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March 4, 2010

Squawking Baseball

LA Story

by Shawn Hoffman

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Did you hear? The Dodgers are getting cheap. Really cheap. By 2018, they'll be spending less than the Royals on payroll, all while pocketing about $300 million in profit. If the team doesn't do well, so be it—people will come to the games anyway, because in the history of sports (and particularly in Los Angeles, where there's little else to do), there's nothing that fans enjoy more than a rich team that doesn't spend.

Now back to reality, where the only thing more ridiculous than that scenario is that the LA newspapers actually seem to think it's plausible.

Here's the quick back story: last week, Jamie McCourt included some documents in a court filing that detailed a pitch the Dodgers made to some Chinese investors that would have resulted in a wide-ranging partnership, including the Dodgers, a Chinese soccer team, and an English Premier League team. Within that pitch were some financial projections going as far out as 2018, when, supposedly, the Dodgers plan on spending $125 million on player payroll—or about $7 million less than they did last year. This despite anticipated revenue growth of over 80 percent between now and then.

Before I get into all the ways that those numbers are preposterous, let's first look at some interesting things that we actually did learn from these documents:

  • The Dodgers spent $128 million on player compensation in 2007, and $123 million in 2008. These figures were supposedly 46 and 42 percent of annual revenues, respectively. Doing some quick math, that means the Dodgers pulled in $278 million and $293 million the last two seasons. (For what it's worth, Forbes had them at $224 million and $241 million in those years. If the Dodgers' figures are pre-revenue sharing, and Forbes's are post-revenue sharing, it's possible that their estimates are at least somewhat close.)

  • The Dodgers' average ticket price was $29.40 in 2007. They sold 3.86 million tickets, meaning ticket sales accounted for about $113 million, or 41 percent of that year's total revenue. Forbes had their gate receipts at $103 million, and total MLB gate receipts at 36 percent of the teams' revenue.

  • We know that the Dodgers' attendance declined by about 130,000 from '07 to '08, which, if ticket prices were held constant, would have resulted in a loss of about $3.8 million. And yet, revenue was actually up for 2008, which means that if everything else stayed constant, the team made somewhere around $20 million during their playoff run that season. (The Dodgers didn't make it in '07, but went to the NLCS in '08.) Don't take that estimate too seriously though, as we have no idea how their other businesses did in those years.

  • The Dodgers modeled in a $53.50 average ticket price in 2018, which, assuming four million in attendance, results in $214 million in gate receipts. That's 40 percent of their projected $529 million, or about the same as it was in 2007—meaning they expect all of their other businesses, including MLB's central fund, to grow at the same 80-percent rate.

Now, on to the ridiculous parts. Based on their "projections," the Dodgers will be spending 25 percent of their revenue on payroll in 2018. For comparison's sake, that's about what the Marlins have been spending lately, based on Forbes's estimates. Not only would they get absolutely destroyed for this politically, it doesn't even make economic sense; there's a reason teams generally spend about half of their revenues on major-league players, instead of just cutting costs and pocketing whatever they can. There are huge rewards for fielding a competitive team, both in terms of operating profits and franchise value, particularly in a market like LA.

That's why you see so few teams keeping their payroll constant over a long period of time. In the 25 years for which we have reliable payroll information, only 11 teams have had a lower payroll than they did 10 years previously, and the great majority of these have been bad teams from the last few years (a slow growth era) who were competitive in the late '90s (a boom era). No surprise that the 2006-08 Marlins take the top three spots, as they were three of the leanest teams, relative to their competition, in modern history:

Team Year Payroll Year Payroll Difference
Marlins 2008 $21,811,500 1998 $41,322,667 -$19,511,167
Marlins 2007 $30,507,000 1997 $48,583,000 -$18,076,000
Marlins 2006 $14,998,500 1996 $31,132,000 -$16,133,500
Orioles 2009 $67,101,666 1999 $80,605,863 -$13,504,197
Rangers 2009 $68,178,798 1999 $76,709,931 -$8,531,133
Padres 2009 $43,333,700 1999 $49,768,179 -$6,434,479
Orioles 2008 $67,196,246 1998 $72,355,634 -$5,159,388
Blue Jays 1995 $45,719,500 1995 $50,590,000 -$4,870,500
A's 2001 $33,810,750 1991 $36,999,167 -$3,188,417
A's 2002 $40,004,167 1992 $41,035,000 -$1,030,833
Royals 2003 $40,518,000 1993 $41,346,167 -$828,167

Note that of those eleven teams, only the 2001-02 A's made the postseason, and we know the story with them. Remember that league revenue more than doubled in both the '90s and this past decade, so teams that stayed flat over a 10-year period were essentially cutting their payroll in half, in real dollars. If MLB really does grow by 80 percent, as the Dodgers project, they would likely be in the bottom five in payroll by 2018.

Can you imagine the Dodgers spending less than the Royals and the Pirates? Me neither.

I've written this umpteen times already: big-market teams are smart to spend lots of money on players, since their potential returns are so high. This is even baked into our GM rankings; given their incredible earning capacities, teams like the Yankees and the Dodgers would get hammered if they didn't have high payrolls.

