Super-Duper Advanced Econ 101. Or Not.

Here’s an attempt (simplistic, yes – I welcome corrections to my reasoning as well) on how and why the posting fee for Daisuke Matsuzaka should not be applied pro-rata across his contract as an addition to each year.  See the bloody mess after the jump.

For clarity’s sake we’ll assume a 40M posting fee, and a 4/40 contract.  The pro-rated math shows 4 years, 80M, or 20M per year.

Now, bear with me.   First of all, if one wants to see the "silly simple math", the actual (hyper-simplistic) pro-rata amounts would go something like this:

Year 1: 50M
Year 2: 10M
Year 3: 10M
Year 4: 10M

Now let’s go to reality.  Say the Sox post 40M, in cash.  This is a non-payroll expenditure, first of all.  It counts against revenue.  This is an anomaly. No other free agent signing brings this revenue sharing reduction "bonus".  I don’t know the math on revenue sharing (a link to the 2002 CBA summary, the most recent documented agreement, is here, and it shows that the 2006 revenue sharing tax rate was 34.6%) but let’s assume that the Sox can apply a certain portion of DM’s posting fee to this number.  Dumb math shows that if a hypothetical basis revenue is $100M, then the savings might be in the very low seven figures.  The 40M posting fee is therefore 40M minus $XM.  And we’re just starting.   Now, let’s assume the Sox leverage an asset to come up with the 40M, not out of the realm of possibility.  Not sure what the interest rates are on a "FELOC", ("Fenway Equity Line of Credit") but if the vig runs at 10 percent annually, the crude math shows an interest payment of $4M annually.  That can legitimately be added to DM’s cost pro-rata, though it might count against revenue and also not towards the luxury tax.  Now subtract marketing money (true for any player, not just a Japanese Leaguer – Schilling sells shirts, ads, seats, etc. for the benefit of the team too, as does Big Papi, so DM isn’t unique here) from both the US and abroad..  Now subtract something for Research and Development.  Obtaining Matsuzaka is, in small part, an R&D expense, a scouting expense.  And factor in that at age 26 DM is probably mostly insurable.

So the final math looks more like this, in my totally uninformed and hypothetical world:

$10M (base salary) + $4M (interest charge on financed posting fee) – marketing money (unknown) – lesser pro-rata revenue sharing (low 7 figures) – R&D defraying (don’t know) = truer DM annual costs. There are probably all sorts of other hidden money factors that I probably have no clue about as well, but indulge me this.

Bottom line: this is a lot of money for an unknown, unproven Major League player.  If it doesn’t pan out, that’s a heavy gamble gone away. But the math is not 20M per year, not even close.   This isn’t SF boosterism, either.  It’s an effort at understanding a very odd signing of a unique player, compared with a more traditional free agent acquisition of a western player.  SFs who would cry "evil empire" ought to digest this too, to be fair.

[EDIT:   Subtract the t-shirt revenue – teams split all revenue generated by merchandise, regardless of team. Marketing relationships with Japanese teams and/or endorsements brokered directly by the Sox might be different, though.

Basically take everything I said with a grain of salt, as I disclaimed at the beginning. We need an in-house economist here at YFSF…

-SF]

30 comments… add one
  • http://www.redsoxtimes.com/?p=352
    Well researched and well thought out. I agree with your final premise, this is like a poker player making a big bet after analyzing the pot odds. They know they don’t have the best hand, but the risk of playing with that hand is worth the potential reward vs. the cost to acquire it.
    Unlike signing a player with dead money on the books years out when that player isn’t worth the high price of his salary, the Red Sox would make a business investment that they feel they can recoup a large % of over time and at the same time make a reasonable contract offer to a young stud pitcher.
    The upside to the Sox staff would be amazing at a per dollar rate with Beckett, Matsuzaka, Papelbon, and god willing Lester making a combined $25-30mm/year collectively for a few years.

    Tim November 12, 2006, 9:44 am
  • …well thought out sf…thanks…uh in other words we can expect it will be less than $80m net over 4 years, and therefore less than a $20m average/year, but may likely result in a year 1 payment of $50m, which is essentially what i just said a couple of hours ago over on “This May or May Not be Confirmed”…what’s still missing is the estimate for the “marketing” revenue stream that is the valid offset for the “investment” in his signing rights…the other stuff is valid enough, but is a little too voodoo, and complicates the point you’re trying to prove…that’s why it sounds like you’re trying to spin…if you really want to mess it up, but be more accurate, you’d need to prepare a cash flow analysis that also shows the cost of coughing up the $40m bid day 1 against the projected revenue over the life of the contract, which factors in loss of income on investing the $40m somewhere else and inflationary factors on the incoming revenue…your speculation is that they’d borrow the money instead of taking it from an investment pool…that’s fine…unless the sox already have the t-shirts printed, it may take awhile to recoup the $40m that you have to pay immediately…just curious, since you probably would’ve signed a pitcher anyway, should you offest the projected sales of DM t-shirts by the “lost” revenue by not signing let’s say, zito?…just kidding…

    dc November 12, 2006, 9:46 am
  • But if they finance the 40M, dc, they are only coughing up interest. That’s a totally different equation.

