Cost/Benefit analysis for the White Sox

In the words of poet Robert Frost, the Chicago White Sox currently stand in front of two diverging roads and they cannot travel both. Should they take the one less traveled? And would that make all the difference?

These are the questions Rick Hahn and company have to be asking themselves post a winter meetings that saw them add third baseman Brett Lawrie. Parting with pitching prospects Jeffery Wendelken and Zack Erwin did not hamstring the White Sox to the point that they have no choice but to win-now.

This package was weak enough, that if the White Sox were to switch gears and rebuild, they could do so without feeling as though they had made a futile trade. In other words, had Frank Montas gone to the Oakland Athletics, there would be a higher obligation to build on that.

With that said, there is still undoubtedly pressure to win.

Whether it’s an internal desire to compete, an onslaught of fan dejection, or the looming fact that the Chicago Cubs are becoming a juggernaut in a mutual market, there are forces that should push the White Sox to travel down the path less taken.

At least a path they have been wary to travel down to this point.

That path is one of investment expenditure. Discourse surrounding the White Sox’s feasibility to spend has flooded both the local media and Twitter, and the company line has often asserted that this is a median market team in a big market that is hamstrung financially.

I’m here to illustrate that it is not only economically viable but actually in Chicago’s best interest to invest in a squad that should pay dividends later on.

The best way I can explain it is with a simple analogy. An auto firm is losing out to its competitors and the future is looking bleak. The board gets together and decides to build a new manufacturing facility that will allow them to produce automobiles at a faster and cheaper rate. This is investment expenditure on capital that will lead to better margins and a better bottom line in the future if the bet pays off.

They’re improving their product and banking on the fact that revenues will follow as a result. For the White Sox, this is the equivalent of adding “capital” such as Justin Upton and Todd Frazier in hopes that it will lead to a playoff berth and a sustainable revenue injection.

I’ve also heard the argument that even if the White Sox were a winner, gate sales would still lag, and they’d never get the bang for their buck. That is simply not true and my cost/benefit analysis will show why.

You have to remember; the White Sox are not the Tampa Bay Rays, who don’t draw regardless of team performance. The White Sox have an entire market ceiling they’re not tapping into because people have recently started to tune out the team in the Spring.

Below you’ll find a financial simulation of what a potential payout would look like if the White Sox took the next step. Is it perfect? No, but it’s a rough enough revenue outline that it should clear up some misconceptions.

Methodology:

The entire simulation follows a simple premise. That is that the additions of both Justin Upton and Todd Frazier would put the White Sox in the playoffs.

I think this is reasonable for a few reasons. First, in 2015 there was unprecedented underperformance from key contributors and positive regression should take its course in 2016. This means Adam Eaton likely won’t have as putrid of an April, and Melky Cabrera won’t hit like a double-A hitter for the first sixty games.

There’s also a matter of addition by subtraction. The White Sox won’t be bogged down by 214 innings worth of Jeff Samardzija‘s 4.96 ERA.

The additions of Brett Lawrie and the new Alex Avila/Dioner Navarro catching tandem could very well give the White Sox above replacement production at two positions that were black holes offensively last season.

Plus, don’t take the Rick Renteria hiring for granted. If Mark Parent really was feeding Ventura advice regarding in-game decisions, Chicago should see immense improvement. This means the brain trust in the dugout might actually know when to give a starter the hook or better yet realize that a reverse split exists or that Tyler Saladino is not a two-hole hitter.

So even without Frazier or Upton, the White Sox should be looking at more around 80 wins. There’s too much variance to stop here though and that’s why adding a power bat or two puts the White Sox over the top.

Making the playoffs is key to this exercise because it contends that consistent postseason berths is the only way the White Sox make a return on their investment. So the overarching hypothesis is as follows:

The additions of Todd Frazier and Justin Upton will lead to a White Sox playoff berth in 2016, 2017, 2018, and yes 2019. 

Remember that in those latter years Chicago’s rotation could very well be Chris Sale, Jose Quintana, Carlos Rodon, and Carson Fulmer so needless to say they will be in the mix perennially if they simply add some offensive firepower.

