9-606-025 REV: MARCH 14, 2006 FRANCES X. FREI DENNIS CAMPBELL Moneyball (A): What Are You Paying For? Baseball creates the magnetic, addictive illusion that it can almost be understood. - Thomas Boswell In 2003, best-selling business author Michael Lewis published Moneyball, a study of the Oakland Athletics franchise of Major League Baseball.1 The book, which charged that the traditional methods of player evaluation were “guesswork,” was immediately controversial.2 Most notably, the book used the story of Oakland Athletics General Manager Billy Beane’s innovative approach to the game to attack the conventional wisdom that resource disparities in baseball were the source of competitive imbalance problems. Lewis wrote: “[T]he market for baseball players was so inefficient, and the general grasp of sound baseball strategy so weak, that superior management could still run circles around taller piles of cash.” 3 Many baseball insiders and traditionalists responded, writing off the A’s consistent competitive success as an “aberration” and pointing to the A’s talented trio of young pitchers as the key to their accomplishments. “A book could have just as easily been written about how the key to winning on a budget is to gather three potential Cy Young Award winners and use any remaining cash on assembling a mediocre offence [sic],” wrote one critic.4 As the debate over the most effective means of player evaluation continued, some teams became convinced by Beane’s methods, going so far as to hire his assistants as full-time general managers. However, the majority of teams still relied on traditional methods for evaluating players. 1 Michael Lewis, Moneyball: The Art of Winning an Unfair Game, (New York, NY: W.W. Norton & Company). 2 Davidi, Shi, “Moneyball feeds controversy over the methods of Oakland Athletics,” The Canadian Press, July 28, 2003, 13:54. 3 Moneyball, 122. 4 Baker, Geoff, “It’s time to turn the page on Moneyball theories,” The Toronto Star, December 3, 2004, E03. ________________________________________________________________________________________________________________ Professors Frances X. Frei and Dennis Campbell prepared the original version of this case, “The Moneyball Controversey in Major League Baseball,” HBS No. 605-042 which is being replaced by this version prepared by Professors Frances X. Frei and Dennis Campbell and Research Associate Eliot Sherman. The authors thank Chuck Whitten (MBA ‘04) for work on an earlier draft of the case. Information about Player Statistics and Salary Data is presented in “Moneyball (A) and (B),” HBS Courseware No. 606-702. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019. 606-025 Moneyball (A): What Are You Paying For? Baseball and Baseball Statistics5 Major League Baseball consisted of 30 teams split between the National and American Leagues. Although teams were independently owned and operated, they were governed by a Commissioner who was given the authority under the Major League Agreement to investigate actions “suspected to be detrimental to the best interest of the national game of baseball” and take preventative or punitive action as necessary. 6 Baseball is a game played between two teams of nine players each, using a bat, a ball, and gloves. The field of play is laid out in a diamond formation, using four bases arranged in a smaller diamond with a pitcher’s mound in the center. (See Exhibit 1 for a diagram of a standard baseball field and the arrangement of player positions.) Teams take turns batting and fielding, with batters attempting to hit the ball out of the reach of the fielders and then maneuver the bases in succession to score points (referred to as runs). Every time a player crosses home plate, or the base that they stand next to while batting, their team is credited with a run. Fielders (including the pitcher) meanwhile attempt to get batters out in a number of ways. The most common ways include the pitcher making three legal throws that are not hit by the batter (strikes), a fielder tagging the batter as he is running toward a base after the ball is hit, a fielder catching a ball that has been hit before it touches the ground, or a fielder throwing the ball to a teammate who is manning the base that the batter is attempting to reach (in this case, the throw must beat the batter to the base). Professional non-partial judges, known as Umpires, preside over the game and make “calls,” such as whether a pitch is a strike or whether a runner beat the throw to a base. When three members of the hitting team are put out by the fielding team, the teams switch positions. The team formerly in the field bats, and the team formerly at bat fields. After each team has made three outs batting and three outs fielding, one inning has been played. The team that scores the most runs in nine innings