January 02, 2007

We Have No Idea How Much Barry Zito is Worth the Giants!


Barry Zito signed a seven-year contract with the San Francisco Giants on December 29 that will pay him $126 million. Last week, this column discussed the shift in Major League Baseball as the players have claimed an increasing share of MLB’s revenues which the owners had long controlled. This is all well and good but as David Goldstein reminded me, this column left unexplored the market value of a Major League baseball player.

The Giants will pay Zito a salary of $18 million per-year through the 2013 season. Zito and his family do well in this deal when the US Census Bureau estimated the median annual household income to be $43,389 in 2004. Zito’s salary is also at the top of MLB salaries. Only seven players made more than $18 million in 2006. But the question remains as to Zito’s value to the Giants. It may be that the Giants overpaid for Zito and it may be that the Giants underpaid for him. On what basis do we evaluate the monetary value of a player to an organization? How much money does Zito earn the Giants? To ask it another way, how much do the Giants earn per-year in exchange for their $18 million investment?

Major League Baseball values players on something of a relative scale. We have Alex Rodriguez at the top. Rodriguez was paid $21.7 million in 2006 by the Yankees. Derek Jeter, Jason Giambi, Manny Ramirez, and Todd Helton were between $20 and $16 million. Randy Johnson made $15.7 and Pedro Martinez $14.9 and we go down through the list of players. Zito entered the open market this off-season with his 2002 Cy Young award, three All-Star game selections, 156 strikeouts per-year, and 3.55 career ERA. He asked for a salary larger than those of Johnson and Martinez.

Let us see, Johnson and Martinez are at the end of their careers and had decent but not outstanding 2006 seasons. Zito is 28 years old and in January 2007, a superior pitcher. If Johnson is worth $15.7, than certainly, our logic reasons, Zito is worth more. The Texas Rangers offered Zito $13.3 million per-year over six years. The Giants offered more plus Zito could stay in the Bay Area where he has played his entire career. The market set Zito’s price. Zito is happy, Zito’s agent is happy, and you can bet new Giants manager Bruce Bochy is thrilled to have Zito to lead his pitching staff.

But baseball is both sport and business. We expect our teams to value winning and championships above the profit making bottom-line. In England, the Tampa Bay Buccaneers’ owner Malcolm Glazer bought controlling interest in the English Football Association’s Manchester United Football Club in May 2005. United fans were outraged in fear that the new American owner would place profit-making above winning. Some fans even broke-away and started a new club, FC United of Manchester which now plays in the North West Counties Football League Division One, level 9 of English soccer.

Sure we all like winning. A former co-worker expressed surprise once when I discussed the Phillies' salary budget. He is a Mets fan and the Mets were spending huge sums on Martinez in December 2004 and Carlos Delgado in November 2005. He argued that it is not our money as fans that teams are spending. Who cares how much teams pay? Our only interest is that they acquire players who will win.

But financial stability and health is a prerequisite of a team continuing operations. A team cannot stay in business unless it generates sufficient revenue to pay its bills. A condition of teams playing, let alone winning, is that their income equals or exceeds their expenses. If they do not meet this condition, there is no team to play the games.

Does Zito’s $18 million per-year make business sense? The street vendor who sells bottles of soda provides me with a service. He or she is there to help me quench my thirst. Let us say that this vendor pays the soda distributor $0.50 per bottle of soda and sells it to me for $1. I am happy to pay the dollar and the vendor makes $0.50 profit with which the vendor pays for the vendor’s cart, electricity, taxes, and eventually provides for themselves and their family. If the vendor cannot sell the soda for more than the soda costs the vendor, than the vendor cannot stay in business and we lose the convenience of being able to purchase a drink along the street.

My father and I both invest in the stock market. If I suggest selling a stock, my dad always asks me if I think it will continue to go up. His question is whether he can sell the stock for more than he paid – who cares what its intrinsic value may be. Great question and this is a primary principle of business. What do the Giants receive from Zito in exchange for their $18 million? How much do the Giants earn?

The Yankees paid Rodriguez a salary of $21,680,727 to play third-base this past year. The Yankees had the highest attendance in baseball with an average of 51,858 fans per game at Yankee Stadium according to ESPN.com. The Yankees have one of the largest television deals in professional sports in the world. Were the Yankees to drop Rodriguez, by how much would attendance, advertising revenue, and television money decline? Would the Yankees lose more than $21.68 million? Will Barry Zito generate revenue through ticket sales, advertising sales, and merchandise sales that exceeds $18 million per year?

Let us suppose the Giants win the World Series. How much is this worth? Maybe the Giants should have also signed Alfonso Soriano who was available to the highest bidder and bid for and signed pitcher Daisuke Matsuzaka for whom the Boston Red Sox outbid all other teams. But the Cubs overpaid for Soriano and the Red Sox for Matsuzaka, you say! Maybe – but on what grounds did they overpay?

Connie Mack understood that he could make more money from his teams if he came close to winning but did not win. Mack managed and owned the Philadelphia Athletics from 1901 through 1950. He won nine pennants and five world championships. He is remembered as much for winning championships as he is for deconstructing them. He lead the 1914 A’s to 99 wins and the American League pennant. After the season, Mack broke up this great team in outrage when his star players signed lucrative contracts with the new Federal League. The 1915 squad lost 109 games and fell to last place. His 1916 team is considered among the worst of all time as they lost 117 games. He broke up his 1929-1931 dynasty due to financial difficulties in the Great Depression. Is baseball a sport or a business?

BaseballLibrary.com quotes Mack as observing, "It is more profitable for me to have a team that is in contention for most of the season but finishes about fourth. A team like that will draw well enough during the first part of the season to show a profit for the year, and you don't have to give the players raises when they don't win." Jeff Suppan proved this true last week. Suppan won the MVP award for the National League Championship Series this past October and commanded a four-year contract with the Brewers that will pay him $10.5 million per-year. He would have signed a nice contract without his post-season achievements but the MVP award certainly boosted his market value.

The relationship between gate attractions and revenues manifest itself recently in the National Basketball Association in Allen Iverson’s departure from the Philadelphia 76ers. The Sixers were 5 and 12 on December 8 when they removed Iverson from the active roster with the intention of trading him. The club finished the 2005-2006 season with a losing record and out of the NBA playoffs – an impressive feat where 16 out of the 30 teams make the post-season. How valuable was Iverson to the team? In regards to winning, the Sixers could have missed the playoffs without Iverson and his $18.3 million salary!

But man, was Iverson good for business! NBA.com reported in December 2005 that Iverson’s was the second most-popular NBA jersey sold at retail, and on his back, the Sixers were the fourth most popular team in jersey sales. The fans certainly were not buying Chris Webber and Willie Green jerseys! When the Sixers played at home at the Wachovia Center after deactivating and then trading Iverson, television cameras showed stretches of empty red seats. The Sixers might have been a mediocre team with AI, but he was fun to watch in person, sold tickets, and sold a lot of merchandise.

Not one Major League Baseball team operates as a public company. This means that all financial records of every organization are closed to the public. We do not know how much revenue each team earns. We sometimes hear owners and general managers claim that they lose money. This may be true and it may not be. We just do not know with financial statements closed to us. This also means that we do not have the information to evaluate the financial value of a player to an organization. Barry Zito is a great pitcher and it will be fun to watch him pitch this year. Giants fans are excited to have him for good reason. But did the Giants underpay or overpay for Zito’s services? We really do not know.

2 Comments:

Anonymous bernz said...

Man, look at that Wharton education work.

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