Interesting article in the Wall Street Journal this morning

[Linnwood]

Interesting article in the Wall Street Journal this morning. Accompanying chart shows Top 20 undervalued and overvalued players according to Vince Gennaro, a consultant to the Cleveland Indians. Says Jermaine Dye is "one of the league’s most underrated, and apparently undervalued, players. "

 

Chart: http://files.linnwood.org/documents/what.p...wsj.14apr07.pdf (PDF 12MB)

 

 

The Real Most Valuable Players

While fans fret over stats and wins, some baseball teams are quietly basing salary decisions on another set of numbers: how much profit a player will generate. The rise of bottom-line ball.

By RUSSELL ADAMS

April 14, 2007; Page P1

 

Wall Street pays its stars based on how much money they generate for their companies. Partners at law firms often get paid the same way. So why not baseball players?

 

In a few quiet corners of Major League Baseball, a movement that could upend the sport's economics is gaining steam. It's being led by a former Pepsi executive and a onetime Ivy League football player who are overhauling the Cleveland Indians. Their idea: Peg a player's value not just to his results in the box scores, but to his potential impact on the team's bottom line. In other words, which particular shortstop will help the team sell the most tickets, hot dogs and corporate sponsorships.

 

In recent years, select baseball executives and the mathematicians they've embraced have made great advancements in measuring the performance of players on the field, from charting the precise landing points of fly balls they hit to calculating complicated data-heavy metrics like "Wins Above Replacement Player." But until recently, few of these measures took into account how these performances translated to dollars.

 

Now, economists who have developed these models have concluded, for example, that Alex Rodriguez might not be overpaid, that Boston's much-ridiculed signing of injury-prone outfielder J.D. Drew was a smart business move, and that Oakland A's general manager Billy Beane is paying Mike Piazza twice what he's worth.

 

For fans who have accepted the notion that baseball is a business, this approach likely to ignite more bickering over questions like whether Derek Jeter is worth more to the Yankees than David Ortiz is to the Red Sox (answer: yes). But for others, it's yet another blow to the sanctity of America's most tradition-bound sport, which has inspired movies like "Field of Dreams" and this year is marking the 60th anniversary of breaking the sport's color barrier, celebrated as a seminal moment in U.S. history.

 

It also raises the unsettling possibility that some teams might determine that it's financially in their best interest to be mediocre, not good, and definitely far from great. That's because by some calculations, the best balance of revenue and expenses isn't always compatible with greatness, nor winning with profitability.

 

Call it bottom-line ball.

 

The main advocates of this approach are Vince Gennaro, a former PepsiCo executive, and Mark Shapiro, a former Princeton football player and the general manager of the Cleveland Indians. Their story goes back to the early 1990s, when Mr. Gennaro, who grew up in New Jersey rooting for the Yankees, was running his company's Midwest bottling operations out of Cleveland. The Indians were preparing to move into a new stadium with a crop of talented young players.

 

Mr. Gennaro says he initially saw an opportunity for Pepsi to latch onto a fast-rising franchise, and made a deal with the Indians for a then-above-market $850,000 a year to replace Coke as the team's official soft drink. In his role as a major team sponsor, Mr. Gennaro spent many days in the team's executive offices and even more nights in his box seats at Jacobs Field, where the Indians were stringing together a run of division-winning seasons with record crowds. After Pepsi's three-year deal expired, the team was able to extract a whopping $1.6 million a year under a new deal with the company.

 

That experience validated for Mr. Gennaro what he had begun studying in his spare time as an M.B.A. candidate at the University of Chicago: that there's a direct, and quantifiable, link between winning and revenue. In 2000, Mr. Gennaro quit his job at Pepsi to pursue other interests, including baseball consulting. He went to work trying to put some hard numbers around his theories, modeling the win/revenue relationship for nearly every major-league team. His conclusions were the basis of a series of articles he wrote in late 2005 for the Hardball Times, a Web site.

 

Mr. Gennaro took his findings to the Indians, where he caught the attention of Mr. Shapiro. After working in real-estate development for a few years postcollege, Mr. Shapiro joined the Indians in 1992, rising through the ranks before being named GM in late 2001.

 

To some extent, Mr. Gennaro's formula builds on the data-oriented approach pioneered by Oakland's Mr. Beane and chronicled in the book "Moneyball." He uses the wisdom advanced by the game's statistics revolution that says a player's ability to create runs is the best measure of his contribution to overall wins.

