The Producers Argument

It occurs to me (and to many of you who commented and e-mailed me) that I did not make my argument about the Tribune Company and the Cubs as clearly as I might have. In an effort to keep the brain from rusting up in the off-season, I’m going to take another stab.

I’m sure that most everyone is aware of the musical The Producers by now, from Curb Your Enthusiasm if nothing else. If so, you’ll recall the premise, which is that a Broadway producer’s accountant discovers that it is possible to make more money by writing a particularly awful musical than by writing a good one. They set out to write the worst possible musical they can, except that it ends up backfiring and becoming wildly successful. Quite clever, no?

Well, what I’m thinking about is what I might call “The Producers Argument.” Here is the premise: what if it is possible for a large-market baseball team to make more money by putting out a middle-caliber team than by assembling the talent most likely to win? Maybe it’s not perfectly analogous to the musical since it probably wouldn’t work for a really bad team, but that’s not really all that important since the only distinction is between “best possible team” and “everything else.”

Let me reiterate: I’m not saying anyone has done this, or that anyone will do this, I’m just suggesting we think about it, hypothetically. Again, the question: What if a team could be most profitable when talent-wise it is most likely to finish second or third in its division?

Hypothetical. Except, if ever there was a team for which this might possibly be true, it’s the Cubs, because of 4 conditions.

1. Guaranteed revenue sources. The Cubs will sell a lot of tickets because they own Wrigley Field, which sells tickets. These attendees will spend a lot of money on paraphernalia and beer. WGN will continue to bring in advertising money for Cubs games. All of this will be true even if the Cubs play .500 baseball for 5 more consecutive years. In a metropolitan area of well over 8 million people, they could probably still make money even if they traded even-up for the entire Royals AAA team.



2. Loyal fans. If we’ve held on for 98 seasons, which is the same as saying that we’ve stayed with the team our entire lifetime, we’re not going to stop any time soon unless there is blatant sabotage.



3. The “so close” mentality. If the Cubs continue to stay within range each year around September, the possibility of something extraordinary seems so enticing that fans will always pay attention. The promise of baseball romance is so strong that people cannot help themselves. The key here is that they only need to have a good enough team to stay close, not to dominate.



4. The “can’t lose” scenario. If it backfires in either direction one year, no problem. With what we can call second-place-talent, if they underachieve, fans will tolerate this for a few years, and the likelihood of underachieving for several consecutive years is much lesser, besides which they could always call an audible if things got too bad and hire a mercenary. On the other hand, if a team with less talent overachieves, then they are geniuses for getting more by spending less, and will reap a windfall.

Along the way, such a team would save a fair amount of money by assembling only second-place-talent, which is cheaper. Hence, by saving such a substantial amount, they could be more profitable over a period of years. Even if one challenges that this is not true because they would obviously be most profitable if they won the World Series, there is no guarantee that spending more will result in a World Series. Once you get above a certain spending point –- the small market / large market divide -– it seems that over the last few years, spending extra often sees diminishing returns on wins. (Just ask the Yankees, but also others.)

Therefore, if I am a profits hawk, and I want to see the safest revenue numbers, spending just enough without reaching the point of diminishing returns could be the way to go. The balance between maximizing profit while minimizing risk could mean second- or third-place-talent. What’s worse is that the scenario only plays out well for a team with guaranteed revenue sources, a loyal following, and enough romance to encourage fans to spend time (and money) on just the slim hope of a World Series.

Sound like any team you know of? Again, I’m not saying it has happened, or is happening, or will happen. I’m just pointing out certain conditions that lend themselves to someone with more of a conspiracy theory bent than myself.

To think about it in numbers, let me do a few quick back-of-the-envelope calculations. Let's say the team's total revenue is $1 billion. From that, maybe profit is $200 million. Then let's say there is a star player who would demand $14 million per year to re-sign. Alternately, you could find a decent substitute at this position for about $2 million per year. Effects of not signing the expensive player on other revenue streams are mostly negligible, but we can even factor in that the loss of such a player will translate to a loss of $2 million in profit from jersey sales, etc. That still leaves you with $10 million more profit, or a 5% increase.

When you're talking bottom lines and corporate stock prices, 5% is a whole lot. Hell, they might start selling MGD instead of Budweiser if it could increase profit 5%. So, mister bottom-line, do you re-sign the player? What is any one player worth, maybe 5 extra wins? And how likely is it that 5 extra wins makes you more than $10 million? Especially if the players you still have under contract will probably win somewhere around 83 games without him?

Pulitzer Prize winning columnist and avid baseball fan George Will writes (not about baseball) that moral hazard “exists when government policy creates incentives for bad behavior.” If we can extend this definition beyond government policy, then we might say that it is a moral hazard when the economics of baseball creates incentives not to assemble the best possible team in terms of winning. A team with all the guaranteed money of the Cubs might find themselves in just this situation one day if they were willing to look at it from such a detached perspective as to see “incentives” as synonymous with “profits,” forsaking “wins.”

Immediately, the Yankees once again come to mind because one might think I’m suggesting that teams ought to spend mightily to get the best talent. Yet again, as we’ve seen over the last five years, it is not so simple as this. I’m not suggesting that the Cubs -– or anyone -– ought to go out and buy mercenary talent. Chemistry and loyalty matter, and spending too much sees diminishing returns. If a scenario similar to this were to play out, what would be most distressing is if the star players that the Cubs scouted and developed were to sign as free agents for another team. Besides which, this is all hypothetical anyway, so let’s not spend too much time dwelling on the ethics of free agency since it's only tangentially and barely relevant.

The real reason it’s worth thinking about all of this is to bring to light the way that profits and winning are not as directly correlated as they ought to be. Profit is not entirely a function of winning, and they might be less closely tied than your instinct would lead you to believe. If that’s the case, this means that it is quite possible to divorce the two and treat them separately.

In turn, this invites an ownership to emphasize one over the other. For Steinbrenner, it’s winning -- profits (and perhaps ethics) be damned. (Not that the Yankees are hurting for revenue.) But for another ownership... who’s to say?

My fear is that over the years, owners of a team like the Cubs might become most concerned with profits, and that as a result, they will neglect to re-sign the players to which we all feel an attachment when they still have many good years left. I'm not saying they should overpay, or at least not too much. It's just that I hope they continue to pay fair market value for their own guys who should help the team win a few extra games.

As for who might not do this, it could be the Tribune Company, since they’re already struggling with profits. Or, it could be another owner, which would most likely be a conglomeration. Or maybe it won’t be anyone.

It hasn’t happened entirely that way yet. (I think.) It might never happen that way. (I hope.) But it could, and if it does, unfortunately I can think of one team that would be a prime candidate.