The Yankees’ Magic Number–$189 million

The Yankees spent much of September saying goodbye to an old friend–Mariano Rivera. Perhaps they will spend November and December saying goodbye to the notion of having a payroll below the $189 million luxury tax threshold for 2014. I was among the first to infer their intentions, as I digested the implications of the trade that brought them Michael Pineda from the Seattle Mariners in January 2012. Several days later, on Clubhouse Confidential on MLB Network, I opined that the Pineda acquisition, coupled with the development track of some of their star young prospects (e.g., Manny Banuelos, Delin Betances) could allow the Yankees to do the unthinkable–have a major league payroll of less than $189 million, while maintaining a competitive, contending team. This is the baseball equivalent of re-fueling the airplane, while in flight, and doing so with discount fuel–a pretty nifty magic trick if one can achieve it. A week or so after my comments on-air, Yankees managing partner Hal Steinbrenner stated publicly that the Yankees had ambitions of tucking under the $189 million luxury tax threshold for their payroll.

Make no mistake, if the Yankees can reduce their payroll below $189 million for even one year, they stand to gain significant dollars well beyond the direct payroll saved. They would reset their luxury tax rate from its current 50% level to a step-ladder set of future rates that begin at 17.5%. This means reducing say a $210 million payroll to $188 would save $22 million in payroll dollars and another $7 million in luxury tax. Even if the Yankees payroll escalated in future years, the value of resetting the luxury tax carries forward as the tax escalates over the balance of the current Collective Bargaining Agreement. However, if this quest for efficiency comes at the expense of making the playoffs and challenging for championships, its a bad financial decision. The potential savings pale by comparison to the revenue opportunities from being a reliable participant in October baseball.

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.

There is a lagged effect to winning (or losing). Fans don’t respond immediately. The first signs of fans withdrawing their financial support for a team come in the form of declining TV ratings and the no show rate at home games. In today’s New York Times, Richard Sandomir reported that viewership of Yankee games was down more than 30% this year. No show rates from fans who had purchased tickets, including season ticket holders, appeared to be on the rise at the Stadium this season. I have no doubts that the Yankees leadership will quickly abandon ambitions of going to battle in 2014 with a payroll of under $189 million, if the strategy threatens fielding a dominant team. If Cano is re-signed to a contract with an average annual value of $25 to $30 million, even with A-Rod’s status in limbo, it will be very difficult for the Yankees to acquire the necessary talent to contend for a championship, while staying under the luxury tax threshold. Get ready for the “Under $189 million Farewell Tour”.