Rebuilding the Big Red Machine: Step 3 (Part 2)

Go Back to Step 3 (Part 1)

1. Converting a player's total on-field contributions into a single Run value

In order to properly value a player, you have to be able to accurately quantify his on-field production. I believe it was Bill James who originally determined that "Runs" were the currency of baseball. This brought about a statistical effort to more accurately value the contributions of players, which led to statistics like WAR (Wins Above Replacement). There are three layers to this wave of player valuation.

The first layer is converting the contributions of a player into a single run statistic. This has been done for both their total offensive production and their total defensive production.

The offensive component of WAR is based on wOBA. So, we have to talk just a bit about wOBA. To start, wOBA isn't based on any other statistics, but rather is based on each and every outcome of a hitter's plate appearances. It uses linear weights to value all the different outcomes relative to each other. So, every outcome has a run value that is proportional to the other outcomes. So, a homer is worth more than a triple, which is worth more than a double, etc etc etc. So, every outcome is weighted and rolled into a single number.

Additionally, once all the contributions are compiled, the wOBA can be converted into a single run value. Basically, you take the difference of the wOBA from league average and extrapolate it out over their number of plate appearances to get their offensive run value above/below league average.

As to defense, fangraphs.com uses Ultimate Zone Rating (UZR), which is the number of runs above or below average (includes range and errors), for it's fielding component.

As with some other advanced defensive metrics, the field is divided into different zones which are assigned to the relevant fielders. And, of course, the balls hit into the zones are tracked. UZR is largely based on hits in the zones, outs in the zone, and the run value of the hits. The player's performance is compared to the league average for all balls converted in the zone. Obviously, he gets credit for plays he makes above the average and deductions for the plays below the average. A run value is applied to his performance on these plays and a total run value is determined. That run value is the defensive run component to WAR.

So, roughly speaking, that's how you get your offensive and defensive run totals.


2. Converting a player's single Run value into a Win Contribution Value
The second layer is converting a player's total run contribution into wins.

At this stage, the offensive run values are adjusted for park effects and a positional adjustment is added. Now, conceptually, the idea of positional adjustment is one that sometimes eludes me, so I'm not going to try to explain it. In essence, a player's performance is more valuable at the premier defensive positions, so an adjustment is made to give those players a boost. Hence, Hanley Ramirez's performance gets a boost, while Albert Pujols gets a deduction.

Now, converting runs to a win number is the simple part. A lot of statistical analysis has been performed to determine that generally speaking: 10 runs = 1 win. So, if a player generates +20 runs, than he's a +2 win player.

Additionally, WAR is tied to replacement level. So, the benchmark is wins a player would provide over a replacement level player. Here, replacement level is an AAAA type player, which includes the type of players available as minor league free agents, the Rule V draft, and MLB bench players.

3. Converting a player's Win Value into a Dollar Figure
Heading into the home stretch, the third layer is converting a player's win total into a dollar figure. Just how much was the player's contribution worth?

As for the value of a single Win, it's once again complicated. Different sources rely on different methods, but fangraphs.com uses something along the lines of the following:

First, there are 162 games per season and 30 teams, which works out to 4,860 total games. Of course, there must be a winner and a loser, so half those games will be wins and half will be loses. So, there are a grand total of 2,430 wins at play in the regular season. Now, due to the fact that every team will field at least replacement level players, who will perform at a .300 win percentage clip, every team is assigned 48 wins. So, 48 wins for each of 30 teams means that 1440 wins are not in play. That means that there are only roughly 990 wins in contention among the 30 teams.

So, if you took the total salary committed to all the players in baseball and divided it by the 990 wins in contention, then you'd get the cost of a win. However, it's not that simple, as many players are cost controlled under the MLB financial structure. So, such a calculation would not reflect the market rate of a win, as players who are in their first 6 seasons or who have forgone free agency for contract security drag down the market cost of a win. You have to exclude players who are not available and focus on those who are. The price of a win is determined by market forces.

As a result, you look at the free agents who signed in any given year, determine their market driven salary, and then determine how many wins above replacement they created. Once that's done, you can determine the market price of a win by (basically) dividing the total salary of all free agents by the wins generated by those free agents.

