Big Money Comes to Moneyball
WHY YOU SHOULD CARE
Because what does the underdog do when the big guys co-opt their tactics (and their tacticians)?
The last time Moneyball came to Hollywood, in the form of the 2011 motion picture starring Brad Pitt as iconoclast Oakland A’s general manager Billy Beane, Pitt memorably lambasted his inner circle of graying baseball scouts as they struggled to solve the problem of how to replace the small-market team’s key players, who had departed for greener pastures. “The problem we’re trying to solve,” he reminded them, “is that there are rich teams and there are poor teams, then there’s 50 feet of crap, and then there’s us.”
A lot has changed in Major League Baseball — whose season starts next week — since Michael Lewis’ 2003 best-seller Moneyball chronicled Oakland’s attempts to combat an “unfair game” tilted in favor of large-market clubs by employing statistical models and data analytics to better identify undervalued players. For one thing, there’s a lot less crap, or perhaps it’s just spread around more evenly. Increased revenue sharing and luxury taxes have helped improve parity between large- and small-market teams in the league. On the other hand, Moneyball’s “sabermetric revolution” — meaning the use of data analysis to measure player performance and value — is practically universal now, with wealthier teams such as the New York Yankees investing their millions on number crunchers and analysts, as well as star free agents, in an effort to re-establish their competitive advantage.
Indeed, the next big wave of Moneyball-like innovation in baseball may come from the sport’s most wealthy. This time in the form of “Hollywood’s team,” the Los Angeles Dodgers, owners of baseball’s largest payroll for the past three seasons, but not of a single title since 1988 — when Ronald Reagan was president, Nike was just starting to “Do It,” and a high-flying Michael Keaton was Beetlejuice, not Birdman. Over the past few seasons, the once-storied franchise has been plagued by costly long-term contracts, off-the-field turmoil and poor management decisions. But this offseason, the Dodgers made some key early acquisitions, though not of anyone who will ever don the Dodgers’ iconic blue-and-white uniform. Rather, the organization brought in a “dream team” of Moneyball-style execs poached from other ball clubs, including Andrew Friedman (from the Tampa Bay Rays), Farhan Zaidi (one of Beane’s deputies in Oakland) and Josh Byrnes (formerly of the Arizona Diamondbacks).
Small-market teams like the A’s are becoming “organ donors for the rich,” Pitt’s on-screen rant continues. “Boston’s taken our kidneys. Yankees have taken our heart.” Well, as another season prepares to open, the Los Angeles Dodgers are out to show baseball that even in 2015, the sport’s richest can still take their brains.
From Bums to Bumbledom
Nobody in baseball referred to “market inefficiencies” or “arbitrage opportunities” in 1947, but what Jackie Robinson, GM Branch Rickey and the Brooklyn Dodgers accomplished by breaking baseball’s longtime color barrier was not just a civil rights triumph, but also one of the most successful business decisions in the history of sports. The exclusion of black players from the major leagues created a market inefficiency unlike any before or since, and as the first team to tackle it, the Dodgers reaped the rewards. The team’s “experiment” not only populated the roster with talented black players, converting the “bums” of Brooklyn into a perennial contender that won six pennants in 10 years and the Dodgers’ first World Series title in 1955, but it also brought legions of new fans through the turnstiles, fundamentally remaking the franchise.
The Dodgers soon consolidated their innovative reputation (even as they devastated Brooklyn fans) by relocating to baseball-starved California in 1958, as air travel made the game’s westward expansion possible. From sunny Los Angeles, they bolstered their roster, multicultural identity and bottom line by being the first big-league team to scout and mine the prodigious reserves of baseball talent in places like the Dominican Republic, Japan and South Korea, leading to the development of such international phenoms as Fernando Valenzuela, Pedro Martinez and Hideo Nomo. In their first 30 years in Los Angeles, the Dodgers won five World Series under the leadership of just two managers and one family of owners.
