Is Winning the Best Investment?

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by Griffin Murphy

“Why haven’t the Angels decided to tank yet?” – Mike Trout, probably

Introduction

In Major League Baseball, tanking is generally not considered an issue. Is this because of the limited impact that one player can have on a team? Or could it be that winning more games, regardless of whether a team makes the postseason, offers the better financial payout for a team?

It might be easy to assume that it is in a team’s financial interest to win more games. Winning generates fan excitement, which should lead to increased ticket and merchandise sales and an overall rise in revenue. So it must be in the interest of all teams to win as many games as possible, right? Well, it depends on the cost of attaining the wins, and the relative payoff that the increase in wins offers. Furthermore, “investing in wins” is never a sure thing; there are often teams with enormous payrolls that, come playoff time, find themselves on the outside looking in. Look at the Yankees this past year, for example, with a payroll of over $214 million. That was good for second-highest in MLB, yet it only bought them 4th place in the AL east. Perhaps not investing heavily in winning at all, then, would be the safer bet. So could it be the case that teams aren’t “trying” to win insofar as the upper-management doesn’t consider it a worthwhile investment? In other words, could the payoff from being consistently uncompetitive with the occasional year of success be higher than constantly trying to win?

Effect of Change in Wins on Change in Revenue

In order to identify the direct impact that winning has on a team’s revenue, I looked at every team’s percent change in wins from the previous year and compared it to the corresponding percent change in revenue from 2002 to 2015. Here are the results:

griffin-graph-1

As can be seen from the results, and more specifically the trend line, on a year-to-year basis the correlation between change in wins and change in revenue is rather weak. Is it fair to conclude, then, that from a business perspective there is not a high incentive to win, especially if it is going to come at a high cost? Certainly not. However, what we can conclude with certainty is that there are many more factors that affect a team’s change in revenue than simply a change in wins.

However, there are a number of problems that arise when looking only at the change in wins as it relates to change in revenue. The right-most point, for example, shows a massive increase in winning without a corresponding increase in revenue. This point represents the Tigers increasing their win total from 43 in 2003 to a still-meager 72 in 2004. In spite of increasing their win total by a massive 67.44%, the Tigers still ended up with a small revenue increase of 7.69% in 2004, lower than the league median in that year. Two years later the Tigers had another large increase in wins. From 2005 to 2006 their win total jumped 33.8% and, contrary to 03’-04’, they saw a high revenue increase of 16.44%, good for the highest percent increase in that window of time in the entire league. So what was the difference between 03’-04’ and 05’-06’? Well from 05’-06’ the Tigers bumped their wins from 71 to 95, good enough to take them from out of contention to an AL wild card berth. Ultimately they appeared in the World Series that year, which unquestionably contributed to their high revenue growth. While wins in a broad sense do not have a large impact on revenue, certain wins, namely those that advance a team into and throughout the postseason, are far more valuable than those that do not.

This has some implications regarding the validity of tanking for a better draft position. The conclusion here could be that tanking is in the financial interest of all non-contenders, at least as it pertains to revenue growth. This seems to follow from the fact that the Tigers saw an 8.33% growth from 2002 to 2003 in spite of a 12-win decrease, only to see a lower growth of 7.69% the following year even though the team won 29 more games. If going from 43 to 72 wins costs teams both better draft position and the extra salary being paid to assets who could be traded for cheaper, more future-oriented assets, and results in no corresponding revenue growth, it seems it would be against a team’s financial interest to not tank in these circumstances.

What have we learned so far? Nothing ground-breaking, but to recap:

  1. Change in wins alone is not a very good indicator of change in revenue.
  2. Winning regular season games is much more valuable, and arguably only valuable if it results in a postseason berth.

Value of Postseason Berths

A question that we must ask now: How much value does making the postseason have? In order to answer this, I again looked at percent change in wins against percent change in revenue from 2002-2015. This time, however, I separated playoff and non-playoff teams.

griffin-graph-2

griffin-graph-3

As we inferred from the league-wide results, winning more only has a large impact on revenue if it leads to a playoff berth. This is supported by the steeper trendline for playoff teams than non-playoff teams. At least to an extent we can now conclude that, if winning from a financial standpoint is only valuable insofar as it increases revenue, and given that winning has higher financial and asset costs (i.e. worse draft position) and only offers certain revenue growth if a playoff berth is achieved, then teams should only try to win if they perceive it possible to make the playoffs. Now this might seem somewhat obvious as it is at the core of “tanking”, but the short-term costs of losing to an organization are often overstated, as we learned from the Tigers from 03’-05’, and thus poor decisions are made.