Fangraphs has calculated the dollars per win as follows:

2002: $2.6M
2003: $2.8M
2004: $3.1M
2005: $3.4M
2006: $3.7M
2007: $4.1M
2008: $4.5M


So, if you had a 4-win player in 2008, he was worth $18M, which gives a more objective valuation that is not driven exclusively by the irrational decision of one or more teams. While this methodology provides a more objective player valuation, we need to take one more step. We need to make this general, league-wide valuation more specific and applicable to a specific organization. In order to do that, we need to examine the layers of revenue and how that impacts a player's unique value to an organization. Suffice it to say, a 4-win player may have a different value to the Yankees than he does to the Royals. But, we'll leave that for Part 3.

Rebuilding the Big Red Machine: Step 3 (Part 1)

Go Back to: Step 2

What is a player worth?

It's a simple, straightforward question, but one that has a surprisingly complicated and elusive answer. And, even determining the answer will require some heavy lifting on our part, but player valuation is a key part of effectively and efficiently operating an MLB franchise, so it's probably worth a bit of our time. So, let's get to it.

If you've been around the block once or twice, you've probably heard the old axiom that something is worth "whatever someone will pay for it." And, of course, on a certain level that is true. However, baseball economics do not precisely reflect the realities of markets driven by pure market forces.

Baseball is not a purely competitive market, as each team is a member of a league. As a result, there is an inherent element of cooperation in the baseball marketplace. Unlike a pure competitive market, the Yankees are prevented from running the Kansas City Royals out of business. Not to mention, they would not benefit from doing so. In a non-cooperative market, competitors benefit from running their competition out of business, as it creates an opportunity for the surviving business to increase its marketshare and customer base, which bring a corresponding increase in revenue streams. But, in baseball, not many fans are going to pay the going rate for tickets to watch the Yankees play an intrasquad game. So, on a fundamental level, the Yankees need the Royals.

The fact that the Yankees can't run the Royals out of business brings about a practical reality that must be recognized in a discussion of player valuation. Namely, bad decisions aren't penalized the same way they are in a true market place. The penalty for foolishness is the loss of business. In MLB, the penalty for foolishness is a last place finish due to a pathetic Win/Loss record. Decisions in life and business are based largely on incentives and disincentives. Here, a last place finish simply isn't a strong enough deterrent to prevent organizations from making similar bad decisions in the future. So, team after team continues to throw out massive contracts driven largely by the market, rather than the value of the player to the team.

So, the obvious consequence is that bad teams are free to make bad decisions regarding free agents. And, of course, that sets the market and drives up the cost of players for rational decision making teams. Or, to put it more succinctly, the dumbest teams in the league can set the value of the players based on what they are willing to pay for them.

So, if that's how the value of a player is frequently determined, then how do rational decision makers place a more accurate, proper value on players?


Proper Valuation Strategy

Now that we've laid out the problem, we are going to attempt to address it. For a mid-market organization like the Reds to hold its own against the big market clubs, it needs to embrace efficiency. It needs to leaner and meaner. Basically, the Reds need to get significantly more units of production per dollar spent than the big market clubs. If it fails to do so, then the big market clubs will win based purely on their wealth of resources. If the Reds aren't more efficient than the competition, then the big clubs will win simply by outspending them.

So, how do the Reds get more "bang for the buck"? How do they embrace efficiency? A proper player valuation system is a key first step. In general, we are going to look to directly tie a player's on-field contributions to the revenue generated by the organization. Linking "monetary expense" to "monetary benefit" to determine the value of an asset is hardly revolutionary, but it does allow us to place a more rational value on players than we would get from relying on what the Pittsburgh Pirates are willing to pay for players. So, that's our goal in our valuation efforts. Detach the impact and influence of outside organizations on our valuations and make the determination of a player's value based on what he is worth to OUR organization. In short, a player's value to the team will be driven by the revenue and value he creates for the organization.

As difficult as it may be, the Reds need to form their own independent valuation of players and stick to it, rather than letting the market dictate player valuations to them.