Needless to say, it would be a terrible business decision for the Dodgers to do this, and I'm inclined to believe that that the invisible hand wouldn't even allow them to: unless they're really terrible, the marginal gain of spending that extra 15-20 percent of revenue on player payroll will always exceed the marginal cost. And I'm sure they know this. Unless they're all on some kind of psychoactive drug cocktail, or possibly preparing for the next round of MLB collusion, there's no way those projections are anything but a sales tool, pitching an investor on what they think he'll want to hear.

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  Dodgers

19 comments have been left for this article. (Click to hide comments)

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ryanlazenby

The Braves spent more this year than 2000? Doesn't seem to fit with all the railing writers have done about the evils of Liberty Media and Corporate ownership.

Mar 04, 2010 09:45 AM
rating: -1
 
ostrowj1

Adjust for inflation (preferable inflation in MLB salaries) and I am sure you will have a much different story.

Mar 04, 2010 09:57 AM
rating: 1
 
BP staff member Shawn Hoffman
BP staff

Exactly. That's why the teams on the list are such extreme examples.

Mar 04, 2010 12:10 PM
 
Greg Ioannou

There's a typo in the years on the Blue Jays line -- both are given as 1995.

Mar 04, 2010 09:50 AM
rating: -1
 
Michael Dennis

Thank you for making this Dodger fan feel a little better this morning.

Mar 04, 2010 10:25 AM
rating: 0
 
vtadave

As a Dodger fan, very interesting reading Shawn. For all our sakes, hopefully the McCourts do us a favor post-divorce and sell the team. When you're longing for the return of the Fox era, that speaks volumes.

I will assume however that you misspoke (or perhaps my sarcasm detector needs a tune-up) when stating that there's "little else to do" in LA.

Mar 04, 2010 11:15 AM
rating: -2
 
YX

It's the later, read the next sentence.

Mar 04, 2010 11:43 AM
rating: -1
 
cloakedarbiter

Your sarcasm detector needs a tune-up. Shawn is imitating Simers and co. Very good read, however. This makes me want to re-read Moneyball.

Mar 04, 2010 13:19 PM
rating: -1
 
GagneCY03

Shawn, where are you getting your payroll figures? Are you saying the Dodgers spent $132 million on player compensation in 2009?

Mar 04, 2010 15:26 PM
rating: 0
 
BP staff member Jay Jaffe
BP staff

That would be the year-end payroll figure, which includes not only salaries but earned incentive bonuses, option buyouts, deferred cash, and more. You can see the difference between opening Day payrolls and year-end ones at http://www.bizofbaseball.com/index.php?option=com_wrapper&view=wrapper&Itemid=179

Mar 04, 2010 16:51 PM
 
GagneCY03

Thanks for the link, Jay. However, I have a question about the salary listed for Manny Ramirez. It says he made just under $24 million, even though most of his salary was deferred over the next 4 years. According to Cots, Manny made $10 million in 2009, will make $10 million in 2010 and will receive payments of $8.3 million each year from 2011 to 2013. Why is his listed salary so high?

Mar 05, 2010 17:13 PM
rating: 0
 
BP staff member Jay Jaffe
BP staff

The question is better directed to Maury Brown, but my guess is that the $23,854,494 listed represents an estimate of the present-day value of the deferrals.

Mar 09, 2010 07:00 AM
 
Adam Madison

Shawn Hoffman is reason enough to re-subscribe to BP.

Mar 04, 2010 17:18 PM
rating: 2
 
jayman4

Thanks for the link to Forbes. Team economics is (purposely) opaque, so some light is interesting and welcome. I found it interesting that Forbes estimated that both BOS and NYA operated in a deficit. I could see how that would be both rational and accurate but it also me wonder about revenues from RSN, since both BOS and NYA have strong ones.

Mar 04, 2010 20:13 PM
rating: 0
 
Dave Pomerantz

I believe the documents Shawn is referencing here discuss the launch of a Dodgers RSN. I wonder if that accounts for a significant portion of the 80% revenue increase, and if so, are the Dodgers obligated to spend that money on player salaries?

Mar 05, 2010 10:52 AM
rating: 0
 
Bombardiers

"This despite anticipated revenue growth of over 80 percent between now and then" I think its about time that people who own teams or analyze sports for the fun of it take heed of their surroundings. California is fast approaching
"failed state" status. Assuming three percent of five percent growth 'cuz ya hafta put something into the excel cell is silly. People will be dropping their cable and going to fewer games.

Mar 04, 2010 20:30 PM
rating: 0
 
Juris

Shawn: the last time I was at Dodger stadium, on a very hot summer day, it seems that everybody in my family thought it was just fine to keep buying premium beers at $12 a pop. I spent a lot more money on beer than on tickets.

Mar 04, 2010 21:45 PM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

Right, and that's been the model there for 50 years -- charge a ton for concessions, parking, et al, while keeping ticket prices low. All the more reason to be skeptical of those documents.

Mar 05, 2010 08:50 AM
 
Juris

We old-timers also remember that after Dodger Stadium first opened, it was discovered that they had installed hardly any drinking fountains. (This was a big news story at the time.) Although they later put some water fountains in, this history is very consistent with your comment here: don't give anything away that you can compel people to pay for.

Mar 05, 2010 19:38 PM
rating: 0
 
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