Jose Mesa Is Dead

December 15, 2009

Considering that the Cavs play 3 games in the next 4 days, I figured I’d try to post about one of the other sports tonight. And while it’s not technically Cleveland-related, I saw the ESPN update that the Phillies are on the verge of completing two simultaneous but separate deals: 1) shipping Cliff Lee to Seattle for prospects, and 2) nabbing the much sought-after Roy Halladay as his replacement.

Apart from my continuing affinity for Cliff, the main reason I want to look at this is because it functions as a good reminder that the Tribe is far from the only team in baseball that let economics override the prospect of success.

You’ll remember around the MLB trade deadline last season that Halladay was seen as the huge prize, and when the Phillies traded for Lee instead, there was somewhat of a backlash from their fan base. That said, the backlash was brief, since Cliff went on to be basically dominant for the stretch run of the season and the playoffs.

Fast forward to today. The Phillies essentially decide to trade Lee for Halladay. Is it because he’s a significantly better pitcher than Cliff?

Here’s a look at some of the relevant numbers:

2009 CLIFF LEE

IP: 231.2
K: 181
BB: 43
HR: 17
HR/9: 0.7
BB/9: 1.7
K/9: 7.0
K/BB: 4.21

2009 ROY HALLADAY

IP: 239
K: 208
BB: 35
HR: 22
HR/9: 0.8
BB/9: 1.3
K/9: 7.8
K/BB: 5.94

CLIFF LEE - CAREER

HR/9: 1.0
BB/9: 2.5
K/9: 6.8
K/BB: 2.71

ROY HALLADAY - CAREER

HR/9: 0.8
BB/9: 2.0
K/9: 6.6
K/BB: 3.29

The career comparison is a little skewed by virtue of the fact that Halladay has 12 seasons of experience vs. Cliff’s 8 seasons. And if you look at the year by year break-outs for Halladay (here) and Lee (here), Halladay’s performance has been more consistantly remarkable in all categories for longer (2001-9) than Lee’s. Cliff can really only go toe-to-toe with ”Harry Leroy Halladay” (true full name - thanks Baseball Reference!) the past two seasons.

However, if you isolate the sample size to just those two seasons, Halladay has still been better overall in the categories we care about — but not by leaps and bounds. And statistics aside for a moment, it’s impossible to say that Lee was the reason the Phillies didn’t repeat as World Series champs this past season. So “upgrading” him isn’t necessarily the move that I’d be trying to make if I were running the team.

That said, one thing that has always stuck with me from taking Econ in college was the concept that if you’re presented an opportunity that results in a net gain — no matter how small — you should take advantage of it, no questions asked. So from that standpoint, the Phillies’ “trading up” for Lee is completely defensible.

But since the Phillies are not directly trading Lee for Halladay, wouldn’t the best possible move be to retain Lee for the final year of his contract AND still make the deal for Halladay? That 1-2 pitching combo would instantly become the toughest in either league. Short of a meteor striking their spring training facility, it’s difficult to imagine a set of circumstances that would prevent the Phillies from getting back to the Series in 2010 if they were running those two guys out their back-to-back for an entire season in the weak-hitting NL.

Apparently the obstacle, though, is financial. According to ESPN’s Jayson Stark, if the Phillies were to use the nuclear option, so to speak, their payroll would balloon to something in the neighborhood of $160M. The franchise also has an internal rule to not sign starting pitchers to deals longer than 3 years.

After initial talks with Lee’s agents, the Phillies’ brass came away convinced that it would take a “CC Sabathia”-level deal to keep Cliff after this year. (As a reminder, the Yankees are paying CC 7 years / $161M, or $23M per). Halladay, on the other hand, has made it clear that he’s willing to take a voluntary paycut to come to Philadelphia. Reportedly, an extension of 3 years and $60M will put him in red through 2013, unless the trade breaks down in some other capacity.

This strategy brings up all kinds of questions that I don’t have the wherewithal to siphon through today. I’m most fascinated by the fact that the Phillies are taking a sort of third way between the extremes every other franchise seems to be gravitating toward. They’re apparently willing to spend but with definite caps and only with relatively short term deals.

However, I know this: if the Indians made these two moves I would be pissed. Throwing away a golden opportunity to have arguably the two best pitchers in baseball on your team is inexcusable — especially for a big market team like the Phils. I understand what they’re trying to do, but I don’t agree with it. You can’t make the hunt for the World Series title half of an arm’s race. Either go in and try to win today, or trade away Lee for prospects so you can save money. The middle road doesn’t end in victory.

