The Captain's Blog

2018 was a banner year in the Bronx, at least from a financial standpoint. Although the Yankees didn’t perform as well on the field as fans might have hoped, the team’s accountants had plenty of reasons to celebrate. According to the latest Forbes study of the business side of baseball, the Yankees won a financial triple crown, as net revenue increased by 8%, operating profit doubled and the franchise’s enterprise value increased by 15%, more than any other team in the league.

Yankees’ Financial Snapshot, 2003-2018

Note: See below for relevant footnotes pertaining to financial metrics.
Source: Forbes.com

A big reason for the Yankees’ financial successful was a significant reduction in payroll. In 2018, the Yankees slashed player salaries by over 12% to dip below the luxury tax threshold, thereby eliminating a further expense and reducing the team’s overall investment in players to a minuscule 27% of revenue. Only the Chicago White Sox invested at a lower rate in 2018, making the Yankees one of the chief culprits in terms of under investment in payroll. In real dollar terms, the Yankees would have had to have spent over $100 million more to just reach the league average rate of 42.8%.

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Major League Baseball’s financial fortunes continue to rise, as franchise values, revenues and operating profits all exhibited healthy growth in 2018, according to the latest Forbes survey of the game’s financial landscape. The top-line was augmented by continued increases in local and national television deals as well as new online opportunities for content, while the bottom line was supported by flat player costs. The end result was a more profitable and valuable league, with only a few teams failing to share in the riches.

MLB Financial Snapshot, 2003-2018

Note: See below for relevant footnotes pertaining to financial metrics.
Source: Forbes.com

League-wide, net revenue was up 5% for the second straight year, although seven teams reported either flat or declining income. The Boston Red Sox were more than just champions on the field, leading all teams with a 15% increase in revenue. On the flip side, the Blue Jays suffered the largest decline as revenue tumbled 3%. In terms of overall net revenue (after subtracting stadium debt service payments and revenue sharing), the Yankees easily remain the game’s top earner, topping the Dodgers’ income by over $100 million. Bringing up the rear was the Oakland Athletics, who, despite recording a 4% increase in revenue, reported net income of only $218 million.

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Strikeouts have taken over baseball like a plague. Or is it an epidemic? How about a crisis? All across the majors, “three strikes you’re out” has become an unwelcome routine at the old ballgame, and, early indications suggest there is no end in sight. Can baseball survive this assault on the aesthetic quality of the game, or will inactivity finally be the death knell that the sport has long avoided?

Strikeouts are boring. That’s the underlying concern of many who fear their seemingly interminable proliferation. But, have strikeouts really had a negative effect on the entertainment value of the game?  To answer that question, we need to examine the impact that the increased level of strikeouts has had on both positive and negative offensive outcomes, and then consider whether those changes are more or less pleasing from a spectator’s perspective.

Strikeout Rate vs. wOBA, 1989-2018

Source: fangraphs.com

Over the last 30 years, strikeouts and offensive production (wOBA) have had a moderate negative correlation, but a plot of both measures defies a discernible pattern. In fact, aside from strikeout and home run rates, the seasons before and after the infamous steroid era peak look very similar. So, if baseball is suffering because of a decline in offense, strikeouts aren’t the culprit. And, if strikeouts really are a plague, it’s not because they have suppressed run scoring to an unprecedented level.

Base Hit Rates by Type, 1989-2018

Source: fangraphs.com

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The Associated Press’ annual report on Opening Day payrolls set off another round of alarm bells in baseball circles. Despite the recent spate of long-term extensions and mega contracts paid to high profile young stars and elite free agents, the average salary was down…again! This revived concern about pending labor strife, and led some to extrapolate an even larger decline for the entire year, essentially heralding the destruction of baseball’s middle class. Framed in that context, it’s easy to understand why so many are predicting a work stoppage when the current collective bargaining agreement expires.