Then things started to change. In 1998, Rupert Murdoch’s Fox Group bought the team, only to flip it to Boston real estate developer Frank McCourt in 2004. McCourt briefly flirted with a sabermetric direction for the Dodgers, hiring Paul DePodesta, one of Beane’s deputies, as GM before firing the Harvard-educated statistician, whom the LA media mocked as “Google Boy,” after just two seasons. More fatefully, McCourt installed his wife, Jamie, a lawyer and businesswoman, as the Dodgers’ president, making her baseball’s highest-ranking woman. But when the McCourts separated in 2009 and Frank fired Jamie, things got ugly, and the entire organization, like a desired only child, became embroiled in the dispute. By the time the whole affair ended two years later, the McCourts had settled perhaps the costliest divorce case in California history, the Dodgers had declared bankruptcy and the team was sold for more than $2 billion — the highest price tag ever for a pro sports team — to NBA legend Magic Johnson and the Guggenheim Baseball Management LLC, a group of investors tied to a financial services firm.
With ownership unclear and a cut-rate budget in place, the Dodgers struggled to field a competitive team during the McCourt saga. And so when the new ownership took over in 2012, they decided it was time to send then-GM Ned Colletti out on a half-billion-dollar shopping spree to improve the club quickly and win back its fan base, acquiring high-priced veterans like Adrian Gonzalez, Josh Beckett and Carl Crawford. When all was said and done, the Dodgers had the highest payroll in baseball and a couple of playoff appearances — but still no pennants or titles.
And so the Dodgers turned their attention in a thriftier direction, toward a mild-mannered 38-year-old executive whose small-market Tampa Bay Rays, like the Dodgers, had won 92 games in 2013. The difference being that Andrew Friedman’s club had paid about $700,000 per victory, while the profligate Dodgers had paid more than 3 1/2 times that ($2.6 million) for each of theirs.
Shedding the Blues by Saving Some Green
Friedman, a former Bear Stearns analyst with virtually no pro baseball experience, was just 29 years old in 2006 when two former Goldman Sachs executives, Stuart Sternberg and Matthew Silverman, installed him as director of baseball operations for the Rays, then the laughingstock of professional baseball. While Oakland and many front offices had employed statistical models derived from the financial markets to value players, Friedman and company had actual Wall Street experience, and quickly set about revamping the Rays using financial concepts like “positive arbitrage” and sophisticated data analysis to take Moneyball to a whole new level.
Under Friedman, the cash-strapped Rays measured and exploited underappreciated talents like a catcher’s ability to frame a pitch; they focused on neglected aspects of the game like baserunning, defense and injury prevention; and even gambled, some claim, on players with less-than-savory personal lives. “I am purely market-driven,” Friedman says in Jonah Keri’s best-seller on the Rays, The Extra 2%. “I love players I think that I can get for less than they are worth.” And while Bear Stearns was going under in 2008, the Rays and their “boy genius” Friedman were making their first World Series appearance, and their first of four playoff appearances in six years.
There’s a good chance that Friedman, and dozens of other smart baseball executives, are themselves undervalued assets.
When the Dodgers finally lured Friedman away from the Rays this past October for a reported five-year, $35 million contract, one of his first moves was to consolidate the organization’s intellectual capital by adding two more of baseball’s blue-chip executive prospects, Zaidi and Byrnes. Zaidi, a 38-year-old Canadian Muslim with a Ph.D. in economics from Berkeley who sent in his résumé to the A’s after reading Moneyball, brings a decade of experience with Oakland to his new post as Dodgers GM. Byrnes, 44, a similarly data-inclined executive who was once an assistant under Theo Epstein at Boston before being made Arizona’s GM at age 35, will head up the Dodgers’ scouting and player development operations. “There are lots of smart people in baseball,” Keri tells OZY, but “the Dodgers do have a strong group, one comprised of different people who’ve found success in different markets.”
LA’s dream team wasted little time, slashing the team’s bloated payroll, revamping its roster and making more than 20 trades this offseason, including trading the team’s most popular position player, the often-injured Matt Kemp, to the San Diego Padres, clearing room for top prospect Joc Pederson. The Dodgers will pay about a third of Kemp’s remaining contract, but that move, along with not re-signing veteran Hanley Ramírez, cleared roughly $150 million off the Dodgers’ books. In another classic Friedman move, LA offloaded their disappointing but still desirable second baseman Dee Gordon along with two other underwhelming veterans for four prospects, flipping one of those prospects just a few hours later to the Los Angeles Angels for All-Star Howie Kendrick. And just like that, the Dodgers received an instant offensive and defensive upgrade at second base.