-T

12:28am | URL: http://www.josemesaisdead.com/post/284434894/hot-stove-economics-vs-titles
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October 16, 2009

Bud Selig is a Relic

Not sure if anyone else is watching the MLB playoffs or not - I wouldn’t blame if you weren’t - but I know at least my dad and I had the TV tuned to TBS when the umpire on the left field line blew possibly the worst foul ball call I’ve ever seen. It was last Friday, the Twins were playing the Yankees, and the batter was Joe Mauer. The call was so bad, in fact, that I was almost impressed.

In the wake of this and a few other lousy calls on the base paths, people started yapping about how baseball needs to use instant replay more than it does (currently only on home runs). I completely agree - and so should everyone else. It’s insane that viewers sitting on a couch at home can look at a play on TV for 5 seconds and have more knowledge than the people who are actually determining the outcome of the game.

Of course, the one guy who didn’t agree was the only person, really, that mattered: MLB commissioner Bud Selig. When asked about implementing replay more extensively, Selig had this to say:

“Baseball is not the kind of game that can have interminable delays.”

Really? Baseball can’t handle long delays? You mean like…

*The 200 times a game a pitcher steps off the rubber.
*The 200 times a game a batter steps out of the box and/or re-adjusts his batting gloves.
*The time outs that are called every time a player slides into a base.
*The 7th Inning stretch.
*The pitcher asking the ump for a new ball.
*The amount of time a team warms up between innings, playing catch in the outfield, and grabbing balls in the infield.
*The amount of time it takes to change pitchers.
*The amount of time it takes a manager to visit the mound.
*Catchers calling time out to run out and chatter with the pitcher.
*Managers arguing calls that never get overturned.

I assume what Bud meant was that because baseball is already full of ridiculously long delays, we’re hesitant to add more…but come on, wouldn’t we all rather see an umpire crew take 5 minutes to review a call and get it right than to just let horrifically blown calls go by?

Really, what Selig should do is find a way to get rid of some of the other delays in baseball that are far less meaningful. To me, his response to the cries for a smarter, more involved use of replay is indicative of what’s wrong with baseball - the belief that it is somehow a pure sport that should be resistant to change in order to maintain its integrity.

Well, if baseball ever wants its fan base to grow, instead of merely age, some drastic things have to be done…and it may take a new commissioner, perhaps someone under the age of 50, to really help shape a new direction.

1:00am | URL: http://www.josemesaisdead.com/post/214529818/selig
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FILED UNDER: Baseball Bud Selig Instant Replay

September 1, 2009

Pinocchio Story: Part 3

I was a little concerned about how to get back into this series because I never intended it to become a trifecta. (If you’re behind, here are links to Part 1 and Part 2.) Things got broken up in ways that I didn’t necessarily anticipate, which threw me off a little.

However, last night I read a recent PD column by favorite Mesa target Terry Pluto, and it resolved all my concerns. Pluto unhesitatingly chugs the Kool-Aid served by Paul Dolan on the Indians’ financial difficulties in a follow-up interview to his infamous August 6th presser. Pluto’s blind acceptance of Dolan’s talking points demands what they refer to in the military as a “swift and forceful response” - and it leads perfectly back into the Pinocchio Story throughline:

Chapter 2: The Big Swill (“Ooooh Yeah!”)

Here’s a recap of the points from Pluto’s pow-wow that are relevant to our discussion:

1) When Dolan stated that the Indians’ would lose $16M this season, he meant that $16M was the amount they’d already lost “in late July.” The total loss they were heading toward for the entire 2009 season was closer to $20M. However, because of the much-publicized trades they are now softening those projections to a loss of about $12M.

2) Had they not made the trades, the Indians’ calculations showed that the team would be on track to lose about $30M during the course of the 2010 season.

3) Sports Time Ohio - the Tribe-owned cable network that holds and sells the rights to telecast the Indians’ games - is in Pluto’s words “‘profitable,’ according to Dolan.”

4) The Dolans have “no plans” to sell the team.

OK, let’s address the above point by point:

1) Paul Dolan made the statement with the infamous $16M loss figure on August 6th. He retracted it on August 29th. Here’s the problem: Garko was traded July 28th. Lee was traded July 30th. Martinez was traded August 1st. So by the time Dolan made the statement about the Indians’ 2009 losses on August 6th, his number-crunchers should already have known that they were going to save $4M by making those trades. But instead, he went into the press conference touting the sweet $16M loss.