wins the game. If the score is still tied after nine innings, the game continues until one team scores to break the tie. Games become “official” after five innings, meaning that if they are cancelled (usually due to bad weather) whichever team is ahead will receive the win. Though baseball is a team sport, success is a function of the discrete achievements of individual players. Because an individual player’s actions - and the resulting impact on the game - can be readily observed and recorded, baseball analysts have developed a variety of statistics that attempt to measure the relative skills of pitchers, hitters, and fielders. Take, for instance, an at-bat in which a hitter flies out to an opposing fielder. The pitcher is credited with getting the hitter out (improving his earned run average), the fielder is credited with a successful put-out (improving his fielding percentage) and the hitter is debited with a failed at bat (decreasing his batting average). Table A describes the most commonly used hitting statistics.7 (See Exhibit 2 for the most commonly used pitching statistics). 5 The description of baseball in this section is adapted from “baseball,” Encyclopedia Britannica website, <http://www.britannica.com/eb/article-9108487>, accessed August 9, 2005. 6 Major League Baseball, “The Commissionership: A Historical Perspective,” MLB.com website, <http://mlb.mlb.com/NASApp/mlb/mlb/history/mlb_history_people.jsp?story=com>, accessed August 9, 2005. 7 Another statistic, on-base percentage (OBP), was beginning to receive more attention. OBP measured how often a batter got on base, via a hit or a walk. OBP differed from batting average in that it was influenced by the number of walks a player drew. 2 This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019. Moneyball (A): What Are You Paying For? Table A 606-025 Common Hitting Statistics Statistic Description Batting average (Avg) A measure of how often a batter reaches base by hitting safely (excludes reaching base by means of a walk, a hit-by-pitch, or a fielding error). Calculated by dividing the number of base hits by the number of at-bats. The number of times a player hits the ball over the outfield fence in fair territory or hits it into play and scores on that play without an intervening error. A batter is awarded an RBI on any run that is scored as a direct result of the batter’s hit; the batter’s sacrifice (the batter is out but a runner scored); or when the batter either walks or is hit by a pitch with the bases loaded. The number of runs a player scores. Home runs (HR) Runs batted in (RBI) Runs scored (R) Stolen bases (SB) A runner is credited with a stolen base when he advances to the next base, without the ball being hit into play, and unaided by a hit, a putout, an error, a force out, a fielder's choice, a passed ball, a wild pitch or a balk. Source: Adapted from Major League Baseball, “Baseball Basics: Stats 101,” MLB.com website, htp://mlb.mlb.com/NASApp/mlb/mlb/official_info/baseball_basics/stats_101.jsp, accessed August 9, 2005. Baseball Revenues Baseball teams had three sources of team revenue. Local revenues resulted from ticket sales; local television, radio and cable rights; ballpark concessions; parking; and team sponsorships. Central Fund revenues were generated from national television and licensing agreements. Finally, revenue sharing, first introduced in 1996, transferred locally generated money from high- to low-revenue clubs. Local revenues constituted the largest component of team revenue. Unlike other professional sports that pooled and then equally distributed television and radio rights fees, most MLB television and radio contracts were negotiated and sold separately by each team. This revenue structure produced a contentious debate about competitive balance in MLB. Because local markets varied in size, the local TV and radio revenues varied as well. The size of a team’s media market affected other revenue streams as well, since the price of ballpark naming rights, signage, and other sponsorships depended in part on the size of a franchise’s market. Such revenue disparities translated into payroll disparities as the large-market teams had more money to use for player salaries. It was these payroll disparities that were at the heart of the Moneyball debate. (See Exhibit 3 for the 2003 payrolls across the 30 teams.) In 1999, MLB appointed the “Blue Ribbon Panel on Baseball Economics” to examine whether baseball’s economic system was creating long-term competitive imbalance. The findings offered a clear assessment on the implications of revenue and payroll disparity: The 18-month study left absolutely no doubt that large and growing revenue and payroll disparities exist in Major League Baseball, causing chronic problems of competitive imbalance. The economic data clearly substantiate the widespread notion that the problems have become much worse during the five complete seasons since the strike-shortened season of 1994 and seem likely to remain severe unless Major League Baseball undertakes remedial actions proportional to the problem. … Baseball’s current economic system has created a caste system in which only high revenue and high payroll clubs have a realistic opportunity to reach the post-season. That is not in the best interests of baseball fans, clubs or players.8 8 “Commissioner’s Blue Ribbon Panel on Baseball Economics Issues Report,” Major League Baseball press release (New York, NY: July 1, 2000). 