    SF November 12, 2006, 9:56 am
  • Fuzzy Math.

    Eric November 12, 2006, 9:57 am
  • And its not just the interest, you have to pay back the principle at come point too.

    Eric November 12, 2006, 9:59 am
  • Of course they have to pay off the principal. But it can be amortized over a great deal of time, and offset against other gains. It’s a very different expenditure from shelling out $40M cash at once, up front.

    SF November 12, 2006, 10:19 am
  • They probably do have the T-shirts already printed up, fwiw.
    Good post, SF. And, dc, I know you’re joking, but the Sox did need to sign a starter, and Matsuzaka per-year likely will cost roughly the same as a lower-tier starter and less than a top-tier one. That should be accounted for, too.

    Paul SF November 12, 2006, 10:51 am
  • good stuff. I must admit that my grasp of contract stuff is pretty limited, but I think I’m following this thread.
    Slightly off-topic, what do you think this does to the pitching market in general? Are Zito and Schmidt the big winners in this whole thing?

    Nick-YF November 12, 2006, 11:06 am
  • Subtract the t-shirt revenue – teams split all revenue generated by merchandise, regardless of team. Marketing relationships with Japanese teams and/or endorsements brokered directly by the Sox might be different, though.
    Basically take everything I said with a grain of salt, as I disclaimed at the beginning. We need an in-house economist here at YFSF…

    SF November 12, 2006, 12:20 pm
  • Good research, but my argument is that the marketing, etc, applies to not just the Sox, but the same with Yankees (for which you can say it’s cheaper since the Yanks pay more taxes) and the other big market teams. You can account for it, but the fact is almost *everybody* accounts for it, and you can say the same thing for every team, which means the current player’s salary is already accounted for (assumes a bit of a efficient market), meaning the “true” cost of DM is the same for most of these teams, give or take.
    Which means players, for the most part, are paid what they’re worth with all those consideration factored in. 20 mil isn’t only a lot in itself, but it’s a lot because it would make him the most expensive pitcher in the league.
    For example, if Johan Santana gets paid 20 mil (at least, if in a bigger market), and let’s just assume he sells as much tshirts, etc, as DM. Well, the “true” cost of JS would be the same of DM. Plus, because the contract doesn’t have a 40 mil payment at the beginning, you save on interest (which isn’t much, in the grand scheme of things)..
    If your team is over the cap year after year (the Yanks), then you can “cancel” out the interest, since that’s how much you would pay to the luxary tax..
    The 20 mil per$ is obviously a naive one, and the “true” cost of a player is always less than their contract, and I don’t think it’s by much. The only (obvious) advantage is that it would be that it’ll get BoSox into the Asia market of sorts, and perhaps makes it a good target for free agents from Japan in the future, which is immense in itself, and I’ll concede that..

    Lar November 12, 2006, 12:38 pm
  • Nick-YF: That’s really what I’m worried about, the aftermath of which would mean other players (perhaps especially the Boras players) would drive the market up.. which in turns, of course, makes DM more attractive, but only in a mutually assured destruction kind of way.

    Lar November 12, 2006, 12:39 pm
  • I don’t think this affects Zito, simply because Boras has proven that he can create a market where there is none (Washburn, anyone?), and gouge teams when there is. In other words, I imagine Boras has an astronomical number in mind for Zito, no matter what happens with Matsuzaka. And he’ll get it.

    SF November 12, 2006, 12:45 pm
  • Schmidt, already the most overrated of the pitchers in this market, is the big winner. He’ll wait until Matsuzaka and Zito sign enormous deals, then clean house in the bidding war among the remaining teams desperate for his services…
    SF, the problem is that we’re bloggers and writers — and writers do not good mathematicians make.