I’m not accepting the counter-argument that the analysts didn’t have enough time to run those numbers in the time between the trade deadline and Dolan’s press conference. It’s not a complex formula. Take your already-existing projections for profit / loss, deduct the total pro-rated salary saved by trading away those three players, add in the total pro-rated salaries from adding Masterson and the 7 prospects. Done. We’re not exactly bending spoons in half with our minds here.

I don’t want to belabor this point because it’s not hugely impactful on its own. However, I think it’s indicative of a general pattern: owners (especially the Indians’) spewing out garbage facts that even a rudimentary analysis can bring into question. If they’re lying about things that are this simple to dispute, how can anyone realistically be expected to believe the bigger picture?

2) I’m sure that every team does projections of next year’s revenue numbers. As Dolan demonstrated, those projections are subject to change based on a variety of factors. The whole thing is speculative. I would just make two points about this particular case.

First, when you’re interested in making your financial situation look dismal, it’s particularly convenient to make projections a year ahead of time while a) we’re still in the grip of the worst economic downturn since the 1930s, and b) the team you own is seemingly stuck at 14 games under .500.

Second, it’s worth noting that Dolan didn’t put forth a revised number to show the softened losses thanks to unloading all those contracts.

To do a quick calc on our own, Cliff was due $8M if the team picked up his 2010 option. Victor was due $7M. Garko would’ve been up for arbitration in the off-season and would’ve commanded north of $2M. We’ll say that’s a total of $17.5M in outgoing salary.

Meanwhile, of all the players they got back in those three trades, only one is actually in the majors, and that one guy (Masterson) is making $415K this year. Though I’m having some issues finding his salary for next year, I can’t imagine it’s going to be a drastic raise.

If we assume that the other 7 players acquired by the Tribe are making something in the same neighborhood as Masterson - let’s assume for the sake of argument they’ll all make 500K next year, which is generous on my end - that brings the total for all 8 incoming players to $4M.

To me, $17.5M - $4M = $13.5M in savings. So if Dolan is to be believed, the Indians should now be coming in for the smooth landing of a $16.5M loss for the 2010 season. But he didn’t want to put that on the record, likely so that the fan base could be scared by the $30M number and its potential consequences for the team’s continued stay in Cleveland. It’s an implicit way of saying “Hey, get to the ballpark, or else.”

3) In the same vein, I love that Dolan was content to just say that Sports Time Ohio was “profitable,” without actually telling Pluto how profitable. Truly startling that he would keep the profit numbers hidden but trumpet the supposed losses.

Now, I’m not saying that STO is the YES network, but they’re clearly making bank off of it. Though until someone does some serious muckraking, we won’t know how much bank.

This leads us into…

4) The Dolans have no plans to sell the team.

Let me repeat that: despite the fact that their current “projections” show that the Indians are a financial sinkhole slated to bleed the family fortune for $28.5M over the course of 2 years, the Dolans are so philanthropic and dedicated to producing a winner for the city of Cleveland that they will not even explore the possibility of unloading this investment.

Obviously, this is the point I’ve been harping on since the beginning of this series – and really, even all the way back in my “Mythbusters” posts last month. If these teams are so gut-shot financially, why are their owners so willing to dig in their heels and try to weather the storm when their own math says that the smart play is to get the F out of Dodge?

The answer is, of course, that the numbers are a lie. It’s just hard to prove because the few people who seem to be paying attention don’t have access to the real figures…with a few notable exceptions.

One of these is Forbes Magazine. Every year, Forbes runs an independent accounting of the 30 MLB franchises. Shockingly, they come back with vastly different financial pictures of each team than the League itself presents. Why? Because in theory, Forbes takes into account all of the accounting tricks I detailed in parts 1 and 2 of this series.

If we go back to the 2001 season -the first for which Forbes ran this independent analysis - here’s the story: Forbes found that as a whole, MLB had an operating profit of $75M. Meanwhile, Bud Selig had just testified before Congress that MLB had a total operating loss of over $200M. Not only that, but Selig also swore that in the previous five seasons, only two teams made a profit.

In other words, Bud Selig testified that MLB was on life support. The only problem was that there was a $275M difference between his figures and an independent analyst’s. Not surprisingly, Selig also testified that Forbes’ numbers were “pure fiction.”

But that was way back in 2001-2. What about this past season? The Biz of Baseball website did a league-wide financial analysis of 2008 based on that year’s Forbes findings. As a whole, BoB found that the league increased in value - but only because the gains by the Mets and Yankees were so inordinately large that they were able to pull the entire league of the red.

On the other side of the coin, 10 teams decreased in value between 2007 and 2008. One of those teams was the Indians.

They decreased in value to $399M.

If you recall, the Dolans bought the franchise for $320M.

