I find it quite disheartening, yet humorous, that most “Business of Baseball” stories that I read are negative. World Series ratings have been down for decades, the players’ union and ownership can’t agree on anything, and the antitrust exemption is still a 110-year-old problem. However, last weekend, a different picture was painted on the West Coast, with Shohei Ohtani signing a record contract for $700 million over ten years with the Los Angeles Dodgers. The saga had concluded; the best player in baseball and the most highly-touted free agent in baseball history had decided on his new home, albeit not that far from his old one. And then something funny happened: Jeff Passan tweeted about business school finance.
Shohei Ohtani’s contract will be largely deferred, meaning that most of the money will be paid out to him long after he retires. Mets fans might be familiar with this concept through “Bobby Bonilla Day”, but Ohtani’s contract is so massive that it dwarfs Bonilla’s vomit-inducing deferral situation into a lesser category entirely. Shohei will be earning just $2 million a year for the duration of his ten-year deal, then $68 million a year for the ten years following the contract's end. This arrangement, unprecedented in the world of MLB contract defferals and MLB contracts themselves, was Ohtani’s idea. It gives the Dodgers financial flexibility to improve their roster around him in the short term (a roster still desperately in need of starting pitching, mind you), while also guaranteeing the two-way star the biggest contract in North American sports history.
That’s the extent of what baseball fans probably cared about when it came to the deal. But the financially literate saw a different story, highlighted by something Jeff Passan said in a tweet that he sent out last Saturday, the day of the famed pixelated Dodgers logo:
To see a baseball pundit of Passan’s stature talk about the time value of money is so funny, yet so insightful, that now I, Certified Public Accountant Matt Nadel, need to talk about it. So, allow me to put my accounting degree and business education to good use.
Whether you like it or not, Shohei Ohtani is going to be 30 years old next season. He was never going to get a contract that extended well into his 40s because that’s just not economical, unless you look at it from a financial perspective. Inflation affects the purchasing power of every dollar you have. In other words, today, a gallon of milk might be $2, but in 10 years, it might be $4. That might seem like a small increase, but it’s a 100% price jump over the decade you had that milk jug in your fridge (ew, gross). There’s a bunch of reasons for why inflation happens, which we don’t have to get into, but the bottom line is that it’s a main driver for why baseball teams will go out of their way to sign stars to long-term deals. Remember when Albert Pujols signed with the Angels in 2012? That contract was for 10 years at a $25.4 million AAV clip. When he signed that deal more than a decade ago, twenty-five big ones a season seemed gigantic. But in 2023? Josh Donaldson made almost $22 million last season. See what I mean?
Ohtani gets the benefit of eventually earning 700 million US dollars, as stated in his new contract. The Dodgers, on the other hand, get to mitigate the damage to their wallets over time when those deferred payments soften as inflation takes its toll on dollar values over time (and by time, I mean the decade that he will earn a total of $680 million). It also allows the Dodgers to recoup as much as they can of the investment in Ohtani through the amount of business they’re going to generate to the organization just by putting up a banner of their new acquisition (too soon, Angels fans?). I guess my whole point is that Shohei Ohtani is a unicorn on and off the field through his persona, and whether you just want to focus on the way he plays the game or if you choose to include the environment and community he cultivates into your personal evaluation, this is a deal that the Dodgers have been happy with for a while and it’s impossible to look at it through a negative lens. Cautiously optimistic or even pessimistic? Sure. Negative? For once in “Business of Baseball” news, I truly don’t think so.
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