 

Then he takes it one step further. He uses WARP, or "Wins Above Replacement Player," a seemingly arcane but widely accepted figure published on BaseballProspectus.com that indicates how much of an edge in wins a team receives by having the player in question rather than a theoretical below-average pro. Take that number and translate it into revenue, and you can then attach a dollar value to each player.

 

For players, the results can create an entirely new, and often disquieting, reality, one that runs up against the previous concepts of market value. According to Mr. Gennaro's calculations, the San Diego Padres are paying Greg Maddux nearly $6 million too much, while the Angels are getting a good deal on Gary Matthews Jr. Mr. Gennaro agreed to share these figures, which are not publicly available, with The Wall Street Journal, on the condition that he would not discuss players currently on the Indians roster.

 

Generally, these methods show that the market tends to overvalue better than average players on average teams. Jeromy Burnitz, for example, last year earned $6 million with the Pirates, but only brought the bottom-feeding team a few extra wins, which translated to about $2 million in revenue, according to J.C. Bradbury, a professor at Kennesaw State University and author of a book, "The Baseball Economist," that covers player value.

 

On the other end of the spectrum, this approach suggests elite players could earn even more if their talents are tied to the revenue they help create by pushing a team into playoff contention. Yankees closer Mariano Rivera was worth about $27 million to the team last year, by one calculation, or some $17 million more than he made.

 

For baseball franchises, this approach helps them deal with one of their most vexing problems: fluctuating revenue. Typically, a team's revenue rises when it's on a roll and dips when the losses start to mount. Tickets are one of the biggest revenue drivers. The Detroit Tigers went from a losing team two years ago to the World Series last year. The turnaround amounted to an immediate attendance increase of more than 500,000 fans last year, along with an enormous jump in season-ticket sales for this season. No matter how poorly the team does this year, Mr. Gennaro says the team could continue to generate revenue for several years because they're unlikely to lose all of those new fans, sponsors and suite holders right away.

 

Some teams also own a share of the networks that broadcast their games. Assume that Daisuke Matsuzaka, the Japanese pitcher the Red Sox paid $103 million to acquire, improves the Red Sox by six wins to a 95-win team. That jump in wins will add about $2.5 million in annual ad revenue for the New England Sports Network, Mr. Gennaro estimates. That could also increase the value of the network by $12.5 million. Given that the team owns 80% of NESN, that player is creating $10 million in incremental value for the team's television asset.

 

The idea that players can affect a teams finances beyond simply winning games is, of course, not new. The San Diego Padres in 1995 signed a fading Fernando Valenzuela, over the objections of the team's own general manager, because of the pitcher's potential to attract Mexican and Mexican-American fans. In fact, economists were working to convert player performance in dollar values in mid-1970s. Gerald Scully, an economics professor at the University of Texas at Dallas, applied the principle known as marginal revenue product to baseball. He used this approach to show how underpaid players were during an era before free agency, when players were tied to one team for their entire careers. But his calculation gave wins equal value across all teams.

 

By early 2006, when Mr. Gennaro first approached the Indians to ask if they were interested in using his work, Mr. Shapiro had shipped out all the team's expensive veterans, and attendance had fallen. He decided to focus on developing young players and assembled a front office of analytical minds who used statistical tools to find bargains on the player market.

 

In the last few years, led by a crop of young talent, the Indians began winning again. Moving into a more competitive phase, they've been investing in free agents, adding players like Aaron Boone and Trot Nixon. Many of their young players, including Grady Sizemore and C.C. Sabathia, have started to take off. Heading into this season, the Indians are a favorite to win one of baseball's toughest divisions with a payroll in the bottom quartile of the league.

 

To help in the hunt for free agents, the Indians hired Mr. Gennaro last year to pore over their financials and create for them a version of Mr. Gennaro's "win curve," which charts what each additional win is worth to the team in revenue from everything from hot-dog sales to TV ratings.

 

Mr. Gennaro, who recently published a book called "Diamond Dollars" on this subject, finished the project in January. The team plans to use his findings, together with its own data on how many extra wins each player is expected to contribute, to help decide which free agents to go after and how much to pay them. The Indians will be using other criteria, too. But in an era when teams have over- and underspent themselves into deep trouble, they say this is another tool to limit mistakes. "We're trying to reduce the margins," Mr. Shapiro says.

