What Does $235 Million Buy the Los Angeles Dodgers? 166 Wins

The Los Angeles Dodgers broke a lengthy streak at the start of the season this year. Since 1998, the New York Yankees, known to many as the Evil Empire, has led Major League Baseball in payroll by considerable margins. This year marks the ending of that streak as the Dodgers zipped by the Yankees with a pay roll a hair north of $235 million, the most ever paid to field a single baseball team in history.

When is $235 Million Peanuts? Or Cracker Jacks?

For baseball fans, this doesn’t come as a tremendous surprise. The Guggenheim Group, which acquired the Dodgers in 2012, paid a whopping $2.15 billion for the franchise. This staggering sum was based on the media contracts that come with the team, made all the more valuable by the fact that sports remain one of the only types of programming that viewers watch live.

As such, spending about 11 percent of enterprise value a year on the creation of the actual product hardly seems excessive. The ROI on those dollars paid to players will be clear for the Guggenheim Group in TV rights (the team started their own channel) and ticket sales. But what about from a baseball perspective? After all, a pricey team that loses isn’t any more likely to attract fans and boost ad revenues for televised games. And, if wins can be had for less, why spend extra?

This sort of crossover from dollars to baseball outcomes can be pretty tricky and was the focus of Michael Lewis’ now legendary book about Oakland A’s GM Billy Beane, Moneyball. But, based on the going rate for baseball players, what correlation between wins and money should be expected? How much does a team need to spend to expect to go 0.500? To make the playoffs?

The New York Yankees Since 2001 – Huge Spending Advantage and One World Series

In 1998, the Baltimore Orioles spent $6.2 million more on players than the Yankees. This didn’t stop the Yankees from winning the World Series in 1998. In 1999 and 2000, the Yankees took the top prize home again while leading the league in payroll by modest margins. In 2001, the Yankees returned to the World Series only to lose a classic to the Arizona Diamondbacks twin-headed pitching monster of Curt Schilling and Randy Johnson. That year, the Yankees spent $232,985 more than the Boston Red Sox, or a mere 0.2 percent more than Boston’s payroll.

That marked the end of an era and the beginning of the Evil Empire. From 2002 to 2012, the New York Yankees spent at least 13.4 percent more than the second-highest payrolled team in the Major Leagues, and usually much more. That margin peaked in 2005 at a staggering 69.8 percent higher than their next-closest competitor and stayed over 60 percent in 2006.

And what did the Yankees have to show for it? A single World Series title despite an avalanche of money. This included losses in the postseason to teams the spent less than half what the Yankees did.

It’s Not ONLY About the Rings

Of course, this is probably unfair to the Yankees in terms of understanding their ROI. While a World Series win is big, and undoubtedly valuable for the franchise, near misses in the playoffs after winning seasons are still going to keep fans watching and boost the value of the team.

What’s more, one of the central points of Moneyball is that baseball is a game of considerable variance. One can prepare a team to play the 162-game regular season with smart player acquisitions, but a sample size as small as a single 7-game series means that even the best teams can easily lose in the postseason. Winning over 162 games is about a strong team, winning over seven games often has a lot more to do with luck.

And, as such, the Yankees lavish spending from 2002 to 2012 appeared to produce results. The Yankees made the post-season every year save one (2008) and averaged 97.3 wins a season. If you chalk the lack of World Series titles up to a run of bad luck in the post season, the Yankees have, nonetheless, clearly gotten a return on investment.

How Much Does a Win Cost?

In any given year, some teams with very low payrolls will win a lot of games and some with very high payrolls will lose a lot of games. How much bang you get for your buck can vary wildly depending on the quality of your front office, injuries, and the prevailing free agent market.

However, how many wins should teams expect each year based entirely on their payroll? If you assume that all front offices were even and the only advantages to be gained came from spending more money on talent, what results should this year’s Major League teams expect?

The calculation is simple enough: take the combined payrolls of all 30 MLB teams and divide that by 2,430, the total number of wins out there over the course of a season.

Using figures compiled by the Associated Press, MLB teams have a combined opening day payroll of $3,453,960,397, which gives us a player salary per win number of $1,421,382.88, a metric I’m going to call “Purchased Wins.”

So, with that number in mind, what would the expected win totals be for each team be assuming that money was the only factor? The table below contains the results:

Were I a betting man, I might take the under on the Dodgers to win 166 games this year. What with the 162 game schedule and all.

All joking aside, though, the results do present an interesting study of diminishing returns and the haves/have-nots nature of baseball salaries.

Clearly, the numbers at the top and bottom of this table won’t happen. The top three teams are each paying for, proportionally, the greatest regular seasons in MLB history. Meanwhile, the bottom two teams aren’t even paying enough to surpass the lowly 1962 Mets record of 40-120.

So, it suffices to say that the relationship between money spent and wins is not entirely proportional. But what happens if we look at last year, where we can compare purchased wins to, you know, actual wins?

So it’s interesting to note that, while increasing payroll by $20 million from last season to this season, the Dodgers actually had three more purchased wins at the start of 2013 because the league as a whole was spending almost half a billion dollars less. It’s also interesting to note that last year’s Yankees had (attempted) to purchase some 13 more wins than this year’s Dodgers, showing that, proportionally speaking, the current Dodgers payroll isn’t necessarily the monstrosity some might make it out to be.

But maybe the most interesting thing is the dramatic difference between teams that spend very little on players and those that spend a lot. Of the ten teams with the highest opening day payrolls, every team but one was at least 18 wins behind what they had paid for with the St. Louis Cardinals acting as the one outlier.

And for the ten lowest opening day payrolls, every team wound up with more wins than they paid for and, if you discount Minnesota, they did so by at least 15 wins. On average, the top ten teams by payroll averaged 37 wins fewer than they paid for, and the bottom ten teams won 28-more wins than their payroll would indicate.

This would seem to indicate that, at a certain point, spending more money on players dramatically decreases in its effectiveness.

So What Does This Mean for Next Year?

So, for one last table, let’s compare this year’s purchased wins to the ZiPs Projections for wins, which takes into account the projected statistics for each player and then calculates the expected number of wins based on its roster.¹

Once again, the average deficit between wins purchased and wins projected is large for the ten teams with the highest payroll (an average of 32 fewer wins projected than purchased), and the surplus for the ten teams with the lowest payroll is also large (an average of 23 more wins projected than purchased).

It is worth noting that the Dodgers have purchased the best roster in terms of projected wins, but in doing so they spent $100 million more on talent for the same projected number of wins as the Washington Nationals.

Talent Gap Hard to Cross

At the end of the day, much of these difference have to do with the free agent system in baseball. Younger players are kept under club control for year, limiting their salary, only to see the amount paid for players balloon significantly once they hit the free agent market and have teams competing to be the highest bidder. Players of the same or similar quality will routinely have wildly different salaries depending on which side of free agency they’re on.

This ultimately means that teams with more young talent that they’ve developed themselves pay significantly less for their talent than teams that are acquiring free agents.

However, building a team from the ground up takes time, and some of the only ways to improve a team in the short term is by either signing expensive free agents or trading away younger players who could ultimately help reduce costs in the long run even if they aren’t ready to contribute in the immediate future.

And for big-market teams like the Dodgers, fighting through losing seasons just to keep player costs down doesn’t make much sense. Spending an additional $100 million a year on players to increase the likelihood that your $2.15 billion baseball team is worth watching is hardly unwise.

¹ There are a variety of different methodologies for projecting season wins used by statisticians that have varying degrees of success. Before I get any letters I should note that I don’t have any particular reason for picking ZiPs over the others other than that it seems to be one of the most recognized.