Labor and Capital

In looking at the Moneyball philosophy it's easy to see how these two factors can shape a baseball team.  Using them effectively can be the difference in a successful team and a perennial loser.  One of the many things that, in my opinion, makes baseball such a fun sport to watch is the fact that there is no salary cap and therefore each team has a very unique financial situation.  Each team has different assets to work with and different markets to try and produce revenue from.
Since the introduction of free agency in the 1970s teams have had to work much harder to find and keep talent. Rare is the player who will spend his entire career with a single club.  There are a number of reasons for that and not all of them are surrounded by pure greed.  Just like with any worker baseball players want to be paid a fair amount for the skills they provide.  Working in construction or at a factory the more difficult the skills for a particular job are typically means the higher the workers who do that job are paid.  The same is true in many ways for baseball players.  What many people view as pure greed from players demanding 10s of millions of dollars to play is really no different than an electrician offering his services for $20-$30/hr.
The skills that draw the biggest paycheck change from year to year in baseball just as they shift over time in the general work force.  A player who has the rare ability to hit 50+ HR will draw more fans to games and help produce more wins for a team than a player with similar other statistics and less power thus he is a more valuable commodity, just as a surgeon is more rare than a physician. Determining the exact value of different skills is not easy but there are numerous formulas that exist and agents and general managers spend countless hours attempting to find the systems that best fit their needs.  That is what makes agents like Scott Boras so good at what they do.
In addition to finding the best system for determining value each team has to establish, in their market, how much they can afford to pay.  In many ways that is the greatest strength of the Yankees, they have a huge market and large amounts of revenue each year to use to keep the level of talent on their team high.  Keeping a top notch product on the field keeps fans in the seats and cycle can continue, in theory.
The beauty of MLB's lack of salary cap is that each team has a different amount of money tied up in players.  Teams like Oakland have proven however, that the lack of large bank accounts doesn't mean you can't win games.  The creative use of the capital is of equal if not greater importance to the amount of capital used or available.

A Change in the Game

Around the time of the Civil War in America the game of baseball was invented.  Since that time many events have taken place that have helped it evolve into the game that we know today.  In the 1870s the box score was first created as a way to attempt to measure each player’s contributions to the game.  In the 1890s a professional league was put together to try and put the best players together to play against one another.  In the 1910s a young pitcher named George Herman Ruth was moved to right field so that he could bat more often. As a result, he hit more home runs than any one believed was possible.  In the 1960s Bob Gibson pitched so dominantly that they lowered the pitching mound in an attempt to make things more competitive.  Throughout the 1990s players hit home runs at a rate that seemed impossible, setting records or coming close, nearly every year.  In 1998 Billy Beane took control of the Oakland Athletics and changed the way players were evaluated. What he created in Oakland was a system that could turn the fortunes of the poorer teams; a way to minimize risk and maximize returns on investments in players. His “money ball” philosophy is the best way to approach team construction to maximize potential revenue and bring parity to a seemingly uneven business market that is Major League Baseball.

When placed in context with some of the great events that have shaped baseball through the years Billy Beane’s influence is seemingly small. However, over the next few years it is likely to continue to grow into one of the turning points of the game.  Keeping in mind that Major League Baseball and the teams that make it up are all businesses and their ultimate goal is to produce measurable profit, what Beane started is truly revolutionary.  His “money ball” system of scouting and trading for players has brought balance to a sport that has no salary cap and extreme differences in the amount of capital different teams have available.   This saber metric approach allows teams with limited monetary resources to compete with the wealthiest teams on an even keel.  It reduces the risk involved with putting a team together and allows for the opportunity to significantly improve profits for all teams.  Instead of simply being a question of who can buy the best talent now the question is becoming who can find the most undervalued skills in the market.

Before we can explore the reasons why this is the best way to build a team, one must first look at how this approach came into existence. Billy Beane didn’t invent the idea of saber metrics.  Many consider Bill James to be the father of the science that he defined as, “… the search for objective knowledge about baseball,” (Garbiner).  James began publishing his personal studies of baseball statistics and their inability to capture the whole truth in the late 1970s. What James was trying to find was a way to measure each player's performance and how it influenced the game. He spent hours looking over box scores and finding the areas that they didn’t tell the whole story of what took place on the baseball field. He began developing his own statistics and new formulas for statistics to attempt to produce a more accurate numerical measure of what had taken place in each game and throughout a season (Smith).  Through his Baseball Abstracts he came in contact with a large number of individuals who shared his interest, many of whom were mathematicians or statisticians by profession and thus opened more opportunities for the growth of their inquiry.

The quest to find objective knowledge and statistical explanations for the things that took place on the baseball fields continued to grow and baseball continued to be run by people who didn't look at this information. Michael Lewis explains that in the 1980s some of James' friends put together a company to collect statistics and sell it to major league teams so that the teams could use this valuable information. The teams showed little interest in their findings. As a result Stats inc. had to start selling their information to the journalists that covered the sport in order stay in business (Lewis).