The Dodgers, like Friedman’s Rays and Zaidi’s A’s, also now appear to be employing a strategy — backed by data — that Zaidi calls “managing the roster from the bottom,” focusing on building a deep, balanced team without any glaring holes, instead of the “stars and scrubs” roster fielded by so many wealthy teams. Key to this will be also improving the Dodgers organizational depth, and re-establishing the franchise’s international credentials around potential stars like Cuban defector Yasiel Puig and 18-year-old Mexican pitching phenom Julio Urías.
“[W]e’re trying to touch everything we can,” Byrnes recently told The New York Times, “take some of the small-market disciplines and mind-sets, but understand that we have a lot of resources and a team that won 94 games last year.” And with these executives and money, the Dodgers do have a chance of touching just about everything, including tapping into what might well be the next big frontier in the Moneyball arms race: properly valuing the performance of baseball’s execs themselves.
Analyzing the Analysts
One of the somewhat forgotten takeaways from Moneyball was the real value of having a smart, talented front office, as well as undervalued players. After the 2002 season, Beane himself famously turned down a five-year, $12.5 million offer from the Red Sox. Earning $7 million per year, Friedman is now the highest-paid executive in baseball. But even at that salary, there’s a good chance that Friedman, and dozens of other smart baseball executives, are themselves undervalued assets — an inefficiency that teams like the Dodgers have only just started to exploit.
“The greatest market inefficiency in baseball,” says Lewis Pollis, “is in fact the systematic undervaluation of the people who put the teams together.” Who’s Lewis Pollis? Like Friedman, Zaidi and other front office maestros, he’s a smart kid and a number cruncher. He’s also a recent economics graduate of Brown University and baseball analytics intern for the Cleveland Indians whose senior thesis last year on valuing baseball’s front offices was republished in full by the Society for American Baseball Research (SABR), the game’s premier group of analytics sages and advocates.
Pollis’ research uses transaction data like free agent signings and trades to measure the investing skills of the league’s general managers using the same yardstick they regularly apply to players — namely, how many wins they are worth to their team each year. Under his calculations, for example, the cost of one win purchased by signing a free agent player in 2013 was just over $7 million, meaning that even Friedman is being compensated as if he is worth just one win per season to the Dodgers. In fact, says Pollis, Friedman — perched in the top 10 of GM performers between 1995 and 2013 — is worth about 2.27 total wins more than the average GM, or, in dollar terms, almost $16 million more than the average GM each year.
Limited to publicly available data, Pollis’ findings cannot disaggregate the relative contributions of everyone working under the GM to make those decisions and transactions, but if he’s right, then having an elite GM — like having an All-Star player — impacts a team’s win-loss record, and bottom line, far more than previously imagined. Plus, unlike with player salaries, the league can’t count a team’s front office compensation toward its payroll, and there’s no luxury tax or other penalty for hoarding smarts in baseball.
Did the Dodgers’ ownership know all of this when they brought in Friedman, Zaidi and Byrnes to retool their bloated franchise? Probably, though perhaps not in so many words, or numbers. (The Dodgers did not respond to requests for comment.) But until other teams more fully realize the value to be gained from outspending their competitors on front office talent, the Dodgers could make out like bandits, and not just in the form of winning games and championships.
One hidden mandate of the Friedman era in Los Angeles, says Keri, “is to not only win, but also do so in a leaner and meaner way.” And for high-revenue teams like the Dodgers, the most reliable benefit to be gained from a more efficiently run team is paid out in fatter profits, not pennants. If Friedman can field a competitive team with a sub-$200 million payroll that is under the league’s luxury tax threshold, then Magic Johnson and his hedge fund buddies could make a killing, especially given their $8.5 billion television deal with Time Warner Cable. (Johnson and Guggenheim Baseball Management did not respond to requests for comment.)
But, just like any good baseball team must learn to play together and become more than just a collection of talent, it remains to be seen how well the Dodgers’ ownership, including front office holdovers like former GM Colletti, will jell with the new suite of executives, and who will ultimately call the shots in Los Angeles. Good data and analytics are only as good as the people using them, and the same is true for good data analyzers.
“What begins as a failure of the imagination ends as a market inefficiency,” Lewis observed in Moneyball. One of the last great inefficiencies in the game of baseball may be the failure to imagine that talented executives like Friedman are worth as much to their teams as the players they can acquire. And for the moment, it appears that the big-spending Dodgers, for all of their woes and indulgences, may have at last found themselves one helluva bargain.