3 This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019. 606-025 Moneyball (A): What Are You Paying For? Player Assessment When it came to assessing player skill, experts took essentially two different approaches. One group, characterized by traditional baseball scouts and coaches, mixed statistics with subjective judgments. They favored using stopwatches, radar guns, and direct observation to identify players that ran fast, threw hard, appeared physically strong, and “[looked] like a major leaguer should look.”9 A new and much smaller group, characterized by Billy Beane, relied much more heavily on statistical analysis to tease out the performance categories that were related to winning. Although the two methodologies were not mutually exclusive, proponents of each have long been at odds. Bill James, a baseball analyst who has been called “the guru of baseball statistics,”10 took exception with subjective measures of player performance: Think about it. One absolutely cannot tell, by watching, the difference between a .300 [batting average] hitter and a .275 hitter. The difference is one hit every two weeks. It might be that a reporter, seeing every game that a team plays, could sense that difference over the course of the year if no records were kept, but I doubt it.11 Many members of baseball’s old guard, such as Rod Gardenhire, manager of the Minnesota Twins, were skeptical about the reliance on statistics: Numbers, numbers, numbers. That's all you hear today. What about the guy who hits .260 but makes plays? What about the guy with the .480 on-base percentage who never swings the bat at a close pitch with a guy on third? We have scouts who come in here all the time with statistics. When they show me numbers, I show them the door.12 According to Lewis, the A’s succeeded in large part because of their willingness to replace subjective measures of player performance with statistically-driven performance indicators. Moneyball described in detail how the Athletics’ new methods of statistical evaluation led them to assess players differently than their competitors did. As a result of their analyses, the A’s implemented several uncommon practices. For example, where most other teams preferred to select high school players in baseball’s amateur draft, the Athletics preferred college players, since they had a greater chance of making it to the major leagues. And while other teams preferred to pay a premium for established closers,13 Billy Beane would routinely obtain talented but undervalued pitchers and put them in the closer’s role. Lewis’ book discussed the budding success of the A’s franchise and argued that the club’s performance was more than fleeting: I was inclined to concede the point [that] the people with the most money often win. But when you looked at what actually had happened over the past few years, you had to wonder. 9 Boswell, Thomas, “Evaluation By Numbers Is Beginning To Add Up,” The Washington Post, May 29, 2003, D01. 10 Schmuck, Peter, “Bullpen woes puzzling Boston,” The Baltimore Sun, April 11, 2003, C05. 11 Hands, Robert, “Taking Different Viewpoint To Measure Success,” The Times (London), July 11, 2003, 48. 12 Bryant, Howard, “New breed vs. old guard,” The Boston Herald, March 30, 2003, B15. 13 Closer is a term for a team’s best relief pitcher, who is usually brought into a game in the 8 or 9 inning to secure the victory. Conventional wisdom held that the pressure of getting the final three outs of a game required a degree of skill and mental toughness that was rare and highly valued. Bill James and other statisticians believed that the last three outs were no different than the first three outs. th th 4 This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019. Moneyball (A): What Are You Paying For? 606-025 The bottom of each division was littered with teams – the Rangers, the Orioles, the Dodgers, the Mets – that had spent huge sums and failed spectacularly. On the other end of the spectrum was Oakland. For the past several years, working with either the lowest or next to lowest payroll in the game, the Oakland A’s had won more regular season games than any other team, except the Atlanta