Solving The Yankees Problem

Alright, so I have outlined the general strategy of the Yankees Dynasty yesterday and mentioned that I would do this follow-up post covering the drawbacks of their method and the solution. Let's go over the drawbacks first.

The most obvious disadvantage to the way the Yankees spend money is that they have a huge amount of capital dedicated to payroll, which is not something you want typically. On a typical team it is to your advantage to pay your athletes as little as you can get away with but with the Yankees their advantage comes when they can pay their athletes as much as they can. It's tough making a profit with the payroll numbers they have on there but luckily the Steinbrenners care more about having a winning team than the dollars. Baseball is a business, however, and by raising cost they are bleeding money all over the place.

Another drawback is the fact that players who hit free agency are usually in the early thirties or late twenties and in the decline phase of their careers. Whereas young teams get better as time goes on, veteran heavy teams just get worse (excluding the effects of steroids and players who simply buck the trends). In the late nineties and early two thousands this effect wasn't as pronounced, due to the aforementioned steroid abuse and the simple fact that contract lengths were a lot shorter. Before, they had guys running out their contracts when they were 33 or 34, now it's 36 - 37. Their team becomes older and, thanks to the decline of steroids, less effective.

There's also the curious result that the Yankees cannot seem to win in the playoffs since 2001. Many commentators would be quick to blame individual players (ie. A-Rod and Giambi) but such pathological failure has to run deeper than that. Another team with a very engrained methodology, Billy Beane's A's, suffers from a similar problem. There's no obvious root for this problem but I figured I would mention it anyways.

The Yankees' Dilemma - or - How They're Gonna Fall

The continued lifespan of the Evil Empire is very tenuous. Like every empire in history and monopoly in business it had a time when it rose, it had its golden age, it had its decline, and soon we will see its fall. I will give an economic interpretation of this eventually.

The problem with their strategy of escalating player contract inflation is that it has a cap. More than a salary cap could kill the Yankees, the Yankees will fall when they simply can't pay their players more than they already do. Players are already making money in the hundreds of millions and it's reaching the point where salary inflation simply cannot rise at this ridiculous rate. Player contract inflation will soon fall down to match monetary inflation and the Yankees will lose every bit of competitive advantage they've been enjoying up until this point. They'll still get some of the best players in free agency but they won't be able to grab salary dumps like they used to.

It just needs one domino for the entire set to fall, and this economic crisis the world is going through can be that catalyst. Many teams are either keeping their payroll the same or reducing it in advance of the bad times to come and this will have a huge effect on payroll inflation. Sure the top players are still getting paid more, but the mid and low level free agents won't get a proportional payday letting more teams afford players. Next offseason will see a huge dip in player contract inflation with teams in the midst of a global recession and the Yankees unlikely to buy the entire market again. This can spark a trend towards more modest salary growth in the future.

With their strategy obsolete the Yankees will no longer be the powerhouse they once were.

Aside: The Economic Interpretation

This shouldn't really be an aside per se as it's what I'm basing this blog around, but anyways. In economics there is this idea of "creative destruction," popularized by Joseph Schumpeter. The gist of it is that innovations (of product, marketing, or whatever) give one party a great competitive advantage that turns into monopolies. What destroys monopolies is another party coming up with an even better innovation (which in turn creates a new monopoly). I won't bother to give real world examples, but the important thing to take away from it is that innovations create and destory monopolies.

In the economic interpretation of baseball, where instead of dollars we have wins and world series rings, each team and head office is their own company competing with every other team. So the Yankees use of salary inflation was their innovation that allowed them to form a monopoly over the AL East for a decade. Billy Beane is the ultimate example of an innovator in baseball, where his innovation was better evaluating tools for players in order to get a better team with less payroll.

What destroys these monopolies is a superceding monopoly, and we really already saw that with the Red Sox overtaking the Yankees to be the "beast of the east." So really the Yankee Dynasty is already finished and they can no longer hope to remain competitive without changing their strategy - developing a new innovation. Problem is and the problem with many who come up with a great idea is that they lucked into their innovation and are soon pushed aside when they can't do something new.

Now with the emergence of the Rays (draft and scouting based innovation), I think we've seen the final nail in the Yankee Dyansty's coffin.

How Do You Solve A Problem Like The Yankees?

Ah, the Yankees, so maligned, so hateable. As a Toronto fan, it is beyond easy to blame the success and failure of the Jays on the free-spending ways of the "Evil Empires:" the New York Yankees and the Boston Red Sox. It's not unreasonable to suggest that the success of those two franchises has had a large effect on the fate of those aforementioned Blue Jays. Recently with the Tampa Bay Rays' run at success for the first time in their dozen year existence commentators are suggesting that it is not unfair to be in the same division as the heavyweights; afterall, if the Rays can do it, so can the Jays, right? Shockingly, the Jays management doesn't seem too keen about the prospects of a decade of last place finishes to restock their farm system and get lucky in one year. According to many metrics, the Jays were better than the Rays last year.

