Case STUDIES IN SPORT MANAGEMENT

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1 Case STUDIES IN SPORT MANAGEMENT Volume 2 Case Study 8 Diamond Dollars Case Competition: The Mike Trout Dilemma Vince Gennaro SABR President Keywords: Statistical analysis; player personnel decisions; management, leadership, and strategy; finance and economics; North America. This case was prepared by the author for the Diamond Dollars Case Competition in March It was developed for the purpose of a case discussion. It contains various assumptions that were generated for illustrative purposes and is not intended to serve as a source of primary data. It takes the hypothetical 2013 performance of young baseball superstar Mike Trout to provide students with an opportunity to apply analytical skills to the types of real-world problems faced by professional sport organizations. The case study invites students to weigh the many factors that Los Angeles Angels management must consider in determining how to realistically negotiate with Trout for the benefit of the ball club following the 2013 Major League baseball season. On July 8, 2011, a 19-year-old Michael Nelson Trout stepped into a major league ballpark in Anaheim to make his much-anticipated debut for the Angels. The high expectations reflected the hype surrounding the 25th selection in the first round of the 2009 amateur draft. In his big league debut, he went 0 for 3 against the Seattle Mariners Blake Beaven and Jamey Wright, in a game eventually won by the Angels with a walk-off homerun by Mark Trumbo. Trout s fortygame major league initiation in 2011 fell short of expectations, as he batted a modest.220 with a.672 OPS, despite hitting.326 with a.958 OPS in over 400 plate appearances in the minor leagues (AA), prior to his call up. Beginning the 2012 season at AAA Salt Lake City, Trout could not be contained. In his twenty games in the Pacific Coast League, he pounded out hits at a.403 clip and was promptly recalled to the Angels roster for the April 28 game in Cleveland in a fateful coincidence, the same day as Bryce Harper s major league debut. One month later, Trout was hitting.300 and by late July, the emerging superstar was hitting.350 with an OPS over He went on to deliver a rookie season that vaulted him into the role of front-runner for the AL MVP award. He led the major leagues in runs scored and stolen bases and the AL in OPS+. His.326/.399/.564 and.963 OPS, as a 20-year old, placed him in historic company. He drew frequent comparisons to Mickey Mantle s age-20 season sixty years earlier, with the few differences in their comparable seasons favoring Trout. Mantle led the AL in strikeouts, while Trout s 49 stolen bases (with only 5 caught-stealing) dwarfed Mantle s eight. Despite Trout s extraordinary year, he finished second to triple crown winner and World Series-bound Miguel Cabrera for the AL MVP. Mantle suffered a similar fate, finishing third in the MVP voting, behind two pitchers Bobby Shantz and teammate Allie Reynolds. Although twenty-one clubs passed on Trout in the draft (some teams passed twice), it did not take long for scouts to rave about the phenom from South Jersey. He was heralded for his quick, concise batting stroke with few moving Vince Gennaro is President of the Society for American Baseball Research (SABR), author of Diamond Dollars: The Economics of Winning in Baseball, a consultant to Major League Baseball (MLB) teams, and he teaches in the graduate programs at Columbia University and Manhattanville College. This case was prepared solely by him for use in the Diamond Dollars Case Competition held at the SABR Analytics Conference in Phoenix, Ariz., in March Eleven colleges and universities competed in two divisions graduate and undergraduate with MLB executives serving as judges for the competition. The Diamond Dollars Case Competition is a series of competitions held at various locations for the purpose of providing students with an opportunity to apply their critical thinking and analytical skills to the types of real-world problems faced by Major League Baseball front offices. For more information about the series, please contact the author at vince@vincegennaro.com or visit vincegennaro.com. 1

2 2 Gennaro parts one that scouts expect to be highly repeatable and less susceptible to prolonged slumps. Trout also displays outstanding power for a young player, evidenced by his 30 homerun rookie year. He also exhibits solid plate discipline, particularly given his age, showing a low chase rate on pitches out of the zone, and scores high on raw athleticism, displaying blazing speed and great baseball instincts. On any given summer night we are apt to see a homerun-saving catch on Angels game highlights. Combining Trout s early results with the prevailing assessment of his tools leaves little doubt that he is the real deal. While the Los Angeles Angels have control over one of baseball s top young talents, even good news often presents challenges and dilemmas. In this instance, the Angels are challenged to develop a strategy to maximize the value of their prized asset. MLB s Collective Bargaining Agreement assures that the club will have the rights to Trout through the 2017 season. It also outlines the provisions for the arbitration process, for which Trout is eligible during his 2015, 2016 and 2017 seasons. These provisions define the rules, but also leave room for a player and ballclub to negotiate