To establish their own valuations of players, the Reds will need to follow certain steps, which will involve some heavy lifting on our part, but that can't really be helped. Basically, proper valuation requires the following steps:

1. Use statistical analysis to convert a player's total on-field contributions (offense, defense, positional value, etc) into a single Run value,

2. Convert that player's Run contribution into a Win value,

3. Determine a player's objective monetary value on the basis of his Win contributions, and

4. Convert a player's objective monetary value into a subjective, organization specific value based on a team's position on the Win Curve and an understanding of the various layers of revenue that exist under MLB's economic structure.

Basically, to have a proper valuation, you need to know what a player is, how what he is impacts the team's W/L record, and how his Win value impacts the specific fortunes of the organization's revenue stream.

So, that sets the table for what we'll be doing over the next few days, but we'll break it down into several parts in order to make it a bit more manageable.

Go to Step 3 (Part 2)

Rebuilding the Big Red Machine: Step 2

Go Back To: Step 1

Well, we are still in Phase 1 of the rebuilding process, which focuses on improving the revenue stream. However, we took a big step forward in Step 1, so this step will have dual purposes: increasing revenue and building the Reds brand.

One of the most positive trends to whip through Major League Baseball over the past 60 years is the increasing number of minority and foreign born players. The diversity is not just great for the game of baseball, but also for the business of baseball.

International Prospects

However, not all international prospects are created equal or treated equally. Many of the best Latin American prospects were signed before the age of 18 at an inexpensive cost. The Reds signed Johnny Cueto that way. Latin American prospects can provide tremendous on-the-field value. In fact, they are still the best value in the international realm. The trickle down effect of increasing revenue is raising the bonuses of the top Latin American prospects, but there are still values to be found.

On the other end of the international free agent spectrum are the Japanese players. Whereas the Latin American players are young, inexpensive, and raw, the Japanese players are typically just the opposite. They are usually experienced, expensive, and polished. All of which means that the Latin American players are usually low risk and high reward, whereas the Japanese players are much higher risk and lower reward.

By and large, I'd like to see the Reds focus their international scouting efforts in Latin America, where the best values are typically found. However, oddly enough, this step focuses on the other end of international free agent spectrum: making a big splash with an elite Japanese prospect.

"Go West...er, East...Far East, Young Man"

In the past, whenever someone has suggested that the Reds should pursue one of the big name Japanese free agents, I always oppose the ideas. Looking over the recent past, it frequently seems that the Japanese prospects fail to live up to the hype. From DiceK to Kosuke Fukudome to Kaz Matsui to Hideki Irabu, the production is frequently outweighed by the cost.

However, that was looking at things from purely a baseball standpoint. That was the old way of thinking, not the new Big Red Machine train of thought. Now, we are thinking big in order to rebuild this organization into something great. To quote Bull Durham: "Think classy, you'll be classy." The move I'm advocating here is much more of a business decision than a pure baseball decision. However, in the best case scenario, it would work out in both respects.

Thinking back to the day when the Red Sox outbid the Yankees for the rights to negotiate with Daisuke Matsuzaka, I couldn't understand how the deal made any sense. The Red Sox submitted the high bid of $51,111,111 to the Seibu Lions to acquire the exclusive rights to negotiate with Matsuzaka. They then proceeded to sign DiceK for 6 years and $52,000,000.

Now, sitting at home, I could scarcely fathom how it made sense for the Red Sox to spend the equivalent of the Kansas City, Tampa Bay, or Oakland payroll simply for the right to negotiate with DiceK. Of course, the answer is that it didn't. At least not from a purely baseball standpoint. As evidenced by his performance at the MLB level, DiceK was not worth the cost to acquire him. However, that deal had much less to do with performance than it did revenue. The purpose of the deal was for the Red Sox to build their brand by making inroads into the Asian market.

In 2001, Ichiro's first season with the Mariners, sales of Seattle Mariners' MLB-licensed merchandise increased 60% in Japan. In addition, the Mariners were able to negotiate a better local broadcast deal after signing Ichiro, as ratings increased for Mariner games.