Braves. … How on earth had they done that? … That answer begins with an obvious point: in professional baseball it still matters less how much money you have than how well you spend it.14 Lewis did not anticipate the controversy his book would spark. “I was really kind of surprised by the degree of upset it caused in baseball, because I didn’t think of it as a controversial book,” Lewis remarked. “I thought of it as an inspirational tale, guys who had been overlooked or underestimated being given a shot.”15 Though much of the ire was directed at Beane (“Billy Beane’s ego has exploded” according to the Rocky Mountain News), many pundits still believed the A’s success was an anomaly in what was still a game of the “haves versus the have-nots.”16 The 2003 season did little to settle the issue of competitive balance. Playoff teams included a mix of high payroll teams (New York Yankees, Atlanta Braves, Boston Red Sox, San Francisco Giants, Chicago Cubs) and low payroll clubs (Minnesota Twins, Oakland Athletics, Florida Marlins). The Florida Marlins defeated the New York Yankees to win the 2003 World Series. (See Exhibit 4 for payrolls of recent World Series teams). 14 Moneyball, p XII and XIII. 15 Davidi, 13:54. 16 Lewis, Michael. “Out Of Their Tree - The author wrote a book, Moneyball, that drove baseball's clubby traditionalists crazy. They fought back. Now he does too,” Sports Illustrated, March 1, 2004, 66. 5 This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019. 606-025 Moneyball (A): What Are You Paying For? Exhibit 1 Baseball Field Diagram and Player Positions Major League Baseball: Defensive Player Positions Note: The opposing team’s batter stands immediately in front of the catcher (2), facing the pitcher (1) Source: Major League Baseball. MLB Advanced Media, L.P. (www.mlb.com). Exhibit 2 Common Pitching Statistics Statistic Wins (W) Losses (L) Earned Run Average (ERA) Description A win is achieved by pitching five innings or more and departing with a lead that is maintained by relief pitchers, or by pitching a complete game in which the pitcher’s team outscores the opponents. A loss is credited to the pitcher when he allows more runs than his teammates score off of the opposing pitcher. A pitcher’s ERA is calculated by multiplying the total number of runs allowed by nine, and dividing the result by the total number of innings pitched. Strikeouts (K) The number of strikeouts a pitcher records over the course of the season. Walks (BB) Innings pitched (IP) The number of walks a pitcher records over the course of the season. The number of innings a pitcher records over the course of a season. Each individual out is counted as 1/3 of an inning pitched. Saves (SV) A measure of how many times a relief pitcher records the last three outs of the game while his team is ahead by three runs or less, or records the final out of the game with the potential tying run on deck. Source: Adapted from Major League Baseball, “Baseball Basics: Stats 101,” MLB.com website, http://mlb.mlb.com/NASApp/mlb/mlb/official_info/baseball_basics/stats_101.jsp, accessed August 9, 2005. MLB Advanced Media, L.P. (www.mlb.com). 6 This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019. Moneyball (A): What Are You Paying For? Exhibit 3 606-025 2003 MLB Team Payrolls as of Opening Day Team Total payroll Team Total payroll NEW YORK YANKEES $152,749,814 COLORADO ROCKIES $67,179,667 NEW YORK METS $117,176,429 CINCINNATI REDS $59,355,667 ATLANTA BRAVES $106,243,667 MINNESOTA TWINS $55,505,000 LOS ANGELES DODGERS $105,872,620 PITTSBURGH PIRATES $54,812,429 TEXAS RANGERS $103,491,667 MONTREAL EXPOS $51,948,500 BOSTON RED SOX $99,946,500 TORONTO BLUE JAYS $51,269,000 SEATTLE MARINERS $86,959,167 CHICAGO WHITE SOX $51,010,000 ST LOUIS CARDINALS $83,786,666 OAKLAND ATHLETICS $50,260,834 SAN FRANCISCO GIANTS $82,852,167 DETROIT TIGERS $49,168,000 ARIZONA DIAMONDBACKS $80,657,000 FLORIDA MARLINS $48,750,000 CHICAGO CUBS $79,868,333 CLEVELAND INDIANS $48,584,834 ANAHEIM ANGELS $79,031,667 SAN DIEGO PADRES $45,210,000 BALTIMORE ORIOLES $73,877,500 MILWAUKEE BREWERS $40,627,000 HOUSTON ASTROS $71,040,000 KANSAS CITY ROYALS $40,518,000 PHILADELPHIA PHILLIES $70,780,000 TAMPA BAY DEVIL RAYS $19,630,000 Source: USA Today Baseball Salary Database via www.usatoday.com Exhibit 4 Payrolls of Recent World Series Teams Compared to the MLB Average (in millions) Year AL Team Payroll NL Team Payroll Average 2003 Yankees 152 Marlins* 48 70 2002 Angels* 61 Giants 78 67 2001 Yankees 112 D’Backs* 85 65 2000 Yankees* 92 Mets 79 60 1999 Yankees* 88 Braves 75 48 1998 Yankees* 63 Padres 45 40 1997 Indians 54 Marlins* 47 38 Source: Case Author, USA Today Baseball Salary Database. *Winning team 7 This document is authorized for use only by Supriya Devendra Dwivedi in Fall-2019-MGMT-62500-002 at Purdue University, 2019.