Organizational Logic and Playoff Trades

Brewers fans are so busy dissecting the recent rumors about the club scouting potential trade returns that they have lost focus of the central aim of the club: an MLB team’s first order of business is selling cable subscriptions (and therefore advertising), and their second order is returning (hopeful) profits to the ownership group. Make no mistake about it, the MLB is an elite entertainment organization hellbent on delivering a desirable experience to fans. That desirable experience just so happens to (usually) center around hopefully winning baseball games, so here we are with the 2017 trade deadline and the Milwaukee Nine.

These words should not ring as cynical. They are organizational truths. Moreover, they are important truths for analysts to consider, because organizational logic will help to decipher some of the typical questions; the most important question of this sort that Brewers fans and analysts currently face is, “How much should the Brewers spend (in terms of prospects) on contending in 2017?” This is obviously an imperfect question for many reasons, not the least of which that the Brewers can return value many which ways given their prospects and MLB assets, and also that trade deadline talent can come in the form of controllable contract reserve assets as well as two month rentals. But this is a scouting issue; by turning to organizational truths, a more straightforward structure can emerge for answering these types of value riddles.

I propose a simple hypothesis: MLB midseason trades can be priced based on an organizational goal (securing playoff revenue) rather than on an individual basis (ex., player for player).

Even though it is extremely difficult to find published accounts of what MLB teams take home from the playoffs, it is possible to reverse calculate a team’s share by using player’s pool announcements and following the calculation rules for MLB playoff revenue sharing (MLB Rule 45). Forbes includes some articles on playoff revenue in general, including a specific look at the 2015 Mets that helps the corroborate any estimates based on reverse calculation. Crain’s Cleveland expands on the Mets tale by discussing other lucrative areas associated with playoffs trips, such as increases in regular season ticket revenue, merchandise sales, and other licensing or sponsorship agreements.

In 2016, the players brought home $76,627,827.09 from playoff revenue. Given that Rule 45 stipulates revenue sharing through the Wild Card game, first three games of the League Divisional Series, and first four games of both the League Championship Series and World Series, one can determine the percentage share teams and commissioner received from those games. The teams that received more revenue were those that extended series beyond their minimal game requirements, such as the Cubs/Giants (+1), Dodgers/Nationals (+2), Cleveland/Blue Jays (+1), Cubs/Nationals (+2), and Cleveland/Cubs (+3). The World Series was a smash hit in every regard last year, from the stunning Game 7 drama to the extended revenue received by both teams. For the purpose of trade accounting, I will not use these particularities, but it is worth noting that the Cubs’ gamble to acquire Aroldis Chapman was fully worthwhile (tabling any moral conversation for the moment), as the club pulled in claims on six additional revenue shares during the playoffs.

Through the standard 26 games of the playoffs, players receive approximately 15.4 shares (“Games”), the Commissioner’s Office 3.9, and the teams 6.7 shares of playoff revenue. Using the player’s playoff pool published by MLB, one can estimate a single share of playoff gate revenue to be worth approximately $5.0M (or, more accurately, $4,975,833). In this case, a playoff team that wins the Wild Card and plays three divisional series games will receive a percentage of $8.8M in gate revenue (shared with their opponents), and untold sums of television revenue (I have not confirmed whether teams are paid playoff television revenue) and merchandise. The largest minimum pool available to teams is approximately $33.3M, based off of 2016 playoff player’s pool announcements.

Using this system of estimates, a minimal run to the World Series (26 games) would be worth at least $6,717,375 in gate revenue to one club, and probably closer to a minimum amount of $7.5M. Of course, these estimates are difficult without being able to account for the increase in ticket prices on a series by series basis, so the bare minimum for a World Series team is probably much higher (for example, Forbes noted that the 2015 World Series run was worth approximately $20 million to the Mets [including all sources], so there is admittedly some disconnect here). Nevertheless, a basic estimate will suffice for determining organizational logic for obtaining additional revenue:

A base of approximately $7 million in shared gate revenue, plus additional merchandise sales and positive externalities (such as increase ticket and merchandise sales the following year), may not seem like much motivation to move prospects for MLB talent. However, since this line of analysis has already moved away from $/WARP trade calculations, it is worth fully abandoning that framework. For example, while a marginal free market assessment of acquiring WARP may elicit a price of $7 million / win above replacement, it is worth noting that teams actually acquire talent within strict constraints that lower the cost to approximately $1.7 million / actual win (for instance, in 2016 MLB teams spent roughly $4.2 billion on payroll and the draft, in order to win 2,430 games). Given that WARP and wins do not equal one another (since a win above replacement is a marginal concept), one can also note that there exist approximately 0.4 WARP for every 1.0 W. This line of reasoning is important for properly pricing out prospects; a trip to the playoffs is worth approximately one future win to an MLB club (at the bare minimum), and a trip such as the 2015 Mets’ run can yield nearly a dozen future wins (in terms of revenue collected).

By this basic measurement, one could find that a WARP/$ prospect model translated into W/$ model means that a World Series trip is worth at least one 55 OFP prospect (such as Brett Phillips or Trent Clark in the Brewers system). But I suspect that this greatly undervalues a playoff run for the MLB club. One problem with this model is that it deeply undervalues cash, as opposed to MLB prospects, since cash does not depreciate in the same manner as prospects. Prospects require a development cycle of approximately three-to-five years to reach the MLB, and once there they do not immediately reach their ceiling. For example, my study of the 2013 prospect class showed that within the first four years of appearing on a Top 10 prospect list, a 70 OFP prospect is worth 3.9 WARP ($27.3M).

Thus, it can be stated that in abstract cases prospects are much more overvalued than their actual likely MLB performances. Granted, over five-to-seven years of MLB reserve control, even a 50 OFP prospect may become much more valuable than their trade return from a midseason deal, but it is worth arguing that that long-term window adds significant risk to accurately valuing prospects. Translating cash into future MLB wins, and expressing that figure in terms of a prospect’s Overall Future Potential, one can discern that a playoff run is worth significant prospect value. For example, the Cubs’ prospect package for Aroldis Chapman, in terms of securing playoff revenue, was a suitable gamble:

All this begs the question about where the 2017 Brewers are likely to land should they reach the playoffs. Here, the club is in quite a different scenario than the Cubs, as it is not clear that the Brewers are bona fide, undeterred contenders simply looking to secure a deeper playoff run. Yet, Brewers fans and analysts should not use that fact to dismiss spending prospects on a playoff run. Reaching the playoffs is arguably even more important for the small market Brewers, who cannot rely on regular season revenue streams controlled by clubs such as the Cubs. There is no such thing as “mortgaging the future for 2017″ insofar as a playoff run returns significant cash to the organization, which the Brewers can turn into more future wins. Moreover, returning playoff revenue for prospects is a gamble of offsetting risk, from the risk of an extended development cycle and likely MLB struggles to find an initial role, to the risk of moving deeper into the playoffs. Given the mediocre NL Central in 2017, doubling down on a divisional lead could be less costly (as the Brewers need to overcome fewer obstacles to the playoffs) and more worthwhile (they arguably have a clearer path than a murky future in which the Cubs, Pirates, Cardinals, and Reds can all reload).