Sunday, 27th of January 2008 at 06:39:05 PM
I was listening to Colin Cowherd on ESPN Radio this past week and the topic was baseball salaries. Colin made note of the fact that the New York Yankees have, what amounts to an almost unlimited supply of cash to acquire as much talent as they can bring in. Unfortunately, this has not translated into any marginal success for the Yankees over the past several years. In contrast, many teams have been able to match the Yankees post-season success on a much smaller budget.
If any of our readers are baseball fans, you’ll have undoubtedly read Michael Lewis‘ baseball classic, Moneyball. If you have lived under a rock or in a cave for the past 5 years, Moneyball is a book about the hypothesis that the collected wisdom of baseball insiders over the past century is subjective and often flawed. Statistics such as stolen bases, runs batted in, and batting average, typically used to gauge players, are relics of a outdated view of the game and the statistics that were available at the time. By using sabermetrics (econometrics for baseball), Billy Beane, General Manager of the Oakland Athletics, was able to assemble playoff caliber teams for almost a decade with one of the lowest payrolls in the league.
Whereas I feel that the book offers the business world a fantastic analysis and case study of the opportunity of market inequities and arbitrage, I think the point I want to make here is that a team like the Yankees has an excessive payroll and makes bad spending decision while the resource constrained A’s make much smarter decisions and garnered the same effective results (obviously something worth discussing since many of the arbitrage opportunities in the market have been discovered and eliminated).
Translate this to the business world and you will hear terms like “capital efficient” and “bootstrapped” to identify savvy entrepreneurs and startups that make do with less and identify better ways to enact a successful startup. I leave you with this quote from Sun Tzu’s The Art of War:
“Throw your soldiers into positions whence there is no escape, and they will prefer death to flight. If they will face death, there is nothing they may not achieve.”Â
Sorry Josh, you’ve struck a nerve and you need more details on your example. Not surprising considering your source is Cowherd. No team makes more money than the Yankees. With the TV network, the new stadium, the advertising, etc there is no shortage of cash to pay the players. Do you think that revenue stream would be what it was if they spent “only ” $70 million a year? Thats why they spend more money. Has it resulted in championships? Not recently, but the Yankees have made the playoffs every year since 1995, including 10 division championships and 4 World Series championships. The A’s since 1995 have 4 division championships and 0 World Series championships. So the results have not been similar, not even close.
I agree with the statement about spending money wisely, just not the example you gave.
I could go on and on but just read this brief article on some of the economics of the Yankees…and find something else to listen to than Cowherd. http://nymag.com/news/features/2007/profit/32903/
Dave,
First let me thank for your comment. I wish more readers would join the conversation as you have. With that being said, I will have to respectfully disagree with you on several fronts:
- First off, you cannot compare the A’s to the Yanks from 1995 on because Beane only took over in 1998. In fairness, we should compare more recent results to allow the Bill James philosophies a chance to develop within the Athletics system. I would argue the last 6 years are most fair.
- Second of all, I do not give much credence to post-season play because there are so many factors that play into a 5 or 7 game series. Baseball is a game if probability and statistics which is peppered with streakiness. I would argue that over a 5 game series, who wins could go either way (for example, how do you explain when the Tampa Bay Devil Rays sweep a three game series from a superior Yankee ball club?)
- When you look at comparable records over the last six seasons, the A’s have compiled a 571-400 (.588) record, which is the second-best record in the American League next to the Yanks 582-386 (.601) mark and the fourth best mark in all of baseball.
- Over that same time frame, the A’s averaged $651,398 in payroll per win while the Yankees averaged $1,795,943 per win, a 2.76:1 ratio for an average 8 more wins and arguably better post season performance. This tells me that the Yanks are on the wrong side of the marginal utility curve when it comes to payroll by a long shot. The cost of living difference between NYC and the Bay are are slightly different but not by that much.
- The ONLY reason that the Yanks have significant more revenue than almost all other sports teams globally is the market they play in and the brand recognition (which in no way is due to recent performance…Babe Ruth set it all in motion). They have made smart decisions on leveraging the pinstripe appeal, but I would not say that makes them better decision makers. What matters in sports are records and World Series Championships to which I will concede the Yankees have done slightly better on, but not by a far margin and not enough to warrant an almost 3:1 outspending policy. Bottom line is that managers and GM’s get fired because of poor performance on the field, not off the field.
- In answer to your question, if the Yankees spent $70 million and still had similar results like the A’s, Brian Cashman would be given the key to the city.
I grew up in New York and was a Yankee fan throughout the seventies, eighties and nineties (and still find myself rooting for them against the Sawks every time they play); I am not an outsider or Yankee hater on this. I agree Cowherd can talk out of his back-side frequently but I am not glorifying him on this. He just made an interesting observation.
So as to not make this about baseball and bring it back home to the startup world, if a startup could employ similar efficiencies against the 800lb gorilla in their market space, that startup would create more value for their founders than the one who raised a ton of cash and barely beat the nimble and thrifty startup.
I welcome additional commentary and thanks again Dave for starting the conversation.