to configure a compensation plan that meets both parties objectives. Our case is set seven months in the future in the offseason following the 2013 season. Our crystal ball shows us that the Angels are coming off an AL pennant winning season. They logged the highest win total in the AL for 2013, (95 wins) edging the Tampa Bay Rays in a nail-biting 7-game ALCS. The Angels ride ended when they lost the World Series in 6 games to the Washington Nationals. The Angels outfield of Trout, Peter Bourjos, and Josh Hamilton proved to be the perfect complement to an MVP season for Albert Pujols. Pujols torched AL pitching, continuing his strong second-half 2012 performance into En route to his first AL MVP, he posted a.301 average with 38 HRs and a.928 OPS. For Mike Trout, 2013 was a year of responding to the challenges of pitchers adjustments and the grind of the 162-game major league schedule. He followed up his memorable rookie performance by delivering a glowing sophomore season. In 2013, he batted.312 with 27 HRs, 93 RBI and a.915 OPS. His walk rate rose to 11%, while his strikeout rate was trimmed from 21.8% in his rookie year to 18% in In fact, some believe that despite his impressive 2013 numbers, he may have experienced some misfortune, evidenced by his.349 batting average on balls in play, down from an MLB third best.383, during his rookie-of-the-year season. We once again observed stellar defense from the star LF (and sometimes CF). Trout earned his first Rawlings Gold Glove Award, logging 30 Defensive Runs Saved (DRS) more than any other outfielder according to Baseball Info Solutions measure of defensive performance. His performance in his first postseason was memorable, as he notched a.377 average in 61 plate appearances in 16 postseason games, which included 4 HRs. In game six of the World Series, he rose to the occasion with a 3 for 4 effort, including a homerun, in a losing cause. Despite the ultimate disappointment of the Angels World Series loss, the Mike Trout legend gained steam and continued grow during his age-21 season, leaving pundits to wonder how high is up. If there is a genuine weakness or flaw in his game, it is not visible to the untrained eye. Even the experts the veteran scouts that have seen it all are having trouble finding the soft spots in his game, evidenced by their teams inability to stifle him at the plate. With his prime still years away, the debate rages on publicly in the media and privately in the offices of the Angels about the height of Trout s performance ceiling. While this may be an entertaining topic for the media and fans, to the Los Angeles Angels front office staff and owner Arte Moreno, it is a serious business matter with enormous financial implications. The projections for Trout s performance over the next 5 to 10 years will influence how the Angels treat his contract situation. After his rookie year, the attitude towards Trout was phenomenal, but let s wait and see how he follows it up. Now everyone has two-plus seasons and 330 games of history to gauge his future. Should the Angels continue to proceed one year at a time? Should the ballclub attempt to negotiate a compensation package which covers his control years his remaining pre-arbitration and arbitration years, through 2017? This would offer the team four years of cost certainty, while providing Trout with his first tranche of big money, while still allowing him to monetize the bulk of his expected career through free agency. Another option for the Angels is to offer Trout a package that extends beyond 2017 into his would-be free agent years. How much would it take to keep Trout as a Halo into his free agent years? These are the vexing, but critical questions facing both the Angels and Mike Trout. The easy path to take for the Angels is to simply postpone the decision as to how to proceed. As in most cases, the easy path may be the most costly one. There are few decisions the Angels will make over the next five years that will have the long-term impact

3 The Mike Trout Dilemma 3 on the organization comparable to the way in which they decide to treat the contract status of Mike Trout potentially, a once-in-a-generation player. Angels owner Arte Moreno has pressed GM Jerry Dipoto for his position on the issue of Trout. Dipoto knows that simply telling Moreno, let s wait and see how Trout s on-field performance plays out is an insufficient answer, as it lacks the depth of thought that Moreno has come to expect from his baseball operations leadership team. If Dipoto s answer is to wait, Moreno wants to understand the trigger events that will prompt action. In other words, he wants a more definitive long-term plan that defines how the Trout contract situation will be approached over the time horizon the player is under the Angels control. Your exercise in this case study is to formulate a plan is to advise and assist Jerry Dipoto and his staff in formulating a multi-year approach to the Trout dilemma. In your meeting with Dipoto, he talked openly about the things that he would like to consider in his ultimate recommendation that he presents to Moreno. Below are the notes from your meeting with Dipoto and the questions he raised: How good is Trout likely to be through the end of this decade? What are the risks to Trout s performance over this timeframe? How do you create an aging curve for a player as young and talented as Trout? Are there players that are comparable to