan in place, which, for this franchise, is very new.

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Here’s my original take on it. The paper is having a major cash crunch, and this is a tremendously high-value asset that isn’t related to their core business. I’m not sure how liquid the market is right now, but this is a smart move. From the WSJ:

The Times Co. pushed discussions beyond the exploration phase early last month at a quarterly meeting of NESV’s limited partners at which the Times Co. indicated to the partnership its intention to sell. Since then Times Co. has been pursuing potential buyers, according to people familiar with the discussions. A Times spokeswoman declined to comment.

It is unclear what the Times Co. thinks it can get for its stake. Barclays Capital estimates the Times Co.’s investment is worth about $166 million; analysts and sports bankers recently told Reuters the Times Co. could raise at least $200 million if it sold its stake.

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Shockingly enough. For my thoughts on salary caps and salary floors, read here, here, and here.

Not that it matters, since the players would never accept a cap anyway, but this is just political jockeying by an owner looking to increase the value of his investment. Attanasio bought the Brewers for $220 million, a figure which priced in the existing system. If the system was changed to become more favorable to the Brewers, the team would obviously be worth more (although I’m not so sure a cap even does this).

This type of lobbying is inevitable in a collective sports league (i.e. one that is guided by a shared framework, instead of a free market), so it’s not really Attanasio’s fault. But his statements need to be taken at face value, and the cap needs to be judged on its own merits. And viewing it from this perspective, it fails on almost every level.

The Yankees make a lot of money, but the current playoff system doesn’t allow any one team to win the World Series every year (last time I checked, the Yankees haven’t since 2000). Attanasio said, “At the rate the Yankees are going, I’m not sure anyone can compete with them.” He’s wrong, on a lot of levels. To start with, the Yankees made these moves because they are trying to catch up to the Red Sox and Rays. I’m not even sure they’ve done that.

Remember, the NFL makes billions of dollar a year from its national television contracts. This is why so many teams in the league can compete, and still make money. This has little to do with the salary cap. On the same level, MLB’s media presence (including MLBAM and MLB Network) is becoming large enough where a similar effect is taking hold.

Baseball’s system is just fine how it is. Lots of teams are making money, and any team can compete if their management is good enough. The Yankees signing Mark Teixeira doesn’t change that.

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From Will at BP:

Yes, the Yankees spent a lot of money, but they didn’t suddenly spend money they didn’t have. They used money coming off the books and backloaded to work with money that’s coming off the books next year as well. I’m not defending them against charges that they’re “buying championships” but I would like to see some acknowledgement that the Yankees aren’t in some new era of spending. They’re just still spending, like they always have.

Add in some interesting ways of looking at the Marginal Revenue per Win calculations might make this make even more financial sense as the economy continues to turn down. With all the comparisons of 1931 and 2008, it’d be interesting to know what the payroll was on this 107-win monster.

Exactly. At this point, the Yankees’ payroll will either be stagnant or down a bit from last year, even though their revenues are almost guaranteed to skyrocket. So with that considered, the Yankees’ 2009 player costs will actually be extremely conservative relative to previous seasons.

There are, of course, big risks going forward. If the economy takes a turn for the worse, the Yankees won’t be able to cut costs as briskly as they did in the 1930’s, when most players signed one-year contracts and the team more or less chose their salaries. And that’s before we account for the normal risks, such as a decline in the player’s performance, injury, or opportunity cost.

But that’s the Yankees’ prerogative. And think of it another way: if they win the World Series this year, they might have enough cash stocked away to survive another Great Depression anyway.

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Not a whole lot to add to the Teixeira discussion, past what I wrote last week. The Yankees are going to have a major glut at 1B/DH in 2011 and beyond, and possibly earlier if Jorge Posada and Derek Jeter deteriorate even quicker than we expect.

But I will say this: the Yankees have a tremendously valuable brand, one that is essentially that of a luxury item. This allows them to charge exorbitant prices for tickets, suites, hot dogs, and even conference rooms. That luxury brand exists partly because of the market they’re in, but mostly because of the franchise’s history of success. They are baseball’s Tiffany, Rolls Royce, Apple, etc.

But these things don’t last forever. The Yankees of the early ’90s were far separated from Ruth and DiMaggio. And while the current Yankees are much better than those groups, it’s been almost a decade without a title, and they are facing far stronger competition than at any point in the last fifteen years.

To keep the brand image that they want, the Yankees need to win championships. And on that front, they greatly improved their chances today.

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We’re rapidly approaching the point where a great owner or CEO is more important to a baseball team than a great general manager.

This would have sounded semi-blasphemous ten years ago, when very few teams used sabermetrics and advanced data. But now, even though a great GM is still a significant competitive advantage, and most teams are still pretty stats-averse, there’s been a key change in the marketplace: more GM candidates, and less influential top-level managers.

In other words, there are more people working in baseball who could be the next Billy Beane, than there are who could become the next Mark Cuban.

The last couple weeks I’ve been writing about the flaws in MP / MW (or marginal payroll divided by marginal wins). In particular, it doesn’t take into account each team’s economic context (i.e. the Yankees make more per win than the Pirates, and should therefore be willing to spend more per win). So if we’re going to rate a GM based on MP / MW, it has to take into account MR / MW (or marginal revenue divided by marginal wins).

But here’s the thing: MR / MW can be changed, for better or worse, by the team’s management. This is aside from just winning games and making the playoffs. If a team’s owner, CEO, or marketing staff is good enough, they can grow the team’s earning potential per marginal win.

