August 10, 2010
SABR 40: Vince Gennaro on Asset Value in Trades
The Society for American Baseball Research [SABR] held its national convention this past weekend in Atlanta [next year‘s venue will be Los Angeles] and one of the many presentations was given by Vince Gennaro. The author of Diamond Dollars: The Economics of Winning in Baseball, Gennaro works for the Cleveland Indians and teaches at Columbia University and Manhattanville College.
David Laurila: In a nutshell, what was your presentation?
Vince Gennaro: My talk was about how teams make trade decisions, measuring the asset values of players on different teams and in different situations. At the core of it was the difference between being in the hunt for the postseason versus being out of contention and how teams view their assets, particularly those whose contracts are expiring at the end of the year -- particularly those who have a short time left in terms of control.
Players have very different value, economically, to two different teams. This is based on, largely, where the teams are on the win curve, or the win-revenue relationship. If teams are fighting for that 72nd, 73rd or 74th win, the marginal value of those wins is very small. If teams are fighting for that 91st, 92nd or 93rd win, the value of those wins is extremely high. The reason it is high is that those are more likely to be the wins that push you into the postseason and unlock that pot of gold at the end of the rainbow.
DL: You used Cliff Lee as an example.
VG; Yes. In the case of Cliff Lee, who got dealt in early July -- Lee had only a couple of million dollars of value, as I calculated, to the Seattle Mariners, because he was going to help them win their 72nd or 73rd game, figuratively speaking, whereas with the Rangers he has a chance to be the difference, maybe like Sabathia was for the Brewers a couple of years ago, between reaching the postseason or not reaching the postseason and unlocking a 30 million dollar revenue stream.
DL: Where does the revenue stream come from?
VG: If you make the playoffs, the economic value results from the city and the local fans getting optimistic and excited about the chances of the team going forward. What typically happens is that they’re scrambling for postseason seats and they’re dissatisfied with the ticket prices and the seat availability, so they end up buying their own season-ticket package the following season and can be considered options for future season tickets. The other revenue streams have a similar positive affect, and this can go on for up to five years after the team reaches the postseason, even if they never go back to the postseason again.
If a team makes the playoffs rather than just missing, they should experience a much better windfall, because, again, they’ll actually have an October experience -- the fans will experience October with baseball. The caveat there is: if they go three and out in the division series, it does mitigate the impact. But if you put up a fight in the division series, or are fortunate enough to get to the league championship series, you really unlock this revenue stream. If they come close but don’t make it [into the postseason], they’ll still build a sense of optimism and will be on the right track financially and revenue-wise for the next year, but the bump will be nowhere near as great.
DL: Earlier, you mentioned 30 million dollars. Is that what a team like the Cincinnati Reds would stand to gain if they were to reach the postseason?
VG: Yes, I would expect that for a team like the Reds, who fit the generic case I’ve studied more closely, the net present value of the revenues they generate over the next five years could be in the neighborhood of 30 million dollars or so.
DL: There is obviously a risk factor associated with these types of deals.
VG: There are risks on both sides. The risk for the team that is getting the impact player -- often renting the impact player -- is that they spend their prospects, and maybe spend some extra salary dollars, and fall short of the postseason. Then they’ve left themselves going forward with a potentially depleted farm system, which doesn’t bode well for their future chances. On the other hand, the team getting the prospects is dealing with the inherent risk associated with players who show promise in the minor leagues, or young major leaguers, who may or may not materialize into what they expect them to be. The landscape is littered with those. So both sides are dealing with financial risk.