This is the third and final part of an analysis of the business of baseball in the Motor City.
In the first, I discussed the apparent fact that 29 of 30 MLB teams are not profit-maximizing businesses, and how we ought to look at the financial aspect of team management.
In the second, I discussed the size of the Detroit metro market and how it impacts the near-fixed component of our team’s budget. We aren’t a small market, but we are losing ground.
In the third, I’m going to discuss how winning affects the Tigers’ bottom line.
Before I go any further, I’d like to give thanks to Forbes magazine who estimated this data on team revenues and to sports economist Rodney Fort who compiled and disseminated it.
As I already discussed, many of a baseball franchises revenues do not seem to have much of any connection at all to winning. Media contracts are over a very long time horizon, and are affected more by the size of the market than by the team’s performance in the recent past. In 2002 the Mets collected more than 4 times the media revenue that the Cardinals did, and that is certainly not because their team has been stronger on the field. Gate receipts, on the other hand, are strongly linked to actual team performance – if the team does well, more people show up and buy tickets and hot dogs. If a free agent is going to help to bring in dollars to pay their own salary, it is by creating wins which then in turn sell tickets. The amount of additional revenue that wins bring in this way will vary a lot from team to team and market to market – if you have dispirited fans (like in Cleveland) winning brings them back – if you have no fans (like in Tampa) then you will have a lot of empty seats even if you have the best record in the league.
My question is this: How much additional revenue do the Detroit Tigers (specifically) expect to get for each additional win?
For starters, take a look at the numbers I’m working with:
The respective deflators are there for statistical purposes to make the different years comparable (using year 2000 as a base), so we can try to tease out the impact of wins – which means that these ‘real’ numbers are in (more or less) year 2000 dollars. Total revenues in 1999 were about 12% less across the major leagues than in 2000, so the ‘deflator’ is 112 and we multiply the Tigers’ 1999 total revenues by 112% to put them in year 2000 terms. All that remains is to do a linear regression of the impact of winning percentage over that decade on Tigers gate revenues and other revenues. As far as ticket sales are concerned, there’s one other thing we have to correct for: the impact of Comerica Park. We sold a lot more tickets in 2000 and 2001 due to our stadium transition – by 2002 it appears to have all gone up in smoke.
For the regression results: there is no impact whatsoever (at least in the short run) of wins on ‘other’ revenues in Detroit. The coefficient that we get is negative which would suggest that our ‘other’ revenues actually fall when the Tigers win more games. Of course, that coefficient isn’t ‘statistically significant’ so to speak – so there is no reason to believe that the true impact on ‘other’ isn’t zero. For gate receipts, the ‘stadium effect’ was significant (of course) and added about $21 million in 2000 dollars in the years 2000 and 2001. The impact of wins on gate revenues is also significant, at $297,000 per additional win in 2000 dollars. We’ve only got numbers on gate up to 2008, but we have numbers for total revenues for 2009. [Forbes will presumably give us 2010 data just before spring training - I'll be eagerly awaiting it.] So, if we update that number to 2009 dollars we get an estimated return on wins to the Tigers of $533,000.
Is it just me, or does that number seem small? It is small. As we’ve all heard before, the ‘market rate’ for one WAR is something closer to 3.5 to 4 million dollars. Free agents in Detroit (and most other places around the league) do not come close to paying their own way. Victor Martinez will cost $13 million a year, for an estimated 3.5 WAR. His dollar value to the business side of the franchise is going to be under $2 million a year – even assuming he performs to expectations. Again, the profit-maximizing way to operate a baseball franchise – given the wages that players get in arbitration and free agency – is to pare expenses to the bone and live with the revenue consequences. Be glad this team is not run with those goals in mind. When we see big dollars being given out on free agents, we should bear in mind that as fans we get an awful lot of the benefit from that, but we don’t bear much of the cost. Of that $13 million VMart will be paid next year fans will be contributing about 15% – Illitch will be contributing the remaining 85%. I’m extremely glad that our owner values winning as he does, that he is willing to make that contribution, and I worry about the future of the franchise when Illitch is gone.