Billy Beane, according to Michael Lewis, first discovered these statistical ideals while working as a scout for the Oakland Athletics (Lewis). He was taken aback by the wealth of knowledge one could gain by simply looking at the numbers. As he worked his way into the role of General Manager his adoration of this new science grew. When he was eventually promoted to the role one of his first moves was to hire an assistant. He went against all the conventional wisdom of baseball and hired an Ivy League economics major instead of someone who had been around the game. He and his new assistant began to implement a new system of scouting and evaluating players. They used their minimal payroll to put together some very successful teams in just a few years.

The conventional wisdom in baseball, up until Billy Beane came onto the scene in the late 1990s, was that teams needed to be built by people who had played and worked around the game. The idea was that former players and individuals who had spent their lives watching the game could see the signs of what a young, undeveloped player could become. Teams sent scouts out to watch young players and analyze what they saw the player do. The idea of approaching the construction of a baseball team from an analytical and businesslike approach was not commonly accepted around the Major League Baseball world but teams soon started to take notice. Within less than a decade, a number of Beane's assistants and staff were being offered jobs with other teams around the league. As the philosophy spread, baseball began to shift into two factions. The “old school” of teams who promoted people who had played the game and used traditional scouting to evaluate players and the “new school” of statisticians who looked simply at the numbers those players produced. Even teams from larger markets began using some of these ideas to attempt to save money.

The market differences that exist in Major League Baseball are large and easily visible. There are specific rules in place that won’t allow a team to be moved or created within the vicinity of other teams to protect the market that is already established by the current team. These rules exist to protect the main revenue sources that teams have: the fans. With no salary cap in the league this creates a seemingly uneven field for competition between the teams. Teams that are located in larger cities like New York City have a much larger opportunity to get fans and therefore a much larger opportunity to make money. By using this to their advantage teams like the Yankees have managed to separate themselves from the others by spending more money than others can afford to put a winning team on the field each year. Producing a winning team draws more fans and therefore the cycle logically would keep pushing them further away from the remainder of the league. But that isn’t exactly the way it has worked.

When we start to look at the effects that Beane's philosophy had, the most logical place to start is to look at the win/loss records of the team. In 2001, just a few years after he took over in Oakland, the team finished 102-60, securing themselves a place in the playoffs. Moving forward, in 2004 Oakland played to a record of 91-71, missing the playoffs but still a great record for the year. They continued to implement their new ideas, but in 2007 dropped to a 76-86 record. The Yankees, in those years, continued their pay high style and in 2001 finished 95-65, in 2004 101-61, and in 2007 94-68. The Yankees numbers are more consistent through these years. However, when we look at the payroll difference, the records are a bit less impressive. In 2001 the Yankees had a team payroll to start the year (according to Forbes) of $112.28 million while the As started the season with a salary of $33.8 million (Forbes). That year, the As won more games than the Yankees with less than 1/3 of the payroll. By using his statistical approach to putting a team together Beane had minimized his potential loss while still finding success on the field.

Although the Yankees have had consistent success throughout the years in winning percentage, they haven’t dominated at a rate that matches the amount of money they spend. More importantly, their profit margin is not growing at nearly the rate that it should be for the amount of money spent. The return on their investment is in fact quite a bit smaller than that of Oakland. Oakland puts a team together with the least possible payroll because they are in a very difficult market in which to make large sums of money. The city is not that large and it is economically challenged over all. Due to these circumstances, they have to approach the process of team construction more carefully than many other teams. When Billy Beane took over they began showing improvement, not just on the field but also in the profit margins. The differences in resources are quite evident by simply comparing the team salaries for the year 2010. Forbes magazine put together a database of each team's payroll for the year that shows the New York Yankees as the top spender with $206.3 million in opening day salary

and the Oakland As coming in 28^th over all with an opening day payroll of only $51.6 million (Forbes). Based on their salaries, the Yankees should have dominated teams like Oakland and finished with a much better record. But at season end the Yankees only produced 14 more wins than the low paid Oakland team.

Wins and losses are one of the easiest ways to see if a system is working but it fails to tell the whole story. The goal, after all, isn't simply to win games but to produce revenue. To look at comparisons of revenue we have to go back a bit further since current year's revenue totals have not yet been released. In 2004 the New York Yankees had a team payroll, according to The Biz of Baseball, of $184.19 million and the Oakland As of $59.42 million (Biz of Baseball, n. pg.). Forbes lists and publishes team valuations tables that include team revenue. For the 2004 season the Yankees had $238 million and the As, $110 million (Forbes, n. pg.). What those numbers show us is that while the Yankees had much higher gross revenue their return on their investment was only 129% where the A’s return was 185%. That is a huge difference regardless of the overall numbers. What this shows us clearly is that the As in 2004 had a much safer and better return on their investment. The amount of return received with only 32% of the salary is easily viewed here and almost as an exclamation point on the season the Yankees won 101 games, only ten more than Oakland who finished second in their division.