Trout, who can be used as a benchmark for his expected performance? Are the Angels better off trying to secure Trout to a multi-year deal for only his control years, to gain cost certainty, or to lock him up during a portion of his would-be free agent years? If the latter, for how long? What is a fair price (or price range) for multi-year deals with Trout? What are the club s risks and what are Trout s risks in agreeing to a multi-year deal? How do you incorporate those risks into the pricing of the multi-year deal? What is the ideal type/timeframe of a deal you would like to strike with Trout? If this is not the right time to negotiate a deal with Trout, what criteria define the right time? We ll wait and see how things evolve is an unacceptable answer. What are the specific conditions/criteria that define the right time to do a multi-year deal? While Jerry Dipoto is looking for specific answers to the above questions, woven into an analysis of the situation, he is also asking for a framework he can adopt to continue to analyze this issue (and others like it) over time. During his playing days, Dipoto was a relief pitcher with the Indians, Mets and Rockies, over eight major league seasons. As a player Dipoto emphasized and relied heavily on preparation. As an executive, he recognizes that the best decisions emerge from the best processes processes that integrate and analyze the relevant information in a logical way to prepare decision-makers to make informed choices. Another important aspect that must be considered is Trout s perspective. Following his stellar 2013 season, Trout has expressed (through his agent) his views to the Angels leadership. He believes strongly that he has a bright future in baseball and understands baseball s salary structure of pre-arbitration years, followed by arbitration years, followed by free agency. While he recognizes the personal income and cash flow implications of this structure, he shows a strong interest in securing a deal that would advance him a portion of his future earnings. From his point of view, he has already earned it, given his two near-mvp seasons, the second of which helped lead his team to the World Series. Essentially, the best young player to arrive on the scene since Ken Griffey, Jr. in 1989 is asking to be presented with a scenario that will allow him to monetize his well-documented talents, in advance of baseball s normal pay structure. Given this context, the answers to the questions posed by GM Dipoto have a sense of urgency. It also renders a nonoffer to Trout as impractical and potentially offensive to the young star, perhaps sending the wrong signal to the once-in-a-generation talent.

4 4 Gennaro Other Case Assignment Details This case focuses on the questions listed in the above notes from your meeting with Jerry Dipoto. However, there are several other important background points to keep in mind. The primary goal is to focus on the price for Trout s services, based on external market factors and in the context of alternative options for building a championship team. The focus is not on the incremental revenue that Trout s performance will generate for the Angels. Of course, in an indirect sense this is important, however you are not given enough information to address questions about the Angels win-curve. Should your compelling strategy and potential offer to Trout exceed the incremental revenue Moreno expects to realize from a Trout extension, he believes he can absorb the costs, in support of the long-term valuation of the franchise. However, he has stated very plainly that he will not enter into a deal that is he believes is above market for Trout s future services. Moreno insists that the deal adequately and fairly reflect the expected performance of Trout and all of the risks, many of which are born by the club, within the structure and pricing of the deal. Also, be aware that the use of club options in a contract for an elite player is not likely to be acceptable. Unilateral club options, which can be effective in securing a deal with a young promising player such as James Shields (several years ago), are far less likely to appeal to an elite player, such as Mike Trout. He has far too much leverage during his free agent years to be receptive to this somewhat one-sided concept, unless the compensation is heavily front-loaded, or if it contains a substantial buyout provision one where the team will pay a significant portion of the option value, even if they decline the option. It is not unreasonable to consider Trout to have some marquee value, but this must be tempered by the outstanding supporting cast Dipoto has accumulated. Could Trout be the face of the Angels franchise? Perhaps, but remember that he plays alongside some of baseball s best players, including Albert Pujols, so Trout is less likely to stand alone in that role. If Trout were to leave the team and the city, the star power might diminish only slightly, Pujols, Hamilton, CJ Wilson and others would remain as symbols of a star-laden ballclub. In many ways Moreno has insulated himself from desperately needing Trout, but it does not make him crave the super star any less. One additional consideration is the purchase of insurance for a multi-year contract with Trout. Insurance would offer some financial protection to the team in the event of serious injury to the player. The club has solicited bids from insurers and have found the most