 

Some baseball insiders are skeptical of the method. Not only can a team's fortunes -- and underlying economics -- change from year to year based on the results on the field, players can bring intangible qualities to the team that may pay dividends years after they have signed a multiyear contract.

 

Player agent Scott Boras says one of his clients, Ivan Rodriguez, wasn't widely considered to be worth the $10 million-a-year contract the Detroit Tigers paid him when he came on board in 2004. But the catcher's all-star pedigree laid the groundwork for other elite players to follow. Last year, the team made it to the World Series last year for the first time since 1984.

 

J.P. Ricciardi, general manager of the Toronto Blue Jays and one of the more data-minded executives in MLB, says he sees some value in this approach. But he also says sometimes teams still have to "bite the bullet" to realize long-term revenue and win goals and even to create a culture of winning. He says that's the thinking that went into his decision last off-season to pay two pitchers, A.J. Burnett and B.J. Ryan, a combined $102 million, far more than many people thought they were worth. "People weren't talking about going to Toronto maybe four or five years ago," he says. "Now they are. We've kind of reinvented ourselves."

 

There are other problems with the method. In any given game, a minimum of 18 players on both sides combined can play a role in the outcome in many small and often incalculable ways. That makes it difficult to devise any formula that measures with certainty how many wins any one player contributes. In addition, some players who may be perceived by fans as irreplaceable assets to the team may, according to the raw statistics, be far more of a liability. And, of course, injuries can change the equation in an instant. The Red Sox will have gotten a fair deal on Mr. Drew if he stays healthy, but that's an especially big "if," given his recent medical history.

 

But perhaps the biggest question is what this will do to the integrity of the game.

 

Already, sports is an odd business where things like luxury taxes and revenue-sharing create an environment where the success of a team on the field doesn't always correlate to its financial results. Teams like the Kansas City Royals can finish in last place every year and still be highly profitable. And most team owners know that even if the team isn't profitable year to year, they're likely to make enormous profits when the team is sold.

 

In this environment, the more teams focus on the financial upside of individual players, the more likely they may be to build a roster that yields the most profit, whether or not it will make the best baseball team. And they may conclude that winning simply isn't worth the price. The Houston Astros, for instance, are projected by some pundits to win 75 games this season, not enough to qualify for the playoffs. Based on his performance last year, Carlos Lee, their recently signed heavy-slugging outfielder, will likely contribute five extra wins to the team this year. Those five wins equate to $6.4 million in incremental revenue based on Mr. Gennaro's estimates of how much Astros fans and sponsors can be expected to support a 75-win team. Problem is, Mr. Lee's new deal pays him an average of $17 million a year -- far more than he's projected to generate in incremental revenue. The Astros might be better off without Mr. Lee, and at 70 wins than 75 wins.

 

Of course, the Astros could improve throughout the deal, making Mr. Lee more valuable down the road. (By the numbers, Mr. Lee's five extra wins would mean a lot more to the New York Mets, a team in a bigger market with more playoff potential. There, Mr. Gennaro says Mr. Lee would be worth about $17 million if he helped make the Mets a 90-win team.)

 

Another issue: how teams will value attributes like a player's star power or personal popularity, that have nothing to do with winning and everything to do with selling tickets. Pitcher Barry Zito may not win enough games to justify the seven-year, $126 million the Giants are paying him, says Larry Baer, the Giants' COO. But top starters are increasingly scarce in the current market, and the Giants say they saw a rare opportunity to get a popular player who could be a face of the franchise when Barry Bonds retires. Deals like Mr. Zito's, says Mr. Baer, "have multidimensional philosophies."

 

Mr. Gennaro says his work attempts to quantify the seemingly unquantifiable, including a formula to calculate a player's "marquee value," a measure of his popularity. Mr. Shapiro says the Indians "had a couple of scenarios this winter where we talked about that."

 

Down the road, it's unclear how many teams will use these sorts of calculations in their decisions about players, or how many already do. Steve Walters, an economist at Loyola College in Maryland who advised the Red Sox in 2002 about player salaries, says it's likely several teams employ similar methods but are reluctant to disclose them.

 

One thing is certain. Like it or not, ballplayers will be evaluated for more than just the statistics on the backs of their baseball cards.

