Sports

MLB teams drop big money on star players in chase for playoffs, revenue

Key Points
  • There is a variety of metrics analysts use to place a dollar value on players, but it's really all tied to making it to the postseason and performing well.
  • If the Yankees manage to win two World Series over the next nine years, they're record-breaking acquisition of Gerrit Cole for $324 million last week will have paid for itself and then some.
  • There is a 5-year bump in revenue from just one season in the playoffs.
Bryce Harper #34 of the Washington Nationals warms up on the on-deck circle before hitting in the third inning against the San Francisco Giants at AT&T Park on April 23, 2018 in San Francisco, California.
Ezra Shaw | Getty Images

Major League Baseball teams have signed some eye-popping multi-year contracts for marquee players in recent weeks.

Though the sums are staggering — $324 million for pitcher Gerrit Cole, $245 million for World Series MVP player Stephen Strasburg — the payoff can be even bigger, especially if a star player can help a team get to the playoffs where the financial rewards are substantial. Those contracts are backed by reams of data and teams of financial analysts who specialize in quantifying the return.

"The Yankees have an analytics staff of maybe 8 or 10 people that are trying to crack these numbers and make some sense out of all of it, and most teams will approach it that way," said Andrew Zimbalist, an economics professor at Smith College who's written extensively on the role of financial analysis in baseball. "If you have the data available, you can make reasonable estimates of how much extra revenue the team will earn if they have an extra wind."

For a team that doesn't often make the postseason, like the Houston Astros, a World Series win can send the franchise value up between 200% and 300%, said Ari Kaplan, who has worked with more than half of all MLB teams' data departments throughout his career.

"If you win the World Series ... the valuation goes up. It could go up tremendously. The Cubs won [the World Series] in 2016, and since then their valuation has gone up well over $1 billion," he said. "When I was with the Orioles, we made the playoffs for the first time in 19 years and we saw benefits of tens of millions of dollars at just the gate the next season."

Revenue from the gate is substantial, he said, but it's a fraction of the potential pop in revenue from contract deals with broadcasters and sponsors. While ticket sales might jump for a few years after a strong postseason performance, the real money comes from renegotiating long-standing contracts, Kaplan said.

"There's a 3-year tangible boost in regular ticket sales, which is really significant, but that can fizzle out, so you want to negotiate contracts while you're coming off a strong season," he said. "Every year that I've been with a team, at the beginning of the season you make plans to decide if this is the year we want to go all in or this year we want to rebuild."

Vince Genarro, author of "Diamond Dollars: The Economics of Winning in Baseball," was one of the first financial analysts to consult with MLB teams in 2006, after a 20-year career at PepsiCo. Genarro spent years encouraging clubs to adopt traditional business strategies and to view player contracts like acquisitions meant to boost the value of the overall organization. There is a variety of metrics he used to place a dollar value on players, Genarro said, but it's really all tied to making it to the postseason and performing well.

"First prize is getting to the postseason and even winning the World Series, and there's gradations in between. The reason is there's a psyche that hits the fan base that happens when the team makes the postseason," Genarro said. "What happens with that mindset is it triggers a series of actions by fans, and they're the ones who really write the checks."

Genarro said it's impossible to quantify the value of a championship win generally, because the factors are so specific to each team's situation. However, he said that if the Yankees manage to win two World Series over the next nine years, their record-breaking acquisition of Gerrit Cole for $324 million last week will have paid for itself and then some.

Genarro said that the fan excitement of the postseason creates a ripple effect that boosts ticket prices, increases season ticket renewals as well as new season ticket purchases, bumps TV ratings, corporate sponsorships and premium seating sales. All of these factors collide to increase the overall value of the franchise, but the effects are not immediate.

"This is not just a one year impact," Genarro said. "There is sort of a 5-year life on the increase from just one postseason appearance, diminishing slightly each year afterwards. The benefits to revenue are very forward facing."

The Houston Astros are an example of how a World Series win can excite fans and lead to a pop in revenue at the gate. In 2012 and 2013, the Astros lost more than 100 games in each season and their attendance numbers reflected that. Each year, they drew about 1.6 million fans, according to data provided by Baseball Reference.

Then by 2015, they were an 86-win team drawing 2.15 million fans. After their 2017 World Series win, they managed to attract more than 2.8 million fans next two seasons.

This increase in attendance immediately injects the franchise with fresh revenue from tickets, merchandise and concession sales. More importantly, if the teams are able to continue winning and drawing fans, the attendance numbers give a franchise an edge in negotiating media and sponsorship contracts, said David Carter, a professor of Sports Business at the University of Southern California.

"Making the playoffs reinforces that you are invested in the brand, and that generally is reflected in the ability to increase money from your media relationships and boost overall business confidence," Carter said, adding that it's an intangible asset. Making the playoffs also creates more loyal fans who "want to go to the games, they want to buy the merchandise and they want to live vicariously through the team." It also generates more interest from business partners.

It's the job of team analysts at the MLB to calculate that value, factoring in the likelihood of making the playoffs each year and how that translates into season ticket sales as well as more lucrative media contracts, sponsorship deals and overall revenue.

MLB super-agent Scott Boras, who negotiated nearly $1 billion in player contracts for the upcoming season, challenged the analytical approach to baseball team management. He said the league's sliding overall attendance numbers over the past few years is evidence that this analytics-driven approach to the sport "didn't work." Boras negotiated Cole's 9-year, $324 million contract deal with the Yankees as well as Strasburg's 7-year, $245 million deal with the Washington Nationals, among other mega contracts.

"Teams who employ great players, veteran players, are being very successful," Boras said in an interview Friday on CNBC's "Squawk Alley." "The need for them is something that the fans identify with; they want known commodities to go see. They want competition at the ballpark."

-- CNBC's Jabari Young contributed to this report

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MLB agent Scott Boras on recent signings