I used historical parallels as a way to project attendance figures. Using numbers from the Baseball Almanac , I equated 2016 attendance to 2010 (A year the White Sox were competitive coming off a mediocre season).

2017 attendance equals the figure from 2008 (A playoff year for the White Sox).

Years 2018 and 2019 use the trend seen in 2006 and 2007 as a barometer, because in this simulation the White Sox win the World Series in 2017 behind a competent line up and a seasoned rotation of elite arms (If the White Sox can get into the playoffs, their rotation of Sale, Quintana, Rodon, and Fulmer could essentially make them the 2015 New York Mets).

Attendance in 2020, 2021, and 2022 is not noted because under this outline these will not be playoff years and remember that added “benefits” ride solely on the premise that the White Sox make the playoffs because of Upton and/or Frazier.

While they may still bring other inherent benefits even without a postseason berth, the playoffs are the only way the White Sox can justify the investment.

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Revenue was calculated using 2014’s gate receipts as a constant in the proportional equation and attendance serves as the primary variable. This constant was $43 million in gate receipts, per Forbes based on a 1,650,821 attendance figure for 2014.

Using 2014 numbers means that prices will be adjusted to include the parking deals, cheaper upper deck seats, and family Sundays that weren’t around back when the White Sox were consistently in the mix.

So the proportion looked like this:

$43 M/1,650,821 = x/historical attendance figure

The attendance figures do not include postseason tallies, so for postseason projections I used baselines from thefieldsofgreen.com. They use a win-curve value chart to show how the playoffs pay-off for MLB teams.

"“Fans pay for wins. The more a team wins, the more fans will support the team, which leads to higher broadcast ratings and larger sponsorship deals. Which leads to greater revenue.Once a team reaches the playoffs, it can count on an additional revenue stream over the next four to five years as a result.”"

This is essentially my thesis as well and the perpetuated revenue cycle is exhibited in the curve I created. I don’t use the same methodology to reach my projection because my curve factors in variables like the market size by using historical trends as benchmarks.

I highly recommend reading how The Fields of Green arrived at their numbers. It’s a great read, but their arbitrary findings are as follows:

87 wins and postseason berth = $20 million in added playoff revenue 

91 wins and postseason berth = $30 million in added playoff revenue

96 wins and postseason berth = $37.5 million in added playoff revenue

Essentially, these projections assume that a team with more regular season wins will go deeper, but of course that isn’t always the case. Still the more regular season wins a team gets the more it assures that it will at least see the ALDS vs. just the one-game wildcard and it also guarantees that the majority of the games in the series will be at home, due to record advantage.

For my model, I used the 87-win, $20 million projection for 2016 under the impression that the White Sox get in via a wildcard and ride Chris Sale to at least the ALDS, with an early exit possible.

The more experienced 2017 team, which will have an improved Rodon and Fulmer and a positional core assuredly in its prime, wins the AL Central outright and converts on a World Series victory. Thus, the $37.5 million figure is used.

The 2018 team can’t follow-up the 2017 club, and only an ALCS berth is possible. So $30 million.

2019 is a last hurrah for this core and leads to a wildcard berth and an additional $20 million.

Of course, depending on future expenditure and the infusion of minor league talent, the window could be extended but for the purpose of this simulation, four-consecutive playoff years and a world championship is this core’s absolute ceiling.

That means Justin Upton’s back loaded contract may not provide as much value in the non-playoff years, and that implication is reflected in the data.

But that’s the point of a cost/benefit analysis. It is an effort to unearth not just the positives in the good years, but the overall return on investment over the entire length of the deal.

Sep 3, 2015; San Diego, CA, USA; San Diego Padres left fielder Justin Upton (10) hits an RBI double during the first inning against the Los Angeles Dodgers at Petco Park. Mandatory Credit: Jake Roth-USA TODAY Sports

For Justin Upton’s contract I projected 7-years at a $22 million AAV. That leads to 7-years, $154 million. That’s in line with other estimates thrown out this offseason. I back loaded the deal so that both Upton and Frazier could fit into roughly a $135 million payroll for 2016, which will fall significantly in the following years when Adam LaRoche and John Danks come off the books.