 

"I don't know how you can say we're going to get this many wins because of this player," says Aaron Rowand, the center fielder for the Philadelphia Phillies. If statisticians can, says Mr. Rowand, "more power to them."

 

http://online.wsj.com/article/SB117650403302269660.html

[caulfield12]

Interesting article in the Wall Street Journal this morning. Accompanying chart shows Top 20 undervalued and overvalued players according to Vince Gennaro, a consultant to the Cleveland Indians. Says Jermaine Dye is "one of the league’s most underrated, and apparently undervalued, players. "

 

Chart: http://files.linnwood.org/documents/what.p...wsj.14apr07.pdf (PDF 12MB)

 

 

I don't agree with Gary Matthews, Jr., being an undervalued player at all.

 

You can see where the Cubs and, to a lesser extent the the White Sox, have excelled at breaking even (or, in the Cubs' case) at making huge profits while not spending much money on the payroll. The irony is that spending lots of money and increasing expectations at Wrigley might actually turn the fans off, as the team can't be "loveable losers" at that payroll level.

 

Of course, KW and JR changed that philosophy in recent years. And you can also see why the Royals, Brewers, Pirates, D-Rays, Marlins, etc. have chosen the paths they have chosen, although the signing of Meche, the hiring of Dayton Moore and additional scouting/front office staff shows more commitment on the part of the Royals.

 

And just look at the Dice-K phenomenon. How much revenue is he creating for Boston hotels and tourism with all the Japanese interest in the team now? Lots of signage with English and Japanese marketing approaches opening up new revenue and marketing possibilities. I'm sure the Red Sox are receiving revenue for games shown in Japan. They're now being able to market themselves very effectively to a small but relatively wel-off and rabid baseball "fan population" that's yet to be fully exploited on the East Coast. Each one of his starts is being covered (for now) like "an event" or happening. Matsui and Irabu didn't have anything close to the appeal of this guy. I think the Red Sox are even getting into the NASCAR marketing with their promotions and NESN somehow.

 

By the way, my Adobe Acrobat isn't working.

 

Is there any way you could send me the list of undervalued/overvalued players to [email protected]?

 

That $103 million will seem like a HUGE bargain compared to the Zito contract.

[caulfield12]

I don't agree with Gary Matthews, Jr., being an undervalued player at all.

 

You can see where the Cubs and, to a lesser extent the the White Sox, have excelled at breaking even (or, in the Cubs' case) at making huge profits while not spending much money on the payroll. The irony is that spending lots of money and increasing expectations at Wrigley might actually turn the fans off, as the team can't be "loveable losers" at that payroll level.

 

Of course, KW and JR changed that philosophy in recent years. And you can also see why the Royals, Brewers, Pirates, D-Rays, Marlins, etc. have chosen the paths they have chosen, although the signing of Meche, the hiring of Dayton Moore and additional scouting/front office staff shows more commitment on the part of the Royals.

 

And just look at the Dice-K phenomenon. How much revenue is he creating for Boston hotels and tourism with all the Japanese interest in the team now? Lots of signage with English and Japanese marketing approaches opening up new revenue and marketing possibilities. I'm sure the Red Sox are receiving revenue for games shown in Japan. They're now being able to market themselves very effectively to a small but relatively wel-off and rabid baseball "fan population" that's yet to be fully exploited on the East Coast. Each one of his starts is being covered (for now) like "an event" or happening. Matsui and Irabu didn't have anything close to the appeal of this guy. I think the Red Sox are even getting into the NASCAR marketing with their promotions and NESN somehow.

 

By the way, my Adobe Acrobat isn't working.

 

Is there any way you could send me the list of undervalued/overvalued players to [email protected]?

 

That $103 million will seem like a HUGE bargain compared to the Zito contract.

 

 

VORP Ratings for pitchers in 2006/07

 

1. Santana

17. Verlander

20. Sabathia

23. Robertson

30. K. Rogers

34. Bonderman

40. Zumaya

42. Westbrook

46. Nathan

50. El Gran Titan de Bronze

54. Garland

55. Freddy Garcia

67. Dennys Reyes

84. Jon Rauch

85. Brad Radke

88. Jeremy Sowers

89. Javier Vazquez

95. Jesse Crain

104. Juan Rincon

105. Cliff Lee

117. Chad Bradford

 

This tells you all you need to know about why the White Sox didn't make the playoffs last year. And why Baseball Prospectus rated us so poorly coming into 2007.