Mark Cuban is a perfect modern example of how big an impact a top-level executive can have on a team’s topline. Since Cuban took over the Mavs in early 2000, the team has been very consistent on the court (they’ve won at least 51 games in each of Cuban’s first eight seasons), and has continually outpaced the NBA’s growth rate in terms of revenue.

Since the 1999-00 season, during which Cuban bought the team, the Mavericks’ revenue (according to Forbes) has grown from $59.7 million to $153 million, or 156%. In the same timespan, the average NBA team has grown from $79.86 million to $125.5 million, or 57%. The Mavs moved into a new arena in 2001, but the growth rate since then has still been impressive. In only two seasons since (2004 and 2007) have the Mavs trailed the league, and both were the result of early playoff exits following long runs the previous season.

What Cuban has done, more than anything, is develop a whole new brand for the franchise. In turn, he’s increased the team’s earning potential, and made each marginal win more valuable. This actually makes his GM’s contributions more valuable, as well.

The John Henry/Larry Lucchino Red Sox have done a tremendous job at this, as did George Steinbrenner to a certain extent (George, of course, got too involved in baseball operations at times). But there aren’t many management teams that have been able to consistently beat the league’s growth rate year in and year out, especially on a per-win basis.

And this goes back to my original point: there are lots of great GM candidates out there, but relatively few CEO candidates who could make a significant difference to a team’s earnings potential. As much time as we spend analyzing the game on the field, there is now probably even more to be gained by studying the business off of it.

(Data courtesy of Rod Fort’s indispensable online database)

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Pretty much what we expected, assuming he’s right. From Buster:

One executive tells the story of three different rounds of downsizing, as his team gathers information about how the economic downturn will affect his team’s sponsorships and season-ticket returns.

It’s not that Major League Baseball is on the verge of bankruptcy; the sport is healthy. But teams — like the average consumers in the U.S. — are simply hanging on to their money, out of concern for what is to come in the months and years ahead.

Teams set their budgets based on their projected revenues, first and foremost. This is an important point to remember, since the media usually frames it differently: i.e. if player x gets a huge contact, it’s fait accompli that player y will get a proportional deal. This does tend to happen in an up-market (which we’ve been in for several years now), since teams have lots of room in their budgets. But obviously this is a very different economic time, and revenue projections are shrinking.

This is what I touched on in my Baseball Analysts piece. Excerpt:

To see how this dynamic plays out, it’s important to consider how teams value players to begin with. If you remember back to Econ 101, companies will hire employees up until the point when marginal revenue equals marginal cost. So if the A’s project that Rafael Furcal will bring them $15 million in additional revenue next season, they should be willing to pay him up to $15 million. This number is his marginal revenue product (MRP).

Sounds simple enough, but a player’s MRP is tied to many different factors. The most obvious, of course, is the player’s production. In our hypothetical, the A’s could project that Furcal is worth five additional wins, and each of those wins is worth $3 million, making his MRP $15 million.

But what if the A’s, worried about the economic climate, decided to do a whole new set of revenue forecasts for 2009, and found that ticket sales were likely to take a huge hit? Or that demand for playoff tickets (should the team get that far) would be much lighter than normal, resulting in lower prices? All of a sudden, the rewards of winning 5 more games and possibly reaching the playoffs are much smaller. This, in turn, means that Furcal’s marginal value to the team is much less, so his MRP (or the salary the team would have been willing to pay him) goes down as well.

It’s unlikely that MLB, as a whole, will see a decline in revenue next year (I’ve actually been very bullish on this front). But there is obviously a tremendous amount of uncertainty, which generally (and rightfully) should lead individual teams to set very conservative revenue projections, and therefore very conservative budgets.

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I actually think these deals can be very beneficial for the outside company. Marketers pay $3 million for a 30-second Super Bowl spot. For a similar fee (sometimes less, sometimes more, sometimes a lot more, depending on the team and the city), a company can have its name mentioned thousands of times per year in news stories, on television, or even on merchandise. If the team makes it to the World Series, or the NBA Finals, or even hosts an All-Star Game, the company gets exposure that would normally cost tens of millions on the open market.

Yet despite all of that, the naming rights market has almost completely seized. The Nationals are entering year two in their new park, and still haven’t landed a sponsor. The Dallas Cowboys are opening a new facility next season, and haven’t found anyone willing to pay Citi-like money. Possibly playing off of that, the Giants and Jets (who move into their new digs in 2010) don’t even seem to be looking for a partner right now.

Obviously the timing is horrible for the teams involved, particularly the Nats, who are essentially losing money every single day that they don’t have a sponsor. Companies are cutting costs wherever possible, and no one wants to be making naming rights deals while slashing jobs, or being bailed out by the government.

But for marketers, this might be a perfect opportunity. This is very much a long-term investment, and could be had at a tremendous discount right now.

Consider one deal that just got done: the Pittsburgh Penguins are hooking up with Consol Energy, for an estimated $2-4 million per year. Yes, the Consol Energy Center. Doesn’t quite roll off the tongue like PNC Park or Heinz Field. But Consol is one of the few local companies that could afford this type of deal. And they’re not paying much more than Mellon did to sponsor the Penguins’ current arena.

Companies should be pouncing right now. It’s certainly unconventional to put millions of dollars into a marketing deal during the worst economic downturn of our lives. But this is a 20 to 30 year investment, not a Super Bowl ad (which are rightfully taking it on the chin, despite a hot start before the crisis). If a naming rights deal brings surplus value in a normal market, imagine what it could do at discount rates.

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