This will be offset some by the raises in line for most of the core, but overall the payroll could very well stay under $130 million for most of the window.

Todd Frazier’s contract is calculated via SportsTrac estimates. They project $8,250,000 million in 2016 and I could see him getting an arbitration raise to about $10 million in 2017, so that’s what I used.

Adding star players like Upton and Frazier should get the White Sox some added revenue in apparel sales (which the team gets a percentage of) and endorsements. I put these gains under marketing and they’re mostly between $500,000 and $1 million per year.

What I couldn’t include is what Reinsdorf will bank in increased television ratings, which is significant because he owns a majority share of Chicago Comcast SportsNet. Even without this added revenue stream, you’ll still get the picture.

The model isn’t a lost-cause without it, because that data would only further prove the point expressed and wouldn’t negatively offset the returns noted below.

Finally, this cost/benefit analysis only takes into consideration monetary costs, because it is hard to quantify the more intangible costs of giving up the comp pick for Upton or young talent for Frazier.

Still, as long as Tim Anderson isn’t in the Frazier deal (Chicago could entice them with the likes of Frank Montas, Spencer Adams, or Trayce Thompson), that move shouldn’t set them back too much.

So here are the results: (keep scrolling down to read analysis on the table)

If on mobile device, click on table and then zoom in to view it better.

Right off the bat, the White Sox will break-even in 2016 and the margins only get better over the next couple years.

In 2018, at the pinnacle of success, the White Sox will rake in $42,533,000 million in net benefits.

The curve dips after that and eventually goes negative with a slight loss in 2020, and more significant losses in 2021, and 2022.

In any other industry, you’d expect to see an inverse. Losses first, and the payoff later, but because this investment is maximizing the present, the return actually comes much earlier.

Here’s the curve:

As you can see the benefits always outweigh the costs, and rise exponentially until eventually stabilizing.

Now just because they lose money in 2020, 2021, and 2022 does not mean they’re posting operating losses. This curve isn’t about payroll vs. revenue, but is rather isolating two specific costs in Upton and Frazier.

So the White Sox will likely post diminishing returns at the latter end of the Upton deal, but only with Upton. The payroll baseline will be much lower in those three years and the White Sox could still afford to supplement Upton and the core, even if both entities are older.

The incredible free agent class of 2018 should help out if they’re willing to reinvest and continue the self-sustaining cycle.

So initially they’re getting in the range of 50 percent return on investment (ROI) and that falls off once they stop making the playoffs. Still the purpose of this is to see if it’s a good move in the aggregate.

When you evaluate the entire length of the Upton contract and the two years of Frazier the total ROI is net positive and comes in at 31 percent.

That means it is a worthwhile investment.

Hopefully this shows how spending on players who actually shift the barometer could very well payoff in the long run.

Again, this doesn’t factor in added television revenue, which would make ROI even sweeter. Now I’m sure you’ve already detected the obvious risk with this: What if the White Sox miss the playoffs?

Well that’s a valid concern, but I have a hard time believing a line up anchored by Adam Eaton, Jose Abreu, Justin Upton, and Todd Frazier, paired with the league’s best rotation, can’t compete over the next few years.

When you evaluate the entire length of the Upton contract and the two years of Frazier the total ROI  is net positive and comes in at 31 percent.

On the flip side, we know what will happen if they don’t invest. That leads to a middling team that doesn’t tap into the sustainable riches of consecutive playoff berths and one that will find ROI on the “overall payroll” to likely not be very satisfying.

The White Sox are making operating profit now, but attendance has almost never been lower and if nothing changes and the Cubs continue to absorb more of the market, those operating profits won’t last long.

Eventually the bottom will fall out, because they can still break through their support level for low attendance and when that happens, the White Sox’s current model will no longer be dubbed as viably sustainable.

The crux of the argument is to make the investment now, win with this core, and set yourself up for a much better future. It’s a risk Chicago has to make because the risk of staying pat is actually far greater in terms of sustainability.

Or the South Siders can take the road they know, and that path leads to 78 wins. Here’s to hoping they take the road less traveled.