But whether or not the Jays can improve their chances, there's still the problem of the Yankees. They are fresh off the signing of AJ Burnett, CC Sabathia, and Mark Teixeira now and a lot of people seem to believe they have bought their way into contention yet again. Remarkably, since the start of this decade the Yankees have not won a World Series ring to speak of, since they began their ridiculous spending spree. They have a strategy but a lot of people don't realize what it is. Let's go over it now.

Player Inflation

You know how it is, every free agent season there seems to be something like every person in baseball waits on baited breath for the big guys to sign? This year no chips would fall until CC Sabathia lanked with the Yanks. Year in, year out, this is what happens. This is no surprise: the best free agents set the markets for the lower classes. Teix signs for 180/8 and players agents' now have a standard to compare to. The more the top free agents get paid, the more everyone else down the line gets paid. This is what I refer to as player contract inflation.

The top dollars go up every year, natural due to inflation but far outpacing it because baseball's a boom industry right now. This is not sustainable in the long run as you have a hard cap after which the owners just aren't making enough money to justify the spending increases year after year. Or, well...

The Grand Yankee Strategy

Notice how the top free agents, the ones who set the market, usually seem to fall into the hands of the Yankees? Teixeira and Sabathia this year, A-Rod last year, Pavano, Giambi, etc. It doesn't happen every year, such as AJ Burnett's contract with Toronto or Barry Zito's with San Fran, but in the long run there is one driving factor to the dramatically escalating contract inflation: the New York Yankees.

With the money they throw around this is no shocking revelation. Steinbrenner wants a winning team so he pays top dollar for the top players, right? Well, that's almost like a side effect. It's more about Brian Cashman, Yankee GM, than anyone else as far as I can figure. It pays for him to pay top dollar, even if they're crap players. He has a blank check for his payroll and he can afford anything, so it's in his best interest to keep contract inflation skyrocketing. Players get signed to ridiculous contracts on other teams because their GMs want to compete with the Yankees in the FA market. They can't afford them and ownership forces them to trade them to whoever can pay their salary. But it's only the Yankees who can afford them, and they've had a couple years to look at the players and see if they're good enough for the team.

The prime example here is Alex Rodriguez. He became a free agent after his six years in Seattle and the Rangers signed him to a ridiculous ten year contract. If they hadn't, the Yankees would have. A few years in, the Rangers still aren't a great team and they have to trade A-Rod. They got a decent return for him in Soriano, sure, but A-Rod might be the best player to ever play the game. What would be happening now if Barry Zito didn't suck so much? The Giants probably would have moved his contract already to the Yankees, but now the Yankees don't want him. The risk is on the signing team, not the team that can pick up the salary dump.

So there you have it: the Yankees drive up player contract inflation so that only a few teams can afford the top players. It forces the mid-market teams who hope to contend via free agency into dumb contracts that they can't afford, and the Yankees can pick apart the carcass. That is how the Yankees compete, because baseball is like a business and like every business you need a strategy.

Tune in soon to hear the drawbacks and why it's headed towards a fall.

Weighing in on the Halladay Debate

If you're a Jays fan then this off-season has had one repeated debate: do you trade Roy Halladay? The argument usually boils down to the merits of keeping JP Riccardi around. If ownership wants the Jays to rebuild then you fire JP and bring in someone else to blow the team up. Otherwise it might be prudent to have a extension discussion with Roy.

I'm not going to weigh in on the relative merits of JP or Doc because way too many bloggers have already done so. I'm going to look at what makes financial and economical sense in this argument.

Value of the Franchise

Forbes' ranked the Jays at a 352 million dollar valuation this past April, putting them 22nd in the 30 major league teams. Their operating income was -$1.8 million. These numbers aren't great seeing as they had a $350 million valuation the year before (good for 20th) with an operating income of $11 million. In 2007, only the Yankees were in the red in terms of operating income but in 2008 both the Jays and the Red Sox joined them, which is not a position any of the three teams want to be in. Note, however, that this probably does not account for all the value the Jays have for Rogers Communication as a lot of the value they gain for ownership is in marketing the Rogers brand.

Looking back at 2004, when Rogers bought the Skydome, the Jays were worth $169 million with an operating income of $0. That's a significant jump in value in a few short years and a large amount of credit goes to outgoing President of Baseball Operations Paul Godfrey and his right-hand man JP Riccardi. On one hand, Rogers Communication will look favourably at JP's guidance during these years, but on the other they've been looking at declining incomes since 2006 so may not be terribly happy.

