Question

1. Alex Rodriguez is a rather costly resource. What sources of benefit cited in the article? 2. Are you convinced that the Yankees made a good decision by acquiring Rodriguez? Why or why not?

STRATEGY SESSION: The Yankees' Deal for Alex Rodriguez In February 2004 the New York Yankees assumed the richest contract in sports by trading players to the Texas Rangers for shortstop Alex Rodriguez. Rodriguez was working under a 10-year, $252 mil- lion contract that he signed with the Rangers in 2000. As soon as the deal was announced, commentators speculated about whether the contract was econom- ically sensible. In fact, when we look at the underlying economics, the Yankees appear to have gotten the best player in baseball at a relatively bargain price. First, the Yankees received $67 million in cash from the Rangers--the largest sum to trade hands in the history of baseball. This reduced the Yankees' liability to Rodriguez to roughly $112 million. The expected payouts to the players the Yankees got rid of in the trade were approximately $13.3 million. Rodriguez was to receive $15 million in 2004, but he agreed to defer $1 million. Hence the added cost of Rodriguez to the Yankees' payroll in 2004 was roughly $750,000 For future years, the payouts to Rodriguez would be the following: $15 million for the next three sea- sons: $16 million in 2007-2008; $17 million in 2009; and $18 million in 2010. Rodriguez would defer $1 million for the first four years at no interest and receive the $4 million in 2011. Because of their high payroll costs, the Yankees must pay a luxury tax (which is split among the other baseball teams). In 2004 the Yankees estimated their payroll would equal $190 million (this was higher than the 10 lowest-payroll teams). A payroll of $190 million would cost the Yankees $21 million in luxury taxes. The total revenue for the Yankees was estimated to be $330 million in 2004. Approximately $110 mil- lion was generated from 3.5 million paying custom- ers (ticket prices increased by an average of 10% for the 2004 season). The Yankees received $60 mil- lion from the YES Network, $10 million from WCBS radio, and over $30 million from national television, licensing, and sponsorship revenues. The team also received revenue from local sponsorships and game concessions. The Yankees expected the addition of Alex Ro- driguez to increase attendance even in the face of in- creasing ticket prices (after the trade was announced, the ticket office was swamped with ticket requests). These additional fans also presumably would spend more at the games on snacks, drinks, and merchandise. After all the factors are considered, most experts believe the marginal benefit to the Yankees was greater than the additional costs for Rodriguez's contract Source: "Sports Business: Steinbrenner Has Got It, and He Loves to Flaunt It," New York Times, February 17, 2004.

Answer 1

The following sources of benefits are cited in the article-

• Exchanged players' salaries.
• Deferral of 1 million per year by Rodriguez
• Increased ticket sales due to the presence of Rodriguez, despite increased prices.
• Higher spendings on merchandise, snacks and drinks.

In my opinion, the long term benefit that Rodriguez brings to the Yankees is indeed higher than the cost- when all benefits of the transfer are considered.The additional costs re not much when other players' salaries are deducted and the benefits are higher. Also, whenever they trade Rodriguez in the future, that will also earn them some financial value. So, in my opinion, the Yankees made the right call in trading Rodriguez in.