In 2003, during Hideki Matsui's first season with the Yankees, international licensed merchandise sales went up 30%. And, of course, in 2007, DiceK's arrival created a 15% increase in international merchandise.

Also, MLB has been able negotiate agreements to broadcast games in Japan, which has brought in significant revenue.

Now, it should be mentioned up front, that there isn't much direct financial benefit to signing Japanese stars. The increased revenue, wherever collected worldwide, is distributed equally among the 30 teams. So, if the Red Sox sell a ton of DiceK jerseys, they still only get 1/30th of the revenue. International broadcast revenue is also divided equally.

However, that's not to say that signing a big name Japanese free agent is without financial value. While MLB teams cannot enter into their own licensing deals, they can contract for sponsorship deals. If you watch a Mariner, Yankee, or Red Sox game, often times you will see advertising for Japanese companies. These companies want to take advantage of the increased Japanese viewership of the team created by the new free agent.

In addition, the excitement generated by the new international free agent typically leads to increased ticket sales, as foreign tourists and hometown fans alike have an interest in seeing the new player. Also, the excitement could lead to better television ratings, which would allow the Reds to charge more for advertising on the team owned Regional Sports Network.

So, there is significant financial incentive to signing a big name Japanese free agent.

Building the Brand

In addition to the financial benefits of signing a premier Japanese free agent, there are ancillary benefits to be reaped by the organization. Namely, building the brand.

Over the last decade, the Reds have sunk to new lows. In fact, they have sunk so low that they are in danger of sliding right past incompetence and hitting bottom at irrelevance. Over the past months and years, I've increasingly heard the Reds organization and players being disparaged and made the punchline of jokes. The Reds have lost a great deal of respect around Major League Baseball and have been relegated to also-ran status. In short, the Reds simply don't "move the needle" in the world of baseball.

The last time the Reds made a big splash was when they acquired Josh Hamilton in the Rule V draft. The Reds were the toast of the town when Hamilton turned his life around and flashed the potential that made him the #1 overall pick in the draft. That's the only time in recent memory the Reds were discussed in positive, borderline glowing, terms around baseball. It's time for them to do it again.

By signing an elite Japanese free agent, the Reds would be announcing to not just baseball, but to the world, that they are an organization with which to be reckoned. That they are serious about building the organization into a first class winner.

However, all of this cannot be done with just any run-of-the mill Japanese free agent, rather it must be an elite Japanese free agent. But, which one?

Yu Darvish - Reds Savior?

Well, it just so happens that there is an elite Japanese free agent on the horizon. Young, fireballing righthanded pitcher Yu Darvish has been on the radar for the past couple of seasons and he is likely the next big import from Japan. Darvish throws from a three-quarter arm slot and is reported to feature a 93-97 mph fastball with a nasty slider. Like many Japanese pitchers, he also features a wide array of offspeed offerings. He is already coveted by many teams in the game, but there's no reason why the Reds cannot compete for his services.

It remains to be seen when, or if, Darvish will head to the States to play pro-ball, but the odds are good that it will happen in the near future. When it does, the Reds could make a bold statement by beating the competition to the punch and acquiring his services. There has been some question of whether Darvish would have to go through the posting system, but it might be advantageous (though expensive) for the Reds if he did. After all, the negotiating rights that go to the highest bidder are exclusive, so Darvish would have to sign with the team that won his rights or not at all.

Final Thoughts

By making a big splash with a signing of Yu Darvish, the Reds would be increasing their revenue and refurbishing the image of the entire organization. The Reds logo would become a popular and recognizable symbol in Japan and the team's games would be watched by Darvish's fans back in Japan.

It's also the type of bold action that could "move the needle" and make the Reds relevant once again in the United States. The national media would be forced to sit up and take notice. Not to mention, ESPN might actually televise a Reds game again. The Reds would again be discussed in a positive manner around Major League Baseball.

This is also the type of move that would improve the image of the organization in the eyes of players around the league, which would make attracting free agents easier and would allow the Reds to attract talent without having to overpay for it. Darvish could be a "loss leader" of sorts, which could lead to an improved product on the field.