So if Forbes’ analysis is correct, the Dolans have made $79M since acquiring the team in 2000. That’s roughly a 25% ROI over the course of 8 years. Not bad.

Before we go on, I should emphasize that there are two separate categories that we’re considering here: operating income and total value. Operating income is, again, single-season profit before taxes, interest, and depreciation. Total value includes earnings plus the value of the team’s stadium, so it acts as a more complete picture of a team’s financial well-being.

I bring this up to highlight that you could theoretically have an operating loss for several consecutive seasons, but if the total franchise value after those losses is still higher than what you paid for the team, you’re still in the black on the investment.

That said, let’s look at what Forbes calculated as the Tribes’ yearly operating income, from 2002 to 2008:

2008 OI: $29.2M

2007 OI: $24.9M

2006 OI: $34.6M

2005 OI: $27.2M

2004 OI: $10.4M

2003 OI: -$1M

2002 OI: -$3.6M

NET 2002-2008: $121.7M

Obviously, there are 2 years of Dolan ownership not accounted for in this analysis. And as discussed above, operating income is trumped by total franchise value.

To me, those numbers are pretty eye-opening - especially if you consider the fact that Forbes supposedly did not take into account the “related businesses” aspect of the 30 franchises. In other words, profits of the team-owned cable networks are not reflected in their analysis…and despite that, they’re still showing massive yearly windfalls for the Indians.

To try to bring this to a close, here’s what I can’t do: I can’t provide hard evidence that says definitively “Paul Dolan’s projections differ from economic reality by $___M.”

However…operating income is what Paul Dolan is referring to when he states that the Indians are going to lose $12M this season. So if we accept the Forbes analysis despite its flaws, Dolan’s projections require us to believe that this year has been so utterly catastrophic that the team’s annual operating loss will be 3.333x greater than the biggest operating loss on the books since 2002. Or another way to look at it, a -$41.2M single-season crater ($29.2M in 2008 to -$12M in 2009) that would’ve nose-dived to a -$49.2M single-season difference without shipping off Victor, Cliff, and Ryan.

This is not only unlikely, it borders on the financially impossible. Short of adopting a string of promotions like ”Hepatitis C Day” and “Feral Dog Give-Away Night,” there are few circumstances that could swing the pendulum so far from black to red in one year.

So we end where we started: the Dolans’ numbers shouldn’t be believed. And that’s a good thing to keep in mind, since they’re not going anywhere anytime soon.

-T

11:18pm | URL: http://www.josemesaisdead.com/post/177755150/pinocchio-story-part-3
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FILED UNDER: Sports Economics MLB Baseball Indians Economics

August 31, 2009

Minor Leagues Strike a Blow Against Fashion

As a quick follow-up to my previous column about MLB batting helmets, breaking news: Minor League Baseball announced that the Rawlings S-100 will be mandatory for all Minor League players starting in 2010. If this is really a set-up to grandfather the S-100 into the Majors, Jeff Francoeur’s runway career may be in an imminent danger….

-T

4:38pm | URL: http://www.josemesaisdead.com/post/176623594/minor-leagues-strike-a-blow-against-fashion
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FILED UNDER: MLB Baseball

August 25, 2009

Pinocchio Story: Part 2

My original goal with last night’s post was to make it through the main accounting tricks pulled by MLB franchises so that I could spend tonight focusing back on the bigger picture. However, I forgot a couple, and I think it’s important to lay out as much as possible so that you get a clear scope of just how fast and loose owners can play with their books.

So without further ado…

Chapter 1, Verse 2: Revenge of the Killer Spreadsheets

4) Ownership Companies

Apart from the salary depreciation loophole discussed yesterday, ownership has another cute game they can play when purchasing a team. The basic idea is that the owner or owners - actual flesh and blood people, of course, barring some kind of bizarre ghost conspiracy that would be bigger than any analysis of sports accounting I could ever conjure - tend not to purchase teams personally. Instead, they set up limited liability corporation or limited partnership to buy and operate the franchise.

The curveball comes in how that company acquires funding to buy the team. More often than not, the company is loaned money from the personal finances of the owner. The company uses that loan to buy the team, then diverts its operating profits to repay the owner plus interest over the course of the next several years.

Once again, those loan repayments appear as a loss on the team’s balance sheet, despite that the money is going directly back to the guy who owns and operates the company. So it’s another premeditated loss of the type I’ve been discussing since yesterday. (Thanks to D. Stanley Eitzen for discussing this in “Dollars & Sense.”)