Incentives of Tanking and Winning

Surprisingly, however, in the MLB we do not see tanking occurring all too often. Let’s look at the Los Angeles Angels team this past season, who I considered a perfect team to tank given their circumstances. From June 1 through the end of the season the Angels were in 4th place or worse, so they were certainly not playoff contenders. The Angels also boasted the league’s 7th highest payroll at just over $146 million, so they had costs that could be lowered in trades. That massive payroll is in part due to the team owing Josh Hamilton over $25 million per year, but regardless, the team had assets to trade. Albert Pujols, for example, certainly had value last year, hitting 31 homers for 119 RBI with a respectable .268 average, not to mention he made $25 million. Of course the Angels would have had to eat some of that salary if they dealt him given his underperformance and injury struggles, however, given that his performance is/was likely not sizable increasing revenue, they’d almost certainly be better off getting some future value back and/or lowering temporary costs than letting him ride out the contract in Los Angeles. Rather than going the tanking route, however, the Angels only made three minor trades during the season. Perhaps this was meant to give fans the impression that they are trying to win, or maybe not trying to lose? Regardless, it does not make financial sense in the short run or long run for the Angels not to tank as it seems their chances at contending for the next few years are minimal. Furthermore, by not tanking, the Angels ended up with just the 10th-worst record and still had to pay out the 7th-highest payroll in the MLB. The question, then: Why aren’t more MLB teams like those in the Angles circumstances tanking?

In summary, we can describe the incentives of tanking as lower short-term costs and, arguably, higher future/long-term chances of making the postseason. So what are the financial incentives of making the postseason? Looking at all of the data from 2002 to 2015 we found the following:

Average %∆Revenue
Entire League 6.65%
Non-Playoff Team 4.60%
Playoff Team 10.14%
Division/Wild-Card Runners-Up 8.10%
Championship Series Runners-Up 9.73%
World Series Runners-Up 14.44%
World Series Champion 15.35%

The chart speaks for itself; there is a clear financial motivation to have one’s team make the playoffs and succeed in the playoffs. Looking at playoff teams versus non-playoff teams alone, we see that, on average, playoff teams experience revenue growth 5.54% higher than non-playoff teams. Even losing in the divisional or wild card stage of the playoffs yields on average 3.5% higher revenue growth than not making the playoffs. These might sound like relatively small percentages, but considering that in 2015 the average team revenue was a cool $335 million and some change, every extra percent of growth is extremely valuable.

So we now know that there are financial incentives for both tanking and making the playoffs, the two extremes of the spectrum. What about the in between? Am I suggesting that all teams should either be tanking or go for it all (which I wouldn’t be the first to do)? To an extent I am, but I recognized that teams who are still contending for a playing spot in September should still see better revenue growth than those who are not, as when games “matter” the fan-base is more excited, so ticket sales are higher and revenues, in general, should be elevated. To identify the financial incentive to end up in this scenario, I looked at revenue growths of all teams who finished within five games of the wildcard in their respective league from 02’-15’ and found that these teams experienced an average revenue growth of 6.77% per year.

As I expected, the teams who were in competition for playoffs spots but fell short did better than the average non-playoff team. Not by an insignificant margin either; the competitive teams saw on average revenue growths 2.17% greater than the average non-playoff team. So what does this all mean in terms of tanking? Are some teams really “trying” to lose? Should they be?

Conclusion

Considering the circumstantial nature of decisions that have to do with a club’s future, it is difficult and somewhat foolish to make general statements about how teams should act. Nevertheless, I am going to make an effort to do so. First, let’s summarize what we have learned and then add any caveats based on new information.

