Do Not Let the Big Numbers Blind You

The Texas Rangers finally found a player in Adrian Beltre to take their obscene amount of money this winter. Throughout their pursuit of Cliff Lee earlier and Beltre recently, writers mentioned the new cable television contract that the Rangers locked in this winter as a motivator for the Rangers to spend money this offseason. Knowing how persuasive initial reports can be in forming long-term memories of facts, I wanted to address this deal by itself. The first news came from USA Today and stated that it was $3 billion over 20 years. That turned out to be grossly inflated, and, within a few days, we had multiple reports of a more reasonable figure of actually about $1.6 billion.

That is still a very large number and easily sticks in your mind. Furthermore, it seemed to represent a dramatic increase in revenue for the Rangers. A number I saw quoted often was that the Rangers currently make only $20 million from television right now, which would make this new deal a fourfold increase. That certainly would be a huge raise, but it does not appear to be accurate.

The Rangers are currently bringing in only about $20 million per year for their cable television rights. However, according to the Dallas News article linked above and noted elsewhere, the Rangers also got another $15 million per year for non-cable TV rights when they signed their current deal. There are obviously many complexities involved, but perhaps $35 million per year is a more accurate figure for what the Rangers currently are making. In which case, their new deal is a little more than double their standing average yearly rate, not quadruple.

A lot can change; a lot will change, in media contracts around the country over the next quarter century. Texas has the capability now to be a bona fide player in the various free agent markets as they have shown. The reports of a signing bonus with Fox Sports for this deal certainly helps get more money into their hands right now, but agreeing to revenue figures 20 years out is a risk for both sides.

Over time, inflation is a steady force devaluing the dollar. Eighty million dollars in 2033 is nearly certain to be worth less than $40 million would be worth today. In fact, if you project out the years 2015-2035, through the end of the Rangers’ current and next TV contract, the average yearly present value of the new contract is likely to be around $55 million. Note that this assumes a constant, $80 million-per-year payout and 3% inflation in the general economy. Either a progressively structured payout schedule (as you often see in player contracts where later years get a higher absolute payout) or an inflation rate above 3% reduces the present value.

When the new TV contract begins, the Rangers go from about $35 million per year in 2011 dollars to a high of about $55 million in 2011 dollars and it could reasonably be as low as around $45 million per year. Do not let the $1.6 billion figure mislead you. The Rangers did well to lock in such a large increase in revenue, but they did not just discover the Sim City money cheat.