In the AP report itself, however, was an important explanation. Because of all the long-term deals that were signed recently, the average salary was artificially deflated by signing bonuses. Players often prefer these lump sums for a variety of reasons, including their preferred tax treatment and higher present value. However, baseball allocates signing bonuses on a prorated basis, meaning year one of each contract is assigned a value much lower than the actual payout. According to AP, that turned a $46,000 per player increase into the $36,000 decline that triggered so much concern.

How Signing Bonuses Deflate Year-One Contract Values

Note: Accounting basis = Base Salary + (Bonus/Contract Length)
Source: Spotrac and proprietary calculations

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Hal Steinbrenner is right. The Yankees are a championship-caliber team. They might even be the best team in baseball. The ceiling is certainly high on a very talented team, and even reasonable expectations put the Bronx Bombers among the game’s elite. However, the down side risk is not inconsiderable. Although the Yankees may be the odds on favorite to win the World Series, they aren’t quite guaranteed to make the playoffs. Would a more aggressive off season have created greater assurance? Undoubtedly, but with a disappointing winter in the past, Yankee fans can still look forward to an exciting summer.

If everything falls into the place, the Yankees could be a juggernaut that wins well over 100 games. This scenario is predicated on a consistent rotation capable of brilliance backed up by a deep, dominant bullpen and an explosive offensive brimming with power. Health is the biggest concern. Early spring injuries to key contributors like Aaron Hicks, Luis Severino and Dellin Betances raise alarm bells, but if the initial prognoses are correct, the long-term impact should be muted. Otherwise, there aren’t many candidates for performance regression. On the contrary, the Yankees can reasonably expect either the same or more production at every position but short stop.

Everything doesn’t have to go right, however. The Yankees have enough talent to overcome a few injuries or disappointments, especially if the team is willing to make a key trade or two at the deadline. But, they are not invulnerable. If the early injuries persist, or expected improvements do not come to fruition, the Yankees could end up on the fringe of the wild card race. Unlike last year, there aren’t many major league ready reinforcements waiting in the minors, so if things go south, Brian Cashman will have to look outside the organization for help, and if the cost is too high, the Bronx Bombers could be left stranded.

Following are 12 key questions outlined and answered in the context of reasonable best, base, and worst case scenarios. Also, scroll below to see how well the Captain’s Blog has predicted the Yankees’ annual win total in the past and click here to see a forecast for the rest of the league.

Best Case Scenario: 105 wins

The Yankees’ efforts to improve the rotation and fortify an already strong bullpen pay off as James Paxton and J.A. Happ join Masahiro Tanaka as stable anchors that allow Luis Severino and CC Sabathia to get healthy and then thrive. The decision to stick with Miguel Andujar at third base also proves enlightened as he and Gleyber Torres build on their rookie season, creating a formidable lineup that includes a resurgent Gary Sanchez complementing the consistent slugging of Giancarlo Stanton and Aaron Judge in the middle of the order. Also, despite several key spring injuries, the Yankees rebound to have good relative health throughout the season, and when needs arise, the organization proves willing to pull the trigger on a big trade.

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American League East

The Yankees and Red Sox are on equal footing in the East, so just about anything could tip the balance. Boston’s bullpen looks to be its biggest weakness, and a few extra blown saves could make the difference in the division race. The rotation is the Yankees’ Achilles heel, and if Luis Severino isn’t healthy, Boston should take the top spot. All things considered, the Bronx Bombers have a little more depth, so if health treats each team equally, the Yankees should celebrate their first division title in seven seasons. The Rays will spend most of the season looking up at the Yankees and Red Sox, but with a good young rotation and solid lineup, Tampa should have enough to claim a wild card spot. All three teams’ position in the league should be bolstered by beating up on the Blue Jays and Orioles. Even if the Blue Jays surprise with an early season improvement, chances are the organization will look to deal veterans for prospects at some point, making them a second half laggard. The only suspense regarding the Orioles is whether they will become the second team in MLB history to have consecutive 110 loss seasons (1962-63 Mets).

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