In short, this is the type of move that the Reds need. And, the increased revenue generated by the Regional Sports Network could give the Reds the financial resources to get just such a move done.

Go to: Step 3

Rebuilding the Big Red Machine: Step 1

**Note: Originally written in May of 2008**

Go Back To: Introduction


ESPN’s Steve Phillips recently wrote an article about how the Reds could build a new Big Red Machine. While I appreciate his efforts, his article consisted of simply shifting around the MLB roster to create a more talented team. However, in this day and age, building a sustainable dynasty will by and large be accomplished through decisions that do not involve the make-up of the 25-man roster. There is so much that goes on below the surface of an MLB team, that the 25 man MLB roster is really just the tip of the iceberg. The substance is under the surface and not easily seen.

While I certainly didn't agree with Phillips' take on rebuilding the Reds, I do enjoy the topic, so I thought I'd take on the task of rebuilding the Big Red Machine myself. Let's see if I can put together a slightly more insightful plan than the esteemed Mr. Phillips.

Lessons Gleaned from the MLB "Cold War"

I recently read an article about the Yankees and Red Sox and how they were running their ball clubs. Suffice it to say, I was pretty well blown away. The Yankees and Red Sox like to talk about themselves as “Nations” for marketing purposes. The new push for the “Red Sox Nation” and the Yankees contention that they are essentially America’s Team” are examples of how they want their organizations to be viewed by the public. However, a closer look reveals that this is NOT how they view their OWN organizations.

The front offices of the Yankees and Red Sox do not view their teams as nations, but rather as Multi-National Corporations. These two organizations view themselves as Global Brands and they are running their business in that spirit. Judging by the strategic moves they have undertaken to position themselves in the market, these two teams are playing for keeps. If other teams want to remain competitive on the field, then they’ll have to step up to the plate off the field.

In that spirit, let’s look at how we can begin to build a new Big Red Machine in a few "easy" steps.

Step 1: Establish a Team Owned Regional Sports Network, which is Essential to Build the Brand and Increase the Revenue Stream.

A significant portion of a team’s revenue is generated by its local television contracts. In the usual scenario, a team will sell the broadcast rights to its games to a cable channel, who will then have the sole right to broadcast the games to the local public. The cable channel will then sell advertising during the games to recoup their investment. Under this scenario, the revenue garnered by the team from selling the broadcast rights is subject to revenue sharing.

So, if the team sells the rights for $50M, then a portion of that is paid to MLB where it is pooled together and divided out into equal shares for distribution to all 30 MLB teams. That way, all teams benefit to a certain extent from the Yankees massive local television revenue. While this provision has had a significant impact on the small market teams, it has also had some ancillary effects. Like any business, the BoSox and Yanks are not fond of having to give up some of their revenue to their competitors. Accordingly, they are now constantly searching for new revenue streams that are not subject to the revenue sharing provisions of MLB.

However, some teams have found a new way to increase revenue from local broadcasts without a corresponding increase in revenue sharing. These teams have now begun to buy and run their own regional sports networks, which generate additional revenue for the team that should outpace the additional costs that come with it. Nine different teams have gone this route, including the Yankees (32% of YES), Mets (66% of SNY), Red Sox (80% of NESN), Orioles (88% of MASN), Indians (100% of SportsTime Ohio), Cubs (25% of Comcast SportsTime Chicago), White Sox (15% of Comcast SportsTime Chicago), Nationals (12% of MASN), and Giants (25% of FSN Bay Area).

For MLB financial purposes, these broadcast companies are treated as separate entities from the team. As such, the team still nominally sells the broadcast rights to its broadcast company and the revenue earned from the sale of those rights is still subject to revenue sharing. However, all other revenue generated by the team owned cable channel is NOT subject to revenue sharing. Accordingly, instead of the cable channel selling advertising during the games, the team now sells advertising time during the game and all revenue generated from advertising sales is kept free and clear of revenue sharing. In addition, the team could also sell advertising during non-game programming, which is additional revenue garnered from owning the network.

