Forbes Magazine estimated earlier this year that the Pittsburgh Pirates 2005 operating income (earnings for the year before interest, taxes, depreciation and amortization) was the 8th highest in MLB at $21.9m.
That means the Pirates operating profit was approximately 87% of the revenue sharing monies they received that year.
Bucco Blog expects Forbes to show the Pirates surpassed their 2005 operating profit mark in 2006 when they release their figures next February.
A typical complaint heard from Pirate fans is that the team isn’t spending enough money on player payroll. There is some truth to that because from 1999 – 2006, the Pirates payroll has averaged just 56% of the median MLB payroll. But isn’t that to be expected since they are in a small market environment?
The late Doug Pappas once stated:
"The oft-recited assertion that "small markets can’t compete" in Major League Baseball is usually supported by a table showing that "winners" like the Yankees, Dodgers, and Red Sox spend far more on players than "losers" like the Devil Rays, Pirates, and Brewers. This argument is misleading in at least three respects:
- First, "small market" is often mistakenly used as a synonym for "low revenue." A team’s revenue, and the size of the payroll it can support, is far more dependent on its recent success (and the terms of its stadium lease) than on the size of its market.
- Second, a snapshot of one season’s "winners" and "losers" ignores the ebb and flow of team fortunes.
- Third, and most importantly, some teams are better run than others."
As to Pappas’ first statement, the Pirates are, and always have been, a lower revenue team. In 2005, for example, their revenue was 5th lowest in MLB. Now is this because the Pirates fielded a less than competitive team, didn’t market properly, didn’t maximize potential revenue streams, had poor customer service? Who knows. Still, their revenue has always been in the bottom tier.
Pappas then states one-year snapshots don’t really tell an accurate tale, and he’s right. Take the 2006 Marlins – who expected them to win 78 games with a payroll under $20m? Not me, that’s for sure.
Lastly Pappas states that the difference might lay in the way a small market team is run, and that is what I want to focus on the rest of the way – front office efficiency.
Quoting from Pappas’ article in Baseball Prospectus: "The Marginal Payroll/Marginal Wins (MP/MW) system evaluates the efficiency of a club’s front office by comparing its payroll and record to the performance it could expect to attain by fielding a roster of replacement-level players."
Replacement level players are typically considered to be minimum wage minor league players ready to hit the majors and, if an entire team of replacement level players played an entire season, they are expected to win 48.6 games (.300 winning percentage).
Every win in a year above 48.6 is considered a marginal win. Every dollar a team spends above 28 players * minimum wage for the year is considered marginal payroll. (28 is used allowing 3 disabled players over the year).
Now that the basics are out of the way, let’s look at MLB front office efficiency from 1999 – 2006:
The Pirates had the 26th fewest marginal wins over the 8 year period and their aggregate cost per marginal win was 24th. For those wanting to know the difference before and after Littlefield came aboard, the Pirates have a 9% lower cost per marginal win and increased their marginal wins by 4% since Littlefield took over.
Look at the Cards and Oakland — an average of $1.2m marginal cost per marginal win and an incredible average of 44 marginal wins. Wow. Now THAT is front office efficiency in action.
On the surface it is easy to see the teams who have not spent enough money to compete over the last eight years — the Pirates, Royals, Brewers, and Rays all have low marginal payroll, wins, and a bad record during the period.
As Pappas noted in his article, MLB’s three-tiered salary structure makes a strong farm system the best investment because of the reserve system and limits on arbitration – which has even been extended out even further under the new CBA.
So, if an organization wasn’t spending to compete, they should have at least been building their farm so they could win using it, like the Twins. Unfortunately for the Pirates, our farm system ranking has tanked for several years in a row and is expected to tank even further in BA’s 2007’s rankings.
On the other hand, the Rays farm system has exploded from being the worst, to being the best (as we project they will have BA’s top farm system in 2007). The Brewers farm system has also been very productive and the Royals somewhat less.
But the Pirates are the biggest losers regarding competitive spending AND farm system investments.
But not in profits. Remember? We had the 8th highest operating profit in MLB in 2005 and we are expected to be even better in 2006.
The one tell-tale factor about the Pirates spending is the $1.5m marginal cost per win price and the value we have received from that — just 21.8 marginal wins on average. That tells the fans the Pirates front office has spent too much money on the players they have obtained or retained.
True — we haven’t over spent as poorly as the Rays, Royals, or Brewers. Nor have we spent as unwisely as the Tigers.
One thing is crystal clear – it took $1.8m for every win above 49 in baseball the last 8 years ($2.2m in 2006) and with today’s out of control spending, that figure is surely going to go through the roof.
Pirate fans have only seen two years where the organization has spent $2m per marginal win – 2001 and 2006. Interestingly, Bonifay was fired at the mid-point of the 2001 year but Littlefield was given a contract extension in 2006 despite winning only 5 more games all year.
Maybe Pappas should have included another column titled: Marginal $/Marginal Wins/Stupid Owners?