It seems relevant to mention at this point that the legal owner of the Cleveland Indians is not Larry Dolan, but rather “Cleveland Indians Baseball L.P.”

5) Related Businesses

This circles back a little bit to the “non-cash” charges item from yesterday.

As is probably clear by now, so much of this accounting game comes down to ownership directing you to all the places where they have figures to show that they’re losing money - and while you’re looking in those places, they’re basically throwing bags of cash from somewhere else out the window into a waiting truck.

There are examples of teams’ having businesses related to the franchise, but separate enough that they can just leave any profits from those businesses off their books when painting a picture of their team’s financial health. So again, cash ultimately goes back to the owner, but it takes a twisty enough path that they can justify not accounting for it when it’s convenient to show that the franchise is suffering.

The most popular of these related businesses is the regional sports network.

The cardinal sinner in this realm is the Yankees. Now, the Pinstripes’ brass has publicly claimed that the team has been hemhorraging cash for several years. Brian Cashman famously claimed that the team lost $28M in 2006. Team President Randy Levine and COO Lonn Trost asserted that the team would certainly lose money when all was said and done last season.

Now to Levine’s and Trost’s credit, they also state in that same interview that “the Yankees financially are in very, very good shape.” But even that admission may be understating the case.

The key in Yankeeland is the YES Network, the cable channel that holds exclusive broadcast rights to 130 of the Yankees 162 annual games. As pointed out by Phil Birnbaum here, the Yankees own at least 33% (and possibly more) of the Yes Network. In 2007 alone, the network had an operating profit of $150M, of which at least 33% would go directly back into the Steinbrenner coffers - or, excuse me, YankeeNets LLC.

However, Andrew Zimbalist argues in his book “May the Best Team Win” that the Yankees profits on the network are actually even higher than that. YankeeNets LLC is, fittingly, a partnered holding company that also legally owns the New Jersey Nets. Zimbalist suggests in the book (which you can read an excerpt of here for more of the gory financial details) that YankeeNets accountants are attributing an artificially high percentage of YES’s profits to the Nets.

Why is this the case? Unlike MLB, there is no revenue sharing in the NBA. Any money made by the Yankees’ organization factors into their total profit, which is the number that the league looks at to calculate revenue sharing pay-outs. So it’s to the Yankees advantage to hide away as much money as possible.

As far as the size of this hidden stash, Zimbalist suggest that in 2002 alone, it was likely in the neighborhood of $60M. In other words, YankeeNets LLC is likely masking more of their YES profits than they’re reporting.

The upshot of all of this is that the ownership shell game develops a second level. On one hand, teams are sheltering money from the league. On the other, they’re sheltering even MORE money from the public.

Another way to say this is that the figures seen by Bud Selig are not the same as the figures reported by ownership to the public. And why would they be? None of the 30 MLB franchises is publicly traded. As a result, they have no obligation or incentive to release their books - true or legally cooked - to John Q. Fan.

Ironically, the only MLB team that has ever been publicly traded is the Indians. This happened for a brief period starting in 1998. Here’s a link to their 1st Quarter 1999 report, if you’re catastrophically bored or make your living via Quickbooks.

However, the end of the Tribe’s presence on NASDAQ ended in November 1999, when Dick Jacobs sold the club to Larry Dol — er, Cleveland Indians Baseball LP. (Sidenote: hilariously, over the course of the year that Tribe stock was available, it was a better investment than Yahoo!)

All that background info aside, the question is: who owns the rights to broadcast the Indians’ regular season games? The answer is Sports Time Ohio - a cable channel owned and operated by the one, the only Larry Dolan.

There’s an important distinction here. The YES Network is owned by the same holding company that actually owns the Yankees. Sports Time Ohio is in fact owned by Larry Dolan, NOT Cleveland Indians Baseball LP. Because the two are legally separate entities, Cleveland Indians Baseball LP has no incentive or obligation to factor the profits of Sports Time Ohio into the franchise’s accounting picture.

That said, all the money made by STO is going to the same place as the money made by the Indians franchise. How much money is that? We have no idea, because - surprise! - STO is not a publicly traded company. But considering that STO owns the cable broadcast rights to not only the Indians’ season, but also the Browns, it’s safe to say that they’re turning a significant profit.

This is all the analysis I can muster for the night, so it looks like this will become Jose Mesa Is Dead’s first three-part column. I don’t know if I’ll have time to write the conclusion until Sunday. Til next time.

Back to Part 1

On to Part 3

-T

10:48pm | URL: http://www.josemesaisdead.com/post/171914851/pinocchio-story-part-2
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FILED UNDER: Sports Economics MLB Baseball indians