1.17.2012

Is Albert Pujols Worth $254 Million? Part II

This post is the second in a two-part series on Albert Pujols' record contract. Part I can be found here. There, we discussed the difficulty of asking the question of whether something is 'worth it.' Here, we do so anyway...

Now we can shift to whether the contract was 'worth' it. Certainly many contracts are signed that don't end up being economically efficient for one, or even both, parties. This is true both in the sports world and in the world most of our readers inhabit. However, despite the fact that we have to look ahead a bit, there is some analysis which can be done to determine if the supply and demand equation came out correctly. To do so, we will look at the contract from both Pujols' and and Angel owner Arte Moreno's perspectives.

Let's start first with the player. Wherever the rest of this analysis ends up, I think it is fair to say that $254 million is a lot of money. Pujols, his children, their children and any conceivable relation to Pujols (no pun intended) should be okay. However, we can't just look at dollar figures, as we are trying to determine worth. After all, $1,000 wouldn't be much to spend on a car these days, while it would be quite a bit to spend on an average children's bike.

Therefore, in addition to the pure dollars, we need to take a look at what Pujols' alternatives could have been. First, let's take it outside the realm of baseball and consider career alternatives. I think it is safe to say that Pujols is very unlikely to be able to make that much money doing anything else in life. This isn't necessarily a knock on Pujols, his intelligence, skills or drive. It is simply a recognition that jobs paying $25 million a year are hard to come by. This is especially true in his native Dominican Republic where over 40% of the population lives below the poverty line. While Pujols did move to the US as a 16 year old, we will just repeat as granted the idea that it is tough to make $25 million a year, even in the wealthiest nations on earth.

Shifting to the universe of baseball, the analysis becomes a bit different. People make a lot of money to play baseball, so some people might think that $254 million is not so big of a deal in that such an otherworldly economic environment. However, even in baseball terms, Pujols signed a large contract.

As noted in Part I, Pujols is only the game's second $200 million contract man behind Alex Rodriquez. However, A-Rod plays third base. For direct comparison, we can look at Pujols' positional peers. The top-paid first basemen in 2011 made the following amounts: $23,125,000 (Mark Texiera), $20,275,000 (Todd Helton), $20,000,000 (Ryan Howard and Miggy Cabrera), $15,500,000 (Prince Fielder) and $15,000,000 (Justin Morneau).



For indirect comparisons, we have to note Alex Rodriquez ($32,000,000), Vernon Wells, (outfield, $26,187,500) and CC Sabathia (pitcher, $24,285,714). Now of course, many factors go into these numbers; markets are different in different years, these are not average salaries, but one-offs for 2011, etc. However, it is fair to say that Pujols' $25.4 million average annual salary puts him among the top-paid players in the game in any position.

Solidifying this point, there are a relatively small number of teams in Major League Baseball, and Pujols was unlikely to get that type of contract from any but a few of them. In economic terms, the supply of jobs is constricted in baseball (and other sports), and only a limited number of teams can prudently pony up the funds for mega-contracts.  His agent had to take this under consideration, and it was also taken under consideration that the other biggest-spending teams in the league both have first base, spoken for (Mark Texiera with the New York Yankees and Adrian Gonzalez with the Boston Red Sox).

What about further afield? Could Pujols' have taken his talents to other shores? Though there are other baseball leagues in the world, none of the others have the capability of writing a contract like this in a fiscally feasible way. By way of comparison, the highest-paid players in countries like Japan make less than $10 million per year. Moving abroad for bigger paydays is standard practice in some sports, like football (soccer), however, baseball players need to either stay in, or go to, the US for the biggest paydays in baseball.

What about other sports? According to Sports Illustrated, Tiger Woods and Phil Mickelson are the highest-paid athletes when endorsements are factored in, with both topping $60 million per year, with endorsements making up the lion's share of each golfer's income. What about athletes globally? Roger Federer and Manny Pacquiao top that list, followed by racecar driver Fernando Alonso and soccer stars Lionel Messi and Cristiano Ronaldo. All make between $38 and $52 million per year, including endorsements. Once his endorsement deals are factored in for a like-to-like comparison, Pujols is not too far off the pace of some of these global icons either.

Essentially, Pujols and his agent looked at the market for other superstar baseball players and looked at the market for his position. They considered the teams that could, and would pay a big contract to see if they were secure at the position. Maybe they even looked at the broader sports world. In all cases, they determined that the deal from the Angels was the best that he could get. Now, Pujols did reportedly leave an offer on the table from the Florida Marlins that would have included an ownership stake in the team, which could have provided long-term benefits. He did not get such a stake in the Angels. However, in any way of looking at it, it would seem that Pujols (and his agent) did very well.

As we know, there are two parties to a contract. Therefore, after thinking about things from Pujols' perspective, we then need to ask whether the contract was worth it to Angel owner Arte Moreno. When he signed Pujols' new contract, what made him decide that $254 million was an acceptable number? We already noted that, in almost every way of looking at it, that Pujols likely did the best he could. Does this mean that Arte Moreno made a bad business decision?

Most likely he did not given the fact that he might have already made his money back on the deal.

