As most baseball fans are well aware of, the New York Yankees have had quasi-mandate of reaching a $189mil or below payroll for the 2014. The reason being that they will be under the luxury cap and their tax rate will reset. If they do not meet that threshold the team will face a tax rate of 50% for every dollar they are over $189million. 50% seems pretty absurd and without looking at other factors, it seems fiscally sound of New York to cut down to a “low” $189mil payroll if it means avoiding a 50% tax rate.
Meanwhile, the current roster in the Bronx isn’t looking too pretty. Their current lineup looks like:
C- Austin Romine
1b- Mark Teixeira
2b- David Adams
3b- Eduardo Nunez
SS- Derek Jeter
LF- Alfonso Soriano
CF- Brett Gardner
RF- Ichiro Suzuiki
DH- Vernon Wells
And a staff of CC, Michael Pineda, David Phelps, Ivan Nova, and one of Vidal Nuno, David Huff, and Brett Marshall.
Obviously bringing back Robinson Cano, Hiroki Kuroda, Curtis Granderson and signing Tanaka from Japan would up that projected win total. But would that bring them above the $189mil threshold? The Yankees already have $89.025 mil tied in 2014 contracts. If you bring Robbie back at $30mil a year that goes up to about $119mil. Throw in a Qualifying Offer for Granderson and Kuroda and that jumps to about $147mil. Those three additions would probably add about 11 wins to the Yankees projected win total- so we’re looking at about a 74 win team now. So with another $40mil they need to find about 16 more wins to be a Wild Card contender. They would also need to cover 9 players in arbitration, which could potentially add up to at least $20mil without adding any additional wins to their projected win total. Granted they could gain $26mil if Alex Rodriguez is suspended, but as a GM you can’t go into the off-season assuming or planning on a suspension. Moreover, even if he is suspended the team would still have a projected $40-$50mil to add about 16 wins. That is a good share of money, but I’m not sure it’s enough to another 16 wins- especially when you look at the F.A. market. Essentially, things are looking very bleak in the borough.
So what should the Yankees do? Meet and the payroll limit and reset their tax rate at the expense of a winning roster or screw the tax rate and grow the payroll above $200mil.
Without access to Yankee financial information, it is difficult to project the financial implications of being non-competitive vs. competitive. I have always maintained that the Yankees have more to lose (than any other team in baseball), by failing to be a perennial playoff team. Their entire business model, including their pricing structure is built around being among the best teams in baseball and having more than a fair share of the games biggest stars on their roster. Along with their storied legacy, being the the best team in baseball (or at least in the discussion) is their identity. Given my research and analysis devoted to understanding the relationship between on-field performance and revenues, as well as my experience assessing the motivations and perspectives of fans, I would estimate that a two or three-year run of winning a respectable 85 games per year could cost the Yankees between $50 and $100 million in revenue per season. Add in the impact of the decline in market value of their assets–the franchise, their stake in the YES Network, etc.–and the financial penalty for failing to maintain excellence gets real big, quickly.
Vince argues that being a mediocre team for the next few seasons will hurt the Yankees more financially than a large luxury tax. This makes sense for a couple of reasons. First, unless the Yankees plan to stay under $189mil for some time then they will be paying an exuberant amount of luxury taxes in the near future anyway. Secondly, as mentioned the Yankees business is based on their winning legacy. With YES the Yankees have a Regional Sports Network (RSN). Instead of being paid a fixed rate per season for TV rights, the Yankees make money through YES based on TV ratings. If you’re a good team and get great TV ratings you can make a fortune with a RSN. YES Network is currently valued at $3bil which is more than the actual Yankees franchise is valued. But if the Yankees become a mediocre team than TV ratings will fall and YES will lose value which would cost the Yankees more than a luxury tax. In fact, TV ratings were down 30% in 2013 from 2012. Attendance is also on the downward swing and luxury suites aren’t selling which is killing the team as well.
What is the best solution to the above problems? Winning. How can the Yankees win in the near future? Spend money. While it is a must to develop a strong farm system to compliment a well-paid ML level team (ie Boston) to keep a team continually competitive, you can add wins to your team by acquiring quality players in the free agent market if you can afford it. The Yankees can afford it. In the game today the free agent market isn’t what it used to be. Although there are couple free agents this year- Robinson Cano, Brian McCann, and Shin-soo Choo come to mind- most star players are extended by their parent clubs, who buyout free agency years. To offset this a team like New York can be aggressive in the international market. Players such as Yasiel Puig, Aroldis Chapman, and Yu Darvish have been bought relatively cheap in this market.
If the Yankees want to protect their brand, remain financially strong, and field a competitive baseball team I believe there is only one option the team can take in 2014- screw the tax threshold and shell out the dollars to field a 90+ win team. As Al Davis once said, “Just win, baby”.
In Part II and III I will look at what a possible Robinson Cano contract should look like and what my off-season plans for New York would look like.