    Paul SF November 12, 2006, 2:37 pm
  • I gotta say, the way all the sox fans are selling matsuzaka T-shirts and planning future revenue, its like the bid and sign is absolutely 100% in the bag, and there’s no way they’ll lose, and its written in stone that he will play in fenway next year.
    Granted, given olneys article, it APPEARS that they’ll win, but it hasn’t been announced yet. Aren’t any of you the least little bit nervous about counting your chickens?
    If you guys are right then you’ve been right all weekend long, and not much will be said (after all, you guys have bee gloating all weekend, how much more can you do?), but if you’re wrong, you’ve posted a lot of fodder that’s going to be shoved down your throats like so much crow.

    jeb November 12, 2006, 5:01 pm
  • jeb:
    pretty clear you haven’t been reading this site these last few days. I for one have no faith that Olney is correct. These discussions are about Matsuzaka’s value and posting numbers, not about his position on the Sox. I will remain skeptical until anything is announced. Frankly I wouldn’t be surprised if this all turned out to be false reporting based on sketchy “inside sources”. Olney better be right, or he’s a laughing stock.

    SF November 12, 2006, 5:57 pm
  • And really, all of this is spoken with the understanding that this is all speculative. Besides, Jeb, who’s going to shove it down our throats? The Yankee fans here who have been discussing this move exactly the same way Sox fans have? Nice try on the wishful thinking…

    Paul SF November 12, 2006, 6:36 pm
  • Yeah I damn well have been reading the stuff on here and its abundantly clear that the sox fans are putting him into their rotation. Moreover, there was an extensive time line which stood for the proposition that the sox have won. We’ll find out tomorrow, I suppose.

    jeb November 12, 2006, 7:18 pm
  • Jeb, would you mind citing places where it’s “abundantly clear” that we as SFs are putting him in our rotation at this site? Can you please back up your completely BS claim?

    SF November 12, 2006, 7:27 pm
  • “Can you please back up your completely bullshit claim?”
    Come on SF. You’ve been working like a mad scientist trying to build a case for the huge financial gamble the Sox may soon make.
    Meanwhile, in “this may or may not be confirmed” Paul was citing every source he could find which could be indicators that the Sox had won the bidding.
    Now if you sfs weren’t pretty certain that the Sox had won the bidding you wouldn’t be starting threads with this content.
    In other words, if Olney hadn’t put up this rumour on ESPN, and others had pretty much agreed, if nobody had heard a thing about what was going on with Matsuzaka, you wouldn’t be saying what your saying.
    At this point in time, you guys are feeling like you will win the bidding and that DMat will be in your rotation next year. Hell, I would be.
    If you weren’t, you wouldn’t be trying to come up with every possible source of revenue the Sox might enjoy because of the signing, or all the other perks of having a guy from Japan on your team might result in.
    So you saying that jeb’s observation is “complete BS” is wrong and unfair.
    I must say SF, I find the energy your spending trying to sell this deal, and your claim that the posting fee really shouldn’t be figured into the cost of DMat’s contract, is a little humorous and kind of interesting. It’s almost like your afraid of losing some sort of moral high ground if the Sox are looked at as crazy, overpaying big spenders and lumped into the same category as the Yankees.
    But, this is all a little premature until the winning bid is is announced, and DMat is signed.

    whatever November 12, 2006, 9:40 pm
  • BTW, I’m glad to see Aramis Ramirez resigned with the Cubs. I had visions of him signing with Boston or the Angels.

    whatever November 12, 2006, 10:05 pm
  • Really, whatever? Was that the timeline where I quoted the New York Daily News citing Sox sources that said the talk was “premature”? Have I missed any mainstream media sources that have said Olney was wrong? Are there any papers quoting anyone saying they believe such a bid is unrealistic and that x team actually won it with an $X million bid? I haven’t seen those, but I guess you have.
    Jeb, do we need to make sure we put “would” instead of “will” to make each sentence concerning DM appropriately conditional? Should every sentence about DM begin, “Assuming Olney’s report is accurate…”? The standard you apparently want adhered to is not being met by even the Yankee fans on this site, so I’m curious who will make us eat crow if Olney turns out to be wrong?

    Paul SF November 12, 2006, 10:10 pm
  • For the record, I do think it’s going to happen. That’s why I did the “may or may not” post. Based on what the reporters are saying, it looks good. Doesn’t mean it is, but I believe it will. So you’re right in that sense, whatever. But I didn’t cherry-pick. I posted all the mainsteam reports I could find that added new information, and that’s what forms the basis of my opinion.
    Jeb makes it sound like we all want it to happen, so we’re already penciling him in, “gloating, “counting our chickens.” That’s just not the case. I think there’s been plenty of statements here acknowledging that we don’t know, but assuming the accuracy of the reports, etc etc etc… But at some point, you’re bound to comment on the news — and the news right now is that the Sox “may have,” “probably,” even “likely,” won the Matsuzaka bidding. I have a hard time seeing how basing our opinions on news reports means we’ll have to eat crow if those reports are wrong.