Of course there are no sure things in life, and that holds true in baseball; Moreno of course bears some risk in this deal. If Pujols gets hurt for a full season between now and his 42nd birthday, revenue based on the deal will decline as less jerseys are sold, less tickets are sold, etc. If Pujols has a Bonds/Clemens issue, it would be very easy to imagine fans turning against him, with a similar reduction in jersey sales, etc. A horrible team around him, meaning worse numbers and less wins could be a problem. Heck, if some Mayans are right, just having the year 2012 as one of the ten in the contract could create issues.

There is another monetary risk that Moreno is taking with this contract, the luxury tax. The luxury tax is a mechanism by which teams who go over MLB's soft salary cap have to pay a percentage of the overage into an account which is then split by other teams. This is baseball's way of sharing the wealth and creating some parity in the absence of a hard salary cap. According to ESPN, the Angels could be getting close to the tax threshold, meaning that expenses related to payroll could potentially end up being more than the cost of player salaries. This isn't an insignificant issue. Though most teams don't end up paying a luxury tax, when they do, it can be a huge expense. For example, due to being over the threshold for years under the system's escalating penalty scheme, the Yankees have contributed over $200 million to the pot since the luxury tax began.

However, these risks are far outweighed by potential rewards. Even before Pujols inked his name to his record contract, the Angels had signed a television deal for $3 billion (to add some perspective, this is over 15 times what Moreno paid for the whole team in 2003) over 20 years. While Pujols wasn't an Angel during the negotiation process, the TV rights negotiations with Fox Sports undoubtedly included a high-level briefing on the state of the team. Undoubtedly Fox was apprised of the potential offer to Pujols, a player who has a very good chance to 'purify' some tainted records (and maybe set some TV records) on the way to the Hall of Fame, and factored this in during negotiations with the Angels.

Ticket sales surely played into the equation as well. While the Angels have been near the top of the league in attendance the past decade, numbers have dwindled a bit over the past two seasons. What better way buck that trend and ensure that gate receipts remain constantly high than to have that same potential record-breaker playing at Angel Stadium 81 times a year. This strategy has already paid off; in the two days after the Pujols announcement over 1,000 season ticket packages were sold, and the organization expects an impact on single game tickets as well. Speaking of Angel Stadium, you can imagine that luring Pujols to the team has increased the odds that there could be a revenue upgrade from naming rights sometime soon.

Add in jersey sales and increased concessions and it isn't difficult to see that the worth of the contract to the Angels is many multiples of what they are paying Pujols. Indeed, as noted above, considering the jerseys that have been already sold, guaranteed television revenues that have already been secured, and season tickets which fans have paid deposits on, and that statement could possibly be true even if Pujols never plays a game for the team. Assuming that he does, you can add in good will from the fans based on positive externalities that potential pennant chases and records could create and this might have actually been a bargain for the Angels.

So what is the conclusion? This might be a tough sell for most lunch pail-toting Americans (in particular those who reside in St. Louis), but under our analysis, and though he 'did well' in baseball terms, it may well be that Pujols has been undervalued in economic terms. In other words, Pujols is creating more value for Moreno with his labor than he is being paid for (we wonder what Mr. Marx might have made of this statement; friend of labor though he was, that is a lot of money...)However it is difficult for us to shed a tear for Mr. Pujols. Undoubtedly this is all part of the bargain in the capitalist system, and one that seems to be working out just fine for everyone involved. Well, everyone except Cardinals fans...

3 comments:

  1. Anonymous20/1/12 11:00

    But will that still make economic sense if the Angels don't win? Mega contracts, such as the one for TV rights, are often worth much less than the eye-popping amount publicized unless certain benchmarks are met. Those benchmarks are usually not disclosed publicly, but I think we can assume the Angels need to sell out at least a certain number of games and make a certain number of appearances in the playoffs to realize all the money on that deal.

    How many wins can Pujols reasonably add? And if they don't win, will jerseys and tickets continue to sell?

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  2. Thanks for the comment.

    As we noted above, there are certainly risks in this deal. However, that is the nature of capitalism, and Mr. Moreno certainly weighed those factors. That said I do have a few thoughts on the risks you mention...

    First, even if the TV deal has contingencies (which we may never know for sure) I would suggest that the advertised $3 billion number won't decline so much as to leave the Angels floundering for cash.

    Second, whether Pujols has a huge impact on wins or not, the Angels have built a fairly strong team which seems likely to make a few playoff appearances, with him or in spite of him, in the medium term.

    Now, one thing I didn't address in the article (maybe I should have...) is decline. In other words, it is almost certain that Pujols will begin to decline at some point during the contract. Whether he does so gracefully after winning some games for the team (and fulfilling potential TV contingencies, selling tickets, jerseys, etc.) or brings the team down with him (and his salary) in, say, year 2 or 3 is a huge risk of this very long deal.

    However, if Pujols has 4 or 5 years of production in line with his career numbers, and if the Angels make it through a few rounds of the playoffs during that time, it seems very likely to me that they will make their money back, even if this is followed by a few years of paying over the odds for declining production during an extended farewell tour.

    However, that is what it was going to take to get this particular deal done, and as noted above, was certainly considered during negotiations.

    JS

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