Valuation in Sports

How are players in sports valued… I keep reading how cut-throat the tranfer markets can be where teams do not end up agreering on differences of few million here and there… I am very curious how they come up with such valuations… (DCF, NPV ??? ) And in all seriousness, is this like a possible industry line that one could get into? What are the prospects for such a job or to be employed in these teams. I am sure they must be having some kind of finance department of such right? What kind of background do you need to have to get into such positions?

check our SportsForum they go into this in detail. Read Moneyball for starters. Almost immediately after moneyball was written, every semi intellectual began writing books on how to value baseball players. Most of its useless, but check out your library, I’m sure they’ll have tons of books on the subject.

I did some work on a German football club. From what I remember their accounts were as you would expect with the players as assets and depreciated over the term of the contract. That side is pretty straight-forward, but doesn’t answer your question relating to market value. It was often said that Beckham went to Real Madrid to sell shirts in Asia. I guess you could do some analysis of that, but ultimately he left Man U because he fell out with Ferguson - not sure how you price that into it. So my guess is is that it is a hand waving thing based on other players etc. etc.

As a truly honest answer… It is heavily peer related. As an athlete you are crossing that threshold of making livable money into glamorous money. At that point, you are not as concerned as the absolute level of your income, but more that relative level compared to your peers. As such, there is a large gray area, perhaps several hundred thousand dollars a season where you would not complain. Also, the owner has a similar gray area where he doesn’t care if it costs a few hundred thousand more or less. The stat-rats (not staten island) who try to put an absolute value on a players worth are out of their collective minds. Although, I would guarantee if you did a multiple regression you would find some correlated variables: More experience will tend to get you more money (to a point of course) Playoff/Big Game experience Few injuries So you could do a peer multiple or an intrinsic value and I think you would be pretty close either way, and when the salary is 10M per year. +/- 300k is not going to make much of a difference.

Sports salary determination is drastically different than most fields. In most fields, you peg salaries to marginal revenue. In pro sports, you generally pay for on-field performance, and the link between on-field performance and revenue is sketchy at best. For example, the Florida Marlins have won two championships in the past 10 years, and are competitive almost every year, and yet they play in front of 40,000 empty seats every game. There seems to be some sort of science in the NFL. The NFL has a hard salary cap, so every team spends the same amount of money. There are no true guaranteed contracts, so pay is linked to current performance, for the most part. Teams in the NFL (especially the Eagles and Patriots) do seem to have a solid idea of what players are worth. Teams tend to place value on certain positions and skill sets (LT, QB, CB, DE) that they believe make the most impact on game day. These guys get the most money, and the best at the positions break the bank. Positions deemed less valuable (LB, S, WR) are paid as such. In sports without a hard cap, salary determination is a mess. There’s no consistent rationale for salaries. Some teams efficiently maximize their payroll to better their team. Some teams throw money at “name” players just to add excitement to the franchise and put fans in the seats. A team looking to a$$es in the seats may value a guy much more or less than a team looking to improve its win/loss. Throw in the fact that teams operate under entirely different mandates. Some teams act like normal, income seeking operations. Some are the hobbies of rich men who willingly lose money in order to win a title. So basically, it’s like a stock market, except that there is no concrete link between performance and cash flow, market valuations and performance measurements are highly idiosyncratic, and market participants do not seek to maximize return for a level of risk. And oh yeah, a lot of people who make personnel decisions have never taken a finance or economic course in their lives. In fact many lack any education, and scoff at and fear attempts to bring some sort of consistent, scientific analysis into sports. Many in MLB consider Billy Beane a witch doctor or a fool because he brings statistics and hard analysis into the game – despite his astounding success.

Yeah, yeah. Now let’s argue about the following people: Derek Jeter: Worth it or not? LeBron James: Donovan McNabb ("(especially the Eagles and Patriots)")

its just supply and demand… there is no fundamental value

From someone who has valued player contracts for MLB and NFL franchises, it’s done via a cost approach. You estimate your player development costs for all players on a team (so the costs to have a minor league system, scouts, a film and video department, medical personnel, etc.) and then make adjustments for position, experience, and skill. These adjustments are based on compensation for all players in the league.