Consumer Confidence

Being a business, one of the largest concerns current interim Pres Paul Beeston and VP Riccardi need to consider is declining consumer confidence in their product. It should be obvious by now that the fanbase is getting pretty restless. The fact that the media shits all over JP every day hardly helps (I'm looking at you, Griffin). On one hand JP has gotten pretty unpopular over the last couple years and firing him may help in turning the public perception.

On the other hand, trading Roy Halladay can hardly help either. Dealing Halladay - who is a top three pitcher in the game right now and will be for the next couple years - tells your fanbase that you don't think you can compete for the rest of Halladay's contract. Barring a fantastic return for him (which I kind of doubt, looking at the Santana deal and the Peavy discussions) the Jays will probably be retooling for 2011 or beyond. If they're retooling for 2010, why trade him? That's asking a lot of patience of the fanbase that has been waiting 15 years for a championship. Trading Halladay instantly loses value for the franchise, he's just that great a player.

Economic Climate

Unless you've been living under a rock this last year you've be deluged by the R-Word, which is a lot less attractive to us than the L version. A lot of people are inclined to believe that the r-word will hit baseball hard and are incredulous at the Yankees' spending spree this offseason (that's actually how the Yankees' compete, but I digress). Historically however the entertainment industry is one of the few that actually grows during recessions. People are less inclined to spend on big trips or expensive luxury items so will go to ten dollar games more often to occupy their worried minds.

The loss of the GM sponsorship sucks, but the Jays are unlikely to lose their others. Interest rates are down so MasterCard's profits should be high and Labatt Blue can hardly be considered a luxury item, so the economy shouldn't hit the Jays as hard. They also have a benefit of being sheltered up here in the Great White North; we're not being hit as hard as the United States.

That last point actually gives the Jays a bit of a competitive advantage compared to the US clubs. Sure the dollar is down which cannot help but the Jays are going to be healthier going forward than any of the other franchises. Look for the Jays to go into the 2009 offseason in a much better condition, which I think leads me to my conclusion.

Conclusion

Going forward people are going to be inclined to trim payroll, which is certainly what's happening for the 2009 season. Trading Halladay doesn't really help though as his benefit to the public perception of the team far outweighs his contract's worth.

This time next year, however, the Jays will be in an interesting position. The current cream of the crop in the minor league system will have graduated to the majors which means contributions from: Snider, Arencibia, Cecil, Mills, Romero, Purcey, Jeroloman, and possibly Cooper. A return of Marcum and McGowan from injuries means that the starting rotation - led by Doc - will be in fantastic shape. If Snider is as we all hope he is then the offense will also have drastically improved.

The biggest thing will be that player contract inflation is unlikely to rise significantly next offseason. Most clubs are unlikely to raise payroll and the Yankees will not be nearly as large a player. With a trimmed down payroll and a shelter from the recession the Jays will have the opportunity to be the major player and grab guys like Greene, Bay, Vlad, or Holliday. It would even be better to talk to Halladay then about an extension when they're facing a greater sense of optimism with a young core and the money is likely to run a lot freer than this offseason.

Regards,
J

Yet Another Baseball Blog

I know I know, yet another baseball blog. It seems this day everybody and their mother had a blog, though luckily enough mine seems to be resisting the temptation. I fear for that day. In any case, I need a hook to keep me fresh and relevant, so I needed to evaluate what I could write about.

I'm a 21 22-year old undergrad at the University of Waterloo, Waterloo Ontario, so naturally my hometown team is the Toronto Blue Jays who frustrate me ever so. Even more naturally, it makes sense for this team to become the focus of the blog, but with so many excellent Jays blogs out there (like the Drunks, Tao, Southpaw, and Mockingbird) who have things like established readers and, y'know, writing talent I needed something more to set myself apart.

Then I figured I'm pretty big into stats, so why not look into that? Again, that's not really new or innovative, and the Mockingbird does such a better job at it than I would anyways. Still, that would figure in.

Then I got into an argument over the internet on why the business model of the Yankees is doomed to fail sooner rather than later, and I had my answer: the economics of baseball. Or, well, a combination of the three items: the economics of baseball, the Toronto Blue Jays, and the competitive advantage of superior stats.

But economics is boring, and complicated, and lame!

Ba-pschh, where did you go to school, idiot? Okay, factor in condescending as well. When I started taking economics I was struck by how much it is overwhelming common sense. I'm going to try to avoid complicated terminology and concepts, explaining as well as I can. I don't know, it could be interesting. Or it could flop, which seems more likely than not, but I'm trying to be optimistic here.

Oh and as for content, I doubt I'll be as delightfully foul as the Drunks, but I reserve the right to drop the occasional fuck or shit (hee-hee, drop a shit) if it'll add to the point (which it often does).

Until next time,