One season, of course, doesn’t tell the whole story. It’s simply a snapshot of the big picture. To look a bit deeper into the issue we can look at the same revenue verses team salary comparisons in other years. In 2007, again from the Forbes database, New York had a payroll of $189.25 million on opening day and revenue listed at $302 million (Forbes, n. pg.) which comes to a rate of return of 159% much better than in 2004. In the same year, Oakland opened, according to Forbes, with a payroll of $79.36 million and had their revenue reported as $146 million, (Forbes, n. pg.) a rate of return of 183%. Nearly as good as the 2004 season. By looking at these seasons it appears quite clear that other factors, such as team debt, removed the “money ball” philosophy of team construction outperforms the “spend big” philosophy where it really matters, in the revenues column.

As the rest of baseball works to implement the new ideas that Billy Beane brought to the table they are more difficult to put into practice. Valuation of skills has shifted drastically over the last few years and in large part because of the success that Oakland had in the first part of the decade. The more teams that start using this philosophy the more difficult it becomes to find the skills that are still undervalued and can help you to win games. Michael Lewis compared what Beane was doing to the stock traders who went after derivative stocks in the 1990s to create huge returns (Lewis, 237). In the same way as in the stock market, the price of investments shift and as more people catch on to what is being done, the more difficult it becomes to implement the strategy. Also, just as in the stock market, no one skill or stock will stay undervalued forever, eventually it will come back to its true value.

The advantage that the Yankees have held since the early years of Major League Baseball seems to be getting smaller. Simply being able to out-spend the competition is no longer enough to guarantee success. As teams like the Boston Red Sox also adopt Beane's philosophy and have a budget near that of New York it presents an even larger challenge for other teams to compete with. The advantage that these large budget teams now have is the ability to drive up the price on skills to a point that the smaller budget teams can no longer afford. The constant challenge presented to teams of being able to put together a winning ball club at an affordable price involves being able to not just analyze which skills are currently of benefit but which ones are available at a price a team is willing to pay. At the time when the book Moneyball was written the main skill looked at by Beane and his staff was the OPS, on base plus slugging percentage (Lewis). Now it seems to change every year due to more teams implementing these philosophies. According to Cameron the current trend with teams using the “money ball” philosophies is to go for defensive skill over offensive (Cameron).

The current state of the United States economics forces businesses to look more closely at their risk management practices. Businesses of all types are looking back at their strategies and assessing their effectiveness. In the world of professional baseball this is just as true as in any other professional realm. Teams are looking at their spending habits and deciding if they have been using their money efficiently. As they look over their reports, there is little doubt that in addition to looking at the effectiveness of their spending they are going to look specifically at areas where they can reduce costs. Cuts have been and will continue to be made in many areas of the operations that make up the team. One of those areas will inevitably be in player salaries. As teams begin to attempt to reduce costs for players the strategies introduced by Beane will become more widely used. The revenue differences mentioned earlier aren't exclusive information. They are available to the public and it is certain that executives from all teams that make up Major League Baseball have looked at similar numbers. The broader realization of the efficiency of the system will feed its spread throughout the league.

Although teams like the Yankees will most likely continue to push the prices of various skills higher year after year, the effectiveness of their strategy will lessen over time. The Yankees' dominance over the last century is without question. They posses the most World Series titles of any team and have managed to build a fan base that stretches well beyond the borders of New York. Many other teams have attempted to win in the same way as the Yankees, by buying the biggest names available no matter the cost, but most have failed and have lost most of the invested money doing so. The system introduced by Beane is one that all teams can implement and the financial risks involved are minimal. Teams using these ideas are showing success that was previously viewed by many as impossible. Just as the American dream is based on the idea that any one has the opportunity to become a success, the “money ball” philosophies create that reality in the world of baseball.

The spread of its uses will be accelerated by the recession and over time it will be implemented and used by the vast majority if not all of the teams in Major League Baseball. In years to come Beane's ideas will become known as one of the major turning points of the game. Perhaps not as visible as Babe Ruth's home run records, but just as important.

Works Cited

Cameron, D. The new “moneyball” approach. Retrieved from Fangraphs.com 28 December 2009. http://www.fangraphs.com/blogs/index.php/the-new-moneyball-approach/

“Forbes’ MLB Revenue List Draws Ire from Some Teams.” Sports Buisness Daily. Street & Smith’s Sports Group, 18 May 1999. Web. 21Sept.2010. <http://www.sportsbusinessdaily.com/article/24735>.

Grabiner, David. “The Sabermeteric Manifesto.” baseball1.com. N.p., 12 Jan. 2010. Web. 21 Sept. 2010. <http://baseball1.com/bb-data/grabiner/manifesto.html>.

Lewis, Michael. Moneyball. New York City, NY: W. W. Norton & Company, Inc., 2004. Print.

“MLB Team Valuations 2010.” Forbes.com. Forbes.com Inc., n.d. Web. 21 Sept. 2010. <http://www.forbes.com/lists/results.jhtmlpassListId=33&passYear=2005&passListType=Misc&searchParameter1=unset&searchParameter2=unset&resultsStart=1&resultsHowMany=30&resultsSortProperties=-numberfield2%2C%2Bnumberfield1 &resultsSortCategoryName=Current+Va>.

Smith, K. Number cruncher: When it comes to baseball statistics Bill James wrote the books. Globe Newspaper Company 30 March 2006 http://www.boston.com/sports/baseball/redsox/articles/2006/03/30/numbers_cruncher/