    Paul SF November 12, 2006, 10:16 pm
  • Paul, Thanks for confirming my point. You DO think that DMat will be in your rotation next year. Hear that SF?
    Nobody said anything about cherry picking. I haven’t seen any reports disputing Olney’s claim.
    Noting all the sources that you mentioned, and your desire to point them out, was to me, an indication that you felt that there was a good chance Boston had the highest bid, and DMat would be pitching for the Sox next year.
    And to be fair, I haven’t seen any gloating here over getting DMat. Not yet.

    whatever November 12, 2006, 10:39 pm
  • …i for one won’t be serving up any crow on this one…i battle it out with sf and paul all the time, and i clobber them when i think they deserve it, but on this one i agree with them that they have been very cautious in not jumping to conclusions that this is a done deal…i even jokingly accused paul of being “giddy as a schoolgirl” in one of my posts on this topic, something i’d be if the yankees were rumored to be the front-runner, but not one of his posts led me to believe he thought the game was over…we’ve all been playing a rather fun game of “what if”, without requiring each other to start out each post with “what if”…
    …olney may or may not be right about it…he’s not staking all that much of his rep on this particular report, because he’s been smart enough to issue a disclaimer that the rumor was from a “source”, and not necessarily an official one…each of the bidding teams probably has a leak, and olney simply pieced that data together…

    dc November 12, 2006, 10:40 pm
  • Thank you whatever for being the voice of reason.
    SF, being a liar is a sad thing.
    1. Isn’t it gloating when you essentially mocked mike plugh at matsuzaka watch with the “meow” title?
    2. The timeline sought to reach conclusions about what was happening.
    3. The math is a joke. If it was the mariners, there’s no damn way you’d try to justify the deal financially.
    Face it, one post tries to PERSUADE that you’ve won, the other tries to JUSTIFY why its ok and the one directed at mike plugh is a GLOATING comment.
    Face it, you ASSUME:
    1. The sox won the post
    2. The sox will sign him
    3. And he will be great
    Res ipsa loquitir bitch

    jeb November 12, 2006, 11:21 pm
  • After Irabu, Contreras, Kaz Matsui, Nomo,etc, for me it would be a relief if the sox win this bid.Tying up a ton of resourses in what may turn out to be another foreign dud is a song Yanks fans have heard too often before. Of course, there is the possibility that DM may live up to the hype, but I keep thinking back to the Pavano sweepstakes a couple years ago – No Thanks.

    Andrews November 12, 2006, 11:21 pm
  • Ok, whatever. Then we agree. Cool. I thought you were cherry-picking, and I was wrong. Sorry about that.
    Thanks, dc, for being the voice of reason on this one, also.
    Jeb, don’t be an ass. Even if you feel others have been rude, there’s no need to respond that way. You’re not SF, so how do you know what he would and would not say if the M’s won the bid?
    Apropos of nothing, if the Yanks won the bidding with that astronomical sum, it would have been a lot less surprising to me than the Sox doing so. Still, considering his age and position in this year’s terribly weak pitching market, there’s a logical reason behind any team deciding to make such a large bid.

    Paul SF November 13, 2006, 12:16 am
  • I mean, I thought you were accusing me of cherry-picking. Gah. Anyway, never mind. Going to bed. Good night. :-P

    Paul SF November 13, 2006, 2:30 am
  • …and if the band your in starts playing different tunes,…..we do that a lot…

    dc November 13, 2006, 7:34 am
  • Jeb, I don’t really feel like I even need to respond, but I will. You’ve made a completely baseless comment, and the “evidence” you pull is evidence of nothing relating to “gloating” about the Sox obtaining DM or anything showing that I “assume” anything. How you can make airtight claims about what I “assume” when throughout this whole situation I have STATED what I THINK? If you believe me a liar, then stop visiting the site; why would you waste your time if that were the case?
    This site has been a mostly civil discussion about the Sox and Yanks, with occasional jabs at the opposing side (hence the “meeow” at Mike Plugh (a YF who runs the excellent “Canyon of Heroes”). His post about the financial ramifications regarding the hypothetical offer of the Sox was laughable and catty, and that’s all I was pointing out. Since you don’t seem to get it, I suggest you stop wasting your time (and our bandwidth) and head off somewhere else. Seriously.

    SF November 13, 2006, 7:41 am

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