The Small Market Fallacy - A Guest Post by Mike Musary

TCS reader Mike Musary submitted this guest post and we obviously think it's worth a read.

The White Sox aren’t a small market team.

The White Sox are a bad team, and blaming a small market is not an excuse. Inspired by recent discussion by The Catbird Seat and a post by Josh Nelson of SouthSideSox, I decided to look into the current payroll predicament that the White Sox find themselves in. Josh notes that the White Sox should be budget conscious and temper their spending this offseason because, based on their historical revenue numbers, they appear to be a small market team that happens to be located in one of the largest sports’ markets in America. I understand Josh’s thought process, he believes that the White Sox don’t have the budget capacity to be extremely active in Free Agency again this winter because they do not have a revenue stream that would support such an action.

However, I respectfully disagree with Josh, and I find myself more aligned with the thought process thrown out by the members of TCS. I think any decision to limit payroll spending this off-season is a poor course of action for the health of the White Sox as an organization. Unless the White Sox are going to engage in a complete fire sale, an inadvisable move given their incredibly good and cost effective roster core, waddling through free agency and adding marginal upgrades won’t be enough for this team. The White Sox may no longer have a top ten revenue in major league baseball, but that’s only because the White Sox created their own small market with poor performance. Holding onto more money instead of upgrading the roster will simply plunge the White Sox deeper down the market share hole.

Every year, Forbes puts out an evaluation of each of the Major League Baseball organizations. It’s not exact, Major League Baseball teams do not open their financials to the public, and if I could hide all of my income from the IRS I would too, but the Forbes’ numbers are a reasonable estimate of the revenue each major league organization is bringing in. I believe the last decade of information tells a pretty clear story about the White Sox, as well as many other organizations.

In millions of dollars

Two tidbits from this information really stand out to me: 1) Revenue growth is largely league driven and 2) Growth relative to league average growth is clearly dependent on team performance. When we reconcile these numbers against team performance, it’s pretty easy to see a correlation. All White Sox fans know that the team won the World Series in 2005. And while the White Sox posted a very pedestrian overall revenue number for 2005 (almost exactly league average and league median), their revenue growth that season (relative to the prior year) and in the following couple of seasons shot up and out-paced both the league average and league median growth. The success in 2005 and 2006 spawned revenue growth and increased the market share of the White Sox and allowed the White Sox to have some of the largest revenue growth in the league from 2006 to 2007, despite the fact that the '07 squad only won 72 games. This should come as no surprise - when your team wins, your team increases revenue and market share. Unfortunately, the converse is also true.

The White Sox went back and forth between competitiveness and irrelevance from 2008 to 2013, and then continued to be bad in 2014 and 2015. This see-saw effect coupled with the recent, very lousy seasons has severely limited sustained revenue growth. It’s difficult enough to keep “die-hard” fans interested when a team doesn’t have sustained success, but it’s incredibly difficult to keep more fair weather fans, attract new fans, and significantly increase market share when a team is consistently bad. The only way to regain market share is to win games and make the playoffs. I am also incredibly confident when I say the best way to build a playoff contender is not by signing lower tier free agents to middle of the road contracts (sound familiar?) and hoping that players on your team with no track record of success will suddenly become competent, everyday major league caliber players. The White Sox need to add talented players, and seeing firsthand what decades of neglect does to a minor league system, the easiest way to add talented players is through Free Agency, which only costs money.

The 2015 crop of free agent players has presented the White Sox with a rare window of opportunity to add premium talent through Free Agency, and they desperately need to jump at the chance. The idea that the White Sox won’t be able to maintain a profitable business model by taking the payroll up to something around $150 million is just nonsense. The best argument I can present for my opinion is looking at the revenue growth of the league (which is on pace to set a new record high in 2015, breaking the previous record high from 2014) and the revenue growth of teams in “small markets” that put forth a winning club. Look at the revenue growth of the Tigers, Orioles, and Pirates (in millions):

 

Just eyeballing the information and looking at unusually large increases should tell you what years these teams made the playoffs. The Tigers, who had generally been between incredibly horrible to really, really bad from 1994 to 2005 saw revenue jump 16% (compared to the league average 8%) from 2005 to 2006 when they put together a winning team and made it all of the way to the World Series. The Tigers would go on to make the playoffs four years in a row from 2011-2014 (and were .500 or better in eight of nine years from 2005-2014) and all of this would drive their revenue up further than it had ever been before. Much like the Tigers, the Orioles and the Pirates had been in very long stretches of poor performance before their recent playoff appearances. Also like the Tigers, the Orioles and Pirates saw immediate and dramatic boosts to their team revenue when these teams became competitive.

It doesn’t matter how bad a team is, or how small their market is perceived to be. If an organization puts together a winning team, and reaches the playoffs, they’ll boost their revenue. League-wide revenues are also increasing like never before. Armed with this information, the White Sox need to be ultra-aggressive this winter and take a shot at adding top flight talent and worry about the payroll after the fact. If the White Sox want to play this chicken-and-egg game and tell fans they can’t add payroll, and thus can’t add talented players, because the market is too small, that’s fine, but they shouldn’t expect to be competitive anytime soon. At some point, teams need to make a decision and try to win in the now, and worry about profitability later. The White Sox have been treading water for almost 8 years now, with, predictably I might add, nothing to show for it. Sure, they can play it safe, trot a payroll of $125 million out there, win 79 games, and say “we tried.” Or maybe, they could take a chance, and see what happens when they run out a team that actually features more than 5 or 6 talented players. I’d wager that investment would pay for itself. And then some.

Follow The Catbird Seat on Twitter @TheCatbird_Seat and Mike Musary @Muzzkill7