  1. Change in wins alone is not a very good indicator of change in revenue.
  2. Winning regular season games is much more valuable, and arguably only valuable, if it results in a postseason berth or playoff contention.
  3. Winning is generally costlier than losing as it pertains to salary and draft picks.
  4. Competing for, making, and playing well in the postseason all create higher percentage revenue growth than not competing, on average.

Now let’s try to answer the question, “When should teams tank, if only finances are being considered?” First, I am going to lay out the obvious cases of teams that should and should not tank. Teams that should certainly tank are those with costs that can be cut, a relatively old and aging roster, and with a peak expected performance of landing a wild card. These kinds of teams might be capable of making the playoffs in a funky year, but generally, do not have rosters built for long-term future success, and likely won’t be in contention for a playoff spot come September. This seems to perfectly describe the Angels of this past year, which was why their lack of moves befuddled me. Teams that certainly should not tank are those that have a good core of young players and/or recently made the playoffs and have reason to believe the team will perform at least up to or close to that level again next year. Think of the Cubs, Red Sox, and Astros.

The harder cases to decide on are the teams in that competitive range (finished within 5 games of the wild card) who still experience solid revenue growth. For younger, developing teams in this range, the choice is easier. Why would they tank when they are already experiencing above league average revenue growth, and prospects for future growth look good? The only question for a team in this situation is whether they want to trade youth away and go for the win-now approach. For older teams in the competitive range, the choice is very difficult.

A good example of this is the 2013 Yankees. After winning the division in 2011 and 2012, the Yankees fell just outside the competitive range in 2013. On a roster with aging talent left and right, including Derek Jeter (39), A-Rod (37), Granderson (32), Teixeira (33), Ichiro (39), Andy Pettitte (41), and CC Sabathia (32), the Yankees faced a clear choice in the offseason; tank and trade away these aging assets or go out and try to win. Rather than tanking, the Yankees took another swing at the playoffs and ended up missing the Wildcard again in 2014, and just barely winning it in 2015 only to lose to the Astros in the play-in for the ALDS. So was it the wrong choice? In the Yankees case, I’ll say no as they are evidently in good shape right now, and thus did not sacrifice future revenue growth by not tanking. Not every team can be so fortunate, though.

I will look at the Tigers of this past season as a team in that competitive range that should have and still should tank. With two elite players in Verlander and Cabrera who have entered their post-prime years and no World Series rings to show for it, this may be a tough pill to swallow, but financially it is the right one. Given the returns in a trade that one might expect for Cabrera, Verlander, or the number of other solid assets that the Tigers possess, it is certain that the Tigers could set themselves up very well for the future in terms of prospects with a few good moves. Furthermore, given that Cabrera and Verlander both made $28 million each last year and will do so again next year means moving both of them would cut costs heavily in the short run. While tanking would lower their expected revenue growth from 6.77% (competitive range growth) to 4.6% (growth for an average non-playoff team), the gains from being a playoff contender in 3-4 years, with an average expected growth of 10.14%, would offset this loss in potential growth and then some. Furthermore, one could argue that as Cabrera and Verlander continue to age we could expect the Tigers to fall out of the competitive range, even without tanking. It will be interesting to see what approach the Tigers take.

Deciding whether or not to tank is extremely circumstantial, and it should be treated as such. Nevertheless, there are cases where tanking seems like the best long-term move for both on-field success and finances, yet teams still refuse to do so (like the Angels). Could this be due to financial interest and team interest (regarding on-field performance) misaligning? Perhaps in the short run, but in the long run, it seems clear that it is in a team’s interest regarding success and finances to be competitive as often as possible, as this will generate the largest revenue growths. Could it ever be the case that a team’s upper management doesn’t consider winning to be a worthwhile investment? I’m very skeptical. So, to all of you tortured sports fans, trying to convince yourself that your team is so God-awful because they’re trying to lose: I apologize. The answer is not so easy. No, it was not the low costs of business and high profits that kept the Royals and the Mariners in the cellar of the American League throughout the 2000s. It was, in fact, poor management.

When times are darkest we’ll continue to tell ourselves that our team is trying to lose, because they couldn’t honestly be that bad, right? (Right?)  But deep down, you’ll know that they really are that bad, and there are, in fact, no sinister sources for their failure. That’s just your team, and tomorrow you’ll wake up loving them as much as any day.

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