How did you manage to get into that position goblue? And like I had asked again…is there any scope for such jobs?

Is valuation of politicians “pay for performance” too? Or is it the marginal contribution to society? Or is it more of an auction - ideal price is the second best offer, paid by the guy who offered the best…

goblue06 Wrote: ------------------------------------------------------- > From someone who has valued player contracts for > MLB and NFL franchises, it’s done via a cost > approach. You estimate your player development > costs for all players on a team (so the costs to > have a minor league system, scouts, a film and > video department, medical personnel, etc.) and > then make adjustments for position, experience, > and skill. These adjustments are based on > compensation for all players in the league. Really? Is that how the Giants valued Barry Zito? Or the Dodgers with Andruw Jones? There are too many truely awful, irrational contracts out there to claim that there is a consistent basis for contract decisions. Every fantasy player in the world could have told you to avoid those guys.

JoeyDVivre Wrote: ------------------------------------------------------- > Yeah, yeah. Now let’s argue about the following > people: > Derek Jeter: Worth it or not? > LeBron James: > Donovan McNabb ("(especially the Eagles and > Patriots)") From a financial perspective, those guys all put people in the seats. In terms of on-field performance: Jeter: not worth it. Jimmy Rollins and Hanley Ramirez are significantly better (maybe much better), but make much less money. Lebron: Can’t pay him enough. He takes slop deep into the playoffs. Donovan: moot argument. The Eagles will (wisely) cut him after 2008 or 2009. He will never see the entire contract. The only way he avoids a cut is a contract negotiation

joemontana Wrote: > Really? Is that how the Giants valued Barry Zito? > Or the Dodgers with Andruw Jones? There are too > many truely awful, irrational contracts out there > to claim that there is a consistent basis for > contract decisions. Every fantasy player in the > world could have told you to avoid those guys. Contract valuation isn’t a perfect science. People overpay when there’s a perceived need. There is no perfect way to value a contract, either. Most of it’s based on gut and need. But, when it comes to financial reporting, you have to value them somehow.

JoeyDVivre Wrote: ------------------------------------------------------- > Yeah, yeah. Now let’s argue about the following > people: > Derek Jeter: Worth it or not? > LeBron James: > Donovan McNabb ("(especially the Eagles and > Patriots)") DJ- NO! Lebron- Yes. Donovan- Does he still play? It still humors me when I think about my buddy keeping him in our Fantasy league last year. HAHA What about Mr. Alex Rodriguez? I can’t beieve Scott Boras tried to argue that he’s worth 500M to the Yanks. What kind of Gorilla DCF was he doing? And, BTW, I can’t wait to see the #'s that they come up with for Hansborough.

Uhhh, Hansoborough will suck in the NBA. He will be a bench player at best. Beasly on the other hand - $3.5 mil

Well, how did kwame brown, michael olokandi, and darko make it into NBA has #1 or #2 picks? Each of those earns a minimum of 1 M at least, if i recall correctly. I mean, I can play better than kwame for sure.

Kwame rejected $5M/yr a couple of years back. What a head case.

Kwame “had all the talents and tools in the world.” But it’s his brain/heart that was never (e)valuated properly

goblue06 Wrote: ------------------------------------------------------- > joemontana Wrote: > > Really? Is that how the Giants valued Barry > Zito? > > Or the Dodgers with Andruw Jones? There are > too > > many truely awful, irrational contracts out > there > > to claim that there is a consistent basis for > > contract decisions. Every fantasy player in > the > > world could have told you to avoid those guys. > > > Contract valuation isn’t a perfect science. > People overpay when there’s a perceived need. > There is no perfect way to value a contract, > either. Most of it’s based on gut and need. But, > when it comes to financial reporting, you have to > value them somehow. Are you talking about valuing them for accounting/tax purposes? That’s all well and good, but we’re talking about the determination of what to offer. Here’s the process Boston used to offer a posting fee for Dice-K: Manager 1: $50M should be enough Manager 2: That’s too round of a number and someone else might use it Manager 1: How about $51M? It’ll get us just over the hump. Manager 2: Sounds good. Manager 1: But someone else might use the same logic. Let’s make it $51.1M Manager 2: Brilliant!