Sports Nut

The Pittsburgh Paradox

Should the Pirates spend money to win ballgames?

Why are the losing Pittsburgh Pirates still profitable?

How can a bad baseball team make money? According to a set of confidential documents published on Deadspin this week, Major League Baseball’s most hapless team—the Pittsburgh Pirates—had a net income of close to $30 million in 2007 and 2008 despite fielding teams that lost 54 more games than they won. As the AP reported on Sunday, “Losing has been profitable” for Pittsburgh.

The Deadspin papers reveal the closely guarded secrets of six privately held sports teams: the Pirates, Tampa Bay Rays, Florida Marlins, Los Angeles Angels of Anaheim, Seattle Mariners, and Texas Rangers. For each one, they spell out exactly how much money the franchise makes (from ticket sales, concessions, etc.) and how much it spends (on player salaries, ballpark operations, and so forth). As the documents clearly reveal, success on the field isn’t required for a sports team to stay in the black.

Like any other business, the Pirates certainly have a right to maximize their earnings. The club’s bottom line stayed strong despite its weak on-field record thanks to the combination of league revenue-sharing money and low player salaries. The newly leaked documents reveal that the Pirates received $30 million in 2007 and $39 million in 2008 from MLB revenue sharing—a program designed to funnel money from cash-rich teams like the Yankees to allegedly cash-poor teams like Pittsburgh. Pittsburgh, however, didn’t spend that extra money to buy better players—the team’s 2010 payroll of $35 million is the lowest in the major leagues, and the Pirates have had one of MLB’s bottom four payrolls in every season since 2004.

In light of these financial statements, the Pirates have been criticized for refusing to spend money to make money. It’s not clear, though, that Pittsburgh’s owners could spend more on player salaries without turning their profits into losses. Buying wins is not a cheap proposition. Sabermetricians—those who analyze baseball statistically—have figured out ways to determine how much an individual player’s performance contributes to his team’s victories. Correlating those performance metrics to actual market prices for free agents shows that it costs management something like $5 million to purchase each additional win. (For example, by signing a $10-million-quality free agent, a team might improve its record by two games.)

The Pirates’ operating income in 2008 was $22 million. If they had spent that entire amount on free-agent players in 2009, they’d have added about four wins for the season—ending up 66-95 instead of 62-99. That is, they still would have been terrible—not exactly what the fans have in mind when they ask the owner to empty his wallet.

But that’s only half the equation. Those extra players, creating four extra wins, might increase fan interest, which would in turn lead to increased revenue. While some of the team’s revenue sources—like stadium naming fees and broadcasting rights fees—are relatively fixed from year to year, ticket and concessions sales do fluctuate based on wins and losses. If an extra win excited fans to the tune of, say, $4 million in extra spending, then the $5 million spent per additional win would have really cost the Pirates a mere $1 million. It’s also theoretically possible that the additional wins could pay for themselves. If the $5 million win led to $8 million in extra ticket sales, then a free-agent acquisition would pay for himself, and more.

So, which is it? If we assume that Pirates ownership is at least somewhat rational in trying to maximize its profits, we have to conclude that each extra win brings in less than the $5 million it costs—otherwise, it would have already spent the extra money. But how much less?

Let’s start with a quick back-of-the-envelope calculation. Suppose the Pirates buy 20 more wins, for an additional investment of $100 million. According to the Deadspin docs, the club makes around $40 million each season from ticket sales and concessions. In order to stay in the black, they’d need to increase that to $140 million. That would mean going from 20,000 fans per game to 70,000—which would be difficult, because PNC Park holds just 38,500 paying customers—and/or raising ticket prices. Would total box office revenues more than triple just because the team went from terrible to average? Doesn’t seem likely.

The situation is even worse than it looks: We haven’t accounted for the fact that, if the Pirates suddenly double their ticket sales, MLB will substantially reduce their revenue-sharing income. The effective clawback rate is somewhere around 31 percent, which means that for each additional dollar in ticket sales, the Pirates will receive 31 cents less in revenue-sharing “welfare” payments from the league. So it wouldn’t make sense for the Pirates to spend $100 million on salaries unless they could see an increase in revenues of about $145 million. (And that doesn’t even take into account the similar clawback on “MLB Central Fund” income, which is the Pirates’ share of earnings from sources such as Clearly, if the Pirates started spending significant money on free agents, they would quickly wind up in the red.

By fortunate coincidence, we don’t have to rely on a back-of-the-envelope calculation to see how this plays out in real life. One of Deadspin’s other leaked reports belongs to Tampa Bay, for the exact two-year period in which the Rays jumped from worst to first in the American League. Tampa and Pittsburgh are roughly equal in market size—both teams earned between $130 million and $140 million in revenues per year, according to the leaked documents, and receive similar revenue-sharing payments from MLB. While we should be wary of drawing conclusions from a sample size of one, the experience of the Rays is nonetheless instructive.

In 2007, the Rays finished with the worst record in the American League; in 2008, they went 97-65 and made the World Series. If you thought this sudden improvement would have led to a huge jump in revenues, you’d be wrong. Excluding the playoffs, the team’s revenues increased only slightly, from $134 million in 2007 to $143 million in 2008.

Why so small a bump? Ticket sales in 2008 jumped by only about $11 million, even though that represented a 40 percent increase. Concessions (including parking) more than doubled, a jump of $6 million. But offsetting those increases was the extra $20 million the Rays spent on player salaries. Yes, that’s an amazing return—31 extra wins for less than $700,000 each—but it was enough to wipe out all $17 million in additional revenue. On top of that, the Rays’ revenue-sharing and Central Fund payments dropped by $8 million in light of their newfound success.

As a result, Tampa Bay’s regular-season operating income declined from $22 million in 2007 to about $3 million * in 2008—which means it cost the team $18 million to transition from cellar dwellers to World Series participants. As amazing as it seems, even after adding in $11 million in postseason earnings, the Rays were more profitable when they went 66-96 than when they went 97-65.

Based on these calculations, it seems unlikely that the Pirates will ever be able to turn a substantial profit while spending significant money on free agents. But as this year’s standings prove, you don’t need a massive payroll to win a lot of games—the cheapskate Padres, Rangers, Reds, and Rays are all great bets to make the playoffs.

How can you be so successful while spending so little money? Basically, you have to rely on young, cheap players. The Pirates appear to be moving in this direction; they have a significant minor league player development budget, and they don’t appear to be shy about spending money to sign their draft picks.

A little luck helps, too. Statistically, in any given season, one out of every six teams will be lucky enough to exceed its talent level by six wins or more. And one team per season, on average, will exceed its talent by as many as 11 wins. (Admittedly, if you’re waiting for that team to be yours … well, it could take a while.)

So if you’re a little bit smart, and very, very lucky, you could wind up with a few young, cheap players that could lead you to a playoff berth. But it would seem that for small-market teams like Tampa Bay and Pittsburgh, established stars cost too much to pay for themselves.

It would be nice for the fans if the Pirates were willing to lose millions of dollars in order to bring a competitive team to their loyal supporters. But even superrich owners are looking for some kind of return on their investment. In the end, the Pirates can spend a lot of money on player salaries, or they can turn a profit. They can’t do both.

Correction, Aug. 26, 2010: This article originally miscalculated Tampa Bay’s operating income from 2008. It was about $3 million, not $1 million. (Return to the corrected sentence.)

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