favorable terms available as follows: For an annual premium of $2 million, the club can secure a three-year insurance policy against serious injury to the player one which results in significant lost playing time. The deductible for any claims is one-half season (90 days). If Trout were to miss one full season, his team would be reimbursed one-half of his contractual pay. The insurance policy is renewable at the end of the term, providing the player passes a physical exam, or the team accepts an exclusion clause for any prior injury. Case Assignment Your challenge is to advise Jerry Dipoto, the Angels GM, on one of the most important choices the club will make over the next five years their strategy for maximizing the value of their prized asset, Mike Trout. Arte Moreno has a bias towards wanting to find the optimal approach to keeping Trout in the Angels family for years to come, although he is open to be convinced of the alternative letting Trout walk after 2017, or even dealing him to another club sooner. With the 2013 season behind us, Trout and his representatives are anxious to hear the Angels perspective on his future. Trout recognizes that a career-ending injury could cost him the opportunity at earning $250 million to $500 million over his career. His expectations are reasonable, but are influenced by both the market for marquee player talent and the hype surrounding his first two full seasons. At age 22, he is expecting some clarification on his future from the organization that knows him best and who has nurtured him for the last four years. Dipoto is expecting the following from you: An understanding of the best way to frame the issue and all of its assorted parts. He expects you to provide a clear and specific definition of the problem that we are trying to solve.

5 The Mike Trout Dilemma 5 A presentation that tells a story, by addressing the questions listed in your notes from your meeting with Dipoto (listed below), plus any other relevant issues/questions your believe are important: o How good is Trout likely to be through the end of this decade? What are the risks to Trout s performance over this timeframe? How do you create an aging curve for a player as young and talented as Trout? Are there players that are comparable to Trout, who can be used as a benchmark for his expected performance? Are the Angels better off trying to secure Trout to a multi-year deal for only his control years, to gain cost certainty, or to lock him up during a portion of his would-be free agent years? If the latter, for how long? What is a fair price (or price range) for multi-year deals with Trout? What are the club s risks and what are Trout s risks in agreeing to a multi-year deal? How do you incorporate those risks into the pricing of the multi-year deal? What is the ideal type/timeframe of a deal you would like to strike with Trout? If this is not the right time to negotiate a deal with Trout, what criteria define the right time? We ll wait and see how things evolve is an unacceptable answer. What are the specific conditions/criteria that define the right time to do a multi-year deal? An ultimate recommendation of either a strategy for the Trout dilemma and/or a specific deal recommendation. Although you are working for the club on this matter, you should create a compelling case as to why your recommended approach is likely to appeal to both the club and the player. Your output for this case assignment should be in the form of a powerpoint presentation to support a 20-minute oral presentation to a panel of judges, followed by a 10-minute Q & A with the judges. The judges criteria will focus on the quality of your decision process, more than any single right answer. The ideal decision process has a logical flow, and is inclusive of the key factors that are expected to have a true impact on the decision. More specifically, there are several key areas that will be a focus for the judges: The reasonableness and defensibility of performance projections for Trout Your methodology and process for assessing and quantifying the riskiness of Trout Your overall level of creativity, particularly in your assessment of risk a vexing issue for teams, with no consensus on valuation metrics or methodology The quality and clarity of the presentation of your analysis and recommendations The ability to articulate a clearly defined strategy a solution to the problem posed even if it does not call for an immediate contract offer The recommended sources for information, insights and data on this issue include (but should not be limited to) Baseball-Reference, Fangraphs, Baseball Prospectus, and The Hardball Times. Since the definitions of various statistics may vary by source (e.g., WAR at Fangraphs vs. Baseball-Reference), please clarify your source, when you reference data. Remember to include Trout s performance for the 2013 season (contained in this case) in your analysis. Since the 2013 data was created specifically for this case, it will not be included on any of the above websites.

6 6 Gennaro APPENDIX A Mike Trout s Stats for the 2011 through 2013 Seasons Year Age PA AB Hits 2B 3B HR RBI Year BB K BAvg OBP SLG OPS BABIP WAR* *WAR is the Fangraphs version This case was prepared by Vince Gennaro and is developed solely for the purpose of a case discussion. It contains various assumptions that were generated for illustrative purposes and is not intended to serve as a source of primary data.