Benefits to the Reds of Having their Own Regional Sports Network

In addition to these immediate revenue benefits, the team would also benefit from the ability to build the Cincinnati Reds brand. If the team owns the channel, then they are free to create 24 hour a day Reds programming. Televise old Big Red Machine games, interview current players, show the ballpark and the surrounding communities, develop kids programming, showing instructional programs that teach the fundamentals, etc. The possibilities seem endless. It’s difficult to imagine a better tool for building fan loyalty and bringing in new fans than a 24-hour a day Reds channel. By creating an outlet solely for the Reds, the team could really ignite the passion of the fan base and increase interest in the organization, both of which would only help with ticket sales and ratings for telecasts.

While the difference in population means that the Reds television network would never be as successful financially as the YES network, there would still seem to be a real opportunity to increase the revenue flow and create a stronger financial foundation on which to build the baseball team. In addition, the Reds could strengthen loyalty among existing fans and tap into that segment of the market consisting of non-fans. Starting their own network would likely increase revenue to the organization and help the Reds develop the team brand.

Final Thoughts

Despite all the talk about the curse, the Red Sox have really only been cursed by mismanagement over the years. However, that's all changed, as the Red Sox now have very savvy management in place, who have built a foundation for the organization that is as solid as the Rock of Gibraltar. They are very sound financially and they use their solid financial position to acquire a consistent flow of revenue to support the MLB roster. They can readily convert their substantial revenue stream into assets to help them win at the MLB level. As it stands, they have waves of talent in the minors just waiting to roll up to the majors. This enables them to better survive bad contracts, injuries, or the aging of the team, as they are always ready to bring up more youthful, cost controlled talent.

Establishing a strong financial foundation is a big key in building a sustainable dynasty, which is why the Reds should invest in their own television network. That would be a very strong first step towards improve their chances at having a consistent winner in Cincinnati.


Go To: Step 2

Rebuilding the Big Red Machine

Well, Reds fans everywhere have fallen into their annual Dog Days of Summer malaise as the team has again dropped off the pace. It hit me today how much I miss seeing the team play meaningful games late in the season.

The Reds haven't sniffed the playoffs since October 4th, 1999, when the Reds squared off against the New York Mets to in a one game playoff to determine who would play in October. Unfortunately, Al Leiter pitched a two-hit shutout against the Reds, sending them back to the Queen City with hat in hand.

Unfortunately, since that game the Cincinnati fans have witnessed nothing but ineptitude and known nothing but frustration. What usually happens this time of year is that fan frustration leads to finger pointing at individual players and the front office. I'm certainly not above it and even Hall of Famer Hal McCoy got caught up in it this year. Fans put so much time, energy, passion, and money into their team that they almost live and die with that team. They identify with the organization and want it to succeed.

It's certainly understandable that frustrations would run high after a decade of incompetence, but finger pointing isn't productive or worth the energy. It may feel good, but it does little to move the discussion forward. The problems obviously run deeper than simply Willy Taveras and Dusty Baker. So, rather than looking at the problems on a micro-level, let's take a deeper look at the problems in the organization.

What would it really take to rebuild the Big Red Machine in this day and age? What type of business and baseball strategies need to be implemented? Obviously, the financial structure of the game has changed and competing against the large market juggernauts is a challenge that the Big Red Machine didn't really face . However, let's see if we can identify problems that plague the organization and find potential solutions to make the Reds the type of organization for which we all want to root.

I'm not sure how many total steps it'll take, but there are 3 clear phases. Phase 1 involves increasing the financial resources available to the organization. Phase 2 requires improving the typical return-on-investment of the organization's financial resources by making more strategic and better informed decisions. Finally, Phase 3 involves maximizing the performance of the assets brought into the organization.

In short, the organization needs to strengthen its revenue stream, make better investments with the revenue it generates, and ensure that the assets it brought into the system are performing at peak levels to ensure a healthy return on investment.

Now, I actually wrote Step 1 back in May of 2008, but other topics prevented me from following up on it. Unfortunately, the topic is still relevant in 2009, so it's time to pick it up again.

I'll be sprinkling in some posts that are based on "between the lines" topics for those less interested in the off-the-field aspects of the game, but for now